Full Cost Pricing and Marginal Costing
Full Cost Pricing
Selling price arrived at by adding overheads and profit margin to the direct cost per unit of a product. In a manufacturer's overheads computation, less than full capacity utilization of the plant is factored in to allow for fluctuations in the output. The profit margin is computed as a fixed percentage of the average total cost of the product.
Pricing - full cost-plus pricing
Full cost plus pricing seeks to set a price that takes into account all relevant costs of production. This could be calculated as follows:
Total budgeted factory cost + selling / distribution costs + other overheads + MARK UP ON COST
An illustration of applying this method is set out below:
Consider a business with the following costs and volumes for a single product:
Fixed costs:
Factory production costs £750,000
Research and development £250,000
Fixed selling costs £550,000
Administration and other overheads £325,000
Total fixed costs £1,625,000
Variable costs
Variable cost per unit £8.00
Mark-Up
Mark-up % required 35% Budgeted sale volumes (units) 500,000
What should the selling price be on a full cost plus basis?
The total costs of production can be calculated as follows:
Total fixed costs £1,625,000
Total variable costs (£8.00 x 500,000 units) £4,000,000
Total costs £5,625,000
Mark up required on cost (£5,625,000 x 35%) £1,968,750
Total costs (including mark up) £7,593,750
Divided by budgeted production (500,000 units)
= Selling price per unit £15.19
The advantages of using cost plus pricing are:
• Easy to calculate
• Price increases can be justified when costs rise
• Price stability may arise if competitors take the same approach (and if they have similar costs)
• Pricing decisions can be made at a relatively junior level in a business based on formulas
The main disadvantages of cost plus pricing are often considered to be:
• This method ignores the concept of price elasticity of demand - it may be possible for the
Selling price arrived at by adding overheads and profit margin to the direct cost per unit of a product. In a manufacturer's overheads computation, less than full capacity utilization of the plant is factored in to allow for fluctuations in the output. The profit margin is computed as a fixed percentage of the average total cost of the product.
Pricing - full cost-plus pricing
Full cost plus pricing seeks to set a price that takes into account all relevant costs of production. This could be calculated as follows:
Total budgeted factory cost + selling / distribution costs + other overheads + MARK UP ON COST
An illustration of applying this method is set out below:
Consider a business with the following costs and volumes for a single product:
Fixed costs:
Factory production costs £750,000
Research and development £250,000
Fixed selling costs £550,000
Administration and other overheads £325,000
Total fixed costs £1,625,000
Variable costs
Variable cost per unit £8.00
Mark-Up
Mark-up % required 35% Budgeted sale volumes (units) 500,000
What should the selling price be on a full cost plus basis?
The total costs of production can be calculated as follows:
Total fixed costs £1,625,000
Total variable costs (£8.00 x 500,000 units) £4,000,000
Total costs £5,625,000
Mark up required on cost (£5,625,000 x 35%) £1,968,750
Total costs (including mark up) £7,593,750
Divided by budgeted production (500,000 units)
= Selling price per unit £15.19
The advantages of using cost plus pricing are:
• Easy to calculate
• Price increases can be justified when costs rise
• Price stability may arise if competitors take the same approach (and if they have similar costs)
• Pricing decisions can be made at a relatively junior level in a business based on formulas
The main disadvantages of cost plus pricing are often considered to be:
• This method ignores the concept of price elasticity of demand - it may be possible for the