The use of job costing as a tool for the pricing and cost control decisions in the printing industry: the case of Société de Presse et d'Editions (SOPECAM)

2. Pricing techniques

Depending therefore on the objectives of the company, it can adopt various pricing techniques. These techniques normally are based on a great number of factors, but here we will be interested in studying those that are based on the cost information provided to management. Pride, Hughes and Kapoor ^19(*)(1988) call them cost-based or cost-plus pricing techniques). We will focus on three of them namely: Total cost-plus, manufacturing cost-plus, and decision-relevant cost-plus method.

a) Total cost-plus pricing

In this method, the future selling price is the result of the addition of a desired set of mark up to the total unit cost of a product or service. This method may be a good one, but the problem here is that it is sometimes difficult in some industries to succeed in allocating overhead expenses to the units of production.

b) Manufacturing cost-plus method

It follows quite the same procedure as the previous one, but here, the costs that are taken into account are the manufacturing costs and as such overhead costs are left out of the calculations. A large mark up percentage is therefore required to cover these overheads and allow for reasonable profits for the firm.

Drury (1992) identified that this method has as main advantage the fact that the cost figure used for pricing is the one used for stock valuation. In this case, if the firm has been producing similar products in the past, it may be easy to determine the estimate of the total manufacturing costs by simply adjusting the old figures.

c) Decision-relevant cost-plus method

It consists of basing the pricing policy the figures of the incremental costs due to producing the new elements. Here what is required is a perfect knowledge of the avoidable and unavoidable costs if the production of a particular item is started. Since the fixed costs of the company will remain constant for short period, then the mark up is added to the additional cost of producing that new item.

The above three refer to the most popular methods of pricing, there is another one based on activity-based cost, which just consists of adding the mark up to the activity based-determined cost. That method is not very different from the others, the main difference residing in the method of determining the unit cost.

These costing methods as we have outlined at the beginning ignore many factors and as such must be used alongside with other elements to come out with a more reliable selling price. The following limitations of these methods explain why they should not be solely used.

Limitations of cost based pricing

Ø They ignore the market demand: these methods do not take into account the price demand relationships characterised by the economic concept of price-elasticity of demand.

Ø Circular reasoning: this is to say that the selling price affects the volume of sales, which in turn affects the unit fixed cost, which will also lead to further price changes. The figure drawn below illustrates that situation.

Figure 2-11 Circular reasonning in cost based-pricing

* ¹⁹ Pride, W.M., Hughes, R.J.,& Kapoor, J.R. (1988): Business (2^nd edition), Houghton Miflin, Boston