Management Accounting Ch08

Once a company has determined the target price, it can determine its target cost by setting a desired profit.

In a competitive, common-product environment the company must set a target selling price using cost-plus pricing.

Under cost-plus pricing, the markup percentage is computed by dividing desired ROI per unit by variable cost per unit.

The labor charge includes the direct labor cost of employees, selling, administrative, and similar overhead costs; and an allowance for a desired profit per hour.

The charges for any particular job are the sum of the labor charge, the materials charge, and the material loading charge.

An appropriate transfer price should assist the company in making proper purchasing decisions.

An advantage of the cost-based transfer price approach is that it can increase a division manager’s control over the division’s performance.

The market-based transfer price approach provides a fairer allocation of the company’s contribution margin to each division than the cost-based approach.