Improve Your Business: Workbook (ILO, 1986, 96 p.) 4. COSTING AND PRICING Part 1 - Questions Costing one product Costing many products Pricing for a manufacturer Pricing for a trader Pricing for a service operator Part 2 - Business practice Part 3 - Action programme How to construct your action programme Answers to business practice

Improve Your Business: Workbook (ILO, 1986, 96 p.)

4. COSTING AND PRICING

Part 1 - Questions

Costing one product

	Yes	No
1. Do you know what is meant by direct costs?
2. Do you know the difference between direct costs and indirect costs?
3. Is the following statement correct: “Indirect costs are the same as overheads”?
4. When you must quote a price to a customer before he buys, do you have all the information from past costs at hand so that you can make an estimate quickly?
5. Do you have written records which tell you how much you have spent so far this year on each of the following: salaries; insurance; rent; electricity; interest on a loan?
6. Is the following statement correct: “ Direct costs are not the same as overheads”?
7. Can you tell from your records exactly how much your wage bill was for the past six months?
8. Do you know what is meant by inflation?
9. Do you keep written records giving the costs of materials and labour?
10. Do your workers work at their jobs 100 per cent of the time they are at the workplace?

Costing many products

	Yes	No
1. Do you know the total number of hours which your employees worked during last year?
2. If a competitor begins to sell goods at lower prices than yours, do you know how much you can afford to lower your price to compete with him?
3. Do you think that your prices are generally right and give you the profits you expect?
4. Is the following statement correct: “The different products made by a carpenter normally use different quantities of material and different amounts of labour”?
5. Is the following statement correct: “An easy way of calculating indirect costs when there are many different products is to show them as a percentage of direct labour costs”?
6. Do you agree with the following statement: “The total costs of making a product consist of the total direct costs plus the total indirect costs”?
7. If the cost of your raw materials rises, do you increase the price of your product?
8. Is the following statement true: “Some costs are fixed but most costs are variable”?
9. Can you give a rough estimate of the current rate of inflation in your country?
10. Do you know the total cost of running your business during the last year?

Pricing for a manufacturer

		Yes	No
1. Do you agree with the following statement: “If you do not know your costs, you cannot know whether the prices you charge give you a profit or a loss”?
2. Do you know what it costs you for labour, raw materials and overheads every month?
3. Is the following statement true: “It is important to know costs, but there are many other factors that you have to take into account when setting your prices”?
4. Consider the way you are working out your prices. Do they enable you to sell well against your competitors?
5. However you work your prices, do you find that they give you a fair profit?
6. Do you set your prices on the basis of:
	(a) The highest you think the customers will pay?
	(b) Your competitors' prices?
	(c) Your total costs plus a reasonable profit?
7. Do you know how to calculate the total costs for each product you make?

Pricing for a trader

		Yes	No
1. Do you agree with the following statement: “ If you do not know your costs, you cannot know whether the prices you charge give you a profit or a loss”?
2. Do you know your labour costs, the cost price of your goods and your overheads every month?
3. Is the following statement true: “ It is important to know costs, but there are many other factors that you have to take into account when setting your prices”?
4. Consider the way you are working out your prices. Do they enable you to sell well against your competitors?
5. However you work out your prices, do you find that they give you a fair profit?
6. Do you set your prices on the basis of:
	(a) The highest you think the customers will pay?
	(b) Your competitors' prices?
	(c) Your total costs plus a mark-up?
7. Do you understand the difference between a trade margin and a mark-up?

Pricing for a service operator

		Yes	No
1. Do you agree with the following statement: “ If you do not know your costs, you cannot know whether the prices you charge give you a profit or a loss”?
2. Do you know what it costs you for labour, materials and overheads every month?
3. Is the following statement true: “It is important to know costs, but there are many other factors that you have to take into account when setting your prices”?
4. Consider the way you are working out your prices. Do they enable you to sell well against your competitors?
5. However you work out your prices, do you find that they give you a fair profit?
6. Have you heard the expression “charge per service hour”?
7. Do you set your prices on the basis of:
	(a) Your competitors' prices?
	(b) The highest you think the customers will pay?
	(c) Your direct costs per hour plus a percentage for gross profit per hour?

Part 2 - Business practice

1. Complete these statements about the types of costs in a business.

Figure

2. Complete the following calculations:

Figure

3. The total costs of a table are 528 NU and you want to add on 30 per cent for your profit. Calculate the selling price.

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4. A carpenter estimates the total costs of producing a table to be 720 NU. He decides to add on 30 per cent for his profit as follows:

Figure

Calculate in the space below his percentage of profit on the selling price.

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5. Are the following costs direct costs or indirect costs ?

Fill in the boxes on the right-hand side.

Figure

	Direct costs	Indirect costs
(a) The wages of your workers in the workshop
(b) The cost of your telephone
(c) The salary of your secretary
(d) The cost of electricity
(e) The cost of using a dry-cleaning machine
(f) The rent of a factory building
(g) The cost of petrol for your car
(h) The cost of replacing a worn-out tool
(i) The cost of stationery
(j) The cost of your raw materials

Now that you have completed the business practice exercises, turn to the pages which follow the action programme. There you will find the answers. Check your answers against the answer solutions which are given. How many correct answers did you get?

CHECK YOUR ANSWERS!

THEN GO TO THE HANDBOOK FOR MANAGEMENT IDEAS

Now go to the Handbook and read thoroughly the management ideas in the same section there. You will then find that all the business practice exercises become easier to answer.

Part 3 - Action programme

How to construct your action programme

Count the number of times you answered “yes” or “no” for each set of questions. How many times did you answer “yes”? The more “yes” answers, the better you are in business management. Now look again at those questions you answered with “no”. Those are possible problem areas in your business. Choose the one which you think is the most important for your business. Take the most urgent problem first. Don't try to solve everything at once.

Now write the problem into the action programme opposite, as we have done with the example. Then write in What must be done, By whom and By when in order to solve your problem.

Finally, go back to your business and carry out the action programme.

Figure

Problem	What must be done?	By whom?	By when?
Example:
I do not know if the price I charge for my products covers the costs and gives me a profit.	Set up a simple costing system which will show me the indirect costs and the direct costs for each product.	Myself and Joshua, my accountant friend.	Start: Monday next week, 1/4/86 Finish: Friday, 5/4/86

Answers to business practice

Figure

Figure

3. The selling price for the table is:

528 NU + 30 per cent of 528 NU = 686 NU

Figure

The percentage of profit on the selling price is:

5. Are the following costs direct costs or indirect costs?

	Direct costs	Indirect costs
(a) The wages of your workers in the workshop
(b) The cost of your telephone
(c) The salary of your secretary
(d) The cost of electricity		*
(e) The cost of using a dry-cleaning machine
(f) The rent of a factory building
(g) The cost of petrol for your car		**
(h) The cost of replacing a worn-out tool
(i) The cost of stationery
(j) The cost of your raw materials

* Usually indirect costs. For some types of businesses such as laundries they could be viewed as direct costs.

** To be considered as direct costs for a transport business.