The Essentials Of Cost And Managerial Accounting
The term price refers to the cost paid by the customers for availing particular goods or services. For the customer or consumer, the price paid for availing any commodity or service should be equivalent to the utility received from it. As per economics theory, the price of a commodity should be based on a demand and supply basis. the higher the demand, higher will be the price and vice versa. Its opposite for supply, higher supply results in lower price and vice versa (Hollander, 1997, p.237). For a buyer, the price is the cost paid for availing the benefit whereas for the supplier price refers to the source of revenue. Price of a commodity plays an important role in generating sales so the seller takes great care while setting the price of the commodity. As per Brooks (1975) Profit satisfaction is the main goal of the industry today. Economists are often of the view that an optimum price can be attained when marginal cost is equal to marginal revenue (Brooks, 1975). But in real life, many other factors affect the price of a product. These factors can be segregated as internal factors and external factors. The internal factors are under the control of the company, as and when required these factors can be manipulated according to the management’s requirement. For example-Cost of the raw materials: when the raw material is available at lower price, the cost of production is low and hence the company can have a good profit margin, even when the price is low (Washington State University amp. U.S. Department of Agriculture Cooperating, n.d.).Cost of labor: labor cost is a prime input for any production or service industry. The higher will be the wage rate of labor, the higher will be operating expenses and price of the product will move up. Thus the price of the product has to be kept marginally high to have budgeted profit margin (Thomas amp. Zanetti, 2008).