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Pricing and Costing Seminar

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Richard V. Simangan
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1K views30 pages

Pricing and Costing Seminar

Uploaded by

Richard V. Simangan
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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Basic Costing and Pricing

Seminar

RICHARD V. SIMANGAN
Trade and Industry Development Specialist
DTI-Nueva Ecija
OBJECTIVES

To appreciate the importance of costing


and pricing a particular product or service

To understand the different concepts


related to costing and pricing

To be able to apply the concepts in


determining costs and prices
SCOPE
This seminar is intended for manufacturers
who are micro in size, the owner of such
can still perform or supervise closely the
manufacturing procedures. The market of
such manufacturers are only for the
domestic market.
2 PARTS

1. Costing
2. Pricing
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
2 PARTS of COST

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
INDIRECT COSTS
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
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. carabao’s 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


======
HOW TO COST A PRODUCT

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


====
Part Two:
PRICING
DEFINITION OF TERMS
PRICING

TERM OF SALE
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
====
BASIC PRICING POLICIES
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
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

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