Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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Managerial Accounting
Second Edition
Weygandt / Kieso / Kimmel
Pricing Decisions
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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Few management decisions are
more important than setting
prices.
Illustration 11-1
Pricing Factors
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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How Are Most Prices Set?
By the competitive market!
In other words…
Supply and Demand
Used mainly for products
that aren’t easily
differentiated from
competitive products
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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When Can A Company Set
the Price?
 When the product is specially made
for a customer
How Are Most Prices Set?
 When there are limited producers of
similar items
 Patented items
 Copyrighted works
 When a company can differentiate its
product -
STARBUCKS
Illustration 11-2
Target Cost
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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The cost that will provide the
desired profit on a product when
the seller does not have control
over the product’s price.
Competitive
Market Pricing
Price Set by Market
Less:Desired Profit
Target Cost
$XXX
XX
$ XX
After Target Cost Is Determined…
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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A team of employees with expertise in:
 Production
 Operations
 Marketing
 Finance
Assembles to:
 Design and develop a product with
quality specifications
 While not exceeding costs
Target Cost Includes All:
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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• PRODUCT COSTS
– Direct Material
– Direct Labor
– Manufacturing Overhead
• PERIOD COSTS
– Selling
Competitive
Market Pricing
– Administrative
necessary
to:Set by Market
Price
$XXX
Less:Desired
Profit
XX
• MAKE
and
Target Cost
$ XX
• MARKET the product.
Illustration 11-3
Target Selling Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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The selling price that will provide
the desired profit on a product
when the seller has the ability to
determine the product’s price.
Illustration 11-3
Target Selling Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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The selling price that will provide
the desired profit on a product
when the seller has the ability to
determine the product’s price.
Cost-Plus Pricing
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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Advantage:
 Easy to compute
Disadvantages:
 Doesn’t consider demand
(Will the customer pay the
price?)
 Fixed cost per unit changes
with change in volume
Markup
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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The percentage applied to a
product’s cost to determine
the product’s selling price.
Time and Material Pricing
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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An approach to cost-plus
pricing in which the
company uses two pricing
rates:
• One for the labor used on a
job
• One for the material.
Time and Material Pricing
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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Used in service industries:
Public accounting firms
Law firms
Engineering, consulting firm
Construction companies
Repair shops
Printers
Material Loading Charge
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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A charge added to cover the cost of
:
Purchasing
Receiving
 Handling
 Storing
Materials, plus any desired profit
margin on the materials
themselves.
Internal Sales Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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How do you price goods
when they are “sold” within
the company?
Companies often expand in
direction of its suppliers or
customers.
Illustration 11-15
Transfer Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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The price used to record the
transfer between two
divisions of a company.
Transfer Price Approaches
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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• Negotiated transfer prices
• Cost-based transfer prices
• Market-based transfer prices
Negotiated Transfer Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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A transfer price that is
determined by the
agreement of the division
managers when no external
market price is available.
Review – Opportunity Cost
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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The potential benefit that may
be obtained from following
an alternate course of action.
Illustration 11-17
Negotiated Transfer Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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No Excess Capacity:Minimum
Transfer Price
Illustration 11-17
Negotiated Transfer Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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No Excess Capacity:
Illustration 11-19
Negotiated Transfer Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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Excess Capacity:Minimum
Transfer Price
Illustration 11-20
Negotiated Transfer Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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Excess Capacity:
Cost-Based Transfer Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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A transfer price that uses as
its foundation the costs
incurred by the division
producing the goods.
Bad deal for division that is
transferring.
Illustration 11-23
Cost-Based Transfer Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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Market-Based Transfer Price
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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A transfer price that is based
on existing market prices of
competing products.
Outsourcing
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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Contracting with an external
party to provide a good or
service, rather than
performing the work
internally.
Target Cost –Price
Determined by
Market
Target Selling
Price- Cost Plus
Pricing
Transfer Between Divisions in
Different Countries
Causes BIG tax problems-
Time and Material
Pricing
Transfer Pricing
*Negotiated
*Cost-based
*Market-based
Transferring
Between Divisions
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Let the CPAs handle it!
Target Cost –Price
Determined by
Market
COPYRIGHT
Target Selling
Copyright
© 2002, John Wiley
PriceCost Plus
Pricing
Reproduction or translation of
& Sons, Inc. All rights reserved.
this work beyond that permitted in
Time and Material
Section 117 of the 1976 United States Copyright Act without the
Pricing
express written permission of the copyright owner is unlawful.
Transfer Pricing
*Negotiated
Request for further information should be addressed to the
*Cost-based
Permissions Department, John Wiley & Sons, Inc. The purchaser
*Market-based
may make back-up copies for his/her own use only and not for
Transferring
Between Divisions
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
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