Promoting sustainable women’s cooperative group businesses in Thailand. A training kit. (2024)

What you will learn in this module

Understand the concepts of cost
Understand the importance of pricing inbusiness
Learn different ways ofpricing a product
Apply theconcepts to decision making

Session 1 - Costing: concept andpractice

• Rural women's cooperative groups often do not understand why they should calculate costs. It is important that they understand both the "why" and "how" of calculating costs.

• Read the handout carefully and work out all the examples before you begin to teach.

• Start the session with a discussion on the importance of calculating costs. Use the example given in the handout to emphasize the need for calculating costs. Proceed with teaching different cost concepts.

• Divide members into groups and give them the case study for calculation of costs and break-even points. Allot at least one hour for group work.

• Go around all the groups during the discussion and see that they are on track.

• Convene the groups in a plenary to check whether each group understood the concepts.

• If necessary, do the calculations yourself and explain to all participants.

• End the session by emphasizing the practical use of calculating costs as in the break-even analysis.

If the women understand break-even analysis, they will be ableto know the level of sales at which they can cover all their costs and begin toearn a profit.

Handout 1: costing concepts

Why calculate costs?

A women's group was earning a profit of 10 000 Baht a monthafter paying all members for their labour. They were very happy and did notcalculate the cost of production. Their product was in demand, and as long asthis was so, they did not have to spend time on any calculation. Do you thinkthis attitude is right? Is it necessary for this group to know the cost ofproduction?

The calculation of costs is important, regardless of whether agroup is doing well or not. It is only when women know how much each productcosts, that they can price the product well. It is important to calculate costs,because it is possible to cut costs only by attending to details.

Women's groups often forget several elements of costing. Theytend to underestimate their own labour and, therefore, the profits theycalculate may be overstated. It is important that groups recognize the voluntarycontributions by members. When women begin to analyse costs, they also look intothe details of the process and are able to find ways in which work can bereorganized to reduce costs.

A major cost is that of raw material. For instance, in onegroup, each woman buys the vegetables to make herbal sweets at home and bringsthem to the group for sale. In another group, each woman purchases the cotton orsilk raw material, weaves on her loom at home and brings the items to the groupfor sale. These groups can save costs if they buy the raw material together. Agroup that makes artificial flowers buys all their raw material (paper, glue,metal, colour) together. The simplest way to reduce cost of raw material is bymaking bulk purchases. This results in individual saving and also enables lowerpricing of the product, making it more competitive in the market.

Thus calculation of costs helps in:

• determination of the costs of products and services sold by the group;
• control and reduction of costs;
• making decisions about pricing, volume of production and sales.

Basic concepts of costing

Costs can be classified into two broad categories:

VARIABLE COSTS

and

FIXED COSTS

VARIABLE COSTS, as the name suggests, vary according to thenumber of units produced. For instance, the raw material used in the productionof each piece of handcraft constitutes direct cost. The bananas used in theproduction of banana chips, the fish used in the production of fish sauce areexamples of variable costs. Raw material and labour are variable costs. Examplesof other costs that vary with production level are electricity andwater.

FIXED COSTS remain the same for a certain level of production.For instance, in hiring a hall with an area of 1 000 sq.feet, which canaccommodate 20 looms, the same rent must be paid even if between 10 to 15 loomsare operating. Therefore, women often develop strategies to spread their fixedcosts. In this case, they could try to improve their market and production andinstall the maximum capacity of 20 looms so that their fixed costs would beoptimised.

Fixed costs include rent, salaries, tools andequipment.

Break-even point

Break-even point is that level of production at which abusiness unit makes no profit and no loss. The level of production and sales atwhich the income covers all variable and fixed costs of the business is termedthe break-even point.

With good planning, it is possible to reduce both variable andfixed costs. Calculating the break-even point also helps in decision-making onthe level of production and sales prices. If fixed costs i.e. overheads arereduced, break-even point will be reached faster and the business will becomeprofitable at a lower volume of production/sale. Similarly, when price isincreased the break-even point is realized at a lower volume.

Handout 2: case study on costing and break-evenpoint

The Duang Mo cooperative group of 30 women makes handicraftsfrom water hyacinth. Their most popular product, a basket, is a fast moving itemthat is in demand throughout the year.

The following information is available about the cost ofproduction:

• members buy the processed raw material - water hyacinth fibre - from the group at 30 Baht per metre;

• 2.5 metre of the raw material is needed to make a basket;

• a skilled woman can make two baskets per day;

• each woman works for 20 days per month;

• the group's total production is 1 200 baskets (30 women, 20 days, 2 baskets per day);

• individual labour charge: 100 Baht per day;

• all the baskets made by the women are sold immediately;

• the group pays a monthly salary of 3 000 Baht each to an accountant and a marketing assistant;

• it pays 300 Baht and 150 Baht respectively as monthly electricity and water charges. The monthly telephone bill is 450 Baht while transport to Bangkok and the district town costs 900 Baht