But this calculation does not take into account overhead costs, such as equipment depreciation. It does not include rent for premises, warehouse, or the work of marketers.
To take into account all expenses, you need to calculate Fixed production costs the cost price using a more complex formula:
Total Cost = (Material and Labor Costs + Direct and Indirect Overhead Costs) / Quantity of Goods
Let’s assume, for simplicity, that apart fromFixed production costs
the shelves you didn’t produce anything else this month, and decided to sell the entire batch to a wholesaler in your city. Then the company incurred the following expenses for their production and sale:
- The worker’s payroll is 35,000 rubles.
- Materials, packaging – 20,000 rubles.
- Rent of production and warehouse premises – 10,000 rubles.
- Payment for utilities – 3000 rubles.
- Delivery of shelves to a wholesale buyer – 2000 rubles including gasoline.
- Contextual advertising that brought in a wholesaler – 5,000 rubles.
- Equipment depreciation – 5000 rubles.
Then the calculation of the fullFixed production costs
cost taking into account direct and indirect costs will look like this:
PS = (35,000 + 20,000 +10,000 + 3,000 + 2,000 + 5,000 + 5,000) / 200 = 400
Therefore, the total costs from production to sale to the buyer amounted to 80,000 rubles per batch of goods. And the total cost of one shelf is 400 rubles, or approximately 45.45% higher than the partial cost.
This means that you cannot set the price lower than 400 rubles per shelf – this way you will work at a loss. Plus, you will have to pay taxes on the profit received (let’s say, simplified tax system 15% “Income minus expenses”) – this must also be taken into account when selling a batch of goods.
The calculation becomes even more complicated when you need to take into account not the full amount of indirect overhead costs, but only some part of it – for example, if you have a wide range of different products.
Calculation of the cost of servicesFixed production costs
In the case of services, the calculation depends heavily on what exactly you offer. It is impossible to calculate the cost of a tutor, a builder, and a hairdresser using the same formula.
One of the calculation options is a cost estimate : it includes a list of all expenses for the provision of the service, which is the cost price. For example, a visiting tutor will calculate the price of an hour of lessons, finishing companies often indicate the cost per square meter of premises, and taxi drivers – the cost per kilometer of travel.
Piece consumables and materials are calculated by the number of units or pairs used, and non-piece consumables (for example, bulk materials or liquids) are calculated by weight or volume. Or by the piece if a full package is used to provide the service.
In addition to the work itself and materials, indirect costs should also be included in the calculation of the service – rent of premises (if any), salaries of managers, service personnel of the enterprise, utilities. If equipment or tools are used to provide the service, do not forget to calculate their depreciation too.
For example, a private school teacher comesFixed production costs
to schoolchildren who cannot attend classes with a school laptop to show presentations and take tests. Let’s calculate the cost of the service per hour:
- Teacher’s salary: 1000 rubles per hour.
- Laptop depreciation: 100 rubles per hour.
- Part of the school management salary Fixed guinea business email list production costs and administrative expenses: 300 rubles per hour.
- Part of the school advertising costs: 200 rubles per hour.
- The cost of travel to a schoolchild, including the teacher’s time: 400 rubles.
The total cost of the service of a visiting school teacher is 2,000 rubles for the first hour of classes and 1,600 rubles for each subsequent hour, since there will be no need to spend additional money on travel.
How to reduce cost
Reducing the cost of production and sales of products leaves no matter the purpose more room for pricing and will help to make more profit in the long term. Business will be able to more effectively “push through” competitors in the market, attract new customers and retain old ones. To reduce the cost price, you can use several tools and strategies:
- Optimize processes. Consider the production stages in detail: how much time is spent on each step, how many consumables and materials are spent on the work, etc. Perhaps some procedures and manipulations can be abandoned without harming the product or several actions can be combined into one.
- Reduce costs. Due to price hikes and competition, prices for raw materials and consumables are constantly changing. It makes sense to periodically monitor the market in order to find replacement suppliers in time.
- Reduce unnecessary employees. Analyze the productivity of employees and the value they bring. Perhaps the staff is too bloated – for example, there is not enough work for everyone. In this case, you can reduce rates or think about expanding production and loading it with new work if there is demand.
- Increase labor productivity. If employees shops 9177 are not motivated to work to their full potential, the percentage of defects may increase, and the speed of production or service provision, on the contrary, will decrease. Plus, employees may work worse on outdated, faulty or inconvenient equipment. In this case, employee motivation systems or production modernization will help reduce costs in the long term.
- Increase production volumes. Fixed production costs do not depend on the quantity of goods produced. Therefore, their share in the cost price will decrease with each subsequent batch of products. So increasing production volumes is a good option to slightly reduce the cost price by “smearing” utilities and salaries over a larger quantity of goods.