Relevant costs and their use in pricing, Alternative...

Relevant costs and their use in pricing

The advantages of the pricing method, based on incomplete cost (in terms of variable costs), are most pronounced in the case of the need to make various managerial decisions.

In this case, the direction of the marginal analysis is used, such as the analysis based on the division of incomes and costs for relevant and irrelevant (irrelevant).

Relevant are significant (significant) revenues or costs when making a particular management decision, and irrelevant - are insignificant (insignificant).

In this case, the concept of relevance is used only when making managerial decisions in a short period, since in the long run all costs will be relevant.

As a rule, irreversible costs include fixed costs (rent, interest for a loan, depreciation of fixed assets, etc.). However, fixed costs can become relevant (depending on whether they can be influenced or not in the decision-making process). In addition, situations may arise where variable costs become irrelevant, i. E. independent of the decisions made. For example, any kind of raw material is purchased and stored in a warehouse. The company received an order for the production of products from this raw material. When deciding on an agreement to fulfill an order, the cost of this raw material should not be taken into account.

A relevant approach is widely used in the situation of adopting the following typical management decisions in the field of pricing.

1. Deciding on the production of an additional batch of products ( additional order ). Suppose that an enterprise produces a single type of product and sells it in bulk at a market price of 200 rubles per unit. Production costs per unit of output, rubles. were as follows:

1) direct material costs 70;

2) direct labor costs 30;

3) Variable indirect costs 20;

4) fixed indirect costs 50;

5) commercial costs:

10 variables;

constants 5;

Total: 185.

The production capacity of the enterprise is 15 thousand ed./month, and in fact, 10 thousand ed., i.e. The production capacity of the enterprise was not fully loaded. The enterprise received an offer to sign an additional contract for 1,000 products at a price of 170 rubles per pcs. The management must decide whether or not to conclude this additional contract?

At first glance, the answer will be negative, since the price of 170 rubles. below the full production cost of 15 rubles. However, here it is necessary to think differently. Since this is an additional order, all the permanent indirect and commercial costs have already been accounted for by the calculation of the actual output, i. are included in the cost price and, consequently, in the price of the production program. It is known that within a certain range (scale basis), fixed costs do not change with fluctuations in output. Consequently, the signing of a contract will not lead to their growth. And this means that, when making a decision, the price for the products of the additional order should be compared with the value of the variable costs, i.e. it is necessary to calculate the incomplete unit cost of production. In our case, the variable costs required to produce a unit of production are 130 rubles. (70 + 30 + 20 + 10).

If the enterprise signs an additional contract, the contribution (the amount of profit and fixed costs) will increase by 40 thousand rubles. Accordingly, the profit of the enterprise will increase by the same amount, since the fixed costs will be unchanged (Table 6.3).

Table 6.3

Comparison of indicators in case of acceptance and non-acceptance of an additional order, thousand rubles


The additional order is not accepted (the volume of the issue is 15 thousand units)

Additional order accepted (the volume of the issue is 16 thousand units)

1. Revenues from sales



2. Relevant costs - total



3. Including:

- direct material costs



- direct labor costs



- Variable indirect costs


220 000

- Variable commercial costs



4. Marginal revenue - contribution (item 1 - n. 2)



5. Unrelevant costs - total



6. Including:

- Variable indirect costs



- permanent commercial costs



7. Profit



Thus, it is profitable for the enterprise to accept an additional order. At the same time, it is necessary to be sure that the sale of an additional quantity of products at a lower price will not subsequently lead to a decrease in the entire volume of output.

2. Deciding to manufacture a component product or purchase it on the side. When making this decision, one should keep in mind that the amount of fixed costs does not depend on whether the component will be produced by the enterprise itself or purchased from a third-party vendor.

For example, an enterprise produces a unit whose total unit cost, rub., is as follows:

1) direct material costs 30;

2) direct labor costs 10;

3) indirect costs:

Variables 5;

constants 10;

Total -. 55.

The external supplier offers this node at a price of 50 rubles. The question arises, which is more profitable: to produce a knot in your own enterprise or to buy on the side.

There are probably two methods for solving the problem.

1. Irrelevant costs (in this case, they are constant indirect costs) are taken into account for both options (Table 6.4).

2. The incomplete cost of own production of a node is calculated in terms of variable costs, which then is compared with the supplier's price. In our case, this incomplete cost price is 45 rubles. (30 + 10 + 5), and the supplier's price is 50 rubles.

