Costing and Pricing of Craft Products

ESP Enterprise Development Guide

This Training Manual has been developed by AIACA with the support of funds provided by
UNESCO, New Delhi under its Life Distance Education Literacy Training Kit.
Table of Contents

Introduction ........................................................................................................................ 3
Factors influencing costing and pricing of products ........................................................... 5
Step-By-Step Process Of Costing Craft Based Products ...................................................... 8
Practice Exercise To Determine Ex-Factory And Fob Price Of A Product ..................... 18
Answer Reference Sheet ................................................................................................... 21
Glossary ............................................................................................................................. 23

2
Introduction

The domestic retail market in India has been growing rapidly over the last decade and
opportunities to sell in such mainstream markets have increased considerably for Indian
craftspeople. However, professional systems and expertise are required within crafts
organizations to be able to connect to mainstream
markets in a commercially sustainable manner. Often,
craft groups located in rural areas lack such systems and
are unable to develop as commercially viable The objective of this manual
enterprises even when the products they make have is to address gaps in
commercial potential. information on costing and
pricing and to serve as a
One of the key gaps that AIACA has noted while working training manual that can be
used by crafts producers,
with craft groups is their incorrect pricing of products.
groups and enterprises to
Craftspeople and craft producer groups do not build in
improve the costing of their
various costs that are involved in production, packaging, products.
marketing, and sale of the products in the price at
which they sell the products in the market. In many
cases there is also a lack of distinction between retail
and wholesale pricing. The craft groups therefore either suffer losses or are not able to generate
sufficient profits to make further marketing and design investments in growing their enterprises.
There is also an ignorance regarding the costing and pricing terminology used by commercial
buyers and importers.

The objective of this manual is to address these gaps in information on costing and pricing and
to serve as a training manual that can be used by crafts producers, groups, and enterprises to
improve the costing of their products. It outlines how individual craftspeople or producer groups
can determine the cost and price of their products efficiently and provides an idea of the costs
that the producer, wholesaler, and retailer bear in bringing the final product to the end
customer.

The second section covers factors involved in costing and pricing of products. The third section
describes the various components involved in costing and pricing of a product from raw material
stage to its sale to a wholesaler or retailer. The fourth section traces the costs involved in a
textile product through a photo documentation of the production process. The fifth section is a
practice exercise to calculate cost and price of a product. The final section is a glossary of terms
used by commercial buyers and importers.

3
 Why is it important to understand costing and pricing?

To make sure that the producer is not making losses due to incorrect pricing of
products.

To be able to understand where production costs can be cut down.

To be able to determine a correct sales price that is competitive in the market.

To be able to make sufficient profits so that investments in production, design,

and marketing can be made for improving business operations.

To be able to plan the business over the long run. By analyzing the costing and
pricing of your products, you can focus on products that provide you maximum
profit. You may realize that there are certain products that you do not want to
produce at all because of high costs and low profits involved. You can also
choose the most effective distribution channel depending on the costs involved.

4
Factors influencing costing and pricing of products
Cost-Plus Method: Product is
The simplest way to determine costing and pricing of products is by the priced by calculating all costs
cost-plus method where the product is priced by calculating all costs incurred on its production,
marketing, and sale and adding a
incurred on its production, marketing, and sale and adding a profit
profit margin to it.
margin to it. In this method the seller does not make any losses.
However, by solely relying on this method, the producer may not be Other factors influencing costing
getting the best price that the product can realize in the market. Also, as and pricing:
a producer, this approach may not be conducive to evolving a long term
plan that will make the business competitive and develop a brand 1. Price of sister products
2. Price of similar products
identity for the firm and its products both of which are crucial in todays
produced by competitors
competitive environment. These aspects are highly critical to the 3. Internal strategy of the
success of a business and are not addressed by a cost- plus method. firm
4. The number of actors in
There are several other factors that therefore need to be considered in the supply chain of your
the costing and pricing process. Some of the key factors are outlined product
5. Minimum profit targets
below:
6. Additional costs for
export markets, including
1. Price of sister products: A product is always part of a range of exchange rate
products. For instance, herbal body care, bath, and hair care fluctuations.
products like creams, lotions, soaps, shower gels, oils, etc can be
categorized as part of a product range or as sister products. You
could be a producer making a range of products or a producer
making one product and selling to a retailer who sells a variety of
products to the customers. It is important to position the price of
your product in relation to its sister products. The end customers at
a retail store perceive a product in relation to a variety of products
that are at their disposal. It is therefore necessary that your product
fits in the range that it is a part of and place from where it is being
sold and price is an important criterion here.

