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Rated: E · Article · Business · #2207557
Article/tutorial explaining how to correctly cost and price products and services.

Costing and Pricing Products and Services


Articles summary


The article covers one of the secrets to business success; correct costing and pricing, with an example scenario.


Costing and Pricing


How to cost your products, avoiding common errors, using correct costing methods and systems


Small, medium and micro enterprises owners; this is the secret to your success or failure. You may have the most wonderful product or service, with great demand, but still run at a loss. This is disastrous, but it's either because:


  • Your mark-up is too low


  • Your production and or purchase costs are not accurate


  • Your total overheads are more that allocated to your individual item costs, thus too low a overhead recovery rate is applied to the costing


  • The overhead recovery rate is not reviewed often enough. Overheads increase in cost so rapidly and regularly, the allocation to cost must also be reviewed regularly


  • There are hidden costs which you have never brought into account when calculating your products' costs. Examples of these are depreciation on machinery and vehicles, as they are direct costs in the production and distribution of your products


  • You haven't included a salary for yourself in the calculations of cost


  • OR - Maybe you have no idea as to how best to run your business


Remember one thing; if you can't recover all your business operating costs, you will have to close up sooner or later. Maybe sooner rather than later, because you are poorer each day that you run your business. Please take care on this process.


An example scenario


I ran a costing project for a security company last year. The directors told me that they couldn't understand why their business was running at a loss, as their monthly turnover was almost half a million rand. They could also not figure out why their cash flow was continually declining with all this cash coming into the business every month. Something had to be wrong.


I analysed their financial statements, which proved that they were making an increasing loss and that they would have to continue to fund the business at an ever-increasing rate for its entire life, because of the continued losses. The cash flow problem was also caused by their continued need to purchase new vehicles (assets).


I then decided to cost each client as a separate project, taking into account all the direct costs involved in servicing each one of them. I also spread the total monthly overhead costs proportionately among all the projects. Guess what?


They were making a loss on all clients, some to the tune of R5,000.00 per month, others to the tune of 45%. Their biggest error was simply that they had originally not decided on a costing method, had never applied any costing calculations to their services, and had therefore way under priced their services. They were charging way too little.


As a result, this company was running at an average loss of R50,000 per month and the directors had to keep pumping more capital into the business's bank account to keep it afloat.


REMEMBER:

It is impossible to correctly price your products or services if you do not know what they cost you to produce, store and distribute.


The KISS Principle


I often say to myself," let's Keep It Simple Stupid, this is not a complex scientific process; just follow the basic principles of costing".


Product costing is made up as follows:


Purchased goods for resale (e.g. retail business)


  • The actual price paid for the item.


Plus the apportionment of related costs of acquiring, storing, and selling it.


  • The delivery costs by the supplier (or cost of fetching them)


  • The warehousing costs (your storeroom rent, for example, split up per product)


  • Delivery costs when sold


  • Allowance for breakages


  • Allowance for shrinkage (theft or shoplifting).


  • Any other direct costs relating to the product


  • Monthly Salaries and Weekly wages (owner included)


  • Overhead or indirect costs (indirect to the product itself)

The total of all these costs can be split up and allocated across all the individual products.



About the author.


Vaughan Jones is an accountant with 35 years' experience, and he is a writer of books and articles to help the business owners improve the managing of their businesses. He also does business analysis and small business management mentoring and training.


Email address: onescribe1@gmail.com

Books by the author are available at: https://www.amazon.com/Vaughan-Jones/e/B00IBN9BYY

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