31 Aug The Cost/Price Relationship

The Cost / Price Relationship 

Meat & Potatoes vs. Dessert 

Douglas T. Hicks, CPA 

Accurate and relevant cost information – based on a valid model of the company – is a prerequisite for any organization that hopes to consistently make economically sound, fact-based decisions. One of the most common cost-based decisions made by executives is the pricing decision. Unfortunately, it is also one of the most misunderstood uses of cost information. 

One thing should be understood at the outset: Cost does not determine price. The market determines price. Cost determines whether or not a company wants to sell at the market price. The day-in, day-out process of estimating costs and then adding a profit to quote new work or establish catalog prices often leaves the impression that there is a link between a company’s costs and the price a customer will pay, but there is no direct link between an individual company’s actual cost and the market price. 

READ MORE