2. Competition: The price of similar products produced by your

competitors is important to consider. If a similar product made by
your competitor is cheaper in the market than your product, in most
likelihood the customer would prefer to buy the competitors
product. It is also possible that a similar product of the competitor is
priced much higher than yours indicating that your own product
may be more valuable to the customer than you think. It is
therefore important to constantly benchmark your products against
products of similar quality made by competitors.

3. Company policies: Your pricing could also be determined by the

internal policies of your company. For example the branding
strategy of the company can determine at what price points your
product should be at. Your company could be promoting its
products under the high-quality, premium, luxury and exclusive
categories catering to a niche market in which case you would price
the product higher. Alternatively, your brand strategy might be to
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 position yourself as a value-for-money brand in which case the pricing will be set at lower
price-points.

4. Supply chain: Supply chain or distribution network is a significant factor to consider while
pricing your products. The supply chain includes wholesalers, retailers, exporters or buying
agents who buy your products to resell it to their customers. The price quoted by you to a
distributor should be such that it is feasible for them to resell the product to his customer
and make a profit. The distributor also incurs costs and should be able to cover those costs
as well as make a profit.

If you as a producer are selling to a wholesaler you would be selling in bulk or high volumes.
The wholesaler would expect you to give him a discount so that he can resell it to a retailer
for a competitive price. If you are selling directly to a retailer it has to be kept in mind that
the retailer has several costs to incur while running the outlet. Therefore your price has to
allow him a feasible profit margin.

In some cases the retailer might like the product, but want to renegotiate the prices with
the producer as similar products in their outlet are in a different price bracket. It is normal
practice in the industry for producers to work with
retailers or wholesalers to modify the product to fit a price
The Craft Group has to identify
bracket that they would like. Being able to retool products
a minimum net profit value first
to fit a desired price range is critical in building long-term
and then determine what levels
relationships with retailers and bulk buyers and increasing of production and sales are
sales. required to sustain it and the
costing structure needed to
5. Profit targets: It is important for a firm to set a minimum achieve those targets.
net profit value as its target that it has to work towards or
meet. It is significant that the firm understands the
industry benchmarks of business viability and achieves that. A minimum profit value has to
be identified first and then one has to determine what levels of production and sale are
required to sustain it and how the process of costing and pricing has to be made efficient to
achieve those targets and grow beyond them. For example, a commercial business will not
operate in the long run under a profit margin that is less than the cost of capital [See
http://en.wikipedia.org/wiki/Cost_of_capital for a detailed explanation.]

6. Export pricing: In export pricing, product quantity is a significant factor. It is essential that a
minimum order limit is set by the producers to ensure that they are making sufficient profit.
High costs incurred in export orders (production, export documentation, freight, and export
agent fees) can only be offset by high volumes of production. Below the minimum order
limit, it is not feasible for the supplier to accept the order unless the importer is willing to
bear all the extra costs involved.

Similarly, processing a big order could also mean high costs of production. It is necessary to
carefully think through it and ensure that all costs are being met and sufficient profit is being
generated through such an order before accepting it. It is also important that an advance
payment of at least 40% be taken by the producer so that you have the working capital
required to process the order and to ensure that you do not suffer losses due to order
cancellations. All terms and conditions should be clearly stated in writing and signed by both
parties involved.

6
Exchange rate fluctuations: A very significant factor to consider in export pricing is
exchange rate fluctuations. In some cases, the price is fixed for a year (either for a financial
year or one year from date of order placed) by the buyer and the supplier. The supplier can
compensate the fluctuations in exchange rate by adding 10-15% in the price as buffer.

