The relationship between manufacturing cost and price purchase (selling price or market price) generally depends upon the production process, volume of products produced and outsourcing tasks taken up by the subcontractors. Secondly, the ration of manufacturing and selling prices vary on the basis of application of automatic technologies or human labor required during the process.
This article establishes the relationship between price purchase and production charge. Additionally, it highlights the factors responsible for it.
The main financial costs involved in a production process include delivery, labor, supply charges, outsourcing and initial investment. It encompasses both cash reserves and assets (such as production facility and installed equipment).
Labor is a term used for defining the cost spent on hiring manpower from the market. It plays an important role in determining price purchase since all products and services require hiring of staff members. Not only onsite physical labor in the factories but salaries of managers, supervisors, deliveryman, marketing team, customer support team, technical team, administrative department and maintenance firms is included in it.
Supply costs define the expenses that focus on securing production materials. Outsourcing is a part of supply costs since manufacturers spend on hiring a secondary company for maintaining their records, packaging their goods or using their storage place. This process does not have that much effect on price purchase since multinational companies have arrangements for addressing all types of task by themselves.
Also, volume of production refers to the amount of goods that have been manufactured. Mathematically, if the volume is more, it will sculpt down the price purchase or a product because manufacturers will get ample of profits by making small investments and so they can offer discounts on bulk orders. However, this volume depends upon the anticipated product requirements, number of consignments and past sales records of a company.
Frequently, the relationship between price purchase and manufacturing cost is determined by the amount of business done by the company. For example, the selling price of tomatoes produced in a farm will lower than the costs of same amount of tomatoes which are produced by an individual. This is because a sole producer will produce less quantity of tomatoes as compared to farm owners.
Moreover, if a company invests large amounts in developing a product, it will charge high price purchase. This investment includes everything from setting up of equipment, purchasing raw materials from the market, producing products, processing them, packaging, marketing and delivering them. Thus, people who have joint businesses can offer discounts on their services since the cost is shared.
Tips and comments
It is the prime responsibility of managers and accountants to gather information on manufacturing prices and price purchase over a fixed time period so that they can review their profit or loss percentage. If the company gains profit, it can offer discounts in next selling season. On the contrary, if the company is selling good quality products and still it is suffering losses, it can raise the market prices of their services in next selling season. The account department of a firm is accountable for maintaining the records and determining the price variation, as per the current status of their firm.