costing & pricing 2: factoring other important costs into your pricing reinhard werner &...
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Costing & Pricing 2:
Factoring other
important costs
into your pricing
Reinhard Werner & Mark Kwami
Costing the labour component
• This is one of the biggest challenges for many
African Crafts companies.
• This is also because many African exporters work with external producer groups (outsourcing).
• Many agree on a piece-price for a finished or semi-finished product.
• This price is like a flat-rate which includes raw materials, production inputs, labour cost..... and possibly other factors.
Costing the labour component
• Rural producer groups often factor their inefficiencies
into such flat-rate prices
• Or they under-state their prices and may actually be producing at a loss.
• This results in them not being willing to produce repeat orders
(or they can even stop production halfway and ask for a higher price).
Costing the labour component ! If you are paying your workers on a piece-basis
make sure to link price per piece to:
1) Productivity…
i.e. How many items can the average producer
make in an 8 hour/working day ?
2) Average daily wage…
What is your target/average daily wage you want your producer to earn ? This should be comparable to a reasonable and fair average daily wage in other sectors of your economy.
Costing the labour component ! Formula for calculating the labour costs based
on Productivity and Average Daily Wage:
e.g. Cost of carving a small mask:
Target daily wage
Productivity
= Labour cost per piece
Costing the labour component ! Formula for calculating the labour costs based
on Productivity and Average Daily Wage:
e.g. Cost of carving a small mask:
Target daily wage (USD 3/day)
Productivity (10 pieces per 8hr. day)
= 30 cents labour cost
per piece
Costing the labour component ! Formula for calculating the labour costs based
on Productivity and Average Daily Wage:
e.g. Cost of carving a small mask:
Target daily wage (USD 3/day)
Productivity (10 pieces per 8hr. day)
= 30 cents labour cost
per piece
Hard working carver who makes 15/day will earn USD 4,50/day
Slow carver who only makes 5/day will only earn USD 1,50/day
Costing the labour component ! • It is important to take your time to explain this to your workers!
• It is important that they understand that if they inflate their price (labour cost), this will make it difficult to compete in the market place (especially when it comes to exports).
• Although you need to manage your labour cost in order to be more competitive, you have to be careful not to compromise on QUALITY!
Revisit Costing sheet template -Factoring in cost of labour
Factoring your overheads into your price based on
Quantities produced
Overheads/month
Number of pieces produced/month= 1,00 USD
Overheads per piece
Summary:
You have to add 1 USD per piece to your cost price to cover overheads!
E.g. Your monthly overhead costs total 1000,00 USD...
1000,00 USD
1000 pieces
Factoring Overhead Costs into your price based on financial performance of previous year:
E.g. • Total overhead costs for 2013: 12.000 USD• Total sales in 2013 including a 30% profit margin: 93.600 USD---------------------------------------------------------------------------------1) Deduct 30% profit (to do this, Divide by 1,3) 93.600 divided by 1.3 = 72.000 USD
2) Deduct absolute overheads -12.000 USD _____________
3) This gives you your Direct Cost of production 60.000 USD
In order to determine your overhead percentage, you now have to divide 12.000 by 60.000
12.000 divided by 60.000 = 0,2 x 100 = 20%
Factoring Overhead Costs into your price based on financial performance of previous year:
Formula:
Overheads of previous year
Sales of previous year minus profit margin
x 100
Revisit Costing sheet template- Factoring in overheads:
Revisit Costing sheet template- Factoring in Design Cost:
Revisit Costing sheet template- Factoring in Marketing Cost:
Factoring Overhead Costs into your price based on financial performance of previous year:
• Re-calculate this percentage at the end of each year and re-adjust
for the new year!
• You can also base this calculation on Targeted Turnover for the new year....
....especially if you are sure that your turnover is going to grow in that year. This way, you can reduce the overhead percentage and hence make your prices more competitive.
Factoring in the cost of packaging
• Many companies forget to factor in their cost of packaging!
