Product costing as a general topic
Product Costing is a complex accounting process that forms part of every business.
The price of any product should be calculated considering the
1) cost of production and
2) the market
where it will be sold.
Costs of production include the following:
- material costs
- labour costs (including the time to do quotations and spending time on the telephone talking to the customer)
- overall business administration and management costs
- sales and distribution costs
- machine costs
- and any expense that relate to the production of a specific product or service
Market considerations include the following:
- the demand for a product
- the existence or not of competition (others who supply the same or similar product)
- the competition's pricing
Two questions that a business owner should ask and know the answer to are:
- What is the minimum price that I should charge for a product in order to break even?
This relates to all the costs involved.
If I sell a product after making it and get to the same financial status as before I started, then I am breaking even.
(It doesn't make sense to do business with the purpose of breaking even, unless one gains some enjoyment from it. Normally the goal is to make a profit in the process)
- What is the maximum price that I could charge for a product without loosing the business to a competitor?
This relates to the market for a specific product.
Everyone in business need to determine the price at which a product or service should be sold in order to make a profit.
- Another way to look at it is as follows:
Will it be possible to provide a certain product or service at a competitive price to what it is already available for in the market without having to pay for it?
- In effect it means, if I sold it at the price of the competition, will I have less money after having made and sold it than before I sold it?
My advice is that one should find a middle ground between the answers to the two questions above.
- Set the price of a product above the overall cost to what it can be produced at,
- and then add a fair profit that will not result in loosing the business to a competitor, or result in loosing a long term customer because your pricing structure may be considered greedy at some future point.
- Adding profit to the price of an item is not something that should be seen as unnecessary or wrong but should be considered as a charge that is levied for some very concrete components such as:
- a buffer for unforeseen costs
- the cost of sustaining a provider of services and products through times of lowered sales as a result of external factors.
- the price of risk taking
- the price of investment
- the price of distribution
- Some of the costs in business are often omitted from the formula of calculating a price, because it is not rated as a cost while it should actually get a price tag.
- If a product is priced higher than the price of the competition, then it is possible that some of the input costs in one's formula is too high, and that it may be possible to reduce some of these.
- The ability to reduce input costs is sometimes a result of business experience that come with time.
The above writing is not an attempt at accounting education but rather some thoughts on price calculation in a small business. Providing costing formulas or sample price tables is not within the scope of the services that Specialized Graphics offer.
Last Updated (Tuesday, 23 November 2010 06:51)