What type of cost is typically used during a cost-plus pricing approach?

In a cost-plus pricing approach, a business determines the total cost of producing a product and then adds a markup to ensure a profit margin. The type of cost most commonly associated with this method is actual or standard cost.

Actual costs refer to the real expenses incurred in the production process, which may include direct materials, direct labor, and overhead costs. Standard costs, on the other hand, are predetermined costs based on historical data and estimates of future expenses. Using either actual or standard costs provides a solid basis from which a company can calculate its selling price.

The reason for this preference is that actual and standard costs provide a comprehensive view of the expenses involved in production, allowing companies to set prices that not only cover these costs but also include a desired profit margin. This rationale helps ensure the sustainability and profitability of the business while maintaining competitiveness in the market.

In contrast, marginal/full cost, relevant costs, and variable costs are not typically used in this pricing strategy as they may not encompass the comprehensive nature of the total costs involved in production, which is crucial for the cost-plus method. Marginal costs focus on the cost of producing one additional unit, relevant costs consider only future costs that will be directly affected by a decision, and variable costs only include