Factoring in the cost of packaging
• You have to distinguish between
Retail Packaging
Export Packaging
Factoring in the cost of packaging
• Simple formula:
Cost of box divided by number of units = cost of box / unit
Cost of box: 1 USD divided by 10 Units = 0,10 USD/unit
Developing packaging units
• Introduction of standardized Export Cartons
• Allows you to easily calculate cost of cartons / item
• Also allows you to precisely calculate shipping volumes/weight and freight charges
• Allows you to purchase in larger quantities
Revisit costing sheet- Factoring in cost of packaging
You are an exporter who sub-contracts production to an external carving group.
In the past you have been paying a piece-price of $2,00 for a mask.
How can you realize a lower price while ensuring that both you and your carvers make a profit?
Practical exercise 1 (Group work - approx. 10mins):
Now that you have negotiated a lower price with your
producers, how do you factor in the following costs:
(We are looking for your calculation method. There can be
more than one solution for each cost item)
1. Cost transporting masks to your premises
2. Packaging
3. Rent of your premises
3. Marketing costs
Practical exercise 2 (Group work approx. 10mins):
Review the costing sheets of your companies in your groups.
1) Indicate areas where these can be improved
2) Are there any common flaws?
3) Each group presents their findings.
Practical exercise 3 (Group work approx. 15 mins) :
Fixed Costs
Variable Costs
Profit
Your Price
Price negotiations
Buyers Price
?
Fixed Costs
Variable Costs
Profit
Your Price
Price negotiations
Min. Profit margin
Break even
Danger zone
Negotiating margin
F.O.B
Fixed Costs
Profit
Fixed Costs
Variable Costs
Profit
Variable Costs
Your buyers
Wholesale or retail price
Your buyers
Costs
Your Costs
Everyone has to make a profit!
F.O.B
Fixed Costs
Profit
Fixed Costs
Variable Costs
Profit
Variable Costs
Your buyers
Cost plus price Market Price
Range
Buyers cost-plus price higher than market
price!
Profit
Fixed Costs
Variable Costs
Your buyers
Cost plus price Market Price
Range
Fixed Costs
Variable Costs
F.O.B
Profit
Buyer trying to meet his market price range at the
expense of your profit range
Fixed Costs
Variable Costs
Profit
Your Price
Min. Profit margin
Break even
Danger zone
Negotiating margin
If you know your bottom-line, you know how far to negotiate
downwards!
If you do agree to eat into your profit margin, review costs to
see where you can cut costs so as to regain profitability
NO!
Setting your minimum Profit Margin: NO!
Summary
• It is important that you understand the basics of costing and pricing!
• This is key to running a profitable business!
• Having control over your costing and pricing, gives you theconfidence and the basis to negotiate with buyers....
...and it lets you know when to say NO!
• Note! Costing and pricing is not done in isolation.
• You need to be aware of market prices, prices of your competitors etc.
Thank You!
Thank You!
The Supply Chain
• What do we mean by Supply Chain?
“A supply chain describes all the activities that are involved When transforming / processing a raw material
into a finished product and delivering it to the end customer.”
Mapping the Supply Chain of a wood carving business:
Forest
Transport to your
workshop
Chain saw operators
Transport
Saw Mill
Timber market
Raw Material Supply Chain
Manufacturer?
Whole saler? / Importer
Retailer
Production
Carving
Drying
Packaging
Loading of Container
Export Wholesaling Retailing
Transport to Port
Finishing
Transport to shipper
Production Supply Chain
Sale to end customer
Delivery to or Collection by
retailer
Raw Materials storage/distribution
Sales
Purchse by end customer
Sale to Retailer
Transport to Warehouse of
Importer
Sale to wholesaler
Product finds place in customers
home
Export/Import Supply Chain
Shipping
Sea/Air
The Value Chain
• What do we mean by Value Chain?
The Value Chain
• A chain of activities within a company that each add value to the product being produced.
(First developed in 1985 by Michael Porter Professor at Harvard Business School. Leading authority o company strategy and competitiveness of
Nations and Regions)
The Value Chain Diagram
The Value Chain Diagram
• The idea is that each activity within your company should seek to add value to the product!
• Value Chain Analysis and management has become an important tool for businesses!
Why is it important that we understanding the supply/value chain?
• It helps you better understand your business
• It helps you better identify/understand all the factors (both internal and external) that affect your business and the value of your product
• It helps you identify problem sources
• It helps you improve efficiency and quality
• It helps you optimize processes and cut costs