MG112 Financial Accounting National University of Computer and Emerging Sciences

University of Computer and Emerging Sciences

MG112 Financial Accounting National University of Computer and Emerging Sciences

CHAPTER 12: PRICING DECISIONS AND COST MANAGEMENT
TRUE/FALSE
1. Companies must always examine pricing decisions through the eyes of their customers.
2. Relevant costs for pricing decisions include manufacturing costs, but not costs from
other value-chain functions.
Relevant costs for pricing decisions include costs from all value-chain functions, from
R&D to customer service.
3. Cost information only helps the company decide how many units to produce.
4. In markets with little or no competition, the key factor affecting price is costs, not
customers’ willingness to pay or competitors.
In markets with little or no competition, the key factor affecting price is the customers’
willingness to pay, not costs or competitors.
5. When prices are set in a competitive marketplace, product costs are the most important
influence on pricing decisions.
When prices are set in a competitive marketplace, companies have no control over
setting prices and must accept the price determined by the market.
6. Short-run pricing decisions include adjusting product mix in a competitive
environment.
7. Profit margins are often set to earn a reasonable return on investment for short-term
pricing decisions, but not long-term pricing decisions.
Profit margins are often set to earn a reasonable return on investment for long-term
pricing decisions, but not short-term pricing decision.
8. In a one-time-only special order, existing fixed manufacturing costs are irrelevant.
10. Customers prefer stable and predictable prices over a long time horizon.
11. Product cost analysis is important even if market forces set prices.
True, because a company still has to decide how much of that product to supply to
market to maximize operating income, and that decision is based on cost factors.
12. Target pricing is a form of cost-based pricing.
Target pricing is a form of market-based pricing.
13. The first step in target pricing is to determine the target cost of the product.
The first step in target pricing is to determine the target price of the product.
14. Value engineering has the objective of reducing costs while still satisfying customer
needs.
15. Rework is an example of a value-added cost.
Rework is an example of a nonvalue-added cost.
16. It is always clear which activities add value and which do not add value to a product.
Activities do not always fall neatly into value-added or nonvalue-added categories.
17. Value engineering seeks to reduce value-added costs as well as nonvalue-added costs.
True, value-added costs can be reduced through greater efficiencies.
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lOMoARcPSD|596061818. Suppliers play a key role in the success of target costing.
19. Costs may be locked in before they are incurred.
20. Locked-in costs have already been incurred.
Locked-in costs are those costs that have not yet been incurred, but which, based on
decisions that have already been made, will be incurred in the future.
21. For manufacturing firms, product costs are generally locked in during the
manufacturing stage.
For manufacturing firms, product costs are generally locked in during the design stage.
22. One goal of target costing is to design costs out of products.
23. Spending more on the design phase of a new product usually reduces subsequent
product-related costs.
24. Kaizen costing focuses on improving productivity and eliminating waste through
continuous improvements.
25. In cost-plus pricing, the markup is a rigid number that determines the actual selling
price.
In cost-plus pricing, the markup is ultimately determined by the market.
26. The target rate of return on investment is another way of referring to the markup
percentage.
The target rate of return on investment and the markup percentage are two different
things.

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