Costing & Pricing. Expro 100 Engineering The Hague November 2013 Martin Bitter Exportant Consultants Ltd. Agenda. Costing vs Pricing Definitions Managerial accounting Overheads + example Types of Cost Calculations Pricing Case. Costing ≠ Pricing. Costing.
Expro 100 Engineering
The Hague November 2013
Exportant Consultants Ltd.
Costing vs Pricing
Overheads + example
Types of Cost Calculations
Calculating a cost price:
Pure technical administrative exercise?
Reliable information and a calculator.
Setting a selling price:
creative marketing exercise
Market knowledge and a clear strategy !
Costing is calculating a cost price on basis of information and with knowledge of production and logistical processes.
Pricing is the strategic choice at which price a product can be sold in the market.
The pricing strategy is an integral part of the market entry strategy and should be in accordance with all other components of the marketing strategy
There are many different pricing strategies, an exporter should choose the strategy that suits his objectives and targets best.
Variable cost : all cost effected by the size of the production
or: cost that go down when sales go down
Fixed cost: cost that are made irrespective of the production
Unit Packing, export packing
Interest and financing cost
Shipment and insurance
Export documentation etc etc etc…..
Costing is no magic, but a calculation job, requiring knowledge of the production process, capacity and logistics.
Production cost(fixed and variable)
(export) Logistics and finance (variable)
(export) Marketing and distribution cost(fixed and variable)
Fixedproductioncost: allproductioncostnotdirectlyrelatedtosize of production(depreciation, energy forheating, maintenance, fixedworkers)
Variableproductioncost: directlyrelatedtoproduction of certainquantity: (rawmaterials, accessories, packingmaterials, labourcost, energy for machines)
Overhead expenses : non-productionrelatedfixedcost: (administration, maitenance office building, non productionpersonnel, cars, mortgages, representation)
Logisticandfinanceexpenses: transport fromfactorytoharbour, sea or air transport, special packing, insurance, bank expenses
Marketing anddistribution:agent’scommissions, ware housing, promotion, service, trade fair, travelling, brochures
provides information to managers to direct and control operation. In contrast, financial accounting is concerned with providing information to shareholders, creditors, and others who are outside an organization.
Managerial accounting provides the essential data with which the organizations are actually run. Managerial accounting is also termed as management accounting or cost accounting.
all costs found on the Profit & Lost statement except for direct labor, direct materials, and costs attributable to outside subcontractors that can be billed directly to a customer's account.
Overhead expenses include accounting, advertising, depreciation, indirect labor, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone, travel and utilities.
Overhead expenses are absorbed by the business and factored into the selling price as a percentage of the direct labour cost.
They include indirect costs such as accounting, advertising, depreciation, indirect labour, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone, travel and utilities.
Find the "average" hourly wage paid for direct labour
Estimate direct labour workdays available
Estimate billable direct hours for work year
Estimate billable direct labor value for work year
Estimate non-billable direct labor value for the work year
Estimate all overhead expenses for year incl. non-billable direct labour
Calculate the annual overhead percentage rel. to direct labour value
Cost of raw materials 10,000,000
cost for prod & services
prod. related 2,000,000
non prod. rel. 600,000
prod. Related 336,000
non prod. rel. 144,000
prod. Rel. 300,000
non prod. rel. 220,000
Earnings before interest and taxes EBIT 660,000
Indirect wages 144,000
Production related wages 336,000
(16 direct employees, working 36 hrs per week)
Work year: 52 weeks of 36 hrs
Holiday: 25 days
Public holidays 10 days
Av sick leave: 10 days
Training and other activities 4 days
Work day = 8 hours, 1 hr spent on non prod work
Avhourly direct wages: 336,000 / (16x52x36) = 11.22
Available direct labourdays:
52 x 4.5 – 25-10-10-4= 185 per man
Billable direct hours185x(8-1) = 1295 per man
Billable direct labourvalue1295 x 11.22x16 = 232,480
Non-billable direct labourvalue =totalavailabeworkinghours (52x5x8) – billable(1295) = 785 x 11.22 = 8,807 x 16 =141,000
All overheads: 600+144+220+141= 1,105,000
Annual overhead %: 1,105,000 / 232,480= 4,75
Marginal costing : assume Fixed costs will be covered by home market sales
Home market sales
Total costs home market
Marginal costing: no margin
100 200 300 400 500 600 700 Sales Volume
Fixed costs will be covered after + 375 units have been sold. For special one-time orders abroad: calculate only the export variable costs + profit.
