Export Costing

Jayashree RVS IMSR

 Price is defined as a function of cost

and the margin taken by the exporter
on the cost
An exporter should first ascertain the
cost of the product and then add
margin to it to arrive at the price.
The process of ascertainment of the
cost is known as costing
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 Cost: monetary outlay incurred to secure

a benefit
Expenditure is incurred for the purchase of
raw material, machines, furniture or
equipment, payment for electricity or
telephone bills etc,
The cost which yield benefits over a short
period of time is called revenue cost
Eg, purchase of raw material
The cost which yield benefit over a long
period of time is called capital costs
Eg. Machines, equipment
Jayashree RVS IMSR

Classification of Revenue
costs
Fixed, variable and semi variable
costs
Direct and Indirect Cost

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Fixed cost
The cost which remain the same for a
given range of production capacity or
the planned range of business activities
These costs represents the committed
expenditure to be incurred by the
business firm at regular time intervals
Eg Plant & Machinery, Land & Building

Jayashree RVS IMSR

Variable costs
The cost may vary in direct proportion
to changes in the output or sales.
These costs are incurred only when
production is being done or some
export order is under execution.
Eg, purchase of materials, supplies,
electricity, payment to the labour,
expenditure on specific design n
drawing, normal wastage, etc.
Jayashree RVS IMSR

Semi variable costs

It contains both fixed and variable
components
They are partly affected by changes
in the quantity of output or sales
level
Eg. Expenditure on electric power,
store keeping costs, repairs,
maintenance and depreciation
Jayashree RVS IMSR

Direct costs
These costs can be conveniently identified and
allocated to a product or item
Direct material cost: the cost of material which
form part of the final product and can be identified
with the product
Eg. The cost of fabric used in the making of a shirt
Direct labour cost: the payment made for the
labour working directly on the product.
Eg. Payment of fabrication charges to the labour
Direct expenses:
Eg. Payment for a particular design or die used for
manufacture of a product
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Indirect costs
These cost that cannot be conveniently
identified and allocated to a product, but are
apportioned over the entire range of product
For Eg, for manufacture of a ready made
shirt, Direct cost - the cost of fabric and
payment of fabrication charges.
Indirect cost supervision expenses,
expenses on the thread etc,
The sum total of all the indirect costs is
known as Overheads
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 Indirect cost are

Factory production overheads
Administration or office overheads
Selling and distribution overheads

Jayashree RVS IMSR

 Factory overheads incurred in relation

to production/processing or fabrication
of a product.
Indirect material like cotton waste,
grease, oil for machines etc
Indirect labour like salary for cleaners,
inspectors, maintenance men etc
Indirect expenses are rent insurance
lightening heating etc
Jayashree RVS IMSR

 Administration overheads : incurred in

relation to the administration of the firm
Eg, salary, rent, insurance repairs,
stationary, cleaning
Selling and distribution overheads:
incurred to make sales and distribution
of goods to the importers.
Eg packaging and packing expenses,
transportation cost, commission paid to
the agents, handling charges, credit risk
insurance premium etc
Jayashree RVS IMSR

An exporter can make use of the statement of the structure of

cost as given below for ascertaining the cost of a product
Structure of cost of product
Item Name ______ Order No _______
Item code no _____ Total Qty _______
---------------------------------------------------------------------------------------Particulars Amount (Rs/$)
---------------------------------------------------------------------------------------Direct Cost:
Raw material
Labour
Other direct expenses
PRIME COST
Add: Factory Overheads
PRODUCTION COST
Add: Office overheads
COST OF PRODUCTION
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Add: Packaging and Packing expenses

Ex-Works cost
Add: Selling and distribution overheads
Processing & handling expenses
Charges for transportation of goods from factory to the port
Charges payable at the port of shipment
Charges on account of insurance premium, export duties,
cost of checking operation to the port of destination
Shipping freight charges
Shipping agents fee/charges
Documentation charges
Payment of quota premium
Consular charges
Credit risk insurance premium
COST OF SALES
(Cost incurred up to the point of loading of cargo on the
plane/ship)
Jayashree RVS IMSR

 Ex works cost/Cost of production is

equal to the sum of the following
Purchase price of the product
Transportation cost for transportation of
the products of the office
Processing expenses including packing
and packaging
Office overheads

Jayashree RVS IMSR

Exporters margin and pricing

policies
Price to be quoted would be equal to the
cost plus the exporters margin.
The amount of margin an exporter can
earn would depend upon the pricing policy
and pricing strategy of the exporter.
Pricing Policies
Cost plus pricing
Demand oriented pricing
Competition oriented pricing
Jayashree RVS IMSR

Cost plus pricing

Price of the product is fixed by adding the
margin of profit to the cost of the product.
This exists when it is monopoly in nature
Large export firms may use techniques and
tools of costing to determine the price.
The various costing methods are
Full cost pricing
Direct cost pricing
Marginal cost pricing
Break even pricing
Jayashree RVS IMSR

 Full cost pricing: it includes all the fixed and

variable costs and a pre-determined profit
margin
Direct cost pricing: price is determined by adding
a certain % of margin to the direct cost to cover
estimated overheads earn profit.
Marginal cost pricing: it is used as a basis of cost
to add the % of margin to arrive at the price.
Marginal cost refers to the amount by which total
costs are charged if the volume of output of a product
is changed by one unit
Jayashree RVS IMSR

 Marginal costing is an accounting technique

which determines the marginal cost on the
basis of additional variable costs
Break even pricing : it is based on the study
of break even analysis to determine the
effect on profits of changes in cost as a
result of changes in the volume/output of
the firm
The level of sales at which there is no profit,
no loss is called break even point
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 The firm is able to recover all its cost at

this level of output or sales
Formula
BEP (in units) = Total fixed
cost/Contribution per unit
Contribution per unit = Selling price
minus variable cost per unit
Break even level of sales in value =
BEP(in units) * Selling price per unit
Jayashree RVS IMSR

 Demand oriented pricing

Price of the product is fixed by taking
into account the intensity of the demand
Higher price can be fixed when the
intensity of demand is highest and vice
versa
This pricing policy is very suitable in the
case of products with seasonal demand

Jayashree RVS IMSR

 Competition oriented pricing:

an exporter cannot earn the margin that
he decides to take.
It depends on the competition in the
market.
In such a market situation, it is customer
who sets the price and the exporter
should be fully prepared to negotiate the
price.
This suitable in case of consumer goods
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which have competitive
market.

Structure of price quotation

Export order no ______ Total units______
Name of item _______
Chargeable item Unit cost(RS) Total cost(RS)
1. Ex works cost
Add: Selling and distribution O/H
2. COST OF SALES or FOB COST
Add: Exporters margin
A) FOB PRICE
3. Freight charges from port of loading to the port of discharge
B) CFR
4. Insurance premium on cargo
insurance policy
C) CIF PRICE
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5. Import duty and tax

6. Clearing agents fee in importers country
7. Demurrage at the dock/airport
8. Unloading charges at destination
9. Port/ariport handling charges & fees at destination
D) Landed cost/Delivered EX-Quay Duty paid
10 Transport form dock/airport to importers warehouse
11 Importers margin or mark up
E) Price to Customer or the RETAIL PRICE

Jayashree RVS IMSR

Resources
Export Management Khurana
International Trade and Export
Management - Francis Cherunilam

Jayashree RVS IMSR