Upgrade Your Banking Experience with Advanced Core Banking Applications
.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
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.
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:
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
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.
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
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
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.
71. FACTORS AFFECTING PRICING (CONT’D)
TYPICAL CHANNEL OF DISTRIBUTION
E
X
P
O
R
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E
R
IMPORTER
AGENT
wholesaler
wholesaler
wholesaler
Retailer
Retailer
Retailer
Retailer
Retailer
Retailer
C
O
N
S
U
M
E
R
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
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
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