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.Costing-and-Pricingpptx
Understand the different costing and pricing methods
Assess current pricing practice of the Cooperative
Practice costing and pricing methods as guide for
implementation in the enterprise
.Costing-and-Pricingpptx
WHAT IS COSTING?
COSTING is the process of
calculating all of the expenses
involved in producing and selling
a product.
COSTING is the way you calculate how
much each individual product or service
costs you to produce and sell.
WHAT ARE COSTS
COSTS
The value of economic resources used in the
manufacture of a product is the cost of the
product. Cost is the minimum amount to be
recovered- the only direct relation to price . It
sets the floor price below which you cannot
go down further.
ELEMENTS OF COSTS
ELEMENTS OF COSTS
Material Costs
Material cost refers to the commodities supplied to
an undertaking, such as the cost of yarn and dyes
engaged in manufacturing cloth.
ELEMENTS OF COSTS
Material Costs
(a) Direct material cost: The cost of materials identifiable with and
allocated to cost centers or cost units, such as the cost of wood in the case
of furniture. Direct materials enter into and form part of the finished
product.
(b) Indirect material cost: The material cost that cannot be allocated but
can be apportioned to or absorbed by cost centers or cost units. These
materials cannot be traced as part of the product, and their cost is
distributed among the cost centers or cost units on an equitable basis.
ELEMENTS OF COSTS
Labor Costs (or Wages)
The cost of remunerating the employees of
an undertaking, e.g., wages, salaries, and
commission.
ELEMENTS OF COSTS
Labor Costs (or Wages)
(a) Direct labor cost (or direct wages): The labor cost identifiable
with and allocated to cost centers or cost units.
Direct labor cost includes the remuneration paid to convert raw
materials into finished products or alter the construction,
composition, or condition of the product manufactured by an
undertaking.
(b) Indirect labor cost (or indirect wages): The labor cost or
wages that cannot be allocated but can be apportioned to or
absorbed by cost centers or cost units, such as the salary paid
to a factory manager.
ELEMENTS OF COSTS
Expenses
The cost of services provided to an undertaking
and the notional cost of using
owned assets (i.e., depreciation of an owned
factory building).
ELEMENTS OF COSTS
Expenses
(a) Direct expenses (or chargeable expenses): The expenses
(other than direct material cost and direct labor cost)
identifiable with and allocated to cost centers or cost units.
(b) Indirect expenses: Expenses that cannot be allocated
but can be apportioned to or absorbed by cost centers or
cost units, such as rent, rates, taxes, insurance of the factory
building, factory lighting, repairs, and so forth.
ELEMENTS OF COSTS
Indirect Expenses
(i) Factory overhead or works overhead: All the indirect costs
incurred in manufacturing operations: indirect materials,
indirect labor, and all other indirect expenses, such as wages,
factory rent, factory rates, repairs, and so forth.
(ii) Office and administration overhead: All the indirect costs
relating to the direction, control, and administration of an
undertaking, such as office rent and staff salaries.
(iii) Selling and distribution overhead: All indirect costs incurred
for promoting sales, retaining customers, and delivering goods
after their manufacture, such as advertising, salesmen salaries,
commission on sales, carriage on sales, and packing charges.
COMPONENTS OF COSTS
The cumulation or aggregate of
different elements of cost.
Aggregating or grouping the various
elements obtains the following
components or types of cost:
COMPONENTS OF COSTS
(a) Prime cost: The aggregate of the direct material
cost, direct labor cost, and direct expenses.
Otherwise known as flat cost, first cost, and direct
cost.
(b) Factory cost: Results from the prime cost plus
the factory overhead (or production costs) and
comprises the aggregated direct material cost, direct
labor cost, direct expenses, and factory overhead.
COMPONENTS OF COSTS
(c) Office cost: Results from the factory cost plus
the office and administrative overhead. Otherwise
known as gross cost or cost of production.
(d) Total cost: Made up of the cost of production
plus the selling and distribution overhead.
Comprises all elements of cost or items of
expenditure up until the sale of the commodity.
Otherwise known as the selling cost or cost of sales.
TYPES OF COSTS
TYPES OF COSTS
TYPES OF COSTS
Fixed Costs Variable Costs
Definition Costs that don’t change
relation to production
volume
Costs that vary/change in
relation to production
volume
Nature Fixed costs are time-
related, as they remain
constant for a period of
time
Variable costs are
related, as they change
with the changes in
production volume
When production
increases/decreases
The total fixed costs stay
the same
The variable costs
increase/decrease
Examples Rent, advertising,
insurance, etc.
Direct materials, direct
labor
STEPS IN COSTING PRODUCTS
STEP 1: CALCULATE RAW MATERIALS
List all the RAW MATERIALS that go into
making your product.
 Cost of transport
 Cost of labeling and packaging
 Cost of wasted materials
STEP 2: CALCULATE DESIRED HOURLY WAGE
As an organization involved in fair trade,
fair wages and employee welfare and
benefits are important components to
consider.
STEP 3: CALCULATE PRODUCTION TIME
Remember that when calculating the amount of time spent
producing a product, include the following:
 Actual time working on the product
 Compare desired hourly wage with the minimum
wage
STEP 4: CALCULATE LABOR EXPENSE
LABOR is the time you and /or your employees spend
producing your product. To calculate the cost of the labor
needed to produce your product, multiply the amount of
time spent producing the product by your desired hourly
rate.
