Multiple Choice
Under the accrual basis of accounting, what must a municipality do with its revenue to comply with proper revenue recognition principles?
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3. Accrual Accounting Concepts
Revenue Recognition and Expense Recognition
Multiple Choice
Which of the following is a cost-based pricing approach?
A
Penetration pricing
B
Market-based pricing
C
Value-based pricing
D
Absorption costing
Verified step by step guidance1
Understand the concept of cost-based pricing: Cost-based pricing involves setting the price of a product based on the costs incurred to produce it, including direct costs (materials and labor) and indirect costs (overheads). Absorption costing is a method that allocates all production costs, both fixed and variable, to the product.
Review the options provided: Penetration pricing, market-based pricing, and value-based pricing are not cost-based approaches. Penetration pricing focuses on setting a low price to gain market share, market-based pricing relies on competitive market conditions, and value-based pricing is determined by the perceived value to the customer.
Identify the correct approach: Absorption costing is a cost-based pricing method because it uses the total cost of production (including fixed and variable costs) as the basis for setting the price.
Clarify why absorption costing fits: Absorption costing ensures that all costs associated with production are accounted for in the pricing strategy, making it a cost-based approach. This contrasts with other methods that rely on external factors like market conditions or customer value.
Conclude the reasoning: Absorption costing is the correct answer because it aligns with the principles of cost-based pricing, where the price is derived from the total production costs.
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