Very popular, this method tries to cover the total cost consisting of prime cost, office cost, selling cost, taxes etc. After covering the total cost, a certain margin of profits is added to mark-up the price.

Selling Price = Total Cost + Margin of Profit

= ( Prime Cost + Office Overheads + Selling Overheads + Taxes )

+ Margin of Profit

Where Prime Cost = Direct Labour Cost + Direct Material Cost + Direct Expenses

Overheads = Indirect Costs

This method is very useful for engineering products  and job costing. It is also useful for marketing intermediaries. It is also useful when we operate in a seller’s market.

In a high cost economy like ours, the consumer is at disadvantage when this method is used. As the cost is recovered from the consumer, there is no incentive to reduce the costs. This method is also not useful for a very competitive market. In a buyer’s market, we should adopt some other method.