Basically, businesses calculate the markup price from the actual cost of the product or services to its selling prices tag when it comes out of the market. This computation may involve several accounting practices like getting all the expenses to create the product.
To determine the profit obtained in the goods and services, most companies usually add the markup to the over-all cost in generating the product.
This way, the firm can distinguish easily the total costs of the over-all expenses, including the distribution of the goods and services.
However, the methods that the company will employ in determining the markup price of the product depend on how the accounting department will see the factors. There are various ways that the company can obtain the markup prices.
One of the most common users of the markup pricing methods is resellers like Wal-Mart and 711 convenient stores. These companies simply add a certain percentage on top of the product that they bought from the distributors to come up with the initial price when they resell the products. The percentage that will be added in the product may vary depending on the quality and materials used to produce it. This may also depend on the objective of the company and number of demands for that product.
The simplicity involved in implementing markup pricing in products makes it more viable for companies since it is cost-effective and can be accomplished in just a short-period of time.
The two most commonly used methods of markup are
Mark-on-cost and Mark-up on-selling price.
In Markup-on-cost, the initial price of the product is, most often than not, set above the actual cost of the product. For example, the item cost is 50 dollars and the markup price is 15 dollars, by getting the difference of the two variables, you will come up with 15 percent markup percentage.
In determining the initial price of the product, a company usually multiplies the actual cost of the product by a preset percentage. The company then adds the result of the equation to the total cost.
Meanwhile, in Markup-on-Selling-Price, most of the companies and resellers acquire their Markup on the reflection of the price tag of the product. Most often than not, these companies see the markup as a certain percentage of the selling price, this is contrary to the percentage of the cost that is obtained in the Markup-on-cost.
The question now is why companies use different styles of acquiring the Markup? In certain industries, like Wal-Mart, it has been accustomed to discuss how they come up with the price.
But studies showed that Markup-on-Selling-Price provides the company promotional value to their money since most of them makes higher profit rather than going with Markup-on-cost method. The promotional value of the product will always show that the costumer saves money, while the company makes a little. But in reality, it is just the same whether you use Markup-on-Cost or Markup-on-Selling-Price. The company always comes up with a high percentage of profit in each product.