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It is hard to disagree that in order to succeed and remain competitive, companies need to consider numerous factors and choose between many different strategies. For instance, it is essential to select the most beneficial pricing method. The purpose of this paper is to review the key differences between variable-cost pricing and full-cost pricing and explore when a company would choose one over the other.
To begin with, it is essential to define the two pricing methods. First of all, according to Liberto (2021), full-cost pricing refers to calculating the final price based on direct, fixed, and variable overhead costs. In other words, costs like fixed office rent and monthly wages are constant, notwithstanding whether the firm begins to produce fewer goods. Direct costs would include raw materials expenses, and variable overhead refers to additional costs that may emerge due to the changes that the firm undergoes (Liberto, 2021). Full-cost pricing considers all these expenses, while variable-cost pricing focuses primarily on establishing the expenses incurred during the manufacturing process, independent of the everyday costs of running a business (Liberto, 2021, para. 8). Finally, another difference is that the latter approach includes fixed manufacturing overhead costs during the incurrence period, while full-cost pricing recognizes these expenses when selling the services or goods. Variable-cost pricing is preferred when the fixed costs are stable and demand and supply data can be easily accessed. On the contrary, when such information and competition are limited, full-cost pricing is a good choice.
To draw a conclusion, one may say that both approaches have their advantages and weaknesses and can be beneficial in different circumstances. External factors and changes within the company impact its choice of pricing method. If it selects variable-cost pricing, it will focus on calculating only the costs associated with the manufacturing process, excluding other daily expenses. However, full-cost pricing considers all direct, fixed, and variable overhead spending.
Reference
Liberto, D. (2021). What is full costing? Accounting method vs. variable costing. Investopedia. Web.
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