7
 Direct Costs vary with the level
Step-By-Step Process Of Costing Craft Based Products of production. They include:

Cost of raw materials

Costing and pricing of products correctly is a crucial exercise for a Dyeing costs
business enterprise. For a producer group it is significant to calculate Wage costs for artisans
all costs involved at various stages of production and distribution to for embroidery, block-
ensure that the price quoted to the buyer covers all expenses printing and other craft
incurred. The description below outlines the costing and pricing processes.
Other labor costs such as
process for textile-based crafts as they form a significant proportion for pattern-cutting,
of the commercial craft market in India. However, some of the stitching, finishing, and
information would be relevant for non-textile crafts as well. The quality check.
process describes cost components relevant to a range of textile
crafts including hand block printing, embroidery, and stitched Fixed Costs do not vary with the
garments. level of production and are related
to administrative expenses. They
include:

COSTS Rent of office/factory

Electricity
a. Variable/Direct costs Telephone and internet
Monthly salaries of employees
Travel expenses
These costs vary with the level of production. They can be directly Insurance charges
traced to the production process. Audit fees

1. Grey fabric Total Cost of the product is the

sum of total direct costs and total
To calculate the total cost of grey fabric, the main raw material in overhead costs.
fabric-based crafts, the following components should be considered:

Cost Rs.
Fabric consumption/length of fabric used for
making the product
Fabric wastage in purchase
Fluctuations in fabric price

A. Fabric consumption on a textile product or in other words the

length of fabric required to make a product unit.

Fabric cost for a unit = Number of metres used x Cost per

metre

B. Fabric Wastage:

When you purchase grey fabric from the market, usually you buy
it in a listed bale quantity (thaan) of 100 meters but actually
receive only 95-98 metres. This wastage is particularly significant
in case of a big order where fabric will be purchased in high
volumes.

8
 C. Fluctuations in fabric price in the market

Grey fabric and other raw material - prices fluctuate significantly even over short time-periods.
It is therefore important to build in a buffer of anywhere from 3-7% of
the grey fabric cost to take both the wastage and potential price
It is important to build in a buffer of
fluctuations into account when costing the product.
3-7% of the grey fabric cost to take
potential price fluctuations into
account when costing the product.
2. Dyeing of grey fabric

Dyeing costs have the following components:

Cost Rs. In order to calculate the dye material

cost for a textile piece, the total grams
Chemicals bleaching agents, caustic soda, etc of material used is divided by the
Colors/dyes number of metres dyed
Labor Dye Master and Dyers
Fabric wastage in shrinkage, uneven dyeing,
streakiness

Fabric wastage takes place in grey

A. Material costs fabric, dyeing, and printing. Wastage
cost at these levels is taken at a total
Chemicals: Used in pre-dyeing processes such as scouring and of 5 7 % of the fabric consumption
bleaching, and in dyeing and has to be included in the cost.
Colors: Cost will differ depending on the nature of colors
whether natural, vat, procion, direct, etc

Dyeing of the fabric is usually done in bulk for cost effectiveness. In

A total of about 10-12% of total fabric
order to calculate the dye material cost for a textile piece, the total consumption comprises the total
grams of material used is divided by the number of metres dyed. wastage in dyeing, printing, pattern
cutting, and stitching. For example, if
B. Labor cost : the wages or salaries paid to the dye-master and dyer the total fabric consumption to finish
an order is 1000 metres, wastage is
calculated as: 12% of 1000 = 120
C. Fabric wastage: Meters

Wastage occurs:
In shrinkage during washing
In case of uneven dyeing and streakiness

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 Example 1a: Costing Block Printed Products using the Cost-Plus Method

A crafts producer group of 50 block printers produces 5,000 one-meter block printed scarves a year. Their
costing is as follows:

i. Cost of grey fabric: Rs. 150 per meter x 5,000meters = Rs. 7,50,000
ii. Cost of dyeing: Rs. 6 per meter x 5,000meters = Rs. 30,000
iii. Cost of printing: Rs. 30 per meter x 5,000 meters = 1, 50,000
iv. Cost of fabric wastage in grey fabric, dyeing, printing, cutting: 12%*5,000 meters = 600 meters x
Rs. 150 per meter = Rs. 90,000
v. v. Labor cost in stitching = Rs. 20 per piece x 5000 pieces = Rs. 1,00,000
vi. Labor cost in finishing: Rs. 2 per piece x 5,000 pieces = Rs. 10,000
vii. Labor cost in quality check: Rs. 1 x 5,000 pieces = Rs. 5,000
viii. Labeling and packaging cost: Rs. 3 x 5,000 pieces = Rs. 15,000

(A) Total Direct Costs = Rs. 11,50,000

Overhead Costs:

ix. Office Rent and Electricity: Rs. 1,00,000

x. Salaries of Office Staff and Designers: Rs. 1,00,000
xi. Tools and other equipments: Rs. 60,000
xii. Marketing material like brochures and business cards: Rs. 12,000

