FNPF - 'Cost plus' pricing

Claire1705

I am just working my way through some practice questions having studied all of the FNPF tutorial in preparation for the exam. They are questions set by my distance learning provider so they arent taken from the Osborne books and this may be why I am a bit stuck.

The question is: Give two advantages and two disadvantages of cost plus pricing. Is there another name for cost plus pricing? I have searched the forum which came up with threads about transfer pricing so I didnt look any further.

Can anyone help?

MarieNoelle

Hi Claire,
I have just looked it up on Wikipedia and it seems to be another term for "markup pricing".
Does this help?
MN

Claire1705

Sounds like the same as target costing so also the same as markup pricing then. I've never heard of it called that before though. Thanks for your help :-)

SandyHood

Target costing is quite different to cost plus pricing.

Cost plus pricing is assumed knowledge at level 4 based on level 3 costs and revenues
A firm using cost-plus pricing would:

1. identify the direct costs
2. absorb appropriate overheads
3. add a mark up (profit)
4. and this gives the selling price

1. This gives a cost per product that satisfies the financial reporting standards for stock valuation.
2. And a cost which will cover all the costs involved in getting the product to the condition and location where it is held.

Target costing is new at level 4
Price is seen as outside the control of the business - set by the market
The profit margin is set by the directors

Price less profit margin = target cost (the opposite way around to cost plus)

KaySarah

I was awake the night you told us this in Class Sandy .... hope you had a fabulous Birthday :001_smile:

SandyHood

Many thanks Kay