CHAPTER 8 PURCHASING PRICE DETERMINATION AND COST ANALYSIS PG133
LEARNING OUTCOME 1- EXPLAIN WHY PURCHASE PRICES ARE IMPORTANT
Purchase prices are important because they 1) act as an element of value, the difference between
the benefits the customer perceives minus the total cost to acquire those benefits. 2) Determining
the right price, a right price is a price that is fair and reasonable to both the buyer and the seller or
supplier and in general a fair price should be in reasonable proportion to the total costs of the
supplier and include a provision for profit, the price should be determined by the supplier and the
buyer in a collaborative effort in finding the required value and the price must be determined by
active competition in a competitive market. 3)Competitive prices-purchasing price shld also be
competitive to allow long term profitability
LEARNING OUTCOME 2 – DISCUSS THE VARIOUS COST ELEMENTS
Costs –are refers to an average cost for raw material over a long period of
time ,direct labour costs and estimated volume of production over a period
of time on which the distribution overhead is based. There are two main
types of costs which are DIRECT COSTS which normally constitute the major
proportion of a product and are tied directly to the production of a product
and INDIRECT COSTS which are those costs which are indirectly tied to the
level of operations eg the office lease payments and staff salaries
1-direct costs of materials – they are consumed or converted during the
production process. Direct materials are easily identified in the final product.
2-direct labour costs – generally some products/services are generally labour
intensive unlike others and issues like labour hours and wage rate are of
importance.The purchasing function is to determine the number and nature
of labour hours needed to manufacture a product.
3 –indirect costs – (also known as overheads) these are costs of a product
that are not direct labour or materials eg electricity, cleaning materials
4-profit mark up – the profit mark up is not a cost element for the supplier
but for the purchaser which the purchaser should understand very well. The
purchaser shld understand the production costs incurred by the supplier, the
risk run by the supplier,the quantity purchased , the technological skills
involved and the balance between supply and demand factors in a particular
market all of which will constitute the supplier mark up price.
, LEARNING OUTCOME 3 BRIEFLY EXPLAIN THE BEHAVIOUR OF COST RELATED
TO VOLUMES
it is important that the purchaser understands how the various costs
elements change in relation to larger or smaller volumes since this info will
help in negotiating the ultimate price. There are 3 categories of costs which
are 1)TOTAL FIXED COSTS – they remain the same no matter how many
products are manufactured or marketed during a certain period 2)TOTAL
VARIABLE COSTS-they increase as total production quantities increase but
the cost per product remain the same no matter how many products are
produced eg direct labour costs and direct materials cost 3)SEMI VARIABLE
COSTS –they have both fixed and variable elements
LEARNING OUTCOME 4 DIFFERENTIATE BETWEEN THE DIFFERENT MARKET
FORMS
Sellers active in Buyers active in the market (purchasers)
the market
Many Few One
(suppliers)
Many Pure Oligopoly Monopsony
Competition
Few Oligopoly Oligopsonistic Quasi-monopoly
Oligopoly
One Monopoly Quasi-monopoly Bilateral monopoly
LEARNING OUTCOME 5 EXPLAIN PRICE DETERMINATION FOR DIFFERENT
TYPES OF PRODUCTS
The type of purchase or the type of product being purchased determine the
price. Pricing method should therefore be adopted to the following product
categories
LEARNING OUTCOME 1- EXPLAIN WHY PURCHASE PRICES ARE IMPORTANT
Purchase prices are important because they 1) act as an element of value, the difference between
the benefits the customer perceives minus the total cost to acquire those benefits. 2) Determining
the right price, a right price is a price that is fair and reasonable to both the buyer and the seller or
supplier and in general a fair price should be in reasonable proportion to the total costs of the
supplier and include a provision for profit, the price should be determined by the supplier and the
buyer in a collaborative effort in finding the required value and the price must be determined by
active competition in a competitive market. 3)Competitive prices-purchasing price shld also be
competitive to allow long term profitability
LEARNING OUTCOME 2 – DISCUSS THE VARIOUS COST ELEMENTS
Costs –are refers to an average cost for raw material over a long period of
time ,direct labour costs and estimated volume of production over a period
of time on which the distribution overhead is based. There are two main
types of costs which are DIRECT COSTS which normally constitute the major
proportion of a product and are tied directly to the production of a product
and INDIRECT COSTS which are those costs which are indirectly tied to the
level of operations eg the office lease payments and staff salaries
1-direct costs of materials – they are consumed or converted during the
production process. Direct materials are easily identified in the final product.
2-direct labour costs – generally some products/services are generally labour
intensive unlike others and issues like labour hours and wage rate are of
importance.The purchasing function is to determine the number and nature
of labour hours needed to manufacture a product.
3 –indirect costs – (also known as overheads) these are costs of a product
that are not direct labour or materials eg electricity, cleaning materials
4-profit mark up – the profit mark up is not a cost element for the supplier
but for the purchaser which the purchaser should understand very well. The
purchaser shld understand the production costs incurred by the supplier, the
risk run by the supplier,the quantity purchased , the technological skills
involved and the balance between supply and demand factors in a particular
market all of which will constitute the supplier mark up price.
, LEARNING OUTCOME 3 BRIEFLY EXPLAIN THE BEHAVIOUR OF COST RELATED
TO VOLUMES
it is important that the purchaser understands how the various costs
elements change in relation to larger or smaller volumes since this info will
help in negotiating the ultimate price. There are 3 categories of costs which
are 1)TOTAL FIXED COSTS – they remain the same no matter how many
products are manufactured or marketed during a certain period 2)TOTAL
VARIABLE COSTS-they increase as total production quantities increase but
the cost per product remain the same no matter how many products are
produced eg direct labour costs and direct materials cost 3)SEMI VARIABLE
COSTS –they have both fixed and variable elements
LEARNING OUTCOME 4 DIFFERENTIATE BETWEEN THE DIFFERENT MARKET
FORMS
Sellers active in Buyers active in the market (purchasers)
the market
Many Few One
(suppliers)
Many Pure Oligopoly Monopsony
Competition
Few Oligopoly Oligopsonistic Quasi-monopoly
Oligopoly
One Monopoly Quasi-monopoly Bilateral monopoly
LEARNING OUTCOME 5 EXPLAIN PRICE DETERMINATION FOR DIFFERENT
TYPES OF PRODUCTS
The type of purchase or the type of product being purchased determine the
price. Pricing method should therefore be adopted to the following product
categories
