Essay Sample on Cost-based Pricing and Target Costing

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University of Richmond
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Explain the differences between cost-based pricing and target costing

Businesses make profits when the prices of goods and services at the market level exceed the cost of production of the same goods and services. Cost-based pricing and target costing are well-familiarized methods used for determining the relationships that exist between prices and cost (DiGioia, Greenhouse, Giarrusso, & Kress, 2016). However, in the majority of the two methods, they all approach the equation from opposite directions. At the most basic level, cost-based pricing, and target costing are methods that are used interchangeably.

Cost-based pricing is the most conducive and simplest method used in setting up prices of goods and services. When setting prices for goods and services using cost-based pricing, a business sums up the total cost of producing a good, or service. The total cost is then tacked on the markup for a profit of that good or service (DiGioia, Greenhouse, Giarrusso, & Kress, 2016). The result that comes out is the selling price. On the other hand, target costing works the other way round as opposed to cost-based pricing. Target costing involves using price in determining the cost of the commodity Navissi, & Sridharan, 2016). Here, the businesses start by deciding how much they want to charge on products. After that, the businesses then subtract their desired profits from the prices imposed on the products. What follows is to arrive at the maximum cost that businesses can afford to pay to pay for the production of those products.

Every business requires operating effectively in a more conducive business environment. The environment can only be conducive if the prices and cost of goods and services are determined. Therefore, cost-based pricing and target costing bring along simplicity and predictability on the cost of operating a business (DiGioia, Greenhouse, Giarrusso, & Kress, 2016). By using the two methods in a business set up, companies can tell that prices of commodities are only limited to what the market will pay.

Should employees be included in the budgeting process? Explain yourself why or why not?

The budgeting process is the way that an organization goes about organizing and building its budget (Berman, 2015). A good budgeting process involves those organizations that consider responsible individuals for observing the objectives of the organization in creating a budget. Budgeting process of an organization involves the finance committee and the senior staff that come together to research and reviews the budget before it is ready for presentation before the organizations board (Berman, 2015).

However, the budget processing can be used to motivate employees to be more fiscally minded and work well within the organization. Therefore, employees should be involved in budget processing so that they can pay much attention to details and think critically before making decisions on various tasks concerning work. When employees are engaged in budget processing and formation, it acts as a motivational tool that they use in monitoring various methods on how they should work (Berman, 2015). Conversely, if employees are not involved in budget processing, they will lose their focus on work. Therefore, it will lead to the lack of motivation, which will result in inconsistency of work.

Involving employees in the budget process makes the whole process even much more efficient and enjoyable because employees are one essential factor in the realization of organizations' objectives. They know all the challenges and problems that the organization faces. In regard, involving them in budget processing will be more productive than punitive.



Berman, L. (2015). The Office of Management and Budget and the presidency, 1921-1979. Princeton University Press.

DiGioia, A. M., Greenhouse, P. K., Giarrusso, M. L., & Kress, J. M. (2016). Determining the true cost to deliver total hip and knee arthroplasty over the full cycle of care: preparing for bundling and reference-based pricing. The Journal of arthroplasty, 31(1), 1-6.

Navissi, F., & Sridharan, V. G. (2016). Determinants of Target Costing Adoption: A Research Note. Journal of Management Accounting Research.


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