Distinguishing between cost and price is fundamental to understanding profit and loss. Cost is the total amount invested by the manufacturer in the product. Price is the amount that is asked or received in exchange for a product. The difference between the price and the cost of the product is profit or loss on that product. For a firm, revenue minus costs equals profit or loss. Revenue is the grand total of all receipts from the sale of the firm's products during a stated time period. In order to make a profit, revenue must exceed costs. When costs exceed revenue, a loss is incurred.
Costing is the process of determining the costs of producing and marketing each product in the product line. Costing decisions involve all functional divisions of a company. Pricing is the process of determining the selling price of goods that are manufactured. Pricing is based on data produced in the costing process, the value customers will place on the product, and the competition in the market.
Under conditions of pure competition, the supply and demand of the product determines the price. In apparel markets, product pricing is the responsibility of the manufacturer. The apparel market structure is monopolistic competition where latitude in pricing is provided by product differentiation. The manufacturer establishes and administers a price that will cover costs and make a profit. A firm's success is often determined by management's understanding of the firm's cost structure, the market, pricing options, and source of profit.
Participants