What is the total cost concept in managerial accounting?
March 25, 2012
Learn about the total cost concept, one of the cost-plus pricing methods in managerial accounting.
In managerial accounting, the total cost concept is one of the cost-plus pricing methods used to determine the selling price of a product. Cost-plus pricing methods determine the selling price of a product as the total cost per unit plus the markup.
According to the total cost concept, the total cost per unit includes manufacturing costs as well as selling and administrative (S&A) expenses while the markup equals the desired profit.
To apply the total cost concept, follow these steps:
- Estimate total manufacturing costs
- Estimate total selling and administrative expenses
- Calculate estimated total cost (step 1 + step 2)
- Calculate total cost per unit: divide total cost (step 3) by the total number of units expected to be produced and sold
- Calculate the markup per unit
- Determine desired profit: total assets x desired rate of return
- Determine markup percentage: divide desired profit (step 5a) by total cost (step 3)
- Determine markup per unit: markup percentage (step 5b) x total cost per unit (step 4)
- Calculate the selling price: total cost per unit (step 4) + markup per unit (step 5c)
The total cost concept can also be used for profit and break even analysis.