Cost plus Pricing Formula

Cost plus Pricing Formula

In cost plus pricing method a standard percentage of profit margins are added to the cost of the product or project. There are two methods of adding cost i.e. % profit of sales or % Profit margin on cost.

Cost Plus pricing = Cost + Profit Margin on cost

Cost Plus Pricing = Cost + profit Margin on selling Price

Example (Cost Profit Margin)

Cost = 120,000

Profit Margin on cost = 25%

Calculate the selling Price

Solution

= 120,000 x .25

= 30,000

Cost Plus pricing = Cost + Profit Margin on cost

= 120,000 + 30,000

= 150,000

Example (Selling Price Profit Margin)

Cost = 120,000

Profit Margin on Selling Price = 25%

Calculate the selling Price

Solution

Cost Plus pricing = Cost + Profit Margin on cost

= 120,000 / (1-Profit Margin)

= 120,000/.75

= 160,000

Profit Reconciliation Formula

Profit Reconciliation Formula

Absorption and marginal cost profit difference may be reconciled by the following formulas. There are two different formula used i.e. one for stock increase and other for stock level decreased

Absorption Cost profit = Marginal cost profit + stock level increased during year

Absorption Cost profit = Marginal cost profit - stock level Decreased during year

Example (Stock Increased)

Marginal costing profit = 45,000

Opening Stock level = 40,000

Closing Stock Level = 45,000

Calculate absorption costing profit?

Solution

Absorption Cost profit = Marginal cost profit + stock level increased during year

= 45,000 + 5000

= 50,000

Example (Stock Decreased)

Marginal costing profit = 50,000

Opening Stock level = 40,000

Closing Stock Level = 30,000

Calculate absorption costing profit?

Solution

Absorption Cost profit = Marginal cost profit - stock level Decreased during year

=50,000-10,000

=40,000

Target Cost Formula

Target Cost Formula

Target Cost can be calculated by the following Formula. Target cost concept is widely used in development of new product. This is an effective tool to control the cost of the new product.

Target Cost = Target Price-Target Profit

Example

Target Sales Price of Product= 120

Target Profit of Product= 70

Calculate Target Cost

Solution

Target Cost = Target Price-Target Profit

=120-70

=50 (Target Cost)

Cost of Goods Available for Sale Formula

Cost of Goods Available for Sale Formula

Cost of Goods available for sale is calculated by the following formula. This concept is quite different from the cost of Goods sold.

Cost of Goods Sold=Opening Finished Goods + Good Manufactured

Example

Opening Finished Goods =                   15,000

Goods Produced =                              20,000

Closing Finished Goods                        15,000

Solution

Opening Finished Goods =                   15,000

Add: Goods Produced =                       20,000

Cost of Goods available for Sale      35,000

Cost of Goods Sold Formula

Cost of Goods Sold Formula

Cost of goods sold is one of the important costs in the financial accounting system, because this cost is used to calculate the gross profit for the year (period). Cost of Goods sold formula is given below

Cost of Goods Sold=Opening Finished Goods + Good Manufactured – Closing Finished Goods

Example

Opening Finished Goods =        10,000

Goods Produced =                   16,000

Closing Finished Goods             15,000

Solution

Opening Finished Goods =        10,000

Add: Goods Produced =            16,000

Closing Finished Goods            (15,000)

Cost of Goods Sold               11,000

Cost of Goods Manufactured Formula

Cost of Goods Manufactured Formula

Cost of Goods manufacture means that how money good are produced during the year (Finished Goods). This concept is quite different from the cost of goods sold. All goods manufacture is not supposed to be sold in the current year.

Cost of Good Manufactured = WIP Opening + Factory Cost this Year – WIP Closing

Example

WIP-Opening = 10,000

Direct Labour =   5,000

Direct Material = 6,000

Factory Overhead= 8000

Solution

WIP-Opening =                      10,000

Add: Direct Labour =               5,000

Add: Direct Material =             6,000

                                          21,000

Factory Overhead=                (8000)

Cost of Goods Manufactures   13,000

Prime Cost Formula

Prime Cost Formula

Prime cost includes the direct labour & direct material cost. in other word prime cost can be calculated by adding direct material and direct labour cost.

Prime Cost = Direct Labour + Direct Labour

Example

Direct Labour = 5

Direct Material = 6

Prime Cost=?

Solution

Prime Cost = Direct Labour + Direct Labour

=5+6

=11 (Prime Cost)

Factory Cost Formula

Factory Cost Formula

Factory Cost formula includes three cost Direct Labour, Direct material, Factory Overheads.

Factory Cost Formula = Direct Material + Direct Labour + Factory overhead

Example

Unit Material Cost = $7

Unit Labour Cost = $8

Factory overhead = $ 2

Solution

Factory Cost Formula = Direct Material + Direct Labour + Factory overhead

Unit Material =                      7

Unit Labour =                        8

Factory Overheads=              2

Factory Cost =                     17