What are direct costs?
Can be specifically assigned and accurately assigned to a given unit of production of a product or a service.
What are indirect cost?
Incurred in the operation of a production plant or service process, but normally "cannot be related directly" to any given unit of production of a product or service. Often referee to as "overhead" (think about an apartment with only one electricity meter)
What is a variable cost?
Vary directly and proportionally with the units of products or services produced
What are fixed costs?
Generally remain the same regardless of the number of units of products or services produced
Vary with the number of units of products or services produced but are partly variable and partly fixed.
Direct Materials $ 5,500
+ Direct labor 2,000
+ Factory overhead 2,500
= Manufacturing cost $ 10,000
+ General, admin. and selling cost 1,500
= Total cost $ 11,500
+ Profit 920
= Selling price $ 12,420
Typical Product cost Buildup
What are the different ways that prices are set?
Loss Leader, Penetration Pricing, Premium Pricing
What is a loss leader?
Product sold at a low price (at or below cost) to simulate other profitable sales
What is penetration pricing?
Price is deliberately set at low level to gain customer's interest and establish a foot-hold in the market
What is premium pricing?
Keeping the price artificially high in order to encourage favorable perceptions.
What is competitive bidding?
Transparent' procurement method in which bids from competing contractors, suppliers, or vendors are invited by openly advertising the scope, specifications, and terms and conditions of the proposed contract as well as the criteria by which the bids will be evaluated. Competitive bidding aims at obtaining goods and services at the lowest prices by stimulating competition, and by preventing favoritism. In (1) open competitive bidding (also called open bidding), the sealed bids are opened in full view of all who may wish to witness the bid opening; in (2) closed competitive bidding (also called closed bidding), the sealed bids are opened in presence only of authorized personnel. See also competitive negotiation.
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How do you pre-qualify competitive bidders?
Must be able to make the item with desired quantity, quality, delivery requirements. Be numerous enough to ensure a truly competitive price, and not be more numerous than necessary.
What are the conditions for competitive bidding?
There must be at least two, and perferably more qualified bidders. The suppliers must want the business "a buyer's market" Specifications must be clear, no collusion between bidders.
What is the government influence on pricing?
Economic regulation, controlled centrally, and social regulation.
What is the economic regulation on pricing?
Seeks to make market equally acceptable and economical to all. seeks to ensure service availability, stability and fair prices.
What is controlled centrally mean?
Controls entry, rates (min and max), and services collaborative pricing
What is social regulation?
Seeks to protect public safety and environment
What is non-regulatory involvement?
Imports and exports
What are the four contract pricing options?
Firm-Fixed Price (FFP)
What is firm fixed price (FFP)?
Price set is not subject to change, under any circumstances
What is cost-plus-fixed-fee CPFF?
If item is experimental, specifications are not firm, or future costs cannot be predicted. Buyer agrees to reinburse the supplier for all "reasonable costs" incurred plus a specified dollar amount of profit
A maximum amount may be specified for cost
What is cost-no-fee?
If the buyer can argue persuasively that there will be enough subsidiary benefits to the supplier from doing a particular job, then the supplier may be willing to do it provided only the costs are reimbursed
What is cost-plus-incentive fee?
Both buyer and seller agree on a target cost figure, a fixed fee, and a formula under which any cost over- or under runs are shared
Understanding of price?
There are many different options available and approaches can change. This topic is for purchasing because it is strategic, operational and etc.