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Costing & Pricing Expro 100 Engineering The Hague November 2013 Martin Bitter Exportant Consultants Ltd.

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Presentation on theme: "Costing & Pricing Expro 100 Engineering The Hague November 2013 Martin Bitter Exportant Consultants Ltd."— Presentation transcript:

1 Costing & Pricing Expro 100 Engineering The Hague November 2013 Martin Bitter Exportant Consultants Ltd.

2 Agenda Costing vs Pricing Definitions Managerial accounting Overheads + example Types of Cost Calculations Pricing Case

3 Costing Pricing

4 Costing Calculating a cost price: - Pure technical administrative exercise? - No creativity? - No imagination? Needed: Reliable information and a calculator.

5 Pricing Setting a selling price: - creative marketing exercise - strategic decision Needed: Market knowledge and a clear strategy !

6 Definitions 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.

7 Costing 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

8 Cost price components? Raw materials Unit Packing, export packing Labour cost Overhead expenses Interest and financing cost Labeling/marking Pre-shipment inspections 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.

9 Export cost price = Production cost (fixed and variable) + Overhead (fixed) + (export) Logistics and finance (variable) + (export) Marketing and distribution cost (fixed and variable)

10 Cost price components defined Fixed production cost: all production cost not directly related to size of production (depreciation, energy for heating, maintenance, fixed workers) Variable production cost: directly related to production of certain quantity: (raw materials, accessories, packing materials, labour cost, energy for machines) Overhead expenses : non-production related fixed cost: (administration, maitenance office building, non production personnel, cars, mortgages, representation) Logistic and finance expenses: transport from factory to harbour, sea or air transport, special packing, insurance, bank expenses Marketing and distribution: agents commissions, ware housing, promotion, service, trade fair, travelling, brochures

11 Management Information?

12 Managerial Accounting (Cost or Management Accounting) 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. cost accounting


14 Overheads defined 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. [1]depreciation [1]

15 Overheads defined 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.

16 Calculating the Overhead % in relation to direct labour value 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 Calculate the annual overhead percentage rel. to direct labour value Estimate all overhead expenses for year incl. non-billable direct labour Estimate non-billable direct labor value for the work year

17 Overheads example

18 Company income statement Company revenue Turnover14,260,000 Company expenditures Cost of raw materials10,000,000 cost for prod & services prod. related 2,000,000 non prod. rel. 600,000 salaries prod. Related 336,000 non prod. rel. 144,000 depreciation prod. Rel. 300,000 non prod. rel. 220,000 ======== Earnings before interest and taxes EBIT 660,000

19 Abbrev. Pay roll Indirect wages144,000 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

20 The % !! Av hourly direct wages: 336,000 / (16x52x36) = 11.22 Available direct labour days: 52 x 4.5 – 25-10-10-4= 185 per man Billable direct hours 185x(8-1) = 1295 per man Billable direct labour value 1295 x 11.22x16 = 232,480 Non-billable direct labour value = total availabe working hours (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

21 1.Variable/Marginal/Direct costing 2.Absorption costing 3.Activity Based Costing Types of cost calculation

22 1.Variable/Marginal/Direct costing is a system under which those costs of production that vary with output are treated as product costs. This would usually include direct materials, direct labor and variable portion of manufacturing overhead. Also regarded as the cost of producing one additional itemproduct costsdirect materialsdirect labor Types of cost calculation

23 Total costs home market 100200 300 400 500 600 700 Sales Volume 76543217654321 Turn - over Fixed costs will be covered after + 375 units have been sold. For special one-time orders abroad: calculate only the export variable costs + profit. Marginal costing : assume Fixed costs will be covered by home market sales Fixed costs Variable Costs Variable costs export Home market sales Export sales Marginal costing: no margin Margin added

24 2.Absorption costing (or full costing system): is a system which treats all costs of production as product costs, regardless whether they are variable or fixed. absorption costing allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the variable manufacturing cost. Types of cost calculation

25 Absorption vs Variable

26 Cost example A small, one product company:

27 Unit product cost according Variable or Absorption

28 Absorption costing / full costing Total absorption costing (TAC) is a method of Accounting cost which entails the full cost of manufacturing or providing a service. This includes not just the costs of materials and labour, but also of all manufacturing overheads (whether fixed or variable). Traditional TAC was developed in the age of manufacturing and mostly used to arrive at the full manufacturing cost of producing goods; an alternative method of arriving at full cost known as activity-based costing (ABC) is often thought to be more appropriate for services.

29 3.Activity Based Costing all costs are allocated according to the amount of activity and resources needed to sell/produce a product. Types of cost calculation

30 3.Activity based Costing Activity-Based Costing (ABC) is a method of assigning the organization's resource costs through activities to the products and services provided to its customers. It is generally used as a tool for understanding product and customer cost and profitability. ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives.

31 Can a Cost Price be manipulated? YES 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

32 Pricing Setting a selling price: - creative marketing exercise - strategic decision Needed: Market knowledge and a clear strategy !

33 Pricing... Creative marketing exercise by marketing manager. Is taking decision what price to quote in market. Marketing manager decides on price levels. Domestic sales: may decide to undercut competition by 5% without calculation. (little competition) Export sales needs consideration of: Market segment Promotional activities to penetrate segment Price levels comparable competing products Anticipation of strike back from competition High price/max profits or lower price/growing market share Total strategy Actual cost price

34 Pricing - methods 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.

35 Pricing – methods continued 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. Variations: Enter very low (penetration and try to raise over time, in combination with turnover oriented) Enter very high: get image of high quality, technologically advanced, prices can be lowered to increase volume later.

36 Market pricing Average market price (market leaders) Penetration pricing Skimming Perceived value pricing Cost price Dumping

37 Question: What pricing method do you use?

38 Setting prices for price followers 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

39 Break!

40 Top-down 1.establish the current market pricing for comparative and/or substitutive products in the target market; 2.establish all the elements of the market price, like VAT, margins for the trade and the importer, import duties, freight and insurance costs etc.; 3.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; 4.see if you can meet this price; 5.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;

41 Bottom-up 1.Estimate total sales in the plan year in numbers of units. 2.Set factory cost price* per unit and multiply with total number of units to be sold, 3.Gives total cost price for planned sales volume. 4.Add: targeted profit (or feasible profit indicated by top-down calculation); also add: total budget for export marketing support, or export promotion. 5.Add: total transportation costs factory to port of shipment (plus possible costs in port), 6.Gives total (planned) turnover at FOB level. 7.Add: total transportation costs to port of destination, also add insurance costs, 8.Gives total turnover at CIF-destination level. 9.Add: import duties and handling costs in port of destination, 10.Gives total (planned) value of sales at LCP level (Landed Cost price).

42 Bottom-up, cont. 11.Calculate sales price of the importer 12.Calculate sales price of wholesaler 13.Calculate net sales-price (excl. VAT) of the retailer 14.Calculate consumer price, or retail price including VAT per unit. 15.Compare with general market pricing. Adjust (sales target, profit target or promotion budget) if necessary.

43 Multiplier 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.

44 Case : BQI Automotive S.A. 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)

45 Case : BQI Automotive S.A. Have a look at the costing & pricing requirements…………….. Get together with your group and make the required calculations to assess export possibilities.

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