- Indirect Costs
- What is cost optimization?
- What is the cost of raw materials?
- When do costs decrease?
- Fixed costs
- How to generate savings in the company?
- What are production costs?
- What are the sample production costs?
- Cost-based pricing examples
- What is the cost of materials?
- How is the prime cost calculated?
- What is the purchase of raw materials?
- Variable costs
To define an adequate price for your product or service, the first thing to do is to calculate the cost of sales. The price is key to compete and allows you to know the profit margin you can obtain.
Knowing the cost of sales also helps to define the Monthly Recurring Revenue (MRR). This is the revenue you receive each month. Many times they are subscription payments.
Many startups and established brands use MMR as their main source of revenue. And to make it stable, they put permanence conditions on subscriptions. Examples are companies like Netflix, online media, gyms, etc.
In the B2B sector, another strategy to build loyalty among recurring customers is to give a large initial discount. This allows you to beat the competition. And the cost to acquire the customer is offset by the expense they make in the long run. The key to making this strategy work is to qualify customers well with a high lifetime value.
What is cost optimization?
Cost optimization simultaneously optimizes the cost and one or more responses to determine the configuration of factors that is economically convenient and produces acceptable values for the responses.
What is the cost of raw materials?
They are part of the variable costs: the more units produced, the more material used. If we take a jam factory as an example, raw material costs would include both the ingredients (fruit, sugar, etc.) and the packaging and labels.
When do costs decrease?
Cost reduction is the process used by companies to reduce their costs and increase their profits. … Every decision in the product development process affects cost. Companies often launch a new product without focusing too much on cost.
“At the moment our operators are busy; please stay on hold, we will be with you shortly”. This is one of the usual locutions that users hear every time they call customer service. Minutes wasted on the phone trying to solve, for example, an error in the bill, which is not their responsibility, are one of the reasons why, in the end and desperate, they end up asking to speak to the cancellation department.
3.- Price out of market: Although it is true that, sometimes, it is impossible to lower the price further, in others it is because the company has not reviewed its policy or studied how it can reduce previous costs, which allow adjusting it. To remain competitive it is not always necessary to cut prices, since they have to continue to cover expenses and provide a profit margin, but it is necessary to adjust them to the quality or offer an extra that justifies it. iPhones cost from 700 euros and, despite this and the fact that there are much cheaper models on the market, they fly out of the stores; Apple has managed to surround its brand with exclusivity.
How to generate savings in the company?
1.) Establish fixed salaries that can be increased with incentives according to the achievement of certain goals. 2.) Seek fiscal advantages from the direction of the company towards community, environmental or social issues, this will generate a large savings fund.
What are production costs?
Production costs (also called operating costs) are the expenses necessary to keep a project, processing line or a piece of equipment in operation. In a standard company, the difference between revenue (from sales and other inputs) and the cost of production indicates gross profit.
What are the sample production costs?
Indirect production costs are those that are necessary to produce the good, but are not necessarily present in the final product. An example of indirect costs are leasing, energy, labor of employees in charge of design, quality control, etc.
Cost-based pricing examples
You will find many of these hidden costs by taking a good look at how much your employees are costing you, analyzing whether you can take advantage of the new bonuses given for hiring, but above all for what is paid for occupational accident and occupational disease; although it may seem incredible, it is quite common that there is an overcharge for not contributing for the correct activity.
Depending on the activity, TA and PD contributions are more or less high. For example, in construction they are very high due to the high accident rate in the sector. In advisory and consulting firms they are low, as in any office job. What mistakes do companies make? They may have workers performing activities other than the main activity of the company and, as their contribution group is not well indicated, they are overpaying. A construction company, for example, must inform the Social Security who are not on site in order to avoid overpaying.
Another example: A glass manufacturing company with several work centers may have one in which its structural personnel (human resources, accounting, etc.) are located. If they all quote for the main activity of the company, they are overpaying. But there are other similar situations that are not so obvious, such as workshops where the contribution for one activity of the workshop is higher than others. It is necessary to take a good look at them because there are categories that are very similar but with different and cheaper contribution codes.
What is the cost of materials?
Direct material costs are the costs of all materials that are used to manufacture the final product and that can be specifically identified in a practical and cost-effective manner.
How is the prime cost calculated?
Prime cost = raw material + direct labor. Cost of production = prime cost + overhead.
What is the purchase of raw materials?
The purchase of raw materials is the acquisition of those goods that the company integrates in its manufacturing process to produce the goods it produces. It differs from the purchase of merchandise in that in this case what is acquired are the finished products ready for sale.
The “Concorde fallacy” is another name for the “sunk cost fallacy,” in which decision makers take past costs into account when making decisions about the future. The term “Concorde fallacy” refers to the UK and French governments taking their past expenditures on the expensive supersonic aircraft as a reason to continue the project, as opposed to the reason to “cut their losses.”
Evidence gathered through behavioral economics suggests that this theory fails to predict real-world behavior. Indeed, sunk costs influence actors’ decisions because humans are prone to loss aversion and framing effects. In light of these cognitive characteristics, it should not be surprising that people often do not behave according to what economists consider “rational” behavior.
Sunk costs should not affect the best option chosen by a rational decision maker. However, until a decision maker irreversibly decides to use certain resources, the prospective cost is an avoidable future cost and therefore it is correct to take it into account in any decision-making process. For example, if you are considering the advance purchase of movie tickets, but have not yet proceeded to buy them, the cost is avoidable. If the price of the tickets rises to a value that requires the buyer to pay more than the value the buyer assigns to them, the prospective buyer should evaluate this change in potential cost in their decision making and reevaluate their decision.