Introduction to the formal costing exercise
A costing sheet enables an exporter to:
- Check that every expense has been
covered in arriving at the export price. (Please note
that the costing sheet is a guide only. We cannot be held
responsible should you neglect to include a cost that is
important to your export price. For this reason, we recommend
that you sit down with your accountant or with a business
partner and carefully consider all the costs that may impact
upon your export price!)
- Provide a detailed record of the terms that have
been quoted to the foreign buyer.
This costing sheet has two sections:
- The first section - outlined below - discusses all of the items included
in the export costing sheet (it is essential an instruction
manual for completing the costing sheet)
- The second part is the sheet itself
- click here to access the costing sheet
Guidelines for completing the costing
1. Determine your product cost
The starting point in your export costing
exercise is to determine the cost of producing the product
you intend exporting. To this end, there are two types
of costs you need to calculate; the first is your fixed
cost, which includes costs that you would have to pay whether
you produced any products or not such as the rent for your
factory (these costs stay the same irrespective of how
many items you produce for export), and the second is your
variable cost, which includes those costs directly associated
with producing the goods and which will vary depending
on the number of items you produce. To learn more about
fixed and variable costs, click here. Fixed costs include
all factory overhead such as rent, rates and taxes, lights
and water, etc.; the cost of senior management which have
to be paid irrespective of how many goods are produced;
administrative costs such as insurance; selling costs and
advertising costs; etc. Variable costs include the cost
of materials, the labour involved in the manufacturing
2. Include all product adaptation costs
If you will be using your domestic cost calculations
as a basis for this export costing exercise, you should
then also include any extra costs associated with making
any changes or adaptations to the product in question.
However, if you start a completely new costing exercise
specifically for your export production, then you will
not have to worry about these costs as they will already
be included in your production costs. See also product
3. Include all individual and sales packaging
and labelling changes to the product
It may be necessary for you to make changes
to the unit (or individual) packaging of your product (for
example, your overseas customer may want glass packaging
instead of plastic packaging for your medical preparations,
and/or the labelling of each unit may also have to be different
to accommodate language and regulatory requirements).
Besides for the individual packaging, you
may also have to include the cost of changing the sales
packs that you use for your product. Your sales packs include
those boxes in which you pack 10 or 20 or more units and
which are used for display in stores (of course, not all
products make use of sales packaging - for example, industrial
machinery is not likely to require sales packaging but
certain food items). Such sales packaging will almost certainly
have to be adapted for the export market in respect of
language, design and regulatory information.
As far as labelling is concerned, these may
have to be printed in a foreign language, perhaps containing
information not included in the labels used within the
local market. Also, from a sales point of view, they must
be suitable to the foreign consumer. The selling price
of the product must include sufficient allowance for these
extra labeling costs.
The above costs can be considered to
be the Product Costs
4. Bulk packing, crating and labelling
This is different from the individual and
sales packaging we referred to above. Instead, it refers
to the bulk packaging (and accompanying labelling) necessary
to ensure the safe delivery of your goods to your customers.
In some instances this may involve the crating of goods
or the palletising of goods combined with shrink wrapping.
At this point, the goods have not yet been containerised
(if they will be sent by container - this task still lies
ahead and the cost thereof needs to be included later).
The cost of packing for overseas shipment will vary according
to the product, destination, and means of transportation.
You must include reasonable provision for these expenses.
A small cost needs to be allocated to the
stenciling of an identification mark on each package for
In some instances, cartons or crates may
have to be wire- or nylon-strapped to help prevent it from
being accidentally opened en route to its destination.
Small packages that are not going to be containerised should
also be strapped together to discourage pilferage and other
7. Internal documentation costs
There may be documentation that must be produced
to accompany the consignment such as a packing sheet. The
cost of producing this documentation must be included here.
8. Bank interest charges
Producing the goods may take some time (days,
weeks or even months) to be produced and then these goods
may be kept in storage for even longer awaiting shipment.
During this time, there is money/capital tied up in the
goods and you may have had to borrow the money to produce
these goods (even if you did not borrow money, you could
have earned interest on your own money that you have used).
For this reason, it is wise to include these interest charges
(or lost income) in your calculations.
Once all of the above costs have been calculated,
you need to include your profit margin into the calculation.
What margin you decide on will depend on your costs, your
export objectives, the circumstances prevailing in your
target market, your intended pricing strategy, etc.
9. Agent's commission abroad
If you have appointed an agent abroad, you
may need to include the agent's commission into your Ex
Works price. This is usually calculated on a percentage
At this point, you have now arrived at your
Ex works price
Ex Works (EXW) is an internationally used
term to indicate a specific selling condition that is outlined
in the INCOTERMS 2000 - a set of rules defining the responsibilities
in international trade contracts, compiled by the International
Chamber of Commerce. To learn more about the Incoterms,
10. Loading the goods
Once you have produced and packaged the goods
for export, and placed the goods at a suitable point for
collection (usually your warehouse), the next step is to
load the goods onto the means of transportation that is
to be used to move the goods to the airport or harbour.
Usually, the means of transportation will be a van, a motorised
truck or railway truck. Where goods are to be sent by container,
the container must be ordered, delivered and loaded.
