Product costing as a general topic
Product Costing is a complex accounting process that forms part of every business.
The price of products in business are calculated while considering two specific influences, namely:
- The cost of production and
- The market where the products 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 expenses related 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 (Breaking even is when no profit is made)?
This relates to 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 or has some other motive. Normally the goal is to make a profit in the process)
- How can profit be maximised by pricing a product in a reasonable way compared to it's value (and it's associated value) 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 of looking at it is as follows: Will it be possible to provide a product or service at the same price than what it is already available for in the market, without loosing money?
- What this means in effect is, if I sold at the price of the competition and I have less money after having sold it than before producing it, then it would defeat the objective of being in business.
- If my price has to be higher than that of the competition to make a profit, then I have to add more value to justify the difference. If the value of a product does not warrant the price charged for it then I will eventually loose the business to the competition.
There will always be pressure from buyers to reduce pricing. Some cultures even expect price negotiation as part of the buying process.
Specialized Graphics however does not engage in price negotiation but also does not attempt to secure the highest possible price in each buying/selling situation. Our prices are pre-calculated and are published as fixed prices for everyone to see. Our prices are based on the considerations mentioned above and any deviation is in direct relation to the addition or forfeighting of value.