Production Time
x Desired Hourly Wage
Labor Cost
STEP 5: CALCULATE TOTAL DIRECT COSTS
RAW MATERIALS and LABOR are directly
related to producing your product, often
referred to as
DIRECT COSTS
STEP 6: CALCULATE INDIRECT EXPENSE
OVERHEAD EXPENSES/INDIRECT COSTS are all the
general costs of operating your business that are
not direct inputs into the production of your
product, but which are necessary to keep your
business running.
STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D)
Overhead Expenses include:
Rent
Telephone/Fax
Electricity and heat
Maintenance/Repairs
Office Supplies
Insurance
STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D)
Overhead Expenses include (cont’d):
Professional Services (Accounting, Legal)
Services (Accounting, Legal)
Administrative Salaries (Secretary)
Contingency Allowance (for
unanticipated expenses or repairs)
Taxes
Selling and Marketing Expenses, and
Depreciation
STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D)
Tools and equipment lose some of their value as
they are used and become older and more
worn. In order to cover the cost of replacing
these materials, include a DEPRECIATION
EXPENSE in your indirect cost calculation.
STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D)
SELLING AND MARKETING EXPENSE
includes any necessary communication
and travel to meet with buyers.
STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D
Selling and Marketing expenses include:
Cost of transportation
Production of price lists or brochure
Cost of producing samples (materials, labor,
labeling, packaging, and sending the samples to
prospective buyers)
STEP 7: CALCULATE TOTAL PRODUCT COST
In order to cost your product, you need to have an
accurate record of your expenses. You should always
carry a notebook with you to track your expenses.
When calculating your expenses, remember to:
 Consider all your expenses
 Make sure your cost are accurate
 Separate business expenses from personal expenses.
STEP 8: CALCULATE PRODUCER’S PRICE
PROFIT is the money necessary to keep
your production unit working and
growing.
STEP 8: CALCULATE PRODUCER’S PRICE (CONT’D)
Your company’s profit can be used as
1. Re-invest the company by
 Purchasing new production equipment
 Expanding your warehouse equipment
 Purchasing a new computer or fax
 Participating in a new trade show or retail show
STEP 8: CALCULATE PRODUCER’S PRICE (CONT’D)
Your company’s profit can be used as (cont’d):
2. Create opening reserves for slow economic times.
3. Build inventory as business increases.
4. Finance accounts receivable.
STEP 9: CALCULATE RETAIL PRICE
DISTRIBUTION COSTS include the expense of marketing and
delivering the product to the end customer.
Understanding these distribution costs and how the final
retail price of your product will enable you to determine
whether the ex-works price of your product is appropriate
in the market.
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
If your target market is the Export Market, the most
common distribution channel for the product to
enter the export market is:
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
Artisan Entrepreneur
Exporter
Importer/Wholesaler
Retailer
End Customer
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
In this distribution channel, the artisan
entrepreneur is responsible for:
 Creating product designs
 Producing the product
 Ensuring quality control at all points of production
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
Materials
Labor
Overhead
+ Profit_____
EX-WORKS PRICE
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The exporter is responsible for:
 Promoting products to international buyers
 Developing promotional materials
 Communicating with the buyer
 Ensuring final quality control
 Packaging and labeling orders for export shipping
STEP 9: CALCULATE RETAIL PRICE (CON T’D)
The exporter is responsible for (cont’d):
 Preparing all export documentation, including paying any
export taxes and other related fees
 Arranging internal transportation of orders from the
workshops to the port of exit
 Arranging international shipping
 Collecting payment from the buyer and distributing
payment to the artisans
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The FOB (Free on Board) is the price at which the exporter sells your
product to an importer.
Ex-Works Price
Packaging
Internal Transport
Documents
Overhead
+ Profit___________
FOB PRICE
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The cost of the exporter’s services may vary from approximately 5-
40% of the ex-works price, depending on many factors
Example: Hand-knitted fashion accessories will require less
packing material than blown glass ornament.
Ex-works Price
+ 5-40%____
FOB PRICE
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
AT THIS POINT, WHEN YOUR PRODUCT
REACHES THE PORT OF EXIT, THE
SELLER’S EXPENSES TYPICALLY END,
AND THE BUYER’S EXPENSES BEGIN.
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The importer/wholesaler is responsible for:
 Paying the FOB price of the products to the exporter
 Paying for international shipping costs and insurance
 Handling all customs and landing logistics and costs
within the importing country
 Warehousing the products
 Promoting and marketing the products, including
exhibiting in wholesale trade shows, printing catalogues,
and all sales marketing to buyers
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The importer/wholesaler is responsible for (cont’d):
 Packaging the product for distribution to the retailer,
which might include special hang tags to help explain
the product, special boxes or packaging for shipping
and display
 Arranging shipping to retail buyers
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The importer/wholesaler is responsible for (cont’d):
 Providing customer service to retail buyers to ensure that
they are satisfied with the products, that they receive re-
orders, and that they maximize their sales
 Providing input to artisans on new product development
ideas and making recommendations for revisions or
improvements to existing products
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The WHOLESALE PRICE is the price at
which the importer/wholesaler sells your
product to retailers.
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
It includes:
FOB price
Insurance
Freight
Customs Clearance
Internal transport
Warehousing
Marketing Expenses
Overhead
+ Profit_______________
WHOLESALE PRICE
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The WHOLESALE PRICE generally amounts to
approximately three times the FOB Price.
