Podcast
Questions and Answers
What does cost of revenue primarily include?
What does cost of revenue primarily include?
- Expenses that remain constant regardless of sales volume
- General administrative expenses
- All expenses that occur when services are sold (correct)
- Fixed costs related to manufacturing products
Which factor does not justify a seller’s insistence on a specific price based on costs?
Which factor does not justify a seller’s insistence on a specific price based on costs?
- Quality of goods sold
- Market demand for the product
- Inefficiency in supplying goods (correct)
- Assuming risk in business
Which of the following is NOT typically included in the cost of services?
Which of the following is NOT typically included in the cost of services?
- Sales commissions related to service sales
- Transportation costs for delivering services
- Legal fees for business operations (correct)
- Contract labor for specific projects
What question arises regarding the costs of different manufacturers?
What question arises regarding the costs of different manufacturers?
Which statement accurately reflects the relationship between cost and market price?
Which statement accurately reflects the relationship between cost and market price?
What does 'fair price' signify for a supplier?
What does 'fair price' signify for a supplier?
What must the supplier's total costs include for sustainability?
What must the supplier's total costs include for sustainability?
Which of the following describes a 'continuous supply'?
Which of the following describes a 'continuous supply'?
Why might the prices set by monopolists be considered fair?
Why might the prices set by monopolists be considered fair?
What influences the determination of a 'fair price'?
What influences the determination of a 'fair price'?
Which statement is true regarding fair prices between different sellers?
Which statement is true regarding fair prices between different sellers?
What role does historical experience play in pricing decisions?
What role does historical experience play in pricing decisions?
What challenge do supply managers face regarding fair prices?
What challenge do supply managers face regarding fair prices?
What is described as a price that may still be considered fair despite being set by a monopolist?
What is described as a price that may still be considered fair despite being set by a monopolist?
What can result when suppliers do not cover total costs and receive a profit?
What can result when suppliers do not cover total costs and receive a profit?
Which cost is typically classified as a direct cost?
Which cost is typically classified as a direct cost?
What is the relationship between direct costs and variable costs typically considered?
What is the relationship between direct costs and variable costs typically considered?
Which of the following is an example of an indirect cost?
Which of the following is an example of an indirect cost?
What is a potential disadvantage of using average rates for overhead costs?
What is a potential disadvantage of using average rates for overhead costs?
What type of costs remain constant regardless of production volume?
What type of costs remain constant regardless of production volume?
What can semivariable costs be described as?
What can semivariable costs be described as?
How is factory overhead often historically determined?
How is factory overhead often historically determined?
Which of the following best describes direct labor costs?
Which of the following best describes direct labor costs?
What component is not typically included in the total manufacturing cost buildup?
What component is not typically included in the total manufacturing cost buildup?
What might cause a prevailing market price to be considered unfair?
What might cause a prevailing market price to be considered unfair?
In what scenario might a supplier choose to accept reduced costs?
In what scenario might a supplier choose to accept reduced costs?
What type of costs could be included when calculating selling, general, and administrative expenses?
What type of costs could be included when calculating selling, general, and administrative expenses?
What is a common challenge faced when determining the actual price of a service?
What is a common challenge faced when determining the actual price of a service?
When calculating costs, which element is based on an estimation of production volume?
When calculating costs, which element is based on an estimation of production volume?
If a company's costs increase in direct proportion to the increase in sales of services, which type of expense is primarily involved?
If a company's costs increase in direct proportion to the increase in sales of services, which type of expense is primarily involved?
What is the critical question that arises after accepting the definition of cost provided in the text?
What is the critical question that arises after accepting the definition of cost provided in the text?
Given that market price is not determined by cost, what should a seller primarily focus on when setting prices?
Given that market price is not determined by cost, what should a seller primarily focus on when setting prices?
If a seller is not entitled to a price that yields profit merely because they're in business, what other justifications for a price are deemed acceptable?
If a seller is not entitled to a price that yields profit merely because they're in business, what other justifications for a price are deemed acceptable?
What is the primary implication if all businesses were automatically entitled to a profit, regardless of their costs?
What is the primary implication if all businesses were automatically entitled to a profit, regardless of their costs?
What is required for a seller to be entitled to get a price that even covers their costs?
What is required for a seller to be entitled to get a price that even covers their costs?
If a price is based on average cost of raw materials, what aspect of those raw material costs is considered?
If a price is based on average cost of raw materials, what aspect of those raw material costs is considered?
What is a key distinction between the cost of services and the cost of general goods?
What is a key distinction between the cost of services and the cost of general goods?
Why should a seller not assume they are entitled to a price that yields a profit, regardless of costs, quality, or service?
Why should a seller not assume they are entitled to a price that yields a profit, regardless of costs, quality, or service?
