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As there are downfalls to the total cost-plus pricing approach, another cost approach that is often used is the absorption cost-plus pricing.<\/strong><\/h3>\n\n
Click through the pages to review the elements of this topic.<\/p>\n","coverMedium":{"params":{"decorative":true,"contentName":"Image","expandImage":"Expand Image","minimizeImage":"Minimize Image","title":"Photo by Alexas_Fotos on Unsplash","file":{"path":"images\/file-6631280e092fb.jpg","mime":"image\/jpeg","copyright":{"license":"U"},"width":6000,"height":4000}},"library":"H5P.Image 1.1","metadata":{"contentType":"Image","license":"U","title":"Untitled Image"},"subContentId":"4c1487d4-05d1-4609-9535-9f84ebf632c1"}},"chapters":[{"params":{"content":[{"content":{"params":{"text":"
Absorption Cost-Plus Pricing<\/strong><\/p>\n\n
As there are downfalls to the total cost-plus pricing approach, another cost approach that is often used is the absorption cost-plus pricing which defines the cost base as the manufacturing cost. Both the variable and fixed selling and administrative costs are not included from this cost base and therefore these costs, in addition to the target ROI, need to be considered in the markup.  <\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"3add3701-84e4-4318-9b61-c90ba01c4e63"},"useSeparator":"auto"},{"content":{"params":{"text":"
The steps to this approach are as follows: <\/strong><\/p>\n\n
1. Calculate the manufacturing cost per unit <\/p>\n\n
2. Calculate the markup percentage using the below formula, but the percentage must cover the desired ROI as well as the selling and administrative expenses:  <\/p>\n\n
Desired ROI per unit + Selling and Administrative Expenses Per Unit    <\/strong><\/p>\n\n
=
\n                    Markup % x Manufacturing Cost
\n <\/strong>
\n <\/p>\n\n
3. Set the target selling price based on the manufacturing cost and markup percentage <\/p>\n\n
Manufacturing Cost per Unit + (Markup % x Manufacturing Cost per Unit) = Target Selling Price <\/strong><\/p>\n\n
<\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"f442d5db-63ef-4964-802a-f74bc719d9b7"},"useSeparator":"auto"},{"content":{"params":{"text":"
Many companies using cost-plus pricing use either the absorption cost OR the total cost. This is because a company\u2019s cost accounting system provides absorption cost information most easily (this usually exists in general ledger accounts), as well as variable costs could encourage managers to set too low a price in order to boost sales (can lead to repeated price cutting) and the absorption cost\/total cost is the easiest basis to defend when prices need to be justified to interested parties.<\/p>\n"},"library":"H5P.AdvancedText 1.1","metadata":{"contentType":"Text","license":"U","title":"Untitled Text"},"subContentId":"8fe03a12-0004-4533-90ff-910730458193"},"useSeparator":"auto"}]},"library":"H5P.Column 1.18","metadata":{"contentType":"Column","license":"U","title":"Absorption Cost-Plus Pricing"},"subContentId":"e97bc40f-e793-49e9-8c18-7a22ce15edb3"},{"params":{"content":[{"content":{"params":{"media":{"disableImageZooming":false},"taskDescription":"Drag the words into the correct boxes","overallFeedback":[{"from":0,"to":100}],"checkAnswer":"Check","submitAnswer":"Submit","tryAgain":"Retry","showSolution":"Show solution","dropZoneIndex":"Drop Zone @index.","empty":"Drop Zone @index is empty.","contains":"Drop Zone @index contains draggable @draggable.","ariaDraggableIndex":"@index of @count draggables.","tipLabel":"Show tip","correctText":"Correct!","incorrectText":"Incorrect!","resetDropTitle":"Reset drop","resetDropDescription":"Are you sure you want to reset this drop zone?","grabbed":"Draggable is grabbed.","cancelledDragging":"Cancelled dragging.","correctAnswer":"Correct answer:","feedbackHeader":"Feedback","behaviour":{"enableRetry":true,"enableSolutionsButton":true,"enableCheckButton":true,"instantFeedback":false},"scoreBarLabel":"You got :num out of :total points","a11yCheck":"Check the answers. The responses will be marked as correct, incorrect, or unanswered.","a11yShowSolution":"Show the solution. The task will be marked with its correct solution.","a11yRetry":"Retry the task. Reset all responses and start the task over again.","textField":"The steps to this approach are as follows:\u00a0\n\n1. Calculate the manufacturing cost per unit \u00a0\n\n2. Calculate the markup percentage using the below formula, but the percentage must cover the desired ROI as well as the selling and administrative expenses:\u00a0\u00a0\n\nDesired ROI per unit +\u00a0Selling and Administrative Expenses Per Unit = Markup %\u00a0x Manufacturing Cost \u00a0\n\u00a0\n3. Set the target selling price based on the manufacturing cost and markup percentage \u00a0\n\nManufacturing Cost per Unit + (Markup %\u00a0x Manufacturing Cost per Unit)\u00a0 = Target Selling Price"},"library":"H5P.DragText 1.10","metadata":{"contentType":"Drag the Words","license":"U","title":"Drag the Words"},"subContentId":"6875eae1-5f5e-419a-822f-bbbec0ef54fd"},"useSeparator":"auto"}]},"library":"H5P.Column 1.18","metadata":{"contentType":"Column","license":"U","title":"Check for Understanding"},"subContentId":"0f658b17-6f79-4728-a9f3-1f83cd1c1009"}],"behaviour":{"baseColor":"#1768c4","defaultTableOfContents":true,"progressIndicators":true,"progressAuto":true,"displaySummary":true,"enableRetry":true},"read":"Read","displayTOC":"Display 'Table of contents'","hideTOC":"Hide 'Table of contents'","nextPage":"Next page","previousPage":"Previous page","chapterCompleted":"Page completed!","partCompleted":"@pages of @total completed","incompleteChapter":"Incomplete page","navigateToTop":"Navigate to the top","markAsFinished":"I have finished this page","fullscreen":"Fullscreen","exitFullscreen":"Exit fullscreen","bookProgressSubtext":"@count of @total pages","interactionsProgressSubtext":"@count of @total interactions","submitReport":"Submit Report","restartLabel":"Restart","summaryHeader":"Summary","allInteractions":"All interactions","unansweredInteractions":"Unanswered interactions","scoreText":"@score \/ @maxscore","leftOutOfTotalCompleted":"@left of @max interactions completed","noInteractions":"No interactions","score":"Score","summaryAndSubmit":"Summary & submit","noChapterInteractionBoldText":"You have not interacted with any pages.","noChapterInteractionText":"You have to interact with at least one page before you can see the summary.","yourAnswersAreSubmittedForReview":"Your answers are submitted for review!","bookProgress":"Book progress","interactionsProgress":"Interactions progress","totalScoreLabel":"Total score","a11y":{"progress":"Page @page of @total.","menu":"Toggle navigation menu"}}