cost-plus pricing, Briefly describe the methods of determining sales prices under cost-plus pricing?

1. (a) What is cost-plus pricing? Briefly describe the methods of determining sales prices under cost-plus pricing?    4
(b) Differentiate the mark-up and margin with an example.        2

A
Cost-plus pricing:
Cost is the most important influences on price of a product or services. Cost-plus pricing means the determinations of sales price by calculating the cost of product or services and then adding a percentage mark-up for profit.
There are two methods of cost-plus pricing and these are as follows:
I. Full cost-plus pricing: where pricing is determined based on full cost of the product or service and adding a percentage mark-up. The full cost may be a fully absorbed production cost only, or it may include the portion of absorbed selling and distribution overheads.

ii. Marginal cost-plus pricing: involves adding a profit mark-up to the marginal or variable cost of production or sales.

Halo Enterprize Solution Cost Accounting Management Information

Question:

Halo Enterprises recently experienced a fire, forcing the company to use incomplete information to analyze operations. Consider the following data and assume that all materials purchased during the period were used in production:

Direct materials:
Standard price per pound: $9
Actual price per pound: $8
Price variance: $20,000F
Total of direct-material variances: $2,000F

Direct labor:
Actual hours worked: 40,000
Actual rate per hour: $15
Efficiency variance: $28,000F
Total of direct-labor variances: $12,000U

Halo completed 12,000 units.
 

Required:
Determine the following: (1) actual materials used, (2) direct-material quantity variance, (3) direct-labor rate variance, (4) standard labor rate per hour, and (5) standard labor time per finished unit.

Another version of the question as found in the Management Information Question of Institute of Chartered Accountants of Bangladesh May-June 2016 Knowledge Level Question

Kamal Manufacturing recently experienced a fire, forcing the company to use incomplete information to analyze operations. Consider the following data and assume that all materials purchased during the period were used in production:
 

Direct materials:
Standard price per pound: Tk.9
Actual price per pound: Tk.8
Price variance: Tk.20,000F
Total of direct-material variances: Tk.2,000F
 

Direct labor:
Actual hours worked: 40,000
Actual rate per hour: Tk.15
Efficiency variance: Tk.28,000F
Total of direct-labor variances: Tk.12,000U

Kamal Manufacturing completed 12,000 units.
 

Required:
Determine the following: (1) actual materials used, (2) direct-material quantity variance, (3) direct-labor rate variance, (4) standard labor rate per hour, and (5) standard labor time per finished unit.

Solution:

in brief:

 (1) actual materials used 20,000 pounds, 

(2) direct-material quantity variance Tk. $ 18,000U 

(3) direct-labor rate variance Tk. $ 40,000U 

(4) standard labor rate per hour Tk. $ 14, and 

(5) standard labor time per finished unit 3.5hours

 

IN DETAILS

(1) actual materials used

We know, Price Variances = AQ(AP-SP)

or, Tk. 20,000F = AQ(8-9)

or -20,000 = AQ(-1)

or AQ = 20,000

So, actual materials used 20,000 pounds

Note THAT: in equation form, Favorable is negative and Unfavorable is positive.

(2) direct-material quantity variance

We know, Price variance + Material variance(MV) = Total direct-material variance(TV)

or, -20,000 + MV = -2,000

So, MV = 18,000

So, direct-material quantity variance tk. 18,000 Unfavorable

(3) direct-labor rate variance

We know,

Labor Rate Variance (LV) + Efficiency variance = Total direct-labor variance

or, LV + (-28,000) = 12,000

so, LV = 40,000

so, direct-labor rate variance Tk. 40,000 Unfavorable

(4) standard labor rate per hour

We know,

Labor rate variance = AH(AR-SR)

or, 40,000 = 40,000 (15-SR)

or, 15-SR = 1

So, SR = 15-1=14

So, standard labor rate per hour Tk. 14

(5) standard labor time per finished unit

We know, Efficiency variances = SR(AH-SH)

or, -28,000 = 14(40,000-SH)

or, 40,000-SH = -2,000

So, SH = 42,000

Units produced 12,000 units

So, standard labor time per finished unit = (42,000/12,000) Tk. = 3.5 Tk.

Solution provided by Sazzad Hossain, MBA CSCA™

A graduate in Accounting & Information Systems from University of Dhaka (BBA & MBA)

And a Chartered Accountants Student as of December 12, 2016

You can contact him by: sazzadais@gmail.com

Thanks