(B) Total Overhead Costs = Rs. 2,72,000

Total cost of 1 scarf = [Rs. 11, 50,000 (A) + Rs. 2, 72,000 (B)] / 5,000 = Rs. 284.40 (C)

Ex-Factory Price = 285 (C) + 15% markup = Rs. 327.75 or Rs. 328

3. Printing

Printing costs will include the following:

Cost Rs.
Chemicals binders, gum, etc
Colors
Type of printing discharge,
pigment, khudi, etc
Labor
Fabric wastage

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 A. Material costs:

Chemicals binders, gum, etc used to prepare the printing color

Colors

B. Type of printing: There are slight variations in costs depending on printing types. While
the material costs in both discharge and pigment printing are almost equal, it is the high
rejection factor in discharge printing that makes it costlier than pigment. In discharge,
since the print is visible only after the printed textile undergoes steaming and drying,
the risk is much higher.

C. Labor cost the wages or salaries paid to the color master and the printers

D. Fabric wastage a part of the fabric on the edges is usually left un-printed. Also the
printer test prints on the fabric before he actually starts printing. So some amount of
fabric is wasted in the process.

Fabric wastage takes place in grey fabric, dyeing, and printing. Wastage cost at these levels is
taken at a total of 5 7 % of the fabric consumption and has to be included in the cost.

4. Pattern cutting

The costs involved are:

Cost Rs.
Fabric wastage

A. Fabric wastage: The pattern master is usually employed by a firm on a salary basis.
Therefore the labor cost at this stage is included in indirect or fixed costs. However an
important component of direct cost here is fabric wastage during cutting of the pattern.
[See Point 6 below for costing total wastage]

5. Embroidery

The cost components here include:

Cost Rs.
Material threads, needles, beads, sequins,
etc
Labor

A. Material cost: Threads, needles, beads, sequins, etc. Total amount of materials used for
an order is divided by the number of embroidered pieces to arrive at the material cost
for a unit.

B. Labor cost: It could be on a piece-rate basis that is calculated on the basis of number of
hours required to finish the job times per hour rate. A firm could also have embroiderers
11
 who are working on salary basis in which case, their salary costs would be divided by the
total number of embroidered pieces to arrive at a per piece costing.

6. Stitching

Cost Rs.
Labor
Rejection

A. Labor cost: The amount paid to tailors either on a wage basis or as salaries. In case of a
tailor working on salary basis the monthly salary is divided by the number of days he is
working to arrive at labor cost for a day. This amount paid per day is divided by the
number of pieces the tailor stitches in a day to calculate the stitching cost for a piece.

B. Rejection cost: After stitching there will be number of pieces that will be rejected or will
have to be redone.

Fabric wastage in pattern cutting and rejection cost in stitching is taken at a total of 5% of the
fabric consumption.

Thus, a total of about 10-12% of total fabric consumption comprises the total wastage. For
example, if the total fabric consumption to finish an order is 1000 metres, wastage is calculated
as:

12% of 1000 = 120 Metres

Thus fabric wastage equals 120 metres. In other words, to complete an order requiring 1000
metres of fabric the producer is actually using 1120 metres.

7. Finishing

After stitching, the finishing of the cloth takes place. Finishing cost includes:

Cost Rs.
Labor in washing
Labor in cutting threads and knots
Labor in hemming
Labor in ironing

Labor cost: Wages or salaries paid for washing, tweaking loose threads and knots, hemming,
stitching buttons, and ironing.

8. Quality check

The cost includes:

Cost Rs.
Labor in inspection of finished pieces
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Before the finished pieces are labeled and packed, each piece undergoes a
thorough quality check to ensure that they comply with the quality standards Theoretically, fixed
desired. This requires employing people to visually check quality parameters. costs are recovered by
dividing total fixed
costs by the number of
products produced, and
9. Labeling and Packaging adding that to the
product cost.
Labeling costs include:

Cost Rs.
Price tags In practice, a group
cannot predict exactly
Company label how many pieces it will
Country of origin label make through the year.
Size label (S, M, L, XL) So it has to estimate at
Wash and care label the beginning of the
year, when it has to
Labor
quote prices to buyers,
how to spread fixed
A. Cost of various kinds of labels used on a product price tag, company costs across all
label, country of origin label, size label, wash and care label products that it will
B. Labor cost - amount paid for stitching labels and tagging make during the year
ahead.
Packaging costs include:

Cost Rs.
Boxes One way to do this is to
Plastic bags look at the previous
Bubble paper years income and
expenditure statements
Labor
and determine the ratio
of total direct costs to
A. Packaging material: Cartons or boxes, plastic bags, bubble paper total fixed costs and use
B. Labor cost: For packing goods in plastic bags and cartons that ratio to estimate
fixed costs for the
10. Transportation/freight following year as well.

