Cost Plus Pricing

Cost-plus pricing - Wikipedia, the free encyclopedia
Cost-plus pricing is often used on government contracts, and has been criticized ... be noted carefully that any pricing on a cost-plus contract can be audited by ...
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cost-plus pricing: Definition from Answers.com
cost-plus pricing Pricing method whereby a standard markup is added to the estimated cost of the product ... Accounting Dictionary: Cost Plus Pricing ...
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Cost Plus Pricing - Definition by InvesTerms Financial Glossary
Cost Plus Pricing. Used in contract work when projects are large and difficult, ... Tesco and Ikea claim tariffs cost consumers billions of euros a year...
www.costpluspricing.com

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Cost-plus pricing with elasticity considerations - Wikipedia, the free ...
One of the most common pricing methods used by firms is cost-plus pricing. ... See also : pricing, cost-plus pricing, price elasticity of demand, markup, ...
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How to Define Cost Plus Profit | eHow.com
How to article - how to define cost plus profit. Learn how to define and use cost plus profit models to help you establish pricing and profitability in your business...
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Cost-plus pricing is a pricing method commonly used by firms. It is used primarily because it is easy to calculate and requires little information. There are several varieties, but the common thread in all of them is that you first calculate the cost of the product, then include an additional amount to represent profit. Cost-plus pricing is often used on government contracts, and has been criticized as promoting wasteful expenditures.

Calculating price using the cost-plus method There are several ways of determining cost, and the profit can be added as either a percentage markup (business) or an absolute amount. One example is:

P = (AVC + FC%) * (1 + MK%)

where:

P = price
AVC = average variable cost
FC% = percentage allocation of fixed costs
MK% = percentage markup

For example:If variable costs are 30 yen, the allocation to cover fixed costs is 10 yen, and you feel you need a 50% markup then you would charge a price of 60 yen:

P = (30 + 10) * (1 + 0.50) P = 40 * 1.5 P = 60

An alternative way of doing a similar calculation is:

P = (AVC + FC%) / (1 − MK%)

It should be noted carefully that any pricing on a cost-plus contract can be audited by the government (see DCAA). How to do this pricing, what items can be included, and how the calculations are to be made is governed by the FAR (or Federal Aquisiiton Regulations). Failure to follow the precepts of FAR can lead to decreased contractor revenue or, in extreme cases, claims of penalties against the contractor under the False Claims Act and Contract Disputes Act.

To make things simpler, some firms, particularly retailers, ignore fixed costs and just use the purchase price paid to their suppliers as the cost term. They indirectly incorporate the fixed cost allocation into the markup percentage. To simplify things even further, sometimes a fixed amount is applied rather than a percentage. This fixed amount is usually determined by head-office to make it easy for franchisees and store managers. This is sometimes referred to as turnkey pricing.

Another variant of cost plus pricing is activity based pricing. This involves being more careful in determining costs. Instead of using arbitrary expense categories when allocating overhead, every activity is linked to the resources it uses.

Cost will need to be recalculated and the percentage markup will likely need to be adjusted as the product goes through its Product Life Cycle Management. This is sometimes referred to as product life cycle pricing, although it is seldom done deliberately or in a planned and organized manner. Price skimming and penetration pricing are also types of product life cycle pricing but they are demand based pricing methods rather cost based.

Advantages of cost-plus pricing

easy to calculate

minimal information requirements

easy to administer

tends to stabilize markets - insulated from demand variations and competitive factors

insures seller against unpredictable, or unexpected later costs

ethical advantages (see: just price)

Disadvantages of cost-plus pricing

tends to ignore the role of consumers

tends to ignore the role of competitors

use of historical accounting costs rather than replacement value

use of “normal” or “standard” output level to allocate fixed costs

inclusion of sunk costs rather than just using incremental costs

ignores opportunity costs

contractors may not focus on performance because the cost is always covered by the client

Cost-plus pricing - Wikipedia, the free encyclopedia
Cost-plus pricing is a pricing method used by companies. It is used primarily because it is easy to calculate and requires little information. There are several varieties, but the ...

Cost Plus Pricing - Definition by InvesTerms Financial Glossary
Cost Plus Pricing Used in contract work when projects are large and difficult, therefore, impossible to anticipate costs.

Cost-plus versus value-based pricing | Business Link
The pros and cons of setting prices linked to costs or pegging prices against the benefits you offer customers

Cost-plus pricing with elasticity considerations - Wikipedia, the free ...
One of the most common pricing methods used by firms is cost-plus pricing. In spite of its ubiquity, economists rightly point out that it has serious methodological flaws.

cost-plus pricing - Hutchinson encyclopedia article about cost-plus ...
Method employed by companies to price their products. The firm calculates the direct cost of production for a particular product (the ‘cost’), and then adds to that a ...

An empirical investigation of the importance of cost-plus pricing ...
Purpose b This paper has two specific objectives: to appraise the relative importance of cost-plus pricing and to develop and test hypotheses concerned with contingent factors ...

Cost-plus
Cost-plus. Cost-plus pricing is a simple method of sales prices. The prices are set to the cost of the goods (as in COGS) with percentage mark-up added.

Marketing - pricing - full cost plus pricing
Marketing revision notes on pricing - full cost plus pricing ... pricing - full cost plus pricing. Full cost plus pricing seeks to set a price that takes into account all relevant ...

Cost Plus Pricing - Hutchinson encyclopedia article about Cost Plus ...
Method employed by companies to price their products. The firm calculates the direct cost of production for a particular product (the ‘cost’), and then adds to that a ...

BBC - GCSE Bitesize - The marketing mix
... aim is still to be profitable. A good marketing manager will try to differentiate their product (ie make their product stand out against similar competitive brands). Whatever pricing ...