finance articles businesses business management business marketing Technologies finance accounting Industrial Manufacturing starting a small business Investment health information

What is variable costing?

womanlookingaroundcorner23505855.jpg
Every business owner has different struggles and challenges with their business. Setting up the prices for your products and trying to earn the right amount to make your business grow and develop stronger is not always the easiest thing to do. There are different ways in which you can figure out how to price your products in a way that it will generate the income you need for your business. What variable costing will do is allow you to see what the customer can afford to pay for your products and it will help you to see where you need to sell your products so that you don't end up taking a loss. Making a decision about the prices you need to charge for your company is vital to the marketing strategy but it is also important to the business plan you present to your lenders when you are in need of financing.

What are ways in which you can create variable costing in an efficient manner? Here are a few of the costs you need to evaluate in order to get it right:

  1. Direct Costs - These are the costs that are directly tied to a product or service or to marketing and other activities. So basically what we mean by direct costs is you need to take into account all of time it takes for you to create a product in order to have it ready to sell (labor costs). Then you have to also include the cost of the things that are needed to create the product like the raw goods along with machinery and equipment needed to create it. Once you have the direct costs, you now know where you need to start the price of the product just to break even. Of course from here you need to come up with a markup cost in order to pay for the product and to make money from it.

  2. Indirect costs - The indirect costs are those that aren't tied to the creation of the product but they are tied to things such as warehousing the products. It's similar to having a garage to protect your car but the garage doesn't count as part of the vehicle expenses.

There are many costs out there that are tied to production along with machinery and rent. You must remember to include these costs as well with the markup in order to come out ahead and to avoid losing money on your investment in the products. There are fixed costs that can change at any time as you never know when you will end up having a machine break down and a sudden need to buy new equipment or to lease equipment.

One of the terms associated with variable costing is called "profit contribution". This is when you have products that need to be sold and each product will contribute to the overhead costs of the business. The contribution amount must be greater than zero in order to effectively cover the overheads for the business.

Cost plus pricing is a great strategy to use in order to bring in the right price. With cost plus pricing you will end up computing prices by guaranteeing that the computed price is going to be higher from the product costs. Sometimes businesses will come up with this cost and then they just add the markup to it. While this works you still need to be sure you are guaranteeing the profit contribution. What some businesses see happen with cost plus pricing is that it doesn't always provide them with fair market prices. You may price yourself out of the market or you might not price yourself within a competitive range at all.

FREE: Get More Leads!
How To Get More LeadsSubscribe to our free newsletter and get our "How To Get More Leads" course free via email. Just enter your first name and email address below to subscribe.
First Name *
Email *


Get More Business Info
Sponsored Links
Recent Articles

Categories

Copyright 2003-2020 by BusinessKnowledgeSource.com - All Rights Reserved
Privacy Policy, Terms of Use