FOB Price
X 3
WHOLESALE PRICE
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
After purchasing the product from the
importer/wholesaler, the RETAILER is responsible for:
 Paying for shipping from the wholesaler’s warehouse to
his/her store
 Promoting and selling the product in his/her store,
including special display and promotion for special
products
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
It includes:
Wholesale Price
Shipping
Overhead
+ Profit__________
RETAIL PRICE
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The RETAIL PRICE is generally about two times
the wholesale price.
Wholesale Price
X 2__
RETAIL PRICE
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
The END CUSTOMER purchases and
enjoys the product, and is also
responsible for paying shipping costs if
ordering from a mail-order catalogue.
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
If your target market is the local market, at
least THREE distribution channels are
common for products being sold in local
markets
STEP 9: CALCULATE RETAIL PRICE (CONT’D)
Artisan Entrepreneur
End Customer
STEP 10: WORK BACKWARDS TO THE FOB PRICE
The best way to conduct price research is
to go to the location where your
product is being sold and look at similar
items being offered
STEP 10: WORK BACKWARDS TO THE FOB PRICE (CONT’D)
You can conduct market research by:
 Looking at gift and other specialty mail-order catalogues
and magazines from the country or market where your
product will sell
 Looking at gift and craft website on the Internet
 Interviewing tourist.
STEP 10: WORK BACKWARDS TO THE FOB PRICE (CONT’D)
You can conduct market research by:
 Asking family, friends or acquaintances who live in or visit the
importing country to find out the retail prices of similar
products
 Asking customers or potential customers how your products
compare to others in terms of price
STEP 10: WORK BACKWARDS TO THE FOB PRICE (CONT’D)
Once you have found the retail price for similar products,
you can wok backwards to the FOB price by dividing the
retail price by approximately 5 to 7.
Retail Price / 6 = FOB Price
END OF DAY 1
Thank you for your
participation!
What happens if your PRICE is TOO LOW?
 You may not make profit.
 You may receive more orders than you are able to fill.
 You may lose customers, if unable to deliver product
on time or if quality does not remain constant.
What CAN you DO if your PRICE is TOO LOW?
Double check that you did your costing
correctly.
Raise your profit margin.
COSTING AND PRICING REVIEW
Export Distribution Costs
Cost Ex-Works FOB Wholesale Retail
The amount of
money it actually
costs to produce an
item, including
materials, labor and
overhead
The price for which the
producer of the
product sells his or her
product, including the
cost plus a profit margin.
The price an importer
would pay for the
product to be brought to
the port of shipment,
packed in a container,
and have the export
paperwork prepared.
The cost of overseas and
internal transportation to
an import business plus
business costs which
include customs
clearance, warehouse,
labor and overhead
added to the FOB cost.
The business costs of
a retail business,
which include
transportation from
the wholesaler, labor,
sales promotion and
overhead, added to
the wholesale cost.
Materials
Labor
+Overhead
Product Cost
Product Cost
+Profit_______
Ex-Works Price
Ex-Works
+ Export Fees
FOB Price
FOB
+Overseas/
Internal Import Freight &
Importer Cost
Wholesale Price
Wholesale
+Retail Costs
Retail price
WHAT IS PRICING?
PRICING is the process of determining the amount of
money for which your product will sell, based on the
costs of producing and marketing your product,
balanced against what the market will bear
WHAT IS PRICING?
PRICE is:
* The figure at which you sell your product to
your customers
* The amount the customer is willing to pay.
PRICE-SETTING OBJECTIVES
• Penetrate The Market
• Increase Market Share
• Project Product Prestige
• Maximize Profitability
• Achieve Target Return on Investment
• Minimize Loses
FACTORS AFFECTING PRICE
COST
- Manufacturing Cost
- Acquisition Cost
DEMAND
COMPETITION
EXPORTER’S OBJECTIVE
CHANNEL OF
DISTRIBUTION
BUYER’S REQUIREMENT
CURRENCY DEVALUATION
FACTORS AFFECTING PRICING (CONT’D)
TYPICAL CHANNEL OF DISTRIBUTION
E
X
P
O
R
T
E
R
IMPORTER
AGENT
wholesaler
wholesaler
wholesaler
Retailer
Retailer
Retailer
Retailer
Retailer
Retailer
C
O
N
S
U
M
E
R
PRICING POLICIES
Cost-Oriented Pricing (Cost-Plus or Full
Costing)
Direct Cost Pricing
Break-even Pricing
Market-Oriented Pricing
PRICING POLICY
COST-ORIENTED PRICING or “cost plus” is the simplest
and widely used policy. The principle is that a
computed cost is determined for each unit of
production and to this base cost a percentage or
absolute make-up is added to determine price.
PRICING POLICY
The most common methods of applying the cost plus
approach are:
FULL COST PRICING- takes into account all relevant
direct and indirect costs directly related to
production and a pre-determined profit margin.
PRICING TECHNIQUES
• COST PLUS (FULL COST)PRICING
A specific percentage or absolute mark-up or margin is
added to the base cost, the computed cost for each unit
of product to determine the price.
