Costing and pricing

costing a product or service

Objectives By the end of this topic, you should be able to:

• Define costing • Explain the importance of costing • Calculate the fixed and variable costs of a product or service • Calculate the break even point

Definition costing is finding out how much a business spends during the process of producing and selling a product or offering a service

Reading

We will now look at the two main categories of cost that a business incurs during the process of production, which are fixed and variable costs;

Fixed costs

Fixed costs are costs that do not change with the level of production. That is whether the level of production is high or low one has to incur the same amount of costs. For example if you rent out a mini bus that has a seating capacity of 25 and only 10 people manage to go on a trip, you will still have to pay the same amount of rental for the bus. Examples of fixed costs are salaries, rent and equipment’s depreciation

The following illustration shows the fixed cost of Ikageng Poultry Farm. The illustration shows that when Ikageng Poultry Farm produces 5000 chickens the fixed production costs are the same as when Ikageng Poultry Farm is producing 15000 chickens

What Have We Learnt • How to calculating the fixed and variable costs • The selling price must always be higher than the variable costs Self Assessment

True or false questions

1. If the cost of production is higher than the selling price the business will run at a loss__________

2. Fixed cost changes with the level of production _______