Costing & Pricing a Product: A Guide for Businesses

which has a fixed rental fee in addition to a variable charge based on mileage, and power costs, which consist of a fixed amount along with a variable charge based on consumption.

A total factory overhead is a combination of fixed overhead and variable overhead. Overhead absorption refers to the process of allocating all overhead costs to specific cost centers or production departments based on the units produced. This process, known as overhead absorption, involves distributing the overhead cost to cost centers or units using appropriate factors such as output, materials, prime cost, labor hours, machine hours, etc. To determine the absorption of overhead in the costs of jobs, products, or processes, an overhead absorption rate is calculated.

The idea of marginal cost pertains to the alteration in costs due to a modification in output. It specifically denotes the fluctuation in total cost when the quantity produced is altered by one unit. For example, while constructing a new factory, the marginal cost encompasses the expense of building said factory. In terms of pricing strategies, businesses possess multiple choices. One method involves establishing the price of a product or service by taking into account the production cost and adding the desired profit margin. Alternatively, businesses can determine prices based on their competitors' charges.