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Hi, Sir. Sir, I doubt the determination of the price of a product, Do we only consider the direct cost incurred in the production process at the time of determination of the price for a product? Do we also consider indirect costs or production overheads?
There are many ways a company might determine the selling price – they will not simply consider costs but also competitors and customer behaviour. However in Paper MA we only consider the cost (the other considerations are not examined until Paper PM).
For cost based pricing decisions we will normally include all costs (including production overheads, which are indirect costs). However in the exam questions will make it clear on what to base a selling price.
Thank you, Sir. Sir, as per you have mentioned, in the management accounting paper, we only consider the cost for determining the selling price of a product but still I have doubt in it. For illustration,
we have a factory where we produce pencils and the rent for that factory is $1000 which is a fixed cost, furthermore, the cost of producing a pencil is $1 which is a variable cost since we consider that all direct costs are variable costs, and all production overheads are fixed cost. In addition, we know that the production costs = prime cost + production overheads or indirect costs.
So, in this case how do we determine the selling price of a pencil if we have produced only one unit of a pencil in our factory?Again, it depends on what the the question says. Whether it says to add a % to the marginal cost or whether to add a % to the absorption cost.
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