Accounting Exam 3Chapter 12Setting Normal Product Selling PricesThe normal selling price is the target selling price to be achieved in the long term. The normal selling price must be high enough to cover all costs and expenses (fixed and variable) and provide a reasonable profit. Managers can use one of two market methods to determine selling price:1. Demand-based concept- Sets the price according to the demand for the product- High demand, price is set high- Low demand, price is set low2. Competition-based concept- Sets the price according to the price offered by competitorsManagers use a cost-plus method called total cost concept to determine the selling price- They do this by estimating a cost amount per unit and adding a markupNormal Selling Price = Cost Amount per unit + Markup- Managers determine the markup based on desired profit for the product- This markup should be large enough to earn a profit and cover any costs and expenses that aren’t included in the cost amount Markup – an amount that is added to a “cost” amount to determine product priceTotal Cost Concept – manufacturing cost plus the selling and admin expenses are included in the total cost per unit. The markup per unit is then computed and added to total cost per unit to determine the normal selling price1How to apply the total cost conceptStep 1: Estimate the total manufacturing costs (DM+DL+FOH)Step 2: Estimate the total selling and administrative expensesStep 3: Estimate the total cost (Total manufacturing cost + selling and admin expenses)Step 4: Determine the total cost per unit, using this formula Step 5: Compute the markup percentage, using this formula- The desired profit is normally computed based on a rate of return on assets using this formulaDesired Profit = Desired rate of return X Total assetsStep 6: Determine the markup per unit, using this formula:Markup per Unit = Markup percentage X Total cost per unit Step 7: Determine the normal selling price by adding the markup per unit to the total cost per unit Total cost per unit + Markup per unit = Normal selling price per unit2Total CostTotal Cost per Unit = Estimate units produced and sold Desired ProfitTotal Cost Markup Percentage % =Target CostingTarget Costing – a concept used to design and manufacture a product at a cost that will deliver atarget profit for a given market-determined price- Method of setting prices that combines market-based pricing w/a cost-reduction emphasis- Under target costing a future selling price is anticipated Target Cost = Expected selling price – Desired profit- Target costing tries to reduce costs - The target cost is normally less than current cost, so managers have to try to cut costs from the design and manufacturing of the product - The planned cost reduction is also referred to as the cost “drift”- Target costing is especially useful in highly competitive markets such as automobiles and smartphones/tablets