There are two flaws in this approach:
1. The product’s price is based on its cost, but no one might want to buy at that price. The product might incorporate features which customers do not value and therefore do not want to pay for, and competitors’ products might be cheaper, or at least offer better value for money. This flaw is addressed by target costing.
2. The costs incorporated are the current costs only. They are the marginal costs plus a share of the fixed costs for the current accounting period. There may be other important costs which are not part of these categories, but without which the goods could not have been made. Examples include the research and development costs and any close down costs incurred at the end of the product’s life. Why have these costs been excluded, particularly when selling prices have to be high enough to ensure that the product makes a profit. To make a profit, total revenue must exceed total costs in the long term. This flaw is addressed by lifecycle costing.