Basic Costing and Pricing Seminar

RICHARD V. SIMANGANTrade and Industry Development SpecialistDTI-Nueva Ecija

OBJECTIVES

To appreciate the importance of costing and pricing a particular product or service

To understand the different concepts related to costing and pricing

To be able to apply the concepts in determining costs and prices

SCOPE

This seminar is intended for manufacturers who are micro in size, the owner of such can still perform or supervise closely the manufacturing procedures. The market of such manufacturers are only for the domestic market.

2 PARTS

1. Costing2. Pricing

Part One: COSTING

DEFINITION OF TERMS

COSTS

DIRECT MATERIALS

DIRECT LABOR

MANUFACTURING OVERHEAD

• Indirect materials• Indirect labor• Other indirect expenses

DIRECT MATERIALS+

DIRECT LABOR+

MANUFACTURING OVERHEAD=

MANUFACTURING COST

DEFINITION OF TERMS

DIRECT MATERIALS

major or main component of the product

example: cloth or textilewoodrubbersteelmeat

DEFINITION OF TERMS

DIRECT LABOR

amount paid to production workers

wage (per unit, per hour) salary (monthly, every 15 days)

DEFINITION OF TERMS

MANUFACTURING OVERHEAD

factory expenses indirect materials – minor component indirect labor – salary of supervisor,

utilitymen (not chargeable to FG) other factory expenses – electric,

water, communication, supplies, gasoline, rent

1. DIRECT COSTS

2. INDIRECT COSTS

2 PARTS of COST

DIRECT (PRIME) COSTS direct materials direct labor

2 PARTS of COST

INDIRECT COSTS manufacturing overhead operating expenses

selling expenses general and administrative expenses

2 PARTS of COST

SELLING EXPENSES salaries of salesperson transportation or delivery expenses packaging expenses supplies water, electric & communication

expenses related to sales activities

INDIRECT COSTS

GENERAL OR ADMINISTRATIVE salaries of Manager, Bookkeeper,

Cashier depreciation office supplies water, electric & communication

expenses related to office operations miscellaneous or other expenses

INDIRECT COSTS

HOW TO COST A PRODUCT

Step 1: Determine the cost of materials and labor to compute for the direct cost per unit.

Example: Pastillas Making

Direct Materials 1 kg. sugar P 26.003 ltrs. carabao’s milk 40.00

1 bar butter 25.001/8 kg. nuts 9.00

Total Direct Materials P100.00

Direct Labor Cook 250.00

Total Direct Costs P 350.00

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Assuming you can produce 500 pcs. of pastillas, compute for the direct cost per unit:

Formula:

Direct Cost/unit = Total Direct Cost No. of units produced

Example: = P 350.00 500.00

= P 0.70 - Direct cost per unit

HOW TO COST A PRODUCT

Step 2: Calculate the amount of indirect cost which will be charged to each unit of product.

Indirect Costs (Indirect Materials, Indirect Labor & Other Indirect Expenses)

Example: Wrapper P 50.00Boxes 50.00Utility Man 100.00

* Other Operating Expenses 500.00

Total Indirect Cost P 700.00======

Formula:Indirect cost per unit = Total Indirect costs_

No. of units produced Example = P700.00

500 pcs.= P1.40/pc. ======

HOW TO COST A PRODUCT

Step 3: Compute for the unit production cost as follows:

Direct cost per unit P 0.70 Add: Indirect cost per unit 1.40

Unit Production Cost P 2.10 ====

HOW TO COST A PRODUCT

Part Two: PRICING

PRICING

TERM OF SALE

DEFINITION OF TERMS

IMPORTANT THOUGHTS on PRICING

What is the lowest price that can be charged to draw customers and still cover all the costs

What is the highest price that can be charged in order to maximize profit without drawing them to competitors

Under pricing leads to loss while overpricing drives customers away

IMPORTANT THOUGHTS on PRICING

What is your wholesale price?

What is your retail price?

BASIC PRICING POLICIES

1. Cost –oriented

Cost plus mark-up

e.g. 25%, 30%,35% mark-up

Mark-up may more or less follow the prevailing rate in the industry you belong to, or it maybe based on the price of competitors

Example : Unit production costs P 2.10Add 30% mark-up 0.63Unit selling price P 2.73

====

2. Break – even techniques

Getting the point where no profit nor loss is realized nor incurred

3. Market - oriented

a. Demand oriented – based on how many buyers demand the product, higher price when demand is strong and lower when demand is weak

• pricing depends on the person buying the product, higher for “uninformed” buyer and lower for hesitant ones

• prices vary with time, place or version of the same product

BASIC PRICING POLICIES

3. Market - oriented

b. Competition-oriented pricing

• based on what its competitors are charging, not necessarily of the same price but could be higher or lower than that of competitors’

• disregards the relationship between the cost of making the product and its price

BASIC PRICING POLICIES

OTHER PRICING STRATEGIES

a. loss-leader pricing – low price for the most popular item to attract many buyers who are expected to buy other goods in the store

b. psychological pricing - e.g. pricing an item a few centavos below like P2.95, P2.99

c. target-earnings pricing – pricing the product with the price that would give the desired profits

d. buy-one-take-one – creates the impression of bargain purchase

PRICING OBJECTIVES

1. maximize profitability2. minimum losses3. return on investment4. increase market share5. penetrate market6. project product prestige