Basic Costing and Pricing

Seminar
RICHARD V. SIMANGAN
Trade and Industry Development Specialist
DTI-Nueva Ecija
Part One:
COSTING
DEFINITION OF TERMS
COSTS
DIRECT MATERIALS
DIRECT LABOR
MANUFACTURING OVERHEAD
Indirect materials
Indirect labor
Other indirect expenses
DIRECT MATERIALS
+
DIRECT LABOR
+
MANUFACTURING OVERHEAD
=
MANUFACTURING COST
DEFINITION OF TERMS
DIRECT MATERIALS
major or main component of the
product
example: cloth or textile
wood
rubber
steel
meat
DEFINITION OF TERMS
DIRECT LABOR
amount paid to production
workers
wage (per unit, per hour)
salary (monthly, every 15 days)

DEFINITION OF TERMS
MANUFACTURING OVERHEAD
factory expenses
indirect materials minor component
indirect labor salary of supervisor,
utilitymen (not chargeable to FG)
other factory expenses electric,
water, communication, supplies,
gasoline, rent
1. DIRECT COSTS

2. INDIRECT COSTS
2 PARTS of COST
DIRECT (PRIME) COSTS
direct materials
direct labor

2 PARTS of COST
INDIRECT COSTS
manufacturing overhead
operating expenses
selling expenses
general and administrative expenses

2 PARTS of COST
SELLING EXPENSES
salaries of salesperson
transportation or delivery expenses
packaging expenses
supplies
water, electric & communication
expenses related to sales activities
INDIRECT COSTS
GENERAL OR ADMINISTRATIVE
salaries of Manager, Bookkeeper,
Cashier
depreciation
office supplies
water, electric & communication
expenses related to office operations
miscellaneous or other expenses
INDIRECT COSTS
HOW TO COST A PRODUCT
Step 1: Determine the cost of materials and labor to
compute for the direct cost per unit.

Example: Pastillas Making

Direct Materials
1 kg. sugar P 26.00
3 ltrs. carabaos milk 40.00
1 bar butter 25.00
1/8 kg. nuts 9.00
Total Direct Materials P100.00
Direct Labor
Cook 250.00

Total Direct Costs P 350.00
======
Assuming you can produce 500 pcs. of pastillas,
compute for the direct cost per unit:

Formula:

Direct Cost/unit = Total Direct Cost
No. of units produced

Example: = P 350.00
500.00

= P 0.70 - Direct cost per unit

HOW TO COST A PRODUCT
Step 2: Calculate the amount of indirect cost which will
be charged to each unit of product.

Indirect Costs (Indirect Materials, Indirect Labor & Other
Indirect Expenses)

Example: Wrapper P 50.00
Boxes 50.00
Utility Man 100.00
* Other Operating Expenses 500.00
Total Indirect Cost P 700.00
======
Formula:
Indirect cost per unit = Total Indirect costs_
No. of units produced
Example = P700.00
500 pcs.
= P1.40/pc.
======
HOW TO COST A PRODUCT
Step 3: Compute for the unit production
cost as follows:

Direct cost per unit P 0.70
Add: Indirect cost per unit 1.40

Unit Production Cost P 2.10
====
HOW TO COST A PRODUCT
Part Two:
PRICING
PRICING

TERM OF SALE
DEFINITION OF TERMS
IMPORTANT THOUGHTS
on PRICING
What is the lowest price that can be charged
to draw customers and still cover all the costs

What is the highest price that can be charged
in order to maximize profit without drawing
them to competitors

Under pricing leads to loss while overpricing
drives customers away
IMPORTANT THOUGHTS
on PRICING
What is your wholesale price?

What is your retail price?
BASIC PRICING POLICIES
1. Cost oriented

Cost plus mark-up

e.g. 25%, 30%,35% mark-up

Mark-up may more or less follow the prevailing rate in the
industry you belong to, or it maybe based on the price
of competitors

Example : Unit production costs P 2.10
Add 30% mark-up 0.63
Unit selling price P 2.73
====
2. Break even techniques

Getting the point where no profit nor loss is realized nor incurred

3. Market - oriented

a. Demand oriented based on how many buyers demand the
product, higher price when demand is strong and lower when
demand is weak

pricing depends on the person buying the product,
higher for uninformed buyer and lower for
hesitant ones
prices vary with time, place or version of the same
product
BASIC PRICING POLICIES
3. Market - oriented

b. Competition-oriented pricing

based on what its competitors are charging,
not necessarily of the same price but could be
higher or lower than that of competitors

disregards the relationship between the cost of
making the product and its price
BASIC PRICING POLICIES
OTHER PRICING STRATEGIES
a. loss-leader pricing low price for the most
popular item to attract many buyers who are
expected to buy other goods in the store
b. psychological pricing - e.g. pricing an item a
few centavos below like P2.95, P2.99
c. target-earnings pricing pricing the product
with the price that would give the desired profits
d. buy-one-take-one creates the impression of
bargain purchase
PRICING OBJECTIVES
1. maximize profitability
2. minimum losses
3. return on investment
4. increase market share
5. penetrate market
6. project product prestige