Cost Rs.
Freight

As a producer you incur transportation costs in:

i. Getting the raw material to the manufacturing unit

ii. Distribution of raw material to the artisans in the villages
iii. Collection of finished products from the artisans
iv. Sending finished products to the buyer

The producer needs to add costs incurred at levels i, ii, iii to the product. To
calculate the freight, the total amount is divided by the number of units in case

13
there is only one product being produced. In case of more than one product, an average
percentage of the product cost (for example 1-2% of the product cost) can be allotted to each
product category as freight.

The cost incurred at level iv is added separately to the total amount in the invoice sent to the
buyer.

b. Fixed/Overhead costs

These costs do not vary with the level of production and are fixed over a period of time. A
producer has to incur these costs irrespective of production.

Some of the Fixed/Overhead cost components include:

Cost Rs.
Rent
Electricity
Telephone
Equipments/tools
Design fees
Insurance

Theoretically, fixed costs are recovered by dividing total fixed costs by the number of products
produced, and adding that to the product cost. For example: A craft group produces hand
woven scarves. Each scarf costs Rs. 100 by way of direct or variable costs to produce Rs. 50 in
raw materials and Rs. 50 in weavers wages.

Fixed costs are rent of storage space and office Rs. 10,000 per month and salary of marketing
and production coordinators - Rs. 20,000 per month. If the group knew in advance that it would
produce 5,000 scarves in a year it could calculate total costs as follows:

Direct costs per scarf:

Raw materials Rs. 50
Labor Rs. 50

Fixed costs per scarf:

Rent Rs. 1, 20,000
Salary Rs. 2, 40,000
divided by total production. 3, 60,000 5000 = Rs. 72

Total cost per scarf = 100 + 72 = Rs. 172

But in practice, a group cannot predict exactly how many pieces it will make through the year.
So it has to estimate at the beginning of the year, when costing products how to spread the
fixed costs across all products that it will make in the future.

One way to do this is to look at the previous years income and expenditure statements and
determine the ratio of total direct costs to total fixed costs and use that ratio to estimate fixed
costs for the following year as well. If you find that total fixed costs are 30% and total direct
costs are 70% of all expenditures, you can add 30% to the price of each product to cover fixed
costs.

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So in this example of scarf production: Rs. 100 + 30% of 100 = Rs. 130

This, however, holds only for producers whose production levels do not vary significantly from
year to year. For producers whose production has increased significantly over the previous year,
the fixed cost percentage in the total product cost will be lower. If the production level has
declined significantly then the fixed cost percentage in the total product will increase.

Total Cost

Total variable costs and total overhead costs are added to arrive at the total product cost.

A profit mark-up is added as a certain percentage of the total product cost. This will be the
earning or return on the product sold.

Total Product Cost + Profit % = Ex-Works Price or Ex-Factory Price

Cost Rs.
Total Variable Cost
Total Overhead Cost
Profit Mark-up

Ex-Works/Ex-Factory/Ex-Mill Price

Export related costs

For producers who are exporting their products there are other costs incurred in addition to the
above that need to be added to the Ex-Factory Price. These additional costs are:

Cost Rs.
Export documentation
Export agent fees and custom
clearance
Freight till boarding on ship at the
port of departure/exit
FOB Price (Freight on board)
Custom duties
Insurance
Freight within country of import

Landed Cost

The first three export-related costs are added to the Ex-Factory Price to arrive at FOB (Freight on
board) Price.

Custom duties, insurance, and freight within country of import comprise the landed cost.
Depending on the agreement with the buyer, if the producer incurs the landed cost then it has
to be added to FOB price.

Buffer for exchange rate fluctuations:

15
If the exchange rate for Rs to $ is 40, you would take the exchange rate at 38 when quoting the
price in $ to make sure you have covered any short term fluctuations.

