Question

what are four common cost bases used in cost-plus pricing. How can they all result in the same price?

Answer 1

In cost-plus pricing method, a fixed percentage, also called mark-up percentage, of the total cost (as a profit) is added to the total cost to set the price.

Common cost bases used in cost-plus pricing are :

Direct Material Cost : Direct material costs are the costs of raw materials or parts that go directly into producing products. For example, if Company A is a toy manufacturer, an example of a direct material cost would be the plastic used to make the toys.

Direct Labor Cost : Direct labor costs are the wages, benefits, and insurance that are paid to employees who are directly involved in manufacturing and producing the goods – for example, workers on the assembly line or those who use the machinery to make the products

Overhead : This includes all costs which are incurred for manufacturing of product however they are not either direct material cost & direct labor cost. Overhead will includes indirect material cost and indirect labour cost and will also include all expenses of factory such utilities

Markup : Markup is the margin which is fixed over cost to determine the selling price of product.

This all four is added to derive the pricing under cost-plus pricing method.

They do not result into same price base but they are added together to derive the price base.