Thus, using both methods, came to one conclusion: it is more profitable to produce a node at home. At the same time, the cost of accounting for profit measurement is 55 rubles. for one node, and the relevant costs needed to make a decision - 45 rubles.

Table 6.4

Baseline data


Own production, rubles.

Buying on the side, rub.

Direct costs:

- material



- labor



Indirect costs:

- variables



- constants



Vendor Price






3. Decision on the price of export products. It is considered relevant for domestic producers to enter the foreign market and, consequently, the issue of the price of export products. The level of the export price is often required to be set as low as possible in order to penetrate the market and gain a foothold on it.

Suppose that the enterprise already sells 1000 items in the domestic market. products. Data on costs for the entire output and unit of output are given in Table. 6.5.

Table 6.5

Baseline data


The volume of the issue is 10 000 pcs., rubles.

Per unit of output, rubles.

Variable costs

50 000


Constant indirect costs

20 000


Total cost price

70 000


Sales price

100 000



30 000


The company has the opportunity to produce additional quantities of products and sell it on the foreign market. It is required to set the price for exported products. For this, one should reason as follows.

The products, which are already sold on the domestic market at a price of 10 rubles per unit, have a profitability of 43% (3: 7 • 100%).

From Table. 6.5 shows that the variable costs are 5 rubles/unit. It is known that 10 000 pcs. products are already sold on the domestic market, so when setting the export price you can use the incomplete cost price. This is due to the fact that:

1) fixed indirect costs of $ 20,000. will not change, and their share in the unit cost of production in the amount of 2 rubles. no need to return the price of the exported products;

2) an enterprise for entering the foreign market may be limited to a profit of less than 3 rubles per unit. In other words, the enterprise will profit from the export of this product if the export price exceeds the variable costs of 5 rubles per unit.

Assume that the enterprise wanted to sell the product on the foreign market with the same profitability (43%) as on the domestic one. Then the export price of the product will be 7 rubles. 15 kop. (5 • 1.43).

The application of such an approach to pricing is possible in cases where fixed indirect costs are actually recovered at prices set for a certain output, and prices based on variable costs are set only for an additional number of products.

In addition to the typical situations discussed, the relevant approach can also be used when choosing different production technologies, forming an assortment, evaluating the profitability of replacing old equipment with new ones, further processing semi-finished products or selling them, etc.

Note that until now the relevant approach is not widely used at United States enterprises. This is due to a number of reasons, among which there is a discrepancy between the accounting and tax accounting, the imperfection of the domestic classification of costs, the shortage of qualified personnel.

Alternative costs and their accounting when determining prices

Alternative costs (costs of missed opportunities), which are also called imputed , e. imaginary - such, data about which are not reflected in accounting.

They characterize the possibility that is lost or sacrificed, when the choice of any one variant of the management decision requires the rejection of the other. In other words, in a separate situation when making decisions it is sometimes necessary to accrue costs that may not represent a real outflow of funds. A similar situation arises in the context of the limited nature of any resources, i.e. alternative costs take place and should be taken into account when making pricing decisions only if there is a limiting factor.

Considering the situation, but taking the management decision to manufacture the component product or purchase it on the side (see 6.1.3), proceeded from the fact that the enterprise has free capacities on which it is possible to organize the production of the necessary node for it. Now suppose that all the capacities of the enterprise are occupied and the release of this node can be organized only by reducing the production of other products. In such a situation, i.e. in conditions of limited resources (in our case this equipment), obviously, there will be alternative costs.

Let's continue the example. The production of the unit requires 2 machine-hours of operation of the equipment on which the product A is currently manufactured, the "contribution" which 8 rubles. for 1 car-h. Then, if you organize your own production unit, the alternative costs will be 16 rubles/ed., And the calculation of the relevant costs, rubles. will be as follows:

1) direct costs:

material 30;

labor 10;

2) Variable indirect costs 5;

3) alternative costs 16;

Total: 61.

When comparing the obtained value of the relevant unit costs to the supplier's price (50 rubles), it should be recognized that it is more profitable for an enterprise to purchase a node on the side. The most difficult moment for the management of an enterprise when making this management decision is the understanding that in the calculation of the cost price, the specific marginal revenue (contribution) for the product A, which will be replaced by the production of the required unit, is the alternative cost.

Thus, the availability of limited resources can lead to a change in the earlier decision.

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