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ACTIVITY-BASED COSTING
Activity-based costing (ABC) provides more realistic estimates of how support costs change with increments in sales volume. For example, traditional cost accounting systems use bases like direct labor...
View ArticleOpportunity Costs: A Practical Illustration
An airline's most important cost for pricing is the “opportunity cost” of its capacity. Incremental costs other than capacity costs (for example, food, ticketing) are literally trivial in comparison....
View ArticlePeak Pricing: An Application of Incremental Costing
The adverse financial impact of average costing is greatest for those companies, such as service providers, whose products are not storable. Such companies face the problem of having to build capacity...
View ArticleESTIMATING RELEVANT COSTS
The essence of incremental costing is to measure the cost incurred because a product is sold, or not incurred because it is not sold. We cannot delve into all the details of setting up a useful...
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AVOIDING MISLEADING ACCOUNTING
Unfortunately, accounting statements can often be misleading. One must approach them with care when making pricing decisions. Let us further examine the publisher's error presented above, and others,...
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WHY AVOIDABLE COSTS?
The hardest principle for many business decision makers to accept is that only avoidable costs are relevant for pricing. Avoidable costs are those that either have not yet been incurred or can be...
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WHY INCREMENTAL COSTS?
Pricing decisions affect whether a company will sell less of the product at a higher price or more of the product at a lower price. In either scenario, some costs remain the same (in total)....
View ArticleDETERMINING RELEVANT COSTS
One cannot price effectively without understanding costs. To understand one's costs is not simply to know their amounts. Even the least effective pricers, those who mechanically apply cost-plus...
View ArticleTHE ROLE OF COSTS IN PRICING
Costs should never determine price, but costs do play a critical role in formulating a pricing strategy. Pricing decisions are inexorably tied to decisions about sales levels, and sales involve costs...
View ArticleHow Should They Affect Pricing Decisions?
In most companies, there is ongoing conflict between managers in charge of covering costs (finance and accounting) and managers in charge of satisfying customers (marketing and sales). Accounting texts...
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