Costing for export business refers to the phenomenon of calculating the final cost of a product or service after factoring in all the expenses that have been incurred.
Costing is an essential element for any business regulation, not only for internal and external reporting but also for setting prices for export goods.
The final cost of export goods includes freight charges, customs duties, taxes, fees, pro-forma invoice fees, sourcing agent’s fees, and insurance. That is why export pricing is different from import pricing due to the additional charges.
Cost of Exporting Goods
Calculating costs for export goods is different and more complicated than domestic goods for reasons that are apparent.
The cost of the export products does not only include electricity expense, salaries accrued, raw material and depreciation of machinery and equipment as these are only the production costs, but it also includes the fees paid to agents and brokers, freight charges, customs duties, tariffs etc.
However, these are only the general costs of exporting that are inevitable in the export business; many other costs also incur during the process. All of these factors affect the final pricing of one’s products, and this is the reason why imported goods are more pricey.
Below Is a List of Costs Incurred in the Export Business:
- Research of potential markets for export. This may involve travelling to overseas markets.
- Export documents such as Pro-forma invoices and commercial invoices.
- Promotion and advertising expenses incurred in the international market.
- Packaging expenses.
- Expenses related to attending tradeshows and events to understand the market.
- Taxes and tariffs.
- Costs incurred in complying with the foreign market’s laws.
- Logistics and supply chain costs. Including the shipping cost.
- Fees and commissions that are given to the sourcing agent or broker.
- Change in price of raw material (variable cost).
- Fluctuation in exchange rate (variable cost).
Ways to Do Costing for Export Business
- The most basic way to calculate the total fixed per unit cost of products is simply by adding the fixed costs and variable costs and dividing by total number of units. After calculating costs through this method one can price the product accordingly.
Fixed costs+ variable cost / total number of units = cost of per unit
The most basic pricing technique is cost plus pricing in which we simply add a markup to the cost of goods to reach a selling price.
However, to ease things up a bit, creating a costing sheet is a better option when calculating the total cost of exporting goods. Below is a sample of a costing sheet to draw a rough idea for the readers.
1. Costing Sheet for Export Business
|1. PRODUCTION COSTS|
– Raw material
– Manufacturing overhead
– Direct labor
– Plant depreciation
2. MARKETING AND SALES
– Market research
– Communication/ translator’s salary ‘
– Attending International tradeshows
– Warehousing costs
– Freight forwarding
– Carriage inwards and outwards
– Labeling and packaging
– Demurrage/detention charges
– Miscellaneous charges accrues while transporting
4. DELIVERY DUTY PAID
– Customs duties
– Broker’s fees (customs clearance)
– Commission paid to sourcing agents
– Freight insurance
Setting prices for export goods is wildly different from setting them for domestic goods. As discussed earlier, the costs associated with both the transactions are the reason behind the complexity of export pricing.
It is essential to set prices straight before entering the market because many potential clients would be interested in knowing the worth of your offerings.
While discussing export prices, it is crucial to an export business’s success to consider all the factors that may change/impact the final sell price of one’s goods in a foreign market.
Change in Prices Followed by Change in Market
To begin with, the price of your goods may vary with the change in the market. Different markets have different types of consumers, and often their preferences may differ from one another in terms of spending on imported goods.
Therefore, while doing market research, exporters should assess what their competitors are charging for goods and improvise accordingly.
Freight charges refer to the costs incurred in moving your goods from one place to another. Freight charges may vary due to factors such as distant between point of origin and point of consumption, time, form of cargo, nature of transport ( land, rail, ocean, or road), and the weight of the cargo.
To put this in lamen’s terms, consider two sellers importing goods from the international market. One seller is getting the goods imported utilizing the sea, and the other uses air freight service. The former will quote lower prices for goods because sea freight charges are less than air freight and take longer to reach the destination.
Customs duties are taxes levied on goods when they are being transported across the border. Usually, customs duty varies across different types of goods, but there are scenarios where two countries may have a free trade agreement to regulate the trade between the countries. In this case, customs duties may vary.
GSP, a generalized scheme of preference, is a program that intends to increase economic growth in Pakistan. According to this scheme over 3,500 different products can enter the US market duty-free.
Similarly, many countries intend to increase the ease of doing business for exporters by lifting tariffs which also affect the final price of the goods that is quoted to customers.
Fees / Commission Paid to Agents or Brokers
Agents and brokers tend to make the process of exporting goods internationally easy for the exporter by connecting with the right suppliers in a time sensitive fashion. These agents and brokers are paid for their services by the exporter. These additional costs also impact the final price of goods and services for the end customer.
Cost, Insurance, Freight (CIF) refers to the payment made by the exporter that not only covers the cost of shipping goods overseas but also covers any loss that may occur during the shipping process of goods. The final price of goods also incorporates the insurance amount paid by the exporter.
To protect the domestic industry, many countries impose taxes and tariffs on imported goods which are borne by the final consumer of the goods. The amount of these taxes may differ for some products such as tobacco or alcohol. These taxes are added to the final price of exported goods which is paid by the customers.
All of these factors that are responsible for affecting the sales price of goods internationally may also affect the demand; higher prices may reduce the attractiveness of imported goods.
This article summarizes costing for export business; Costing differs for both international and domestic trade. One can conveniently jot down all the costs that a business may incur with the help of a costing sheet and also account for the factors that affect the final sales price of goods for export businesses.