Costing & Pricing of product or service
Costing & Pricing of product or service
The costing and pricing of a product or service must be done without errors because of the possibility of losing money in the long run. Costing is a separate subject, as many different methods of allocating costs to business activities exist. Charging is the expenses incurred in the production of a product or in providing a service. The price is the amount the customer is willing to pay. Therefore you need to check when you do the pricing and costing of products or services as to whether your customer will pay that.
The cost incurred to produce a product directly impacts pricing and the profit earned by the company. There is a well-known tendency for small owners to under-price the item, as they believe in having more sales. However, they do not realize that it is risky to under-price as the business might face a substantial loss.
It is essential to classify the costs appropriately for budgeting and accounting purposes. It is vital to properly understand direct and indirect costs, as you need to use that for correct pricing. When you know the exact charges, easy to price your product competitively and accurately, it also becomes easier to implement better practices and explain to the investors. Some of these costs are tax-deductible when filing your accounts.
The terms used in accounting for the costing and pricing of products or services.:
Direct cost
It is the cost involved in producing the product or service. Direct costs include
Direct labor
Direct materials
Manufacturing supplies
Wages tied to production
Variable costs.
These costs can vary depending on the number of units produced, such as manufacturing for the purchase of materials, wages of employees directly involved in the production, and transport costs. It also depends on the quantity of the goods produced; for example, the packaging is a variable cost and depends on the number of packages done.
Indirect costs
These costs are not directly related to production. Some incidental damages might be overheads. Indirect costs refer to the director’s salary, electricity allocated to production, transport, distribution, shipping, and postage.
Fixed costs
These costs are incurred regardless of the sales, which means if you sell a product or not, charges are incurred. For example, these are costs for rent, rates, wages for employees, depreciation, owner’s salary, and drawings.
Usually, in the service industry, the owner’s time is not adequately accounted for and neglected; therefore, it should be there to record the owner’s time to include in the cost of the service you deliver.
Pricing
Before considering pricing, you must know your product’s market well and research the comparison. Then decide whether you will be at the same level or increase the price more than your competitor’s. However, being on the same level is dangerous without checking your direct and indirect costs account. Nevertheless, ensure the customer will pay the fee you set for your product.
Then you have to know the value that the customer attached to your products; in other words, the market value for your product. Maybe you have made a mistake with the costs of producing your product. You cannot overprice your product.
Do not undercharge your product or service, even if you want to make enough sales. If you are the service provider and new to the industry will tend to undercharge. Then also, if you realize your mistake, you will not be able to return to the customer and claim the real value for your service.
You will be safer to do market research in checking prices before setting the price. Then when you set the price, keep an additional percentage for your profit and arrive at the sales price. However, do not rush and offer discounts because you need more sales. In case of a bulk order even, do not give a refund but provide some other facilities like free delivery.
Then pricing also depends on the location; therefore, you need to know the price in your area before finalizing your price setting.