COST BASE + PROFIT MARGIN
MARK-UP =PRICE
• 2 METHODS :
1. MARK UP
2. MARGIN
COST PLUS PRICING
COST + PROFIT = PRICE
Mark-up Method
Margin Method
MARK-UP METHOD
PROFIT ON COST:
Selling Price = Cost (1 + Profit in %/100)
EXAMPLE: Cost = Php 5.50
Profit Mark-up = 10%
Selling Price = Cost (1 + Profit in %/100)
= Php 5.50 (1 + 10/100)
= Php 5.50 (1 + 0.10)
= Php 5.50 (1.1)
= Php 6.50
MARK-UP METHOD
PROFIT ON COST:
Selling Price = Cost (1 + Profit in %/100)
EXAMPLE: Cost = Php 3.50
Profit Mark-up = 20%
Selling Price = Cost (1 + Profit in %/100)
= Php 3.50 (1 + 20/100)
= Php 3.50 (1 + 0.20)
= Php 3.50 (1.2)
= Php 4.20
MARGIN METHOD
Profit on Sales
Selling Price = Cost / (1-Profit % /100)
Example: Cost = Php 5.50
Profit % = 10 %
Selling Price = Cost / (1-Profit % /100)
= Php 5.50 / (1- 10 / 100)
= Php 5.50 / (1- 0.10)
= Php 5.50 / (0.90)
= Php 6.1111… or Php 6.11
MARGIN METHOD
Profit on Sales
Selling Price = Cost / (1-Profit % /100)
Example: Cost = Php 3.50
Profit % = 20 %
Selling Price = Cost / (1-Profit % /100)
= Php 3.50 / (1- 20 / 100)
= Php 3.50 / (1- 0.20)
= Php 3.50 / (0.80)
= Php 4.375… or Php 4.38
PRICING POLICY
DIRECT COST PRICING- any direct cost is taken
into account, profit mark-up is added to cover
estimated overhead and leave a profit.
PRICING TECHNIQUES
• MARGINAL COST PRICING
When fixed costs are already recovered by current
volume of output & sales, the company has the option
to sell additional volume at lower prices. Marginal cost
is determined on the basis of additional variable costs,
the sum of the PRIME cost and VARIABLE OVERHEAD.
PRICING POLICY
BREAK-EVEN PRICING- used to determine
the level of profit/loss that will be incurred at
given sales prices and varying volumes
PRICING TECHNIQUES
2. BREAK-EVEN POINT PRICING
BEP Price = Variable Cost/Unit + Total Fixed Cost
-------------------
Quantity
BEP Volume = Total Fixed Cost
------------------------------------------
Selling price/unit – Variable Cost/unit
PRICING POLICY
MARKET-ORIENTED PRICING can either be
DEMAND-ORIENTED PRICING or
COMPETITION ORIENTED.
PRICING TECHNIQUES
DEMAND-ORIENTED PRICING is done by
matching selling prices with the demand of foreign
buyers. Selling prices are related to the intensity of
demand expressed by the consumers
MARKET-ORIENTED PRICING
DEMAND-ORIENTED PRICING
– An export company maximizes profit by matching
selling prices with the demand of foreign buyers.
– A higher price is charged where customer
demand is high; a low price is charge where
customer interest is low.
MARKET ORIENTED PRICING
COMPETITION ORIENTED PRICING
• This approach is based on the actual or
anticipated behaviour of competitors.
Price is maintained not because of cost or
demand but because competitors do.
MARKET ORIENTED PRICING
• PERCEIVED VALUE PRICING =prices set on
the basis of the customer’s perception of
features, product performance,
psychological benefits & other benefits.
UNDERSTANDING COSTING AND PRICING
Costing and pricing are skills that are necessary for
the successful management of a business.
 They are used to develop sales and pricing terms;
 Analyze a company’s break-even point; and,
 Calculate sales volume and business earnings.
UNDERSTANDING COSTING AND PRICING
Calculating your costs accurately and determining an
appropriate for your products will allow you to:
 Cover your production costs; and
 Sell in sufficient quantity to make
• COSTING is the process of calculating all of the expenses
involved in producing and selling a product.
• PRICING is the process of determining the amount of
money for which your product will sell, based on the costs
of producing and marketing your product, balanced
against what the market will bear.
IMPORTANCE OF COSTING & PRICING
ERA OF GLOBALIZATION
(Tariffs range 0 to 5%)
INDUSTRIES MUST BE COMPETITIVE in
COSTING & PRICING
• Cheap raw materials
• Low wages for labor
MARKETING OBSTACLES
• Gaps in the infrastructure tended to increase costs:
- Higher transport costs;
- Higher electrical cost;
- Difficulties in communication;
- Problems in available packaging
• High Interest Cost
BASIC RULES IN PRODUCT PRICING
1. Know your market
2. Know the demand
3. Know your competition
4. Know your costs
5. Know your objectives
SETTING THE PRICE
1. Selecting the Price Objective
2. Determining Demand
3. Estimating Costs
4. Analyzing Competitors Costs, Prices & Offers
5. Selecting a Pricing Method
6. Selecting the Final Price
7. Sources of information
FACTORS AFFECTING PRICING
• Demand
• Competition
• Channel of
distribution
• Exporter’s objectives
 Price control
 Currency devaluation/
revaluation
 Cost to manufacture
and sell
ENTREPRENEURS MUST:
• KNOWLEDGE - Markets
- Competitive Prices
- Product Knowledge
• SKILLS - How to compute prices
- Negotiation Skills
• ATTITUDE - Professional
- Market Oriented
LET’S HEAR YOUR FEEDBACK!
Course Evaluation
•Thank you for your participation and
attention…..
•Have a nice day!

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.Costing-and-Pricingpptx

  • 2. Understand the different costing and pricing methods Assess current pricing practice of the Cooperative Practice costing and pricing methods as guide for implementation in the enterprise
  • 4. WHAT IS COSTING? COSTING is the process of calculating all of the expenses involved in producing and selling a product.
