How to Calculate the Cost of Product
Overview
Miss. Jai Shree Vyas has taken an example of a vegetable seller to explain How to Calculate the Cost of Product in a business cycle.
#1 Business Life Cycle of a Vegetable Seller
The business life cycle of a vegetable seller includes the following steps:
- Buy vegetables from the wholesale market
- Take the purchased vegetables to the market where you will sell them
- Sell the vegetables to the end customer
Let us understand how the cost is calculated in the above steps.
Suppose a vegetable seller buys 10 kg potatoes at the rate of Rs. 30/kg.
So, the total purchase cost of the vegetable seller is Rs. 300.
Transportation cost = Rs. 30
Thus, the total cost = Rs. 330
Suppose 1 kg of potatoes are spoiled. How, from 9 kg potatoes, you need to out your cost of Rs. 330 and you need to profit of Rs. 30. This means you need to take out Rs. 360 from 9 kg potatoes.
So, you need to sell potatoes at the rate of Rs. 40/kg to recover your cost and earn some profit.
A business owner needs to understand this equation because most of the business owners don’t understand this equation and keep on increasing their debts.
#2 What should you do to calculate and control your costing?
- Understand your business life cycle
- Determine your costing in detail
- Determine the amount of money spend and the amount of profit margin expected at the end of the business cycle
- Add the total cost and expected profit margin and based on it, determine the price of your product
If your costing is not correct, then your pricing cannot be correct
So, you should have a grip on your costing.
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#3 Should a small business owner do business without bills (Kacche mein business) or with bills (Pakke mein business)?
Initially, a small business owner can do the business without bills to understand his/her business, market, and industry properly.
Once the business starts growing, then they can shift to a proper billing system and start maintaining their accounts.
A small business owner should maintain a simple cash book that includes the following information:
- How much money did you spent on the purchase of raw materials or finished goods in a day?
- How many products were sold in a day?
- How much money you earned in a day?
So, you just need to write this simple information every day with discipline.
Initially, small business owners are not ready to maintain this account; but, they start maintaining this account, they get a clear idea of:
- How much are they investing in their business?
- How much are they earning from it?
- How much losses are they incurring?
#4 What are the benefits of doing business with bills?
1. Helps in maintaining records: If you do business with bills, then you will be able to maintain your accounts properly.
2. Allows business owners to do business on credit successfully: By maintaining accounts, the business owners can have a clear idea of the products given on credit to the customers and the amount that needs to be received from the customer. You will not have this information if you don’t maintain the accounts and you might forget to whom you have given the products n credit.
For example, if you have given products on credit to 10 people but you only remember 5 people, then it will be a loss for your business.
3. Helps in getting a loan: For expansion, business owners require working capital, which they can get from banks in the form of loans. The account books maintaining by them help in getting the loan.
Banks get confidence in the business owners who maintain their accounts and often give them loans easily.
4. Helps in an expansion of business: Once business owners start maintaining their accounts, they get a clear idea of whether they are earning profit or incurring losses. Based on this, they can decide to expand.
5. Helps in growing your business: You can grow your business only by doing business with bills of maintaining your accounts.
Taking the example of a vegetable seller, who maintains the accounts and wants to expand his business by taking a loan. He/she can take a loan for the following purposes:
- Buying a cart, if the vegetable seller sits on the road
- Buying a shop or tempo, if he/she already has a cart
So, there are several benefits of doing business with bills. Do not think f tax and GST because today. It is very easy to determine how much taxes you need to pay.
You can get education about this on the government website and even from Miss. Jai Shree Vyas of S.M.S.S. bank.
Learning
- How to do cost accounting in the business cycle?
- What are the benefits of doing business with bills?
To grow your business further, you should do business by maintaining proper accounts.
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