There is no single manner or ideal way to determine the cost of the sales object.
Whether calculating the sales price or determining the profitability margin of a given price, there are many costing alternatives, each meeting particular pricing and evaluation needs. While it is advisable to use absorption costing, effective cost, and average cost for one offerer, ABC costing, target cost, and standard cost may be better for another.
Despite the countless existing cost variants, we will focus on those that meet the usual pricing needs outlined in the table below.
As expounded, these variants are the result of using four types of parameters:
– the basis for calculating the sales price and the profitability margin,
– the method of allocating the cost to the product
– the nature of the cost that serves as the calculation basis, and
– the criterion for valuing the inputs or products used.
The basis for calculating the price and profitability (net margin, gross margin, markup margin, and contribution margin) are the full cost, the cost of the product sold, the markup base cost, and the contribution margin base cost, respectively. The allocation methods are direct costing, absorption costing, and ABC costing. The natures of the cost basis are actual cost, standard cost, budgeted cost, and target cost. The criteria for valuing the inputs or products that compose the sale object are average, most recent, replacement, and arbitrated costs.
Any cost variant can be used to calculate prices and sales profitability. The choice is based on various factors, such as the field of activity, company specificities, market characteristics, information availability, stakeholder requirements, or even personal preferences.
C. L. Eckhard, author ofPricing in Agribusiness: setting and managing prices for better sales margins.