Costing for Profit Philip M Collis, FFA Fellow of the Institute of Financial Accountants Home  | Market Pricing  | Bio  | Working Example  | Itinerary  | Costs  | Contact  | Links

The arithmetic doesn't lie. Your Sales Director will make decisions on the final selling prices of your products, but your sales forecast will still have to show that your budgeted total gross profit from these prices agrees with your master budget.

Ok, so what does all this mean?

There is no such thing as the official "market price" for a product, unless the product is regulated some way, such as shares prices on the Stock Exchange. If some of your products can command a higher selling price than the Standard Selling Price calculated by your costings, then GO FOR IT!

This doesn't mean that you have to reduce your other product prices to compensate. However, if a product cannot command the standard selling price then you have to make a commercial decision on whether to produce it at all. The management information system will do the arithmetic and let you know whether the prices you have chosen add up to the targeted profit.

I once prepared a suggested price list for a company (office furniture manufacturer), based on accurate costings which required an overall average increase in prices of 7% and my Chairman said "They won't pay those prices". However, he took the plunge and published the suggested prices and the management accounts subsequently showed a UNIT SALES increase of about 2%. Customers were buying more at the increased prices!

Another company I worked for (double glazing manufacturer) said something similar so I challenged my MD to compare the new suggested prices with the competition. He discovered that the new suggested prices averaged out at the third highest price out of four. Two out of three of his competitors were charging higher prices for the same product.

You may be saying "I can't budget because nobody can forsee the future". This is certainly true, but you can't just cast your fate to the winds either.
Did you ever hear the Chancellor of the Exchequer say "I can't do the budget because I don't know what is going to happen" ?.

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