Guest: Claude McKenzie, CPA and President at Excel-Lance Consulting Services
Written by: Claudine Fyfe, President of Fynlam

Beyond simple calculations, the cost price, fundamental to any procurement process, is a science that requires a rigorous method and a clear understanding of the various costs associated with each product. This becomes even more essential for projects involving international markets, where accurate labor cost evaluations and logistics fees can be decisive factors.

Here’s a summary of our podcast with Claude McKenzie (french version only), focusing on the importance of cost price for procurement professionals.

Calculating the Cost Price

The cost price totals the expenses necessary to obtain a finished product ready for sale. Typically, it includes the in-store cost, which incorporates not only the purchase price of raw materials but also transportation, customs clearance, and inspections.

Here’s the formula for the in-store cost:
In-store cost = product cost + transportation + customs clearance + inspections before arriving at the store.
To refine the calculation, we break down the product cost.
Here’s the formula for product cost:
Product cost = raw material cost + manufacturing overheads + indirect costs.

Indirect Costs: Challenges and Methodology

Indirect costs, such as insurance, rent, and equipment maintenance, present a major challenge. To master these costs, it is crucial to segment the company’s activities and allocate indirect costs to each activity, such as procurement, goods receipt, and manufacturing. This activity-based segmentation helps identify the costs of each process accurately.

Essentials of Cost Price Calculation

Everything evolves quickly, and the data used to calculate the cost price changes at the same pace! Here are the essentials to ensure more accurate cost price calculations.

• The Importance of Recalculation
  Product diversification leads to variations in production costs. Therefore, it is essential to regularly reevaluate the costs of each product.
• Collaboration and Information Sharing
  Cost price calculation requires active participation from all involved teams. To optimize indirect costs, each department head must be able to provide relevant information, such as electricity consumption on production lines.
• Automation of Processes
  Automation helps reduce time and costs associated with each activity. It increases precision and efficiency, especially for repetitive tasks, which directly affect product prices.

Towards Strategic Procurement Planning

Reliable data and anticipation of market trends are essential to adjust acquisition and equipment renewal costs. Strategic procurement planning involves analyzing the costs of each product and continuously seeking optimization.

“You cannot improve what you do not measure.”

Practical Tips for Cost Price Calculation

Here are some tips to optimize cost price calculation:

• Understanding Financial Statements
  It’s crucial to understand, especially, labor costs, which are often underestimated. For example, it’s advisable to add a margin for non-working days.
• Allocating Overheads Properly
  Correctly allocating fixed costs, such as electricity, ensures greater accuracy in cost price calculation.
• Outsource When Necessary
  Cost price calculation requires precision and control. In complex situations, it may be wise to consult an expert to ensure the accuracy of the costs.

Cost Price and Planning for Fixed and Variable Costs

Clearly distinguishing between fixed and variable costs enhances control over cost management and profit margins. Procurement professionals must optimize activities to reduce costs without compromising product quality or availability.

In conclusion, rigor in cost price calculation is essential for greater efficiency in the procurement world. Whether in local projects or international initiatives, this skill provides better visibility and a direct impact on operational profitability.

PERSONAL NOTES
I decided to address the topic of cost price after several preliminary discussions, particularly with Sylvain Thiboutot, in the context of the podcast on procurement in Mexico (french version only). He emphasized the importance of understanding your cost price even before launching a project abroad. Specifically, it is crucial to evaluate labor costs within the manufacturing process.

In some cases, calculating the cost price reveals that the most efficient source of supply might actually be local—a principle at the core of “best cost” analysis.

Cost price calculation is a discipline in itself, requiring a rigorous methodology. While cost experts are often part of accounting teams, the expertise needed for such calculations is developed primarily through hands-on experience. This point resonates with the valuable insights shared by Claude McKenzie. Although he was a bit nervous during the podcast recording, he was delighted to contribute to the discussion!