In the case of Ex Works, the seller is only
responsible for placing the cargo at the buyer's disposal
at a convenient point in the factory or warehouse (a loading
ramp, say). As the seller, you are not obliged to load
the cargo onto whatever means of transportation will be
used to collect the goods from your factory or warehouse
- this task is the responsibility of the buyer. However,
it remains a negotiable item and the buyer may request
for you to load the goods onto the truck that they arrange
to collect the goods from you. If this is what has been
negotiated, then you will need to cost the loading of the
goods onto the truck to be supplied by the buyer as part
of your Ex Works cost.
11. Pre-shipment inspection
Some overseas buyers may require that the
goods be inspected before they leave the exporter's premises.
Usually they will require an independent third-party to
do this inspection. Generally, the cost of the inspection
is paid for by the importer, but it may be negotiated that
the exporter carries this cost. In this unlikely event,
you will need to include these inspection fees as part
of your costs.
12. Freight forwarder's fee
If you plan to make use of the services of
a freight forwarder for documentation and book the shipping
space required, allowance must be made for the fee involved.
The amount of these fees can be obtained in advance from
the forwarder or shipping agent.
13. Local inland freight
There are essentially four ways that your
goods can be transported to the country of destination
(referred to as cross-border transportation) - air, sea,
road and rail. Air and sea are commonly used for destinations
that are far away (e.g. Europe, Asia, Americas), while
road and rail are commonly used for destinations in Africa.
However, road and rail are also used to get your goods
to the nearest airport, harbour or railway station for
cross-border transportation. This is referred to as inland
Whichever cross-border mode of transportation
you use, you have to decide how to get your goods from
your factory or warehouse to the required harbour or airport
or railway station (i.e. which inland freight method will
you use?). In the case of road transportation to a destination
in Africa, the truck will probably come direct to your
factory/warehouse, collect the goods and take them all
the way to the end destination, thereby combining the local
freight component and the cross-border freight component
into a single freight cost. However, in the case of the
other three options (rail, sea and air), there will usually
be a local inland freight component that you will need
to including in your costs.
14. Unloading charge
There is usually a charge for unloading goods
from railway cars or trucks. This cost will be incurred
when the goods arrive at the seaport or airport. There
may also be unloading and loading costs incurred if goods
are moved from one transport medium (e.g. truck) to another
(e.g. rail) somewhere along the inland freight component
and such costs must also be taken into consideration.
15. Terminal handling charges
At the harbour there are specialist companies
that take responsibility for all the handling of goods
and payment of harbour and wharfage dues at the quay side.
These are referred to as wharfage companies and you will
need to account for their fees in your costing exercise.
Similar costs are incurred at airports but these services
are provided by the airline in question and are included
in the air freight costs and are usually not a separate
16. Long or heavy load charge
If the shipment is exceptionally long or
heavy, an extra charge may be incurred.
17. Consular documents
Although not a common requirement, some countries
require consular documents to be purchased before they
will allow goods to enter their borders. These documents
can be quite expensive, particularly in the case of export
to the Latin American countries. Initially, the exporter
may wish to quote to the foreign customer a price of so
many dollars plus the cost of consular documents. If not,
it must make adequate provision in the price to cover their
18. Financing charges
Until payment is received, your firm will
have part of its working capital tied up in export merchandise.
Even if no credit is given, it will have to wait until
the goods are shipped or delivered before payment is made
and even the payment process may take some time. If credit
is given to the foreign customer, you may have to wait
an additional 60, 90, or 180 days for payment. Your selling
price should include an amount to cover the cost of this
What is more, if you intend to discount at
your bank a time draft that has been accepted by the foreign
importer, in order to obtain your money sooner, then allowance
must be made in your export price for bank discount charges.
19. Export credit insurance
You may want to buy credit insurance or "Factoring"
for your credit sales abroad. If so, then allowance should
be made for it.
20. Other charges
Here, space is left for the inclusion of
unexpected additional expenses such as the cost of overseas
telephone calls associated with the delivery component
of the contract, extra storage charges that may be required,
At this point, you have arrived at your
Bear in mind that an FOB price requires the
goods to cross the ship's rail for your responsibility
to end. Thereafter the buyer takes responsibility for all
21. Ocean freight
This cost includes the shipping of the goods
by sea to the foreign port. The cost may be quoted by the
ocean carrier (i.e. the shipping line) in local currency
or U.S. dollars.
At this point, you have arrived at your
C & F price
20. Marine insurance
You will want to insure your firm against
financial loss from all possible risks, including damage
to the goods or theft while they are being shipped abroad.
Usually, ocean freight is insured for 110 percent of its
total value to cover anticipated profit and the interest
cost of working capital tied up in the shipment.
At this point, you have arrived at your
22. Conversion into foreign currency
The foreign buyer will usually ask for a
price quotation in US dollars or perhaps in euros, Japanese
yen, British pounds, or some other currency. Therefore,
the price in rands must be converted to a price in the
foreign currency. Care must be taken to use the correct
exchange rate. You may wish to eliminate the risk of an
exchange loss by selling the foreign currency to a bank
on a forward basis, in exchange for local currency. The
cost of this bank service, which provides you with a predetermined,
fixed rate of exchange for any foreign currency you will
sell to the bank in the future, should be included in the
export price quoted to the foreign importer.