  • 5. COSTING is the way you calculate how much each individual product or service costs you to produce and sell.
  • 6. WHAT ARE COSTS COSTS The value of economic resources used in the manufacture of a product is the cost of the product. Cost is the minimum amount to be recovered- the only direct relation to price . It sets the floor price below which you cannot go down further.
  • 8. ELEMENTS OF COSTS Material Costs Material cost refers to the commodities supplied to an undertaking, such as the cost of yarn and dyes engaged in manufacturing cloth.
  • 9. ELEMENTS OF COSTS Material Costs (a) Direct material cost: The cost of materials identifiable with and allocated to cost centers or cost units, such as the cost of wood in the case of furniture. Direct materials enter into and form part of the finished product. (b) Indirect material cost: The material cost that cannot be allocated but can be apportioned to or absorbed by cost centers or cost units. These materials cannot be traced as part of the product, and their cost is distributed among the cost centers or cost units on an equitable basis.
  • 10. ELEMENTS OF COSTS Labor Costs (or Wages) The cost of remunerating the employees of an undertaking, e.g., wages, salaries, and commission.
  • 11. ELEMENTS OF COSTS Labor Costs (or Wages) (a) Direct labor cost (or direct wages): The labor cost identifiable with and allocated to cost centers or cost units. Direct labor cost includes the remuneration paid to convert raw materials into finished products or alter the construction, composition, or condition of the product manufactured by an undertaking. (b) Indirect labor cost (or indirect wages): The labor cost or wages that cannot be allocated but can be apportioned to or absorbed by cost centers or cost units, such as the salary paid to a factory manager.
  • 12. ELEMENTS OF COSTS Expenses The cost of services provided to an undertaking and the notional cost of using owned assets (i.e., depreciation of an owned factory building).
  • 13. ELEMENTS OF COSTS Expenses (a) Direct expenses (or chargeable expenses): The expenses (other than direct material cost and direct labor cost) identifiable with and allocated to cost centers or cost units. (b) Indirect expenses: Expenses that cannot be allocated but can be apportioned to or absorbed by cost centers or cost units, such as rent, rates, taxes, insurance of the factory building, factory lighting, repairs, and so forth.
  • 14. ELEMENTS OF COSTS Indirect Expenses (i) Factory overhead or works overhead: All the indirect costs incurred in manufacturing operations: indirect materials, indirect labor, and all other indirect expenses, such as wages, factory rent, factory rates, repairs, and so forth. (ii) Office and administration overhead: All the indirect costs relating to the direction, control, and administration of an undertaking, such as office rent and staff salaries. (iii) Selling and distribution overhead: All indirect costs incurred for promoting sales, retaining customers, and delivering goods after their manufacture, such as advertising, salesmen salaries, commission on sales, carriage on sales, and packing charges.
  • 15. COMPONENTS OF COSTS The cumulation or aggregate of different elements of cost. Aggregating or grouping the various elements obtains the following components or types of cost:
  • 16. COMPONENTS OF COSTS (a) Prime cost: The aggregate of the direct material cost, direct labor cost, and direct expenses. Otherwise known as flat cost, first cost, and direct cost. (b) Factory cost: Results from the prime cost plus the factory overhead (or production costs) and comprises the aggregated direct material cost, direct labor cost, direct expenses, and factory overhead.
  • 17. COMPONENTS OF COSTS (c) Office cost: Results from the factory cost plus the office and administrative overhead. Otherwise known as gross cost or cost of production. (d) Total cost: Made up of the cost of production plus the selling and distribution overhead. Comprises all elements of cost or items of expenditure up until the sale of the commodity. Otherwise known as the selling cost or cost of sales.
  • 20. TYPES OF COSTS Fixed Costs Variable Costs Definition Costs that don’t change relation to production volume Costs that vary/change in relation to production volume Nature Fixed costs are time- related, as they remain constant for a period of time Variable costs are related, as they change with the changes in production volume When production increases/decreases The total fixed costs stay the same The variable costs increase/decrease Examples Rent, advertising, insurance, etc. Direct materials, direct labor
  • 21. STEPS IN COSTING PRODUCTS
  • 22. STEP 1: CALCULATE RAW MATERIALS List all the RAW MATERIALS that go into making your product.  Cost of transport  Cost of labeling and packaging  Cost of wasted materials
  • 23. STEP 2: CALCULATE DESIRED HOURLY WAGE As an organization involved in fair trade, fair wages and employee welfare and benefits are important components to consider.
  • 24. STEP 3: CALCULATE PRODUCTION TIME Remember that when calculating the amount of time spent producing a product, include the following:  Actual time working on the product  Compare desired hourly wage with the minimum wage
  • 25. STEP 4: CALCULATE LABOR EXPENSE LABOR is the time you and /or your employees spend producing your product. To calculate the cost of the labor needed to produce your product, multiply the amount of time spent producing the product by your desired hourly rate. Production Time x Desired Hourly Wage Labor Cost
  • 26. STEP 5: CALCULATE TOTAL DIRECT COSTS RAW MATERIALS and LABOR are directly related to producing your product, often referred to as DIRECT COSTS
  • 27. STEP 6: CALCULATE INDIRECT EXPENSE OVERHEAD EXPENSES/INDIRECT COSTS are all the general costs of operating your business that are not direct inputs into the production of your product, but which are necessary to keep your business running.