Other costs

Sampling cost: Whether a producer charges for sampling or not usually depends on factors such
as the relationship he has with the buyer and the size of order received. Generally if a producer
has a long-term relationship with the buyer, sampling cost is not added to the product or billed
to the buyer separately. Similarly, sampling costs are not added if the order is big. However, if
an exclusive weaving or embroidery sample is developed where the sampling cost is high it has
to be included in the order invoice sent to the buyer.

As described above costing and pricing of textile based crafts thus include the following
components:

Cost Rs.

Fabric consumption/length of fabric used for making a product

Fabric wastage in purchase

Fluctuations in fabric price
Dyeing chemicals bleaching agents, caustic soda, etc
Dyes
Labor in dyeing
Fabric wastage in shrinkage, uneven dyeing, streakiness
Printing chemicals binders, gum, etc
Printing colors
Labor in printing
Fabric wastage in printing
Fabric wastage in pattern cutting
Embroidery material threads, needles, beads, sequins
Labor in embroidery
Labor in stitching
Rejection in stitching
Labor in washing finished pieces
Labor in cutting threads and knots
Labor in hemming
Labor in ironing
Labor in quality check
Price tags
Company label
Country of origin label
Size label (S, M, L, XL)
Wash and care label
Labor in stitching labels
Boxes or cartons
Plastic bags
Bubble paper
Labor in packing
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 Freight
Overhead percentage
TOTAL COST
Profit Mark-up percentage
EX-WORKS or EX-FACTORY or EX-MILL PRICE
Export documentation
Export agent fees including custom clearance charges
Freight till boarding on ship at the port of departure/exit
FOB PRICE (Freight on board)
Custom duties
Insurance
Freight within the country of import
LANDED COST

Wholesaler: If the buyer is a wholesaler he will add about 25% to the sellers price to resell it to
his customers.

Retailer: If the buyer is a retailer he will add anywhere from 60-100% to the sellers price (as
retailers overheads are very high) to resell it to the end customers.

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Practice Exercise To Determine Ex-Factory And Fob Price Of A Product
A producer group XYZ Handloom is based in Jaipur, Rajasthan. It is working with women artisans
from five villages in and around Jaipur. The women artisans work from their home. XYZ supplies
raw materials to the women and pays them wages on receipt of finished products. XYZ has
supervisors in every village who take care of quality check and collection of finished products.
The finished products are then brought to the main centre in Jaipur from where they are sent to
buyers in Delhi and Mumbai.

Below is an exercise to calculate the Ex-Factory and FOB price of a natural dyed embroidered
cushion cover 16x16. For the purpose of this exercise assume that XYZ only makes cushion
covers and total production for the year is 10,000 pieces. Also, assume that XYZ exports 2,000
pieces annually. It adds on a mark-up of 15% to the cost price as its margin. The Profit and Loss
Account for XYZ Handloom for the year 2006-07 is as follows:

18
 XYZ Handloom
Trading & Profit & Loss Account for the year ended 31st March 2007

PARTICULARS AMOUNT PARTICULARS AMOUNT

(DIRECT COSTS AND REVENUE)

Opening Stock 45,000.00 Sales 5,25,000.00
Purchases 2,80,000.00 Closing Stock 60,000.00
Stitching & Dyeing Expenses 55,000.00
Freight Charges 7,500.00
Quality Checking Expenses 12,500.00
Gross Profit 1,85,000.00

TOTAL 585,000.00 TOTAL 5,85,000.00

(FIXED COSTS AND REVENUE)

Advertisement Exp. 2,200.00 Gross Profit 1,85,000.00

Audit Fees 4,494.00 Interest received on Fixed Deposit 2,500.00
Bank Charges 750.00
Business Promotion 2,040.00
Depreciation 2,560.00
Designing Fees 20,000.00
Insurance Expenses 3,000.00
Office Repair & Maintenance Exp. 2,250.00
Printing & Stationery 1,250.00
Packing Exp. 6,250.00

Rent 24,000.00
Salaries to Staff 40,000.00

Staff Welfare 3,500.00

Telephone & Communication Exp. 6,780.00
Transportation Exp. 12,500.00
Travelling & Local Expenses 10,500.00
Net Profit 45,426.00

