Contents
- What is the cost price?
- Components of the cost price
- Factors affecting the cost price
- Types of cost price
- How to calculate the cost price
- How to reduce the cost price
What is the cost price?
The cost price of a product represents the total of all expenses related to the production and sale of goods, works, or services. It plays a key role in shaping the pricing policy of the enterprise and helps determine the minimum necessary sales volume to reach the breakeven point. Additionally, the cost price is used in accounting to calculate profit and tax obligations. Accurate calculation of the cost price can help identify areas where costs can be reduced and overall business efficiency improved.
Components of the cost price
The cost price includes various types of expenses that may vary depending on the company’s field of activity. The main components of the cost price include:
- Raw materials, materials, and components.
- Fuel and electricity.
- Depreciation charges.
- Employee salaries.
- Social contributions (for example, unified social tax).
- Sales and service costs.
- Transportation and other expenses.
Each enterprise independently determines which costs to include in the cost price, which is usually documented in a document called "Accounting Policy." In accounting, the cost price is reflected in financial results reports, and the principles of expense allocation to the cost price are determined by legislation.
Factors affecting the cost price
The cost price of products is subject to constant changes, as it depends on numerous factors. The influence on the cost price can be classified into external and internal factors.
External factors
These include:
- The economic situation in the country.
- The level of inflation.
- Technical and technological progress.
- Natural and climatic conditions.
- Changes in tax legislation.
- Changes in prices and tariffs for raw materials and resources.
Internal factors
Internal factors may include:
- Labor productivity.
- Duration of the production cycle.
- Loss of working time.
- Amount of defects.
- Level of overhead and management expenses.
- Marketing costs.
Each company has its own unique set of factors that influence the cost price, so it is important to conduct regular analysis and monitoring of these indicators.
Types of cost price
Depending on the included expenses, several types of cost price can be distinguished:
- Shop cost price: calculated based on the expenses of all shops of the enterprise under a shop management system.
- Production cost price: includes all expenses for the production of goods.
- Full cost price: is the sum of all expenses for the production and sale of goods, including non-production expenses.
The cost price can also be divided by the moment of calculation into planned, actual, and normative, each of which has its own characteristics and applications.
How to calculate the cost price
At first glance, calculating the cost price may seem like a simple process; however, in practice, it can be significantly more complex. For example, if an enterprise produces many goods, the question arises of how to correctly allocate indirect costs among them. For this purpose, many companies implement ERP systems that help effectively account for expenses.
For small businesses, a simple formula can be used:
Cost price = production expenses + commercial expenses
An example of calculating the cost price can be illustrated with a furniture production example. If the total volume of expenses is 920,000 rubles, then the cost price of one unit of product is calculated using the formula:
Cost price per unit = Total expenses / Number of units of goods
It is important to note that the correct allocation of indirect expenses is a key aspect that can significantly affect the final cost price.
How to reduce the cost price: effective methods
Reducing the cost price of products has a direct impact on the level of net profit. Below are several methods that can help in this process:
- Increasing production volumes to reduce variable costs per unit of product.
- Improving labor productivity through the implementation of KPIs and modernization of equipment.
- Reducing operational costs for production and optimizing all processes.
- Lowering raw material costs by finding cheaper suppliers or revising current contract terms.
- Minimizing technological losses and reducing production defects.
- Optimizing the volume and structure of purchases using ABC/XYZ analysis.
- Implementing lean manufacturing concepts to minimize losses.
Regular analysis of the structure of the cost price and monitoring of non-production expenses will help identify areas for improvement and achieve a lower cost price for products.