  • 28. STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D) Overhead Expenses include: Rent Telephone/Fax Electricity and heat Maintenance/Repairs Office Supplies Insurance
  • 29. STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D) Overhead Expenses include (cont’d): Professional Services (Accounting, Legal) Services (Accounting, Legal) Administrative Salaries (Secretary) Contingency Allowance (for unanticipated expenses or repairs) Taxes Selling and Marketing Expenses, and Depreciation
  • 30. STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D) Tools and equipment lose some of their value as they are used and become older and more worn. In order to cover the cost of replacing these materials, include a DEPRECIATION EXPENSE in your indirect cost calculation.
  • 31. STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D) SELLING AND MARKETING EXPENSE includes any necessary communication and travel to meet with buyers.
  • 32. STEP 6: CALCULATE INDIRECT EXPENSE (CONT’D Selling and Marketing expenses include: Cost of transportation Production of price lists or brochure Cost of producing samples (materials, labor, labeling, packaging, and sending the samples to prospective buyers)
  • 33. STEP 7: CALCULATE TOTAL PRODUCT COST In order to cost your product, you need to have an accurate record of your expenses. You should always carry a notebook with you to track your expenses. When calculating your expenses, remember to:  Consider all your expenses  Make sure your cost are accurate  Separate business expenses from personal expenses.
  • 34. STEP 8: CALCULATE PRODUCER’S PRICE PROFIT is the money necessary to keep your production unit working and growing.
  • 35. STEP 8: CALCULATE PRODUCER’S PRICE (CONT’D) Your company’s profit can be used as 1. Re-invest the company by  Purchasing new production equipment  Expanding your warehouse equipment  Purchasing a new computer or fax  Participating in a new trade show or retail show
  • 36. STEP 8: CALCULATE PRODUCER’S PRICE (CONT’D) Your company’s profit can be used as (cont’d): 2. Create opening reserves for slow economic times. 3. Build inventory as business increases. 4. Finance accounts receivable.
  • 37. STEP 9: CALCULATE RETAIL PRICE DISTRIBUTION COSTS include the expense of marketing and delivering the product to the end customer. Understanding these distribution costs and how the final retail price of your product will enable you to determine whether the ex-works price of your product is appropriate in the market.
  • 38. STEP 9: CALCULATE RETAIL PRICE (CONT’D) If your target market is the Export Market, the most common distribution channel for the product to enter the export market is:
  • 39. STEP 9: CALCULATE RETAIL PRICE (CONT’D) Artisan Entrepreneur Exporter Importer/Wholesaler Retailer End Customer
  • 40. STEP 9: CALCULATE RETAIL PRICE (CONT’D) In this distribution channel, the artisan entrepreneur is responsible for:  Creating product designs  Producing the product  Ensuring quality control at all points of production
  • 41. STEP 9: CALCULATE RETAIL PRICE (CONT’D) Materials Labor Overhead + Profit_____ EX-WORKS PRICE
  • 42. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The exporter is responsible for:  Promoting products to international buyers  Developing promotional materials  Communicating with the buyer  Ensuring final quality control  Packaging and labeling orders for export shipping
  • 43. STEP 9: CALCULATE RETAIL PRICE (CON T’D) The exporter is responsible for (cont’d):  Preparing all export documentation, including paying any export taxes and other related fees  Arranging internal transportation of orders from the workshops to the port of exit  Arranging international shipping  Collecting payment from the buyer and distributing payment to the artisans
  • 44. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The FOB (Free on Board) is the price at which the exporter sells your product to an importer. Ex-Works Price Packaging Internal Transport Documents Overhead + Profit___________ FOB PRICE
  • 45. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The cost of the exporter’s services may vary from approximately 5- 40% of the ex-works price, depending on many factors Example: Hand-knitted fashion accessories will require less packing material than blown glass ornament. Ex-works Price + 5-40%____ FOB PRICE
  • 46. STEP 9: CALCULATE RETAIL PRICE (CONT’D) AT THIS POINT, WHEN YOUR PRODUCT REACHES THE PORT OF EXIT, THE SELLER’S EXPENSES TYPICALLY END, AND THE BUYER’S EXPENSES BEGIN.
  • 47. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The importer/wholesaler is responsible for:  Paying the FOB price of the products to the exporter  Paying for international shipping costs and insurance  Handling all customs and landing logistics and costs within the importing country  Warehousing the products  Promoting and marketing the products, including exhibiting in wholesale trade shows, printing catalogues, and all sales marketing to buyers
  • 48. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The importer/wholesaler is responsible for (cont’d):  Packaging the product for distribution to the retailer, which might include special hang tags to help explain the product, special boxes or packaging for shipping and display  Arranging shipping to retail buyers
  • 49. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The importer/wholesaler is responsible for (cont’d):  Providing customer service to retail buyers to ensure that they are satisfied with the products, that they receive re- orders, and that they maximize their sales  Providing input to artisans on new product development ideas and making recommendations for revisions or improvements to existing products
  • 50. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The WHOLESALE PRICE is the price at which the importer/wholesaler sells your product to retailers.
