ACC 202 Setting Prices

The assignment requires the use of the Library/Internet research to locate and study written articles on any topics on financial accounting that was covered in the class. The student is required to critique, analyze, and evaluate the articles as they relate to what was learned in class by writing a four to six-page paper (12 font, double spaced, APA format). The objective of this activity is for you to be aware of what is happening in the real world as it relates to managerial accounting issues to make the study of accounting more meaningful, and to bridge the gap between theory and practice.

The professor wants to see: What I want to see for the research is an actual tool that companies can use to manage the organization more efficiently and effectively.

The paper should be 5 typed pages, double spaced, one inch margins, 12 pt Times New Roman font. You should include a minimum of three resources.

My paper is on Setting Prices from chapter 16 of the following book: Financial and Managerial Accounting 7th edition. John J. Wild, Ken W. Shaw and Barbara Chiappetta:

This is from the book:

Over the long run, prices must be high enough to cover all costs, including variable costs and fixed costs, and still provide an acceptable return to owners. For this purpose, absorption cost information is useful because it reflects the full costs that sales must exceed for the company to be profitable. We can use a three-step process to determine product selling prices:

Step 1:  Determine the product cost per unit using absorption costing. Step 2:  Determine the target markup on product cost per unit. Step 3:  Add the target markup to the product cost to find the target selling price.

To illustrate, consider IceAge. Under absorption costing, its product cost is $25 per unit (from Exhibit 19.3 ). IceAge’s management must then determine a target markup on this product cost. This target markup could be based on industry averages, prices that have been charged in the past, or other information. In addition, this markup must be set high enough to cover selling and administrative expenses (both variable and fixed) that are excluded from product costs. Assume IceAge targets a markup of 60% of absorption cost. With that information, the company computes a target selling price as in Exhibit 19.16 .

EXHIBIT 19.16 Determining Selling Price with Absorption Costing

IceAge can use this target selling price as a starting point in setting prices. Management must also consider the level of competition in its industry and customer preferences. If customers are not willing to pay $40 per unit, IceAge must either lower its target markup or find ways to reduce its costs.

While absorption cost information is useful in setting long-run prices, it can lead to misleading decisions in analyzing special orders. We show how variable cost information can be used to analyze special order decisions in the Decision Analysis at the end of the chapter.