Active Learning

Setting up your Product Pricing

Demand in its simplest explanation is referring to a person, a household, or a member of the community it's the people who are capable of buying a product/service, however, the demand of a particular product varies on specific social classes, for example, Lamborghini limited edition this product is specifically manufactured for those who can afford the luxury.

The right way to determine product pricing is by conducting a product costing in this way cost that contributes to the product will be accurately computed, cost from direct materials (raw materials) direct labor, and factory overhead will be summed to get the Manufacturing cost. Let's elaborate on this stuff for you to understand it well.

Direct Materials (DM) from the world direct means 'the first ingredient' to produce a product it can also be called raw materials. For example, your company produces chicken fillets in a restaurant therefore, your DM. Is chicken breast, or, supposed your company produces organic Mango Juice then, your direct material is Mango.

Direct Labor, (DL) labor means the salary received by the worker to produce a product it is usually computed as 8 hours in a day and the suggested Government wages for a group of people, professionals, or regions. Labor means taking into account the time and effort you put to produce a product not to be confused about other kinds of labor e.g. Administrative, Sales, or Marketing.

Factory Overhead (FOH) is the costs incurred during the manufacturing process, not including the costs of direct labor and direct materials it is normally aggregated into cost pools and allocated to units produced during the period. Example: electricity cost, water expense, rent expenses, tools & equipment depreciation at a particular operation (Month)

After the allocation of all expenses on the product its time for the computation of Projected Selling Price, assuming that the company is producing a chicken fillet on a restaurant, the Direct Materials (DM) is 0.91, Direct Labor (DL) 0.83, and Manufacturing Overhead (FOH) 3.82 with the Total Production Cost of 5.56, the company will be using markup 160% for Direct seller and 120% for the whole seller. Usually, manufacturing companies used profit-maximizing markup to covers all operating expenses of the company.

Computation:

DM 0.91

DL 0.83

FOH

IM 1.46

IL 1.06

FOH 1.30

__________

TPC 5.56

Mark up %

VAT 12% (Value Added Tax)

Gross of Vat: 16.80 & 12.88