Every self-respecting entrepreneur must know the cost prices of the products his/her company provides to its customers. The same applies to the costs of service provision. These data are then used to determine the gross margin and the selling price.
What does cost price mean, practically speaking?
The cost price is the amount you spend to provide your customers with each of your products, whether goods or services. It must therefore include all the costs that your company pays for it. To find out whether your business is really profitable, you need to calculate the gross margin. This is given by the difference between the price at which you sell (price excluding tax) and the cost price. Through the latter, you will be able to break down all the expenses that were incurred during a production cycle. This analysis allows you to make adjustments if necessary, and to reduce expenses. This data is of paramount importance for maintaining the selling price.
How do you determine the selling price?
To determine the selling price, you need data on direct and indirect costs. To have a simple idea of how to do it, just remember that it is the total sum of all expenses for an amount of goods produced. Direct costs are those directly related to the production process of the product. The same applies to a service. An expense is considered direct when it can be unambiguously assigned to production or a service.
An expense is considered indirect when it is not directly related to a production or service process. These expenses are necessary for the proper functioning of the company.
The cost price: what is it for?
In the business plan, the cost price is a very important element. It is the only information needed to determine the minimum selling price of a product or service. It allows you to determine the gross margin and discover the ideal selling price for your products and services. Once determined, you can work to reduce your production costs as much as possible. You may also be able to eliminate certain expenses to obtain more margin, or to lower the price of your products and services.