Incorrect cost rates = Incorrect profit
The calculation of your cost rates affects the value of your work-in-progress, which in turn affects the value of your profits. it is essential to get the correct value of your cost rates.
Most people undervalue their cost rates and therefore undervalue their profits.
Getting cost rates correct is vital for two reasons:
Work-in-progress
Working out the value of work completed but not yet invoiced is very important; this enables the accountant to produce meaningful monthly and annual financials without guessing.
Pricing
The start of pricing is to find out how much the product or service will cost your Company. After that, the price will be based on several factors, but you must have an accurate cost of the product or service before determining the price you sell your product or service.
Complications
The two significant errors that frequently occur are:
- The utilisation of either the machine or person. The forecast downtime, unbillable time is usually undercounted. A lot of effort needs to be put into verifying the accuracy of these forecasts.
- All the overheads need to be absorbed into the pricing. There are special occasions where marginal pricing may be used to catch a bigger fish or when all of the overheads are already covered by the normal business.
About Chris Moore FCMA, GCMA:
Chris Moore is a Chartered Management Accountant, he was the Financial Director of a print and packaging group with 50,000 square feet of machinery. These machines needed to have cost rates for the Work-in-progress calculations, and for the estimators to price jobs for the Company’s customers.
Chris then moved on to being the Managing Director of one of Boeing Aircraft’s U.K. subsidiaries, with the majority of its 120 engineering staff being hired out to external companies. The members of staff being hired out needed to have accurate cost rates applied to them, not only to calculate the Company’s month-end and year-end work-in-progress, but to ensure that the price per hour charged out to external Companies, gave a profit on the contracts.
Please contact me if you need any advice:
Email: cmoore@costrates,co.uk
Telephone: 07789 008002