  • 51. STEP 9: CALCULATE RETAIL PRICE (CONT’D) It includes: FOB price Insurance Freight Customs Clearance Internal transport Warehousing Marketing Expenses Overhead + Profit_______________ WHOLESALE PRICE
  • 52. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The WHOLESALE PRICE generally amounts to approximately three times the FOB Price. FOB Price X 3 WHOLESALE PRICE
  • 53. STEP 9: CALCULATE RETAIL PRICE (CONT’D) After purchasing the product from the importer/wholesaler, the RETAILER is responsible for:  Paying for shipping from the wholesaler’s warehouse to his/her store  Promoting and selling the product in his/her store, including special display and promotion for special products
  • 54. STEP 9: CALCULATE RETAIL PRICE (CONT’D) It includes: Wholesale Price Shipping Overhead + Profit__________ RETAIL PRICE
  • 55. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The RETAIL PRICE is generally about two times the wholesale price. Wholesale Price X 2__ RETAIL PRICE
  • 56. STEP 9: CALCULATE RETAIL PRICE (CONT’D) The END CUSTOMER purchases and enjoys the product, and is also responsible for paying shipping costs if ordering from a mail-order catalogue.
  • 57. STEP 9: CALCULATE RETAIL PRICE (CONT’D) If your target market is the local market, at least THREE distribution channels are common for products being sold in local markets
  • 58. STEP 9: CALCULATE RETAIL PRICE (CONT’D) Artisan Entrepreneur End Customer
  • 59. STEP 10: WORK BACKWARDS TO THE FOB PRICE The best way to conduct price research is to go to the location where your product is being sold and look at similar items being offered
  • 60. STEP 10: WORK BACKWARDS TO THE FOB PRICE (CONT’D) You can conduct market research by:  Looking at gift and other specialty mail-order catalogues and magazines from the country or market where your product will sell  Looking at gift and craft website on the Internet  Interviewing tourist.
  • 61. STEP 10: WORK BACKWARDS TO THE FOB PRICE (CONT’D) You can conduct market research by:  Asking family, friends or acquaintances who live in or visit the importing country to find out the retail prices of similar products  Asking customers or potential customers how your products compare to others in terms of price
  • 62. STEP 10: WORK BACKWARDS TO THE FOB PRICE (CONT’D) Once you have found the retail price for similar products, you can wok backwards to the FOB price by dividing the retail price by approximately 5 to 7. Retail Price / 6 = FOB Price
  • 63. END OF DAY 1 Thank you for your participation!
  • 64. What happens if your PRICE is TOO LOW?  You may not make profit.  You may receive more orders than you are able to fill.  You may lose customers, if unable to deliver product on time or if quality does not remain constant.
  • 65. What CAN you DO if your PRICE is TOO LOW? Double check that you did your costing correctly. Raise your profit margin.
  • 66. COSTING AND PRICING REVIEW Export Distribution Costs Cost Ex-Works FOB Wholesale Retail The amount of money it actually costs to produce an item, including materials, labor and overhead The price for which the producer of the product sells his or her product, including the cost plus a profit margin. The price an importer would pay for the product to be brought to the port of shipment, packed in a container, and have the export paperwork prepared. The cost of overseas and internal transportation to an import business plus business costs which include customs clearance, warehouse, labor and overhead added to the FOB cost. The business costs of a retail business, which include transportation from the wholesaler, labor, sales promotion and overhead, added to the wholesale cost. Materials Labor +Overhead Product Cost Product Cost +Profit_______ Ex-Works Price Ex-Works + Export Fees FOB Price FOB +Overseas/ Internal Import Freight & Importer Cost Wholesale Price Wholesale +Retail Costs Retail price
  • 67. WHAT IS PRICING? PRICING is the process of determining the amount of money for which your product will sell, based on the costs of producing and marketing your product, balanced against what the market will bear
  • 68. WHAT IS PRICING? PRICE is: * The figure at which you sell your product to your customers * The amount the customer is willing to pay.
  • 69. PRICE-SETTING OBJECTIVES • Penetrate The Market • Increase Market Share • Project Product Prestige • Maximize Profitability • Achieve Target Return on Investment • Minimize Loses
  • 70. FACTORS AFFECTING PRICE COST - Manufacturing Cost - Acquisition Cost DEMAND COMPETITION EXPORTER’S OBJECTIVE CHANNEL OF DISTRIBUTION BUYER’S REQUIREMENT CURRENCY DEVALUATION
  • 71. FACTORS AFFECTING PRICING (CONT’D) TYPICAL CHANNEL OF DISTRIBUTION E X P O R T E R IMPORTER AGENT wholesaler wholesaler wholesaler Retailer Retailer Retailer Retailer Retailer Retailer C O N S U M E R
  • 72. PRICING POLICIES Cost-Oriented Pricing (Cost-Plus or Full Costing) Direct Cost Pricing Break-even Pricing Market-Oriented Pricing
  • 73. PRICING POLICY COST-ORIENTED PRICING or “cost plus” is the simplest and widely used policy. The principle is that a computed cost is determined for each unit of production and to this base cost a percentage or absolute make-up is added to determine price.
  • 74. PRICING POLICY The most common methods of applying the cost plus approach are: FULL COST PRICING- takes into account all relevant direct and indirect costs directly related to production and a pre-determined profit margin.
