In the conditions of commodity-money relations with such concepts as the price and cost of goods, one has to deal quite often. Moreover, this applies both to narrow-profile employees of enterprises (economists, financial analysts, accountants) and ordinary people, due to the fact that every day each of them is a buyer of certain goods and services. Most often, the cost and price of products are considered synonymous, although in the economy they are completely different concepts.
The specialized economic literature describes these terms in great detail. But how can a simple layman figure out what the difference is? This article is intended to improve financial culture, which will reveal the difference between the cost and price of goods, show the pricing mechanism and what factors affect it.
Forms for determining the value of goods
There are only three of them, and these forms are listed exactly in the order of their formation:
- Cost.
- Cost.
- Price.
In order to understand the difference between cost and price, it is necessary to consider each of thethem.
Cost of products
Each product that ends up in the consumer basket of the end consumer has gone through a difficult path. The beginning of the journey is the purchase of raw materials for the manufacture of a particular product by the manufacturer, then the direct production of component parts, then assembly, testing and other related processes and costs. The result is a finished product of production.
In order to produce finished products, the plant incurred certain costs, which constitute its cost.
To the question "what is the cost of production" in the economic literature there are answers in the form of clear definitions.
In simple terms, the cost is the total cost of manufacturing a particular product. As a rule, the cost price includes the cost of raw materials and materials, wages of workers, electricity, water, rent of workshops, depreciation of equipment and other overhead costs incurred by the manufacturer during the production process.
What is the cost of production?
Why did the factory make the product? Who will be interested in this product if it remains at the factory? Upon receipt of the finished product, the manufacturer expects to make a profit, which means that the further path of this product is to sell it so that it reaches the end consumer, i.e., the one who will own and use it. There are many ways of realization, as well as intermediate links in this process. Canconsider the simplest. The factory transfers its product to the store, which intends to sell it to the final consumer. For example, the cost of production was 200 rubles per unit. What is the cost of production is already known. But it is also known that the plant intends to make a profit from the sale of its products. Consequently, he gives his products to the store not for 200 rubles, but for 250 rubles per unit. At the moment the product of production is promoted for sale, it becomes a commodity, and the cost price, increased by the manufacturer's allowance, becomes its cost.
Cost is the cost of the product plus the producer's expenses (taxes, deductions) and the percentage of profit sufficient for successful business.
What is the price?
The store bought a product from the factory with the sole purpose of selling it to the consumer and making a profit. This means that the store will add its own surcharge to the purchase amount, which will include transportation costs, advertising costs, store rental and other related costs for the sale of this product. It will also include the percentage of profit that the store intends to receive. The cost of the item, plus the sales markup and percentage of profit, is the price of the item.
The price of a product is the amount for which the seller is willing to sell the product, and the buyer is willing to buy it.
Factors affecting price
If cost and cost are constant(if we are talking about a short time period), then the price is the most variable parameter. Pricing is influenced by many factors other than the standard seller's markup. Here are some of them:
- The length of the chain of distributors from the manufacturer to the final consumer. It is easy to see this in the previous example. So, the plant manufactured products at a cost of 200 rubles per unit, handed over for sale at a cost of 250 rubles per unit of goods. Let's suppose that a distributor (intermediary) bought a product from a factory, not a store, and resold this product to the store at a price of 300 rubles, putting his markup and a percentage of the profit into it. In turn, the store will sell this product to the final consumer, having laid down its costs and the expected profit rate. As a result, the end consumer will buy the product at a price of 350 rubles. The more intermediaries between the producer and the end consumer, the higher the price of the goods, therefore, the higher the total difference between the cost and the price of the goods in monetary terms for the end consumer.
- Demand and supply. The more offers of a similar product from sellers, the lower the price for end consumers, and vice versa. The same is with demand: the higher the demand from consumers, the higher the price, and vice versa. For example, if our product could be bought in only three stores in the city, and every family needs it, then its price could well be 1000 rubles (despite the fact that the cost was 250 rubles). In this example, there is high demand and low supply. Another example, if the above product were sold in all stores,at the same time, everyone needs it, then the price would not exceed the competitive mark and could vary from 300 to 400 rubles (depending, among other things, on factor 1). Well, if demand is low, then the price will hardly exceed the cost with minimal margins.
- Seasonality and fashion. In this case, seasonality determines demand. For example, why do clothing and shoe stores often have promotions and sales? At the end of the season, the demand for seasonal goods falls, and the area must be freed up for the next season's goods. That is why the seller is ready to sell goods unclaimed next season with a minimum margin, which significantly reduces the price. The same is true with fashion.
- The uniqueness of the product. The more unique the product, the higher its price, but the narrower the circle of potential consumers and the longer the implementation time may be.
- Product shelf life. The shelf life of a product affects the pricing mechanism for perishable products such as vegetables, fruits, dairy and sour-milk products. The price is reduced to the lowest possible at the end of the expiration date, and sometimes the seller is ready to give the goods at its cost in order to avoid even greater losses.
Conclusion
So what is the difference between cost and price of a product? From the material presented above in the article, it follows that these are completely different concepts, and they are closely related and consistently one comes from the other. The price is determined based on the cost under the influence of external factors, the cost cannot be calculated without the cost price. And the cost determinesmanufacturer through accurate accounting calculations and economic analysis.
