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Historical Costing

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Senior Manager
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Joined: 02 Dec 2007
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Historical Costing [#permalink] New post 07 Sep 2008, 00:51
The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called historical costing. Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous years contractual price.
Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

A. The government might continue to pay for past inefficient use of funds.

B. The rate of inflation has varied considerably over the past twenty years.

C. The contractual price will be greatly affected by the cost of materials used for the products.

D. Many taxpayers question the amount of money the government spends on military contracts.

E. The pricing method based on historical costing might not encourage the development of innovative weapons.
Manager
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Re: Historical Costing [#permalink] New post 07 Sep 2008, 03:29
Nihit wrote:
The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called historical costing. Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous years contractual price.
Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

A. The government might continue to pay for past inefficient use of funds.

B. The rate of inflation has varied considerably over the past twenty years.

C. The contractual price will be greatly affected by the cost of materials used for the products.

D. Many taxpayers question the amount of money the government spends on military contracts.

E. The pricing method based on historical costing might not encourage the development of innovative weapons.


A should be the answer.
Senior Manager
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Re: Historical Costing [#permalink] New post 07 Sep 2008, 06:39
Nihit wrote:
The price the government pays for standard weapons purchased from military contractors is determined by a pricing method called historical costing. Historical costing allows contractors to protect their profits by adding a percentage increase, based on the current rate of inflation, to the previous years contractual price.
Which of the following statements, if true, is the best basis for a criticism of historical costing as an economically sound pricing method for military contracts?

A. The government might continue to pay for past inefficient use of funds.

B. The rate of inflation has varied considerably over the past twenty years.

C. The contractual price will be greatly affected by the cost of materials used for the products.

D. Many taxpayers question the amount of money the government spends on military contracts.

E. The pricing method based on historical costing might not encourage the development of innovative weapons.


IMO A)
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Re: Historical Costing [#permalink] New post 09 Sep 2008, 11:26
A for me too.
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Re: Historical Costing [#permalink] New post 09 Sep 2008, 11:30
IMO A

Because the future price = K * past price, If there is any error made while calculating past price . that error will continue to affect the future price.
Re: Historical Costing   [#permalink] 09 Sep 2008, 11:30
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