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

• Stay competitive

• Attract/retain customers

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⚙️ 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

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🧠 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

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💸 4. Example: Cost-Plus Pricing

🔹 Cost per unit = ₹100
🔹 Desired profit margin = 20%

➡️ Selling Price = ₹100 + ₹20 = ₹120 ✅

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📈 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?

• Resources are limited

• Demand is greater than capacity

• Helps in profit-maximizing decisions

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🔍 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

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🔢 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.

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📌 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

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🔄 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

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📚 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