TOPIC
Visit small to medium enterprises in your community and compile the costing and pricing process
process of products and sales provided by their business . Explain the importance of costing and pricing.
INTRODUCTION
The role of Small and Medium Enterprises (SMEs) in economic growth has been recognized as important
by every nation around the world. The sector is considered to engineer growth and poverty reduction
through the creation of jobs and incomes to people . The Zimbabwean Commission considers SMEs as
key drivers to economic growth, innovation, job creation, and social integration. The SMEs practices the
costing and pricing of products and sales they provide in their business,and below is the process.
DEFINITION OF TERMS
(1) SMEs _____The Ministry of Small and Medium Enterprises and Cooperative Development
(MoSME & CD) policy document (2009), have defined a small and medium enterprise (SME) in
Zimbabwe as a legal business entity considering the following factors:
(a)Turnover of less than US$800 000,
(b) It is not a subsidiary or branch or associate of a large business organization and,
(c) Maximum number of full-time permanent employees .(
2) Pricing products _______Product costing is the process of tracking and studying all the expenses that
are accrued in the production and sale of a product, from raw material purchases to expenses
associated with transporting the final product to retail establishments (Sunarni, 2012).
(3) Business _______The term business refers to an organization or enterprising entity engaged in
commercial, industrial, or professional activities.
OBJECTIVES
.To know the process of pricing and costing products and sales
.To know the importance to of pricing and costing products
.To know the elements of pricing and costing
.To know how to collect data of pricing and costing
.To know the measures to avoid losses in business
METHODOLOGY
. Asking other SMEs in Zimbabwe
. Google reading the price and costing on internet
FINDINGS AND ANALYSIS
OVERVIEW OF PRODUCT COSTING
The literature on product costing and associated strategies is very broad and somewhat characterized by
the type of the readers (i.e., academic elites, business personnel, SMEs’ practitioners etc.). Product
costing involves manufacturing cost estimation of standard mechanical components to cost analysis of
highly customized assembled products. It also covers process cost optimization techniques, specific
methods for overhead costing, unique approaches for estimating the conceptual design phase as well as
general costing procedures intended for future design cycle. However, the major component of the total
product cost is the manufacturing cost . Knowing the product manufacturing costs helps a specific
company to understand whether the product will be manufactured profitably, and at what price it
should sell. Decisions can also be made on whether a certain product should be phased out and what
quantities of each product should be produced in order to maximize resource utilization.
ELEMENTS OF PRODUCT COSTING
The main elements of product costing are , where the total cost is presented as the sum of direct cost
and added overhead expenses . Direct costs are reported to include costs of raw material in the form of
product components and packaging, direct costs of labour to transform raw material into finished
products and direct expenses charged to a specific job or product . On the other hand, overhead costs
are described as indirect expenses accrued during the production process and included costs such as
cleaning of the production facility, maintenance costs, security costs, taxes, energy and water charges,
designing and development costs, marketing costs and administrative costs which cannot be directly
assigned to a certain product.
Direct cost or expenses + indirect costs or expenses= Total cost
In general, product costing should include all expenses incurred in pre- and post-development stages of
a product such as information gathering, specifications development, product ideas generation,
embodiment design, production planning, materials procurement, actual manufacturing, quality
assurance, sales and delivery logistics. All in all, it is usually easy to identify material and labour costs
associated with a specific product than it is for overhead costs which benefits more than one product or
product line .
Product costing follows the following steps :
(a) Identifying cost object; which are cost units targeted for the costing exercise. For example, we might
want to know the cost of making one unit of a product in which the cost object is one unit.
(b) Identifying the direct costs associated with the cost object; which are the costs associated with the
cost object and can be traced to cost object in an economically feasible way. It includes direct materials
and direct labour.
(c) Identification of the overhead costs; which are the costs associated with cost object but cannot be
traced to the cost object in an economically effective way. They include electricity, factory office salaries,
building and machine maintenance, as well as factory depreciation.
(d) Selection of cost allocation base to use in assigning overhead costs to the cost objects; which is the
assignment of the overhead costs to cost object.
(e) Development of the overhead rate for allocating overhead costs to cost object .
EXISTING PRICING PROCEDURES
Pricing strategies are approaches that can be used by organizations in pricing their products and services
correctly and in line with the current market demand. The core objective of pricing strategy is to
establish an optimum price while maximizing both profits and the number of items sold . Published
literature provides various pricing procedures that are being used in different manufacturing industries).
