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Example for a product price calculation using the indirect cost data developed

Category: Budgeting Methodology

The example illustrates the price calculation for a mechanical part which is machine worked on the machines of productive activity 1. The cost intensity is measured through machine hours (0.05 h per item). There is no direct labour calculated. As the example concentrates on the indirect cost, it does not detail the calculation of the direct material cost which, in principle, would have to be shown as the required material quantity x the purchase price. The example, further, assumes 5% material overheads covering the cost of purchasing, incoming inspection and of material positioning. Again, the calculation of this material overhead is not illustrated.

The use of such a calculation scheme has the advantage that order particularities can be taken into account when making the proposal. If a request, for instance, reaches the company later in the year when it is already certain that the budgeted capacity utilisation will be met and that consequently all fixed costs are already covered, part of the calculated fixed cost (in the example 9.56, i.e. 19.75% of the calculated price) can be used for strengthening the company’s competitive position.

The company further, for instance, in the case of minimum marketing cost for an order, can take this fact into account in reducing the calculated cost share for marketing.

Such practice, however, presupposes that the opposite is done too i.e. excessive marketing/quality/development costs etc. are added when the order significantly lies over the calculated amounts for those cost items.

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