How to Understand Accounting Costs and Cost Behavior

Ultrapure is a water purification technology that employs state of the art techniques to produce pure water for bottled water companies and other beverage manufacturing enterprises. With increased demand for purified water, there is a surge of the request for water purification equipment that not only meets the minimum standards but also utilizes modern, cost-effective technologies to ensure that the clients have value for their money and are satisfied with the product (Edzwald, 2011). 

Ultrapure solution is a new technology that incorporates rapid sand filter, activated carbon, precision filtration, reverse osmosis and ozone disinfection. The technology is ideal for most municipal water and can eliminate 99.9% of bacteria, suspended solids, algae and fungi. The competitive aspect of this technology will be its ability to save on power by having efficient pumps that can run on two-phase electricity, therefore, reducing the energy cost and using versatile reverse osmosis technology that is cheaper and takes longer to replace the membrane. The precision filters will range from 0.2 microns to 5 microns while the ozone generator will use corona technology hence reduce replacement of parts. The product will be designed in a compact way that not only minimizes space but also allows easy handling and movement as it would be mounted on a portable base (Edzwald, 2011). 

The costing for Ultrapure depends on the volume of water that can be purified in an hour's time. The more the number of liters that can be filtered the higher the cost of producing the equipment. Some of the variable costs for producing 2000 liters per hour are shown in the table below 

The above costs apply to a purification plant that can purify 2000 liters in one hour. The cost, however, might vary depending on the quantities of filters and filter housing. Based on research, a similar product in the market that consumes more power is trading at $4350. 

The selling price for the product will be based on the targeted cost with the company decomposing the target cost from the plant to the different components. The cost will be designed into the product, and all costs must be controlled throughout the product lifecycle. The selling price should also take into account the selling and administration costs, corporate tax and the profit margins expected by the company (Boyd, 2013). 

The targeted cost will be ideal for determining the selling price for the product because it will take into account all the different components and ensure that the competitive pressure is spread to the design of the plant. It will help in achieving a desired cost reduction level as determined by the costing process. It will also enable the company to study the market conditions and determine the profit margins to allow it identify allowable costs for Ultra Pure (Boyd, 2013). 

The product has the potential for growth based on increasing demand for water purification plants domestically and globally. With an established distributional network throughout America, Europe, Asia Pacific and Africa, the company stands to benefit from increased sales to new and existing clients who are looking for efficient and affordable plants that can easily be repaired. Assuming a selling price of $4310.72 per plant, the company has $1616.52 which is equivalent to 60% to cater for selling and administration expenses, corporate tax and a profit margin of 35%. With an expected annual growth rate of 15%, the plant is projected to contribute 10 of the company's profits in five years (Boyd, 2013). 

References 

Boyd, K. (2013).  Cost accounting for dummies . Hoboken, NJ: John Wiley & Sons, Inc. 

Edzwald, J. K. (2011).  Water quality & treatment: a handbook on drinking water . New York: McGraw-Hill