# Cost-based pricing

Checked for updates, April 2022. Accountingverse.com

## Introduction

Cost-based pricing is a pricing method wherein a mark-up is added over costs incurred to come-up with the suggested price of the product. The goal of doing business is to maximize wealth and profits. Cost-based pricing ensures that costs are fully recovered and desired profits are met.

## Cost-Plus Pricing Formula

The price derived from applying mark-up over the cost of the product is known as cost-plus price.

Cost-Plus Price = Cost + Mark-up

The mark-up can be computed as a percentage of total costs, product costs, variable manufacturing costs, or total variable costs.

## Example

ABC Company identified the following costs incurred in producing 500 units of its new product. Compute for the cost-plus price assuming a mark-up of:

1. 20% based on total costs;
2. 75% based on product costs;
3. 125% based on variable manufacturing costs; and
4. 50% based on total variable costs.
 Total Per unit Direct materials \$3,000 \$6.00 Direct labor \$2,600 \$5.20 Variable factory overhead \$2,000 \$4.00 Fixed factory overhead \$1,500 \$3.00

The company expects to incur \$2,800 variable selling and administrative costs and \$1,850 fixed selling and administrative costs. (Per unit: \$5.60 for VS&A and \$3.70 for FS&A)

1.) 20% based on total costs

Total cost per unit = \$6.00 + 5.20 + 4.00 + 3.00 + 5.60 + 3.70 = \$27.5

Price = Cost + Mark-up

Price = \$27.60 + (20% x \$27.60)

Price = \$33.00

2.) 75% based on product costs

Total product cost per unit = \$6.00 + 5.20 + 4.00 + 3.00 = \$18.20

Price = \$18.20 + (75% x \$18.20)

Price = \$31.85

3.) 125% based on variable manufacturing costs

Total product cost per unit = \$6.00 + 5.20 + 4.00 = \$15.20

Price = \$15.20 + (125% x \$15.20)

Price = \$34.20

4.) 50% based on total variable costs

Total product cost per unit = \$6.00 + 5.20 + 4.00 + 5.60 = \$20.80

Price = \$20.80 + (50% x \$20.80)

Price = \$31.20

Key Takeaways

Cost-based pricing, or cost-plus pricing, sets price by adding a mark-up on cost incurred in production.

The mark-up could be based on all costs, production costs only, variable costs only, or other relevant costs.

Like and share!