Marketing theory places “Price” as the first P in the "4 Ps" theory. Costing theories in management accounting are built from this principle. Compare and contrast the “Target costing approach to pricing” with “Cost-plus pricing."

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"Cost-plus pricing" and "target costing" are useful but distinct ways of generalizing how cost and price are related in a business model, and they are used to assign a unit price on a given product during the modeling stage.

Cost-plus pricing is the most basic method for determining the price of a product. In cost-plus pricing, the business sums up the cost of production of each unit and adds a profit mark-up to calculate the sale price.

Target costing, conversely, starts with the price at which the business wants to sell each unit. It usually involves market and competitor research to choose an optimal price for the product. After arriving at a price, it subtracts the profit the business wants to receive from each unit. The remaining amount is the maximum cost it can pay to achieve its desired profit margin.

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