Pricing Decisions & Optimal Use of Limited Resources in Cost Accounting
🧩 1. What Are Pricing Decisions?
➡️ Pricing decisions refer to fixing the selling price of goods/services using cost data and market conditions.
✅ Purpose:
-
Recover costs
-
Earn profit
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Stay competitive
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Attract/retain customers
⚙️ 2. Key Methods of Pricing in Cost Accounting
| 📌 Method | 🔎 Description |
|---|---|
| 1️⃣ Cost-Plus Pricing | Selling Price = Cost + Markup |
| 2️⃣ Marginal Cost Pricing | Price = Variable Cost + Desired Contribution |
| 3️⃣ Target ROI Pricing | Pricing to achieve a desired return on investment |
| 4️⃣ Market-Based Pricing | Based on competitor prices and customer demand |
| 5️⃣ Penetration Pricing | Low price to enter the market |
| 6️⃣ Skimming Pricing | High initial price, later reduced |
| 7️⃣ Tender Pricing | Pricing for competitive bidding scenarios |
🧠 3. Factors Affecting Pricing Decisions
📌 Internal Factors:
➡️ Cost structure
➡️ Profit objectives
➡️ Production capacity
➡️ Product stage (launch/growth/mature)
📌 External Factors:
➡️ Competition
➡️ Market demand
➡️ Customer preferences
➡️ Government policies
💸 4. Example: Cost-Plus Pricing
🔹 Cost per unit = ₹100
🔹 Desired profit margin = 20%
➡️ Selling Price = ₹100 + ₹20 = ₹120 ✅
📈 5. What Is Optimal Use of Limited Resources?
➡️ It refers to allocating scarce resources (like raw materials, labor, machinery) in a way that maximizes profit or minimizes cost.
🎯 Why Important?
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Resources are limited
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Demand is greater than capacity
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Helps in profit-maximizing decisions
🔍 6. Steps to Optimize Limited Resources
1️⃣ Identify limiting factor (e.g., machine hours, labor)
2️⃣ Calculate contribution per unit of limiting factor
3️⃣ Rank products based on contribution per limiting factor
4️⃣ Allocate resources starting from highest rank
5️⃣ Check if fixed costs are covered → Decide output level
🔢 7. Example: Optimal Resource Use (Simplified)
| Product | Contribution per Unit | Machine Hrs/Unit | Contribution per Hr |
|---|---|---|---|
| A | ₹30 | 2 hrs | ₹15/hr |
| B | ₹40 | 4 hrs | ₹10/hr |
➡️ Product A should be prioritized as it gives more contribution per hour of limited resource.
📌 8. Key Concepts You Should Remember
| 🔑 Concept | 💡 Description |
|---|---|
| Contribution Margin | Selling Price – Variable Cost |
| Limiting Factor | The scarcest resource (machine, labor, etc.) |
| Contribution per Limiting Factor | Used to rank products for resource allocation |
| Break-even Analysis | Helps to decide minimum sales for zero profit |
| Relevant Costing | Ignores sunk costs & focuses on future costs |
🔄 9. Link Between Pricing & Resource Optimization
✅ Smart pricing helps in better resource use
✅ Efficient resource use reduces per-unit cost → More competitive pricing
✅ Both aim for maximum profit using available inputs
📚 10. Conclusion
🔹 Pricing and resource allocation are the backbone of decision-making in cost accounting
🔹 Both require a deep understanding of cost behavior and market conditions
🔹 Mastering these helps companies stay profitable and competitive in any situation
Cost & Management Accounting Syllabus Notes for Lucknow University LU BBA Semester Exams | lunotes.in - lunotes.in
November 24, 2025 @ 2:36 pm
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