Activity Based Costing
all costs are allocated according to the amount of activity and resources needed to sell/produce a product.
Activity-BasedCosting (ABC) is a method of assigning the organization's resource coststhroughactivitiesto the productsand services providedtoitscustomers.
It is generallyused as a tool forunderstanding product and customer costandprofitability.
ABC has predominantly been usedto support strategicdecisionssuch as pricing, outsourcing andidentificationandmeasurement of processimprovementinitiatives.
When exporter is not competitive in specific export market: shifting fixed cost.
Fixed production cost and overhead are absolute amounts.
If local market sales cover all fixed cost and overheads, these cost can be omitted from export pricing
Setting a selling price:
creative marketing exercise
Market knowledge and a clear strategy !
Creative marketing exerciseby marketing manager.
Is takingdecisionwhatpriceto quote in market.
Marketing manager decideson price levels.
Domestic sales: maydecidetoundercutcompetitionby 5% without calculation. (littlecompetition)
Export sales needsconsideration of:
Cost-plus, cost price plus margin: disadvantage: may be very different from price that could be obtained in the export segment, or is simply too high.
Cost-plus is used by companies without market information: change quickly.
Profit oriented pricing: profit percentage or absolute profit
Turnover oriented pricing: sets amount of turnover to be achieved, turnover has higher priority than price
Survival strategy: temp. oversupply strong competition: weak companies disappear, strong companies survive, depends on profits that are made in other markets, or if no other profitable market on financial stamina.
Competition oriented pricing: discourage competition to enter market or relate prices to market leader
Image oriented pricing: pricing has to be in accordance with image of product.
Perceived value pricing
Average market price (market leader’s)
What pricing method do you use?
How to set a price:
Bottom-up: You can start calculating from the cost-price up: by adding the costs of getting your product to the customer
Top-down:by deducting all costs from the market price until you have arrived at the cost-price
establish the current market pricing for comparative and/or substitutive products in the target market;
establish all the elements of the market price, like VAT, margins for the trade and the importer, import duties, freight and insurance costs etc.;
make a top-down calculation, deducting all the elements of the expected market price of your product(s) in order to arrive at the price “Ex Works” ( “Ex Factory”) or ex warehouse;
see if you can meet this price;
if not, re-calculate your own cost price by finding ways to decrease costs in your own factory or organisation. Or decrease your marketing budget, which also burdens your export-market price;
Estimate total sales in the plan year in numbers of units.
Set factory cost price* per unit and multiply with total number of units to be sold,
Gives total cost price for planned sales volume.
Add: targeted profit (or feasible profit indicated by top-down calculation); also add: total budget for export marketing support, or export promotion.
Add: total transportation costs factory to port of shipment (plus possible costs in port),
Gives total (planned) turnover at FOB level.
Add: total transportation costs to port of destination, also add insurance costs,
Gives total turnover at CIF-destination level.
Add: import duties and handling costs in port of destination,
Gives total (planned) value of sales at LCP level (Landed Cost price).
Calculate sales price of the importer
Calculate sales price of wholesaler
Calculate net sales-price (excl. VAT) of the retailer
Calculate consumer price, or retail price including VAT per unit.
Compare with general market pricing. Adjust (sales target, profit target or promotion budget) if necessary.
In a given situation for consumer goods, the price Ex Works (295) = 25% of the consumer price (1,118). The Multiplier is: 4.
This ‘multiplier’ is a calculation aid (typically for consumer goods’ prices), cutting short lengthy calculations when price alternatives are considered. It may vary from sector to sector.
When using the multiplier, keep in mind that it may cause slight calculation deviations.
Since 1987, BQI Group of Santa Cruz in Bolivia has been offering its consistent quality automotive products at competitive prices, on-time delivery and excellent services to global markets.
With the employment of more than 190 people, BQI Group is one of its kind in ANDEAN market, manufacturing and marketing finished products that include a variety of accessory articles and complete after market ranges…….read profile)
Have a look at the costing & pricing requirements……………..
Get together with your group and make the required calculations to assess export possibilities.