TOTAL 1,87,500.00 TOTAL 1,87,500.00

XYZ Handloom For ABC & Associates

Chartered Accountants

Proprietor Partner

19
 Additional Information for Exercise

Break up of Purchases

Grey fabric = Rs. 2,55,000

Packaging material = Rs. 5,000

Accessories like zipper, beads, threads = Rs. 20,000

Information on export charges

Custom clearance = Rs. 3,500 per 100 pieces

Agent fees including documentation = Rs. 2,000 per

100 pieces

Freight = Rs. 1,000 per 100 pieces (5 Kg)

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Answer Reference Sheet

1. Calculation of direct costs

Direct material costs

S. No. Material Cost (Rs.)

1. Grey fabric
2. Dyes
3. Total fabric wastage @ 10% of total fabric
consumption
4. Embroidery threads
5. Zipper
6. Packaging
7. Packing

Total direct material cost per cushion cover =

Direct labor costs

S. No. Labor Cost (Rs.)

8. Pre-dyeing and dyeing
9. Embroidery

10. Stitching

11. Finishing, quality check, packaging, and packing

Total direct labor cost per cushion cover =

2. Calculation of indirect/overhead costs

S. No. Indirect expenses Cost (Rs.)

1. Rent
2. Salaries
3. Professional services:
Design consultant, legal professional, auditor
fees, any other
4. Insurance
5. Equipment/Tools
6. Office Repair & Maintenance
7. Business Promotion
8. Advertisement / Publicity

21
9. Office supplies- grocery items, stationery, etc
10. Local conveyance
11. Telephone & communications like internet
12. Transportation charges
13. Marketing material: catalogue, brochures,
business cards
Total indirect cost per cushion cover =

3. Product cost

Total product cost =

4. Calculation of Ex-Factory Price

Rs.
Ex-Factory Price = Total product cost + Profit %

5. Calculation of FOB Price

S.No. Export expenses Rs.

1. Custom Clearance charges

2. Export agent fees including

documentation
3. Freight till boarding on ship at
the port of departure/exit

FOB Price = Total export costs +

Ex-Factory Price

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Glossary

BREAK-EVEN POINT: The point at which the gross profit of a business enterprise equals
its total expenses. There is no profit and no loss to the enterprise. Break-even analysis
indicates the minimum level of production or sale that the business requires to sustain
itself. The business will be making losses below this point.

BUYING AGENT: A person or company that represents an importer. The buying agent
assists the importer in sourcing and ordering products, selecting vendors, negotiating
prices, and quality control.

CARRIER: Any person or firm that undertakes to handle transportation of goods by rail,
road, air, sea, or by a combination of these modes of transport.

CFR (cost freight): The price quoted by the seller that includes transportation cost/freight till
the overseas port where the consignment is unloaded. It requires the seller to clear the goods
for export. This term is used only in ocean shipments.

CIF (cost, insurance, freight): The price quoted by the seller that includes
transportation/freight and insurance cost till the overseas port where the consignment is
unloaded. Under CIF terms the seller is required to obtain insurance only on minimum cover.
It requires the seller to clear the goods for export. This term is used only in ocean shipments.

CIP (carriage and insurance paid to): The seller delivers the goods to the carrier and pays for
the carriage cost till the named destination. The seller is required to clear the goods for
export. The seller also pays to insure the goods till the named destination. Under CIP terms
the seller is required to obtain insurance only on minimum cover. This term is used for all
modes of transportation.

COST: Total expenses that have been made by the producer in producing and bringing the
finished product to the buyer. It includes expenses on production, transportation, and
marketing of the product. Costs of running a business are of two types: fixed costs and
variable costs.

CPT (carriage paid to): The seller delivers the goods to the carrier and pays for the carriage
cost till the named destination. The seller is required to clear the goods for export. The term is
used for all modes of transport.

CUSTOMS DUTY: Tax on import of a product imposed by the customs authority of a country.
The tax amount varies for different product categories. It also depends on regulations of
individual countries.

EXCHANGE RATE: The rate at which one currency can be converted into another.

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 EX-DELHI: In this case the price quoted by the seller includes charges from the point of
manufacture till the point of departure in Delhi. The charges from there on are paid by the
buyer.

