Explain how an organization can cost a product and determine its price at any activity level

1100 Words Jan 2nd, 2014 5 Pages
For this task I will explain how a product price is determined and how this is calculated at the activity level of the product in the shop.

- Costs can be divided into different concepts. Below I will explain those concepts and give an example of how it will work in practice.

o Direct costs
Direct costs are the costs that are directly linked to a cost object. You can also say, the costs that are made when making the product ready. All the costs of making the product ready for sale are the direct costs of the product. There will be only direct costs in a company when they making products, otherwise there are no direct costs.
- Labour costs are direct costs; the costs paying the employee for his work on the product.
- Costs for the
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If the company is a department it has to share its costs of production. Indirect costs also exists when there is nothing produced in the company. To be able to continue for a business you have to calculate indirect costs into the price as well, otherwise the business will end up bankrupt sooner or later.

o Fixed costs
Fixed costs are constant costs for a company, for example a company need space to produce products, it has to rent a workplace. This workplace rent have to be paid even if there are no employees working there.

o Allocated costs
Costs made by a certain department and are charged to a cost centre and are directly incurred.

o Apportioned costs:
Costs made by several departments of the business are all charged with a proportion of the overhead.

How to calculate the cost price with different methods
Below I describe different methods of calculating the cost price. First I will show an example with the CIF Cream assignment: ‘’The following information is available for the product ‘Cif Cream’:
- Use of raw materials £ 0.35
- Direct labour costs £ 0.25
- Wholesale selling price £ 1.00
- Average consumer price £ 1.40
- Fixed costs per year £ 1,350,000
- Expected production 4,500,000
- Maximum production capacity 6,000,000

Describe different methods of

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