Costs are all costs incurred for or in the production of goods and services. In the case of manufacturing companies, prime costs are made up of material and manufacturing costs, to which additional costs such as administration and sales costs are added.
However, if it is purely a trading company, the cost costs are calculated from the purchase price, the costs for storage, the cost value and the costs for sales and administration. This means that the cost includes ALL costs, including those that are incurred regardless of the number of items produced or the amount of goods sold.
The cost & the cost price
The basis for the operational calculation are the prime costs. Profit, cash discount and rebate are added to these as part of the price calculation , which then results in the final sales price. If a product or service is only sold at cost, no profit will be made, since the cost price only covers the cost of the product.
Costs: direct costs vs. overheads
A distinction can be made between two types of cost when calculating prime costs:
- The individual costs
These are directly assignable and they are costs that can be assigned directly to the product. For example, raw materials and auxiliary materials can be assigned directly to a product and this is the material usage costs.
An example:
A company produces sweets for the German market. The following are required for the production of a 120 g chocolate bar:
- 50 g peanuts at € 0.08
- 30 g chocolate at € 0.06
- 20 g chocolate pieces at € 0.05
Since the quantity and price of the raw materials can be assigned directly to the product, these are individual costs .
- The overhead
Here, too, we start from the example of the chocolate bar that is now being sold to a wholesaler. The packaging costs for 1 box of 250 candy bars are 5.90 euros. Now these packaging costs must first be distributed via a key in order to calculate the costs of 0.02 € that are actually incurred for a chocolate bar. This is then the overhead costs.
Calculate the prime costs for service companies.
First and foremost, in order to calculate the prime costs for services, the wage costs must be calculated using the two factors working time and hourly rate. This is followed by the material costs and the extra costs that are added to it. The calculation is done as follows:
Number of hours
x hourly rate
= wage costs
+ material purchase price
+ material
surcharge + special direct costs of sales
+ special direct costs of production
= cost
Calculate the prime costs for manufacturing companies
According to gradphysics, the prime costs at the manufacturing companies consist primarily of the production costs, i.e. the material and manufacturing costs. In addition, there are additional sales and administration costs.
Individual
material costs + material overheads
= material
costs
+ production wages + production overheads
+ special direct costs of production
= production costs
+ sales overheads
+ administrative
overheads + special direct costs of sales
= cost of sales
The cost of sales
In order to show the actual cost of a billing period, it is necessary to determine the cost of sales. The basis for the previously determined manufacturing costs of sales is to determine the administration and sales overhead surcharge rates. The sales, administration and sales costs are added to the cost of sales in order to calculate the cost of sales.
An example
There is already a calculation of the manufacturing costs and now only the costs for administration and sales should be considered. The corresponding output data are available for this:
- Overhead rate for administration: 12.5%
- Distribution Overhead Rate: 5.88%
Calculating the cost of sales
According to this calculation, cost of sales of 6,981,165 euros arose in the corresponding period (month or year).
The trade calculation
A good entrepreneur will always sell his offered goods and / or services more expensive than he buys them and the difference is his profit. For this very reason, the trade calculation is one of the most important instruments in the context of price calculation, so that the entrepreneur’s existence is secured. The current situation of the entrepreneur results from the following distinction:
- The entrepreneur sells the goods to the customers without any problems after his last trade calculation. The price calculated by him is thus accepted. But there are no similar products from its competitors. The sales prices that the entrepreneur has calculated are above the forward calculation. In order for the entrepreneur to maximize his profit, he tries to buy as cheaply as possible
- The entrepreneur has to orientate himself towards the competition with regard to his sales prices. So the difference between the sales prices of him and his competitors can only be small, even with better service or higher quality. The backward calculation is used to calculate the purchase price that is to be realized with the supplier.
- With its sales prices, the company has to orientate itself towards the competition. No higher price will be accepted by customers. At the same time, the purchase price is determined by the supplier. Here the entrepreneur can use the difference calculation to calculate how high his profit will be. Based on these numbers, he decides whether he is able to offer the goods or services at this price or not.
The trade calculation
The entrepreneur uses a detailed price calculation to calculate the relevant costs for purchasing and selling. Exactly this procedure is called trade calculation and it consists of the.
- Reference costing
- The cost calculation
- The sales calculation
The trade calculation takes into account:
- Supplier discount & supplier account
- Purchase costs
- Handling cost surcharge
- administrative expenses
- Packaging costs
- Profit mark-up or calculation mark-up
- value added tax
Calculate the prime costs in a trading company
In the case of a trading company, the prime costs are calculated based on the price of the purchased product that is to be resold.
Commodity price
– discount
= target purchase price
– discount
= purchase price
+ delivery costs
= purchase price
+ handling costs
= cost