Example The ex-works price of cushion cover in the example below is Rs.115. When the
producer sends it to the buyer in Delhi the producer adds the cost of transport or freight to
it. He sends 100 embroidered cushion covers to Delhi and pays Rs. 200 as door courier
charges. So the freight per cushion cover = 200/100 = Rs. 2

So Ex-Delhi price for 1 cushion cover = 115 (ex-works price) + 2 = Rs. 117

EX-WORKS/EX-FACTORY: According to this arrangement the seller places the goods at the
disposal of the buyer at the sellers factory or warehouse. The seller is not responsible for
loading the goods on any vehicle and further on. This places minimum obligations on the
seller. The buyer has to bear all risks and costs involved in taking the goods from the sellers
premises. The price quoted by the seller in this case is called ex-works/ex-factory.

Example - A producer company in Rajasthan makes hand embroidered cushion covers. To

calculate the ex-works price of 1 cushion cover:

Cost of fabric used in making the cushion cover = Rs. 20/metre

Fabric used = 2 metres
Total fabric cost = 20 x 2 = 40
Labor cost for embroidery work = 30 (piece-rate)
Labor cost for stitching = 15
Total labor cost = 30 + 15 = 45
Cost of labeling and packaging = 2
Total direct cost = 40 + 45 + 2 = 87
Overhead cost = 5
Total product cost = 92
Profit margin = 25% (25 % of 92 = 23)
Ex-works price = 92 + 23 = 115

FAS (free alongside ship): The price quoted by the seller that includes all charges up to the
ship at the port of departure. The seller handles the cost of use of wharfage. The buyer is
responsible for loading and other charges such as transportation and insurance.

FCA (free carrier): The seller is required to deliver the goods to the named airport or terminal
for transfer to a carrier nominated by the buyer. The costs of transportation and risk of loss
are transferred to the buyer from here on. It is used for all kinds of shipments including
multimodal transport (using different modes of transport in a single journey such as road, rail,
and water, and air transport).

FIXED COSTS: They include expenses on running a business such as rent, electricity, telephone,
business licenses, insurance, depreciation, business cards, office stationary, tools, etc. These
are also called as OVERHEAD COSTS or OPERATING COSTS. These costs are fixed over a given
period of time and do not depend on the level of production. These costs cannot be added
directly to the product. They therefore do not directly generate profits.

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 FOB (free on board/freight on board/freight collect): In this case the seller is responsible for
placing the goods on board the ship at the port of departure specified by the buyer. From here
on the buyer is responsible for the goods including loss and damage. The price quoted by the
seller in this arrangement is called FOB. This term is used only for ocean shipments.
FOB = Ex-factory or Ex-Delhi price + export documentation fees +
export agent fees + custom clearance charges + transportation cost till the port of exit

FREIGHT: The charges paid for transporting goods by air, land, or sea.

GROSS PROFIT: Difference between price of product and direct cost of the product

LABOUR COSTS: The amount paid for the labor that goes into producing, finishing, and packing
a product. It is generally calculated on an hourly basis. In case of workers working from home
and getting finished product to a collection centre labor costs are generally charged on a
piece-rate basis.

MARK UP: The amount added to the cost of product to get the sale price. This amount is the
profit of the seller on the product. It is usually added as a percentage.

For example the cost of a carved wooden box is Rs. 100. The craftsperson adds 50% of the
cost as his mark-up or profit (50% of Rs. 100 = Rs. 50) and sells it to his buyer for Rs. 150.

NET PROFIT: Difference between total sales and total expenses of the company. It is also
called as net income or earnings. It shows what the company has earned or lost and is usually
calculated over a period of time (6 months or a year). Total expenses of the company will
include fixed and variable costs of the company.

PRICE: The amount at which a good is sold in the market. The price of a product depends on
many factors such as costs, demand, competition, quality, and its value to the customer.

For example in case of a branded consumer good the price of the product may not be based
on its cost of production but on the brand value it has for its customers.

PROFIT: A gain or return. The amount received for sale of a product after all costs have been
deducted from the amount. Profit = Price - Cost

RETAIL: The sale of goods, in small quantity, directly to the end consumer.

VARIABLE COSTS: They include costs that can be directly traced to the finished product.

For example - raw materials that go into making the product; wages paid to labor directly
involved in production; transportation for getting raw materials and dispatch of finished
product; packaging and labeling of goods.

WHARFAGE: A fee charged for the use of a wharf or pier. The wharf is a landing place where
ships anchor and load or unload.

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 WHOLESALE: The sale of goods, usually in large quantity, for the purpose of resale to the
consumer.

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