Calculating Product Costs

Which areas of the value chain do you think should be included in calculating product costs and why? Where the other costs would be reported, if at all?

            An organization needs to consider some of the costs incurred in the production process and various factors while determining its final price before setting it out into the market. The price evaluation should include some of the activities and operations that have been a part of the product’s value addition process. It may also consider activities that have supported the production process in certain ways to reduce the costs incurred or increasing product differentiation. Nevertheless, not all processes can be included in the product cost evaluation in a firm. Some of the value chain costs incurred in the production process that can be included are the research to product design expenses, production costs and costs incurred in the distribution of the products.

            The research to product design for an organization is the major value chain process essential in determining other business functions and operations that aim to add value to a product for customer satisfaction. Henceforth, the expenses incurred in the research for product design should be included while calculating a product's cost within a business. Furthermore, expenses incurred in the production process should be included in determining the product's price and cost (Syreyshchikova et al., 2021). Since the production process is the key determinant of the product’s quality, the various processes and activities carried out while manufacturing the certain product should be included in the calculation of a product’s final cost. In cases where the product produced is of low quality, the expected market price of a certain product should also be low. A low-quality product may affect the organization's profitability since it attracts lower demand, leading to low volume sales and less revenue generated. Low-quality products may also result in customer complaints and negative feedback, leading to more losses resulting from reduced product demand and sales.

            Expenses incurred while distributing the products should also be included in calculating the product’s cost in the business. The distribution process helps to identify prospective customers and target groups in the market. The distribution process may also help identify suppliers and retailers that can help reach the product to customers far in the supply chain, hence increasing sales for the organization. Therefore, any costs incurred in the distribution process should be considered while evaluating the price for a particular product.

            Another value chain cost that should be included in the calculation of a product’s price is the marketing and sales expenses incurred while advertising for the product. Advertising costs, marketing expenses and other related costs incurred by the business while advertising the product to prospective customers should be considered before making the final price of the good or service for the business (Kozlova et al., 2019). Additionally, customer after-sale services should also be included in calculating a product's final price since the service improves a product's usefulness, accessibility, and reliability. More so, providing after-sale services and marketing have a positive impact on the business by improving customer response and feedback. Both are essential in determining a business profit and loss margins.

            Each process in the production and manufacturing process of a product has various costs incurred. The most crucial activities have to be added to the product price evaluation process since they have significant impacts on the final product. However, other processes that may not be included in the product price calculation process are equally essential in the value addition chain for a product. Such processes should also be recorded and reported in the business operations to determine the level of profitability in an organization.

In the value chain, an organization incurs various costs in the manufacturing process such as product costs and period costs. Product costs may include expenses incurred in the manufacturing stage whereas period costs are expenses incurred outside the manufacturing process. Period costs such as marketing, distribution and after sale services should not be included while calculating a product’s price since they are not directly involved in producing the particular good or service. Such expenses would be reported and recorded during an accounting period.