Cost-based pricing and absorption cost pricing are two common strategies. Cost-based pricing involves adding up all variable costs and overhead to determine the minimum price, while absorption cost pricing accounts for both fixed and variable costs. For cost-based pricing, the formula is price equals cost plus a markup percentage of cost. Absorption cost pricing derives long-term prices to pay for all expenses by including a proportion of fixed costs and overhead in the price, along with variable costs and a markup. Understanding costs is crucial for setting appropriate prices under different strategies.

1. Basic Costing Principles
Section 10 Objective 5
Apply basic costing principles

2. • Price is the amount charged for product or
service.
• Setting the price of a product or service is a
decision owners or manager have to make.
• Costs play an important role in pricing.
• The role varies depending on the industry.
Therefore pricing strategies may differ.
Basic Costing Principles applied in Accounting

3. Basic Costing Principles applied in Accounting

4. • Types of pricing strategies:
– Cost-based pricing(Cost plus pricing/Cost plus mark-up
pricing/mark up pricing)
• Is the simplest pricing method. Commonly used with long
term decisions in mind
• Is the pricing strategy for setting the prices of goods and
services
• The costing principle to be applied is the computation of all
costs go into making the product or service
Basic Costing Principles applied in Accounting

5. • Advantages of Cost plus pricing
– Biggest advantage of this is that the company knows
exactly the amount of expenditure that it has incurred
on making a product and therefore they can add profit
margin accordingly which helps in achieving the desired
revenue for a firm
– It is the simplest method to decide the price for a
product because one has just to add up all the cost and
then add profit. The latter will give the price for a
product.
Basic Costing Principles applied in Accounting

6. • Since the company is using its own data for deciding cost it
is much easier for a company to evaluate the reasons for
the increases in expenses and therefore it can take
corrective action immediately.
• The elements added together to find cost are:
– direct materials,
– direct labour and
– overheads
Basic Costing Principles applied in Accounting

7. The formula is: Price=
Cost + (Mark-up percentage x cost)
Basic Costing Principles applied in Accounting

8. Basic Costing Principles applied in Accounting
Go to:
https://study.com/academy/lesson/cost-
plus-pricing-definition-method-formula-
example.html
There are many other links which you may look
at and gather more information
Listen to the video to gather
information on cost plus
pricing for manufacturing and
inventory control.

9. • Types of Pricing strategies:
–Absorption-cost pricing:
• Absorption pricing is a method used to setting prices
for products or services
• Is used to derive long term price of a produce that is
needed in order to pay for all expenses
Basic Costing Principles applied in Accounting

10. • For this method, the basic costing principle in
accounting applied for pricing, includes all of the
variable costs, as well as a proportion of all fixed
costs
• The formula for this method is:
Price = variable cost per unit (total overheads +
administrative expenses ÷ number of units produced)
+ mark up
Basic Costing Principles applied in Accounting

11. Basic Costing Principles applied in Accounting

12. • Advantages of Absorption Cost Pricing
– Price set covers both fixed and variable costs
– Provides a price that seems fair because it covers all
costs and includes a reasonable margin
– Absorption cost information is required for external
financial reporting (it is already available and the
setting of prices does not involve any expenditure on
the part of the company
Basic Costing Principles applied in Accounting

13. • Listen to the videos to gather information on absorption
cost pricing for manufacturing and inventory control.
• https://www.study.com/academy/lesson/time-and-
material-pricing-formula-example.html
There are many other links which you may look at and gather
more information
Basic Costing Principles applied in Accounting

14. – Search the internet for appropriate video tutorials for
the following on:
1. how to compute unit cost for each of the method
2. how to apply each of the costing principles in
accounting
Basic Costing Principles applied in Accounting