L.6 - Costing

Nations that to glory aspire, Their common men should prosper, By nurturing in every household, An enterprising culture.

UDYAM SHASTRA- Chapter 02, Verse 01

Key Objectives: The students focus on a sandwich to analyse the costs of producing and selling a product. They discover the importance of profit. They then will learn to estimate costs and price of a vocational enterprise product. Reading this module and doing the students activities will enable the students to:

  • Estimate costs and expenses of typical 'Goods' or 'Service' .

  • Figure profit.


Enterprise Concepts:

Raw material cost for one unit.: This is the cost of raw materials that go into manufacture of one piece or unit of the product.

Labor costs.: Cost of salaries and wages of workers employed.

Management costs.: Cost of salaries and wages of managers who supervise and manage work output of workers or do other administrative jobs.

Utilities costs.: Cost of items like gas, electricity, telephone etc.

Fixed costs.: Fixed costs are costs necessary to operate a business (operating costs) that stay the same over the range of the sales the business is making. Example office rent, Management costs etc

Variable cost.: Variable costs are operating costs that change (vary) depending on the volume of sales. Example: wages of labor deployed based on quantity to be produced , electricity consumed for production etc.

Profit.: Profit is the entrepreneur's earning after paying for all expenses.

Profit = Sales - Costs

Overhead costs.: The term overhead is an informal term used for fixed costs. 'Over head' comes from literal 'over-the 'head', i.e. roof over the business.

Cost of service sold.: For a 'service' enterprise, the cost of selling one additional unit of the service is referred to as 'Unit Cost of Service sold'. If a 'service' is selling labor, then the cost of labor should be included in the cost of the service sold. If the service uses some supplies e.g. use of paper for photo-copying, then this cost should also be included in cost of service sold.

Enterprise Skills: The student 'Activities' in each lesson are designed to clarify the ENTERPRISE CONCEPTS of the lesson and develop some ENTERPRISE SKILLS (E.SKILLS). The E.SKILLS included in a lesson may not be exhaustive, but are indicative.

E.SKILLS stated in a lesson elsewhere may also get addressed through the activities of a particular lesson.

Some useful E.SKILLS are dealt with below:

Estimating costs: An entrepreneur may often be called upon to 'estimate' costs of producing a 'goods' or service'. 'Estimating' means assessing, rating or setting a value on goods or 'service', in part or whole, with best available data.

Mathematical calculations: An entrepreneur should have adequate numeric skills to do day to day Mathematical computations.The latter implies numerical calculations of addition, subtraction, multiplication, division, percentage calculation and related arithmetic. An electronic calculator is a handy tool nowadays for 'Mathematical Computations'.

Analytical thinking: This thinking ability enables a person to :

- break a problem into parts,

- identify relevant facts

- interpret the meaning of facts, and project the consequences of a decision.

Because so many factors bear on an enterprise, an entrepreneurs needs what might be called an intuitive analytical sense in order to select key facts and eliminate the nonessential ones.  

Activities:

Activity 1 - SANDWICH COST BREAKDOWN.

Instruction To Students

  • Study the cost breakdown of a sandwich given below and answer the questions in the worksheet. answers in the worksheet.

  • After completing the activity, each group should present and share its main discussion points with the rest of the class.

Product Pricing or Cost Breakdown Of Sandwich
Selling Price Rs 5/-.
 Expenses  
 A. Raw materials Rs 1.
(bun, tomatoes etc.) and packaging
 
 B. Labour Rs 1. 
 C. Miscellaneous Expenses Rs 1.
(Oil, Gas, Paper plates etc.)
 
 Total Expenses (A to C) Rs 3/-.
 Net Profit Rs 2/-.

Work Sheet

1. How much money does the entrepreneur make for each sandwich he or she sells? How many sandwiches would have to be sold to earn 10 Rs. in profit?

_______________________________________________________________________________________

2. How many sandwiches would have to be produced to make up for two sandwiches an employee gave to a friend?

_______________________________________________________________________________________

3. Why is it important that employees should be honest in business ?

_______________________________________________________________________________________

4. If you own a sandwich stall, what are some things you could do to improve profits ?

_______________________________________________________________________________________

Activity 2 - COST - PRICE YOUR OWN RECHARGEABLE TORCH PRODUCT.

Instruction To Students

  • Based on given data prepare the cost breakdown for rechargeable torches by filling up the blanks. Same blanks are filled up for illustration.
  • You have to determine percentage of each type of cost breakdown with respect to sales price in the summary table as % of
cost breakdown = cost per piece for the item x 100 
Sales price
  •  After completing the activity, each group should present and share its main discussion points with the rest of the class.

A) Raw Material Costs

Production per month = Q = 500 pieces
Cost per piece = cost per month/ Production per month, Q

Sr.NoRaw materialsQty/month(a)Rate(b)

Cost per month/Rs.

=a*b

Cost per Piece/Rs.

= (a*b)/Q

01Transformer core50 pcsRs 22/Kg11002.20
02Copper Wire10 pcsRs 190/Kg  
03Clamp500 pcs0.20 per pc1000.20
04Bobbin500 pcs0.30 per pc  
05Electolyte acid150 pcsRs 30/Ltr 9.00
06Reflector500 pcsRs 2/pc10002.00
07Switch500 pcsRs 3/pc15003.00
08Battery accumulator500 pcsRs 58/pc  
09Bulb500 pcsRs 0.50/pc2500.50
10Neon bulb500 pcsRs 1/pc5001.00
11Charging pin500 pcsRs 0.60/pc  
12Hookup wire5 bundlesRs 60/ bundle3000.60
13Diode1000 pcsRs 8/pc. 16.00
14Wire5 bundlesRs 120/bundle 1.20
15Baseplate500 pcsRs 12/pc 12.00
16Packing box500 pcsRs 1.2/pc6001.20
 Total Raw material    
  

B) LABOUR COSTS

Sr. noDetailsNo.Monthly salary per person Rs.Total Monthly cost Rs.Cost/Piece Rs.
01Skilled worker0215003000 
02UnSkilled worker04100040008.00
 Labour Cost    

C) MANAGER COSTS

Sr. noDetailsNo.Monthly salary per person Rs.Total Monthly cost Rs.Cost/Piece Rs.
01Manager15000500010.00

 

D) UTILITIES

Sr.NoDetailsTotal Monthly cost Rs.Cost/Piece Rs.
01Electricity15003.0
02Water100 
 Utilities Costs1600 

E) OTHER COSTS

Sr.NoDetailsTotal Monthly cost Rs.Cost/Piece Rs.
01Insurance100 
02Maintenance5001.0
03Advertisement & Publicity15003.0
04Travelling700 
05Postage/stationary500 
 Total other costs3300 

SUMMARY TABLE

Sr.No

Item

(1)

Cost per Month Rs

(2)

Cost per piece Rs.

(3)

Percent =((3)/H)

X 100%

ARaw Material55800  
BLabour7000 7.4
CManagement500010.00 
DUtilities1600  
EOther3300  
FTotal Cost  76.9
GAdd Profit (Sale 30% of F)   
H

Sale-price

=(F)+(G)

  100