  • 75. PRICING TECHNIQUES • COST PLUS (FULL COST)PRICING A specific percentage or absolute mark-up or margin is added to the base cost, the computed cost for each unit of product to determine the price. COST BASE + PROFIT MARGIN MARK-UP =PRICE • 2 METHODS : 1. MARK UP 2. MARGIN
  • 76. COST PLUS PRICING COST + PROFIT = PRICE Mark-up Method Margin Method
  • 77. MARK-UP METHOD PROFIT ON COST: Selling Price = Cost (1 + Profit in %/100) EXAMPLE: Cost = Php 5.50 Profit Mark-up = 10% Selling Price = Cost (1 + Profit in %/100) = Php 5.50 (1 + 10/100) = Php 5.50 (1 + 0.10) = Php 5.50 (1.1) = Php 6.50
  • 78. MARK-UP METHOD PROFIT ON COST: Selling Price = Cost (1 + Profit in %/100) EXAMPLE: Cost = Php 3.50 Profit Mark-up = 20% Selling Price = Cost (1 + Profit in %/100) = Php 3.50 (1 + 20/100) = Php 3.50 (1 + 0.20) = Php 3.50 (1.2) = Php 4.20
  • 79. MARGIN METHOD Profit on Sales Selling Price = Cost / (1-Profit % /100) Example: Cost = Php 5.50 Profit % = 10 % Selling Price = Cost / (1-Profit % /100) = Php 5.50 / (1- 10 / 100) = Php 5.50 / (1- 0.10) = Php 5.50 / (0.90) = Php 6.1111… or Php 6.11
  • 80. MARGIN METHOD Profit on Sales Selling Price = Cost / (1-Profit % /100) Example: Cost = Php 3.50 Profit % = 20 % Selling Price = Cost / (1-Profit % /100) = Php 3.50 / (1- 20 / 100) = Php 3.50 / (1- 0.20) = Php 3.50 / (0.80) = Php 4.375… or Php 4.38
  • 81. PRICING POLICY DIRECT COST PRICING- any direct cost is taken into account, profit mark-up is added to cover estimated overhead and leave a profit.
  • 82. PRICING TECHNIQUES • MARGINAL COST PRICING When fixed costs are already recovered by current volume of output & sales, the company has the option to sell additional volume at lower prices. Marginal cost is determined on the basis of additional variable costs, the sum of the PRIME cost and VARIABLE OVERHEAD.
  • 83. PRICING POLICY BREAK-EVEN PRICING- used to determine the level of profit/loss that will be incurred at given sales prices and varying volumes
  • 84. PRICING TECHNIQUES 2. BREAK-EVEN POINT PRICING BEP Price = Variable Cost/Unit + Total Fixed Cost ------------------- Quantity BEP Volume = Total Fixed Cost ------------------------------------------ Selling price/unit – Variable Cost/unit
  • 85. PRICING POLICY MARKET-ORIENTED PRICING can either be DEMAND-ORIENTED PRICING or COMPETITION ORIENTED.
  • 86. PRICING TECHNIQUES DEMAND-ORIENTED PRICING is done by matching selling prices with the demand of foreign buyers. Selling prices are related to the intensity of demand expressed by the consumers
  • 87. MARKET-ORIENTED PRICING DEMAND-ORIENTED PRICING – An export company maximizes profit by matching selling prices with the demand of foreign buyers. – A higher price is charged where customer demand is high; a low price is charge where customer interest is low.
  • 88. MARKET ORIENTED PRICING COMPETITION ORIENTED PRICING • This approach is based on the actual or anticipated behaviour of competitors. Price is maintained not because of cost or demand but because competitors do.
  • 89. MARKET ORIENTED PRICING • PERCEIVED VALUE PRICING =prices set on the basis of the customer’s perception of features, product performance, psychological benefits & other benefits.
  • 90. UNDERSTANDING COSTING AND PRICING Costing and pricing are skills that are necessary for the successful management of a business.  They are used to develop sales and pricing terms;  Analyze a company’s break-even point; and,  Calculate sales volume and business earnings.
  • 91. UNDERSTANDING COSTING AND PRICING Calculating your costs accurately and determining an appropriate for your products will allow you to:  Cover your production costs; and  Sell in sufficient quantity to make
  • 92. • COSTING is the process of calculating all of the expenses involved in producing and selling a product. • PRICING is the process of determining the amount of money for which your product will sell, based on the costs of producing and marketing your product, balanced against what the market will bear.
  • 93. IMPORTANCE OF COSTING & PRICING ERA OF GLOBALIZATION (Tariffs range 0 to 5%) INDUSTRIES MUST BE COMPETITIVE in COSTING & PRICING • Cheap raw materials • Low wages for labor
  • 94. MARKETING OBSTACLES • Gaps in the infrastructure tended to increase costs: - Higher transport costs; - Higher electrical cost; - Difficulties in communication; - Problems in available packaging • High Interest Cost
  • 95. BASIC RULES IN PRODUCT PRICING 1. Know your market 2. Know the demand 3. Know your competition 4. Know your costs 5. Know your objectives
  • 96. SETTING THE PRICE 1. Selecting the Price Objective 2. Determining Demand 3. Estimating Costs 4. Analyzing Competitors Costs, Prices & Offers 5. Selecting a Pricing Method 6. Selecting the Final Price 7. Sources of information
  • 97. FACTORS AFFECTING PRICING • Demand • Competition • Channel of distribution • Exporter’s objectives  Price control  Currency devaluation/ revaluation  Cost to manufacture and sell
  • 98. ENTREPRENEURS MUST: • KNOWLEDGE - Markets - Competitive Prices - Product Knowledge • SKILLS - How to compute prices - Negotiation Skills • ATTITUDE - Professional - Market Oriented
  • 99. LET’S HEAR YOUR FEEDBACK! Course Evaluation
  • 100. •Thank you for your participation and attention….. •Have a nice day!