Question: Explain the major cost-plus approaches to price setting. Cost-plus pricing uses a base-cost figure per unit and adds a markup to cover unassigned costs and to provide a profit. It is the most commonly used method of setting prices today. There are two primary cost-oriented pricing procedures. Full-cost pricing uses all relevant variable costs in setting a product's price and allocates those fixed costs that cannot be directly attributed to the production of the priced item.
Incremental-cost pricing attempts to use only those costs directly attributable to a specific output in setting prices to overcome the arbitrary allocation of fixed expenses. The basic limitation of cost-oriented pricing is that it does not adequately account for product demand.