Accounting 102 CH8
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Target Cost
Market Price  Desired Profit

Return on investment (ROI)
 Net income ÷ Invested assets
 ex: 1mil invst expt rnt 20% 1mil*.20=200K
 10K units produced 200K÷10K=$20 per unit

Target Selling Price
 Cost + (Markup % x Cost) or
 cost + ROI

Target Selling Price perU
 Total Unit Cost + (Totl Unt Cst x markup%) or
 total cost per unit + ROI per unit

Markup Percentage
Desired ROI perU ÷ Total Cost PerU

Time and material pricing
 1) calculate the per hour labor charge rate
 (2) calculate the charge for obtaining and holding materials %
 (3) calculate the charges for a particular job

T/M Caluclate Labor Charge
 (1) DL cost of emplye, incldg hrly rt or salary & fringe benefits
 (2)selling, administrative, and similar overhead costs
 (3) an allownce for desired profit or ROI p/hr of emplye time
 ex: $103K (mec wages)÷10K hrs (total hrs) = 10.3 (add all)

TM Calculate Material Loading Charge
 (1) Est totl ann csts for purch, recv, hndl, & storing materials.
 (2) divides this amount by the totl est cst of parts and materials.
 (3) It adds a desired profit margin on the materials themselves
 ex: $13K (matrl chg) ÷ $130K = 10% (add all)

TM Calculate Charges for a paticular job
 (1) the labor charge
 (2) the charge for the materials
 (3) the material loading charge
 ex: 12 hrs x $50 rate + $500 mat+($500 x 10%rate)

Possible approaches for determining a transfer price:
 1. Negotiated transfer prices.
 2. Costbased transfer prices.
 3. Marketbased transfer prices.

Contrubution Margin (AKA Opportunity Cost)
Selling Price  Variable Price

Min Transfer Price No Excess Capacity
Variable Cost + Opportunity Cost (AKA Cont Margin)

Min Transfer Price Excess Capacity
Variable Cost + $0 Opportunity Cost

Absorption cost pricing (GAAP aprvd)
 1) Compute Unit manufacturing costs
 2) Compute Markup Percentage using formula:
 Dsrd ROI pu+Selling/Admin Exp pu=Markup% x Mfg cost pu
 3) Set target selling price using formula:
 Mfg cost pu + (markup% x Mfg cost pu)

Variable Cost Pricing
 1) Compute unit variable cost
 2) Compute Markup Percentage using formula:
 Dsrd ROI + Fxd Cost pu = Markup% x Variable Cost pu
 3) Set target selling price using formula:
 Var Cost pu + (Markup% x Var Cost pu)