What is the primary goal a supply manager should aim for when determining a 'fair price'?
What is the primary goal a supply manager should aim for when determining a 'fair price'?
What is the key difference between 'direct costs' and a 'fair price' of an item?
What is the key difference between 'direct costs' and a 'fair price' of an item?
What is the significant difference between a 'fair price' and the prevailing market price?
What is the significant difference between a 'fair price' and the prevailing market price?
Why is it important that a supply manager understands a supplier's cost structure when determining a 'fair price'?
Why is it important that a supply manager understands a supplier's cost structure when determining a 'fair price'?
How might a 'fair price' differ between two suppliers providing similar products?
How might a 'fair price' differ between two suppliers providing similar products?
What is the long term risk of only paying direct costs of goods regularly?
What is the long term risk of only paying direct costs of goods regularly?
What is the potential issue with a 'prevailing price' that is unusually high?
What is the potential issue with a 'prevailing price' that is unusually high?
What factor is the most critical when defining a fair price for a specific item?
What factor is the most critical when defining a fair price for a specific item?
Why might some businesses choose to use 'average rates' for overhead instead of precise allocated costs?
Why might some businesses choose to use 'average rates' for overhead instead of precise allocated costs?
How does prior experience help in setting a 'fair price' in supply management?
How does prior experience help in setting a 'fair price' in supply management?
If a company uses the last price paid in the immediately prior fiscal period to calculate direct material costs, what potential issue might arise when compared to using a weighted average?
If a company uses the last price paid in the immediately prior fiscal period to calculate direct material costs, what potential issue might arise when compared to using a weighted average?
When categorizing costs, if a company operating at full capacity increases its production by 10%, which cost is least likely to show a directly proportional increase?
When categorizing costs, if a company operating at full capacity increases its production by 10%, which cost is least likely to show a directly proportional increase?
A company is assessing its current overhead allocation and realizes they have been allocating overhead based on a historical direct labor rate, despite the fact that labor is no longer the largest cost element. What's the most significant accounting and financial implication of continuing to use this method?
A company is assessing its current overhead allocation and realizes they have been allocating overhead based on a historical direct labor rate, despite the fact that labor is no longer the largest cost element. What's the most significant accounting and financial implication of continuing to use this method?
Which of the following scenarios most accurately reflects a situation where a 'black' or 'grey' market price arises, potentially making it an 'unfair' price?
Which of the following scenarios most accurately reflects a situation where a 'black' or 'grey' market price arises, potentially making it an 'unfair' price?
In the scenario where a company is operating at a lower capacity, what is most likely to happen to their price of direct costs AND factory overhead?
In the scenario where a company is operating at a lower capacity, what is most likely to happen to their price of direct costs AND factory overhead?
A supplier is calculating the 'fair price' for a new machine for a manufacturing company. Which aspect, though very relevant, is not a direct component of arriving at the fair price, according to the context?
A supplier is calculating the 'fair price' for a new machine for a manufacturing company. Which aspect, though very relevant, is not a direct component of arriving at the fair price, according to the context?
If a company decides to fully allocate its fixed costs based on an anticipated production forecast, what is a possible consequence of this decision, if the actual production is substantially lower than forecasted?
If a company decides to fully allocate its fixed costs based on an anticipated production forecast, what is a possible consequence of this decision, if the actual production is substantially lower than forecasted?
A supply manager is negotiating with a long term supplier. The supplier insists on a specific price based on their total costs, while the market price is lower. According to the content, which justification cannot be invoked by the supplier?
A supply manager is negotiating with a long term supplier. The supplier insists on a specific price based on their total costs, while the market price is lower. According to the content, which justification cannot be invoked by the supplier?
A company is trying to determine the price at which to sell a batch of products. They need to account for a combination of semi-variable costs like electricity, direct costs like materials, and the fixed cost of their property taxes. Which cost does NOT have to be directly allocated to the products in order to derive a total cost per product?
A company is trying to determine the price at which to sell a batch of products. They need to account for a combination of semi-variable costs like electricity, direct costs like materials, and the fixed cost of their property taxes. Which cost does NOT have to be directly allocated to the products in order to derive a total cost per product?
Which scenario could lead to a supply manager having the most difficulty in determining a 'fair and just price' for a needed item?
Which scenario could lead to a supply manager having the most difficulty in determining a 'fair and just price' for a needed item?
Flashcards
Cost per unit
Cost per unit
The average cost of raw materials, direct labor, and overhead spread across a certain production volume.
Cost of services
Cost of services
Expenses related to providing services, such as sales commissions, fees, transportation, and equipment rentals.
Efficiency in manufacturing
Efficiency in manufacturing
The idea that production efficiency can vary between suppliers.
Market price
Market price
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Profit entitlement
Profit entitlement
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Fair Price
Fair Price
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Profit and Supply
Profit and Supply
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Total Cost Coverage
Total Cost Coverage
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Direct Cost Coverage
Direct Cost Coverage
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Fair Price Variance
Fair Price Variance
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Monopoly and Fair Price
Monopoly and Fair Price
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Prevailing Price vs Fair Price
Prevailing Price vs Fair Price
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Supply Manager's Judgement
Supply Manager's Judgement
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Direct Costs
Direct Costs
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Indirect Costs
Indirect Costs
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Variable Costs
Variable Costs
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Semivariable Costs
Semivariable Costs
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Fixed Costs
Fixed Costs
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Standard Cost
Standard Cost
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Manufacturing Cost
Manufacturing Cost
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General, Administrative, and Selling (G&A) Costs
General, Administrative, and Selling (G&A) Costs
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Profit
Profit
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Total Cost
Total Cost
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Selling Price
Selling Price
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Fixed Cost Allocation
Fixed Cost Allocation
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Product Cost
Product Cost
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Supplier Profit
Supplier Profit
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Supply Manager's Role
Supply Manager's Role
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Prevailing Price
Prevailing Price
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What is cost?
What is cost?
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What is cost of services?
What is cost of services?
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Why shouldn't the market price only cover the most efficient supplier's costs?
Why shouldn't the market price only cover the most efficient supplier's costs?
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What determines market price?
What determines market price?
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Is a profit guaranteed?
Is a profit guaranteed?
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What happens if a seller can't meet market needs efficiently?
What happens if a seller can't meet market needs efficiently?
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What is the ideal cost coverage for suppliers?
What is the ideal cost coverage for suppliers?
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What are direct costs?
What are direct costs?
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What are indirect costs?
What are indirect costs?
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What are variable costs?
What are variable costs?
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Study Notes
Fair Price Definition & Relationship to Cost
- A fair price ensures a continuous supply of the right quality at the needed time, and only a supplier making a reasonable profit can sustain such a supply (in the long run).
- A fair price covers the supplier's total costs including a reasonable profit.
- While individual items may not always capture their full cost share, prices should at least cover direct costs.
- Fair prices to different suppliers for the same item may vary, and a buyer can pay both prices simultaneously.
- The presence of a monopoly or seller collusion, in itself, does not make a price unfair. Current market prices, even those established through coercion, may not be fair.
Factors Affecting Fair Price
- Current market prices are not inherently fair; black/grey markets or prices manipulated through coercion aren't considered fair.
- Supply managers must consider past experience, production knowledge, and logistics costs (storage, transportation, service delivery, and other relevant costs) to determine a fair price.
Cost Components and Classification
- To remain in business long-term, a supplier needs to cover total costs, including overhead and profit.
- Cost can be narrowly defined (e.g., direct labor & direct material) or more broadly (including overhead).
- Cost calculation accuracy is crucial for setting fair prices.
- Costs are classified as direct (directly assigned) and indirect (overhead) costs.
- Direct costs are easily assigned to specific products/services, like raw materials or manufacturing time.
- Indirect costs relate to general business operations, not directly tied to specific units, like rent, utilities, and staff salaries.
- Direct costs are often variable; they change proportionally with production volume.
- Indirect costs can be fixed, variable, or semi-variable. Fixed costs remain constant; variable costs change with production; semi-variable costs vary with output but not proportionately (e.g., utilities).
- Overhead allocation is often a percentage of direct costs (e.g., a percentage of direct labor costs).
- Standard costs, or average prices from the prior period, are common for determining direct material costs, as actual prices fluctuate.
Cost Accounting in Manufacturing and Services
- Manufacturing cost = direct materials + direct labor + factory overhead
- Total cost = Manufacturing cost + general, administrative, and selling costs.
- Service cost includes expenses associated with service provision, such as commissions, professional fees, transportation, and rental costs.
- Different suppliers may have diverse cost structures, and a fair price should reflect this diversity, not just the lowest cost structure. Fair prices should cover the costs of all suppliers, not just the most efficient, promoting continuous supply.
Cost vs. Market Price
- Cost alone does not determine market price, market forces and customer demand are significant factors.
- A seller's insistence on a price solely based on cost, irrespective of quality, service, or efficiency, is not justified.
- A supplier unable to efficiently deliver needed goods/services does not deserve a price that even covers costs.
- A supplier needs to cover total costs, including overhead and profit, to remain in business; otherwise, fewer suppliers leads to scarcity, higher prices, lower quality, and worse service.
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Description
Explore the definition of fair price and its connection to costs in supply management. This quiz covers factors that affect fair pricing, including market conditions and supplier profitability. Test your understanding of cost components and their classifications in the context of fair pricing strategies.