These strategies are
;(a) Premium Strategy involves allocating high prices where there is uniqueness in the product offered.
The method is used when substantial competitive advantages exist and is highly effective when a
product is of a status symbol or is perceived as being of very high quality.
(b) Penetration Strategy involves setting the price of a product intentionally lower than the competition
in order to obtain a larger market share. Once the market share is achieved, the price is increased. It is
mostly used when the product is firstly introduced in the market or when the market is new. The
technique leads to cost reduction pressure and discourage the entry of
new competitors.
(c) Economy Strategy is a no-frills low-price pricing strategy. The cost of marketing and manufacturing
are kept at a minimum level and the product price is set just high enough to make a very small profit in
the hope to attain large volumes of sales. The strategy is appealing to customers who are extremely
price conscious.
(d) Skimming Strategy involves charging relatively high price because of the presence of substantial
competitive advantage. However, the advantage is not substantial because high product pricing usually
attracts new competitors into the market resulting in inevitably price falling due to increased supply. The
technique is commonly used by start-ups and is convenient when huge investments made for research
and development need to be reimbursed.
BENEFITS OF USING PROPER PRICING AND COSTING PROCEDURES
When asked on the benefit of proper costing and pricing procedures, it was established that all the
surveyed SMEs knew very well the benefits of proper costing and pricing procedures although they did
not really know if the procedures they used in their product costing and pricing were proper. During the
interview, the surveyed SMEs were also asked to mention some benefits of using proper costing and
pricing procedures. According to these SMEs, the benefits of proper product costing and pricing included
business growth in the competition environment, avoiding losses, maintaining customers,
competitiveness, proper profit margin, sustainable business, smooth operation, easy to manoeuvre
selling prices, planning business, stable prices, satisfaction to both customer and seller, and attracting
more customers. The reported benefits are similar to those found in the reviewed literature (Lew, 2019),
where the benefits of knowing how to properly establish the product costs and prices are detailed.
SOURCES OF PRICING AND COSTING.
Regarding the source of costing and pricing knowledge, the study established that 70% of surveyed
SMEs acquired their costing knowledge through experience; 10% through learning from experts; 35%
through training; 10% through training and experience; and 5% through training and learning from
experts. The trained SMEs got their training from various institutions such as SIDO, the Institute of
Finance Management (IFM).
CONCLUSION
The aim of this study was to investigate on the costing and pricing procedures that were being used by
manufacturing SMEs in the community and then develop a costing system that could assist these SMEs
in the whole process of product costing and pricing. Data was collected through surveying a total of 20
SMEs and employing questionnaire and general observation forms of data collection.The study showed
that the surveyed SMEs knew the importance of proper product costing, however, the methods used for
product costing were inadequate and mostly led to over-pricing and under-pricing of their products.
These shortcomings have continually resulted in intermittent businesses leading to unreliable economic
growth of the SMEs. Thus, many SMEs have perished prematurely or are struggling to survive due to lack
of sales or low sales of their manufactured products.The study concludes that it was possible to
formulate a proper and user-friendly costing system for SMEs, the testing of which showed success in
product-pricing and raised awareness and interest of most SMEs in undergoing changes in the issue of
product costing and pricing. There is a need, therefore, to extend the developed costing system to make
it more comprehensive and adaptive to SME needs so that it becomes a necessary tool for establishing
manufacturing costs of a product and subsequent selling price for the benefit of the SMEs and their
customers.
RECOMMENDATIONS
Based on this study, the following are recommended:
(a) The community manufacturing SMEs should adopt the formulated costing system in this study and
give feedback on areas of improvement to enable formulation of a much more comprehensive costing
system.
(b) SMEs should be encouraged to use computers, particularly Microsoft Office packages, to have access
to the use of the formulated costing system. SIDO can pioneer by ensuring that training in computer
application is incorporated in the SMEs support services.
(c) SMEs should think of innovating their products to create clear differences between their products
and those of their competitors in terms of quality, durability and aesthetics to fetch better prices and
markets. The costing system can assist such innovations in terms of checking the behaviour of product
production cost with changes are made.
(d) The costing system was developed based on the metalwork industry only. It is therefore
recommended to extend the costing system to other sectors like textiles, food processing and services
to test its suitability. It is important to note that these other industries may have specific requirements
to consider in formulating a costing system.
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Journal of Management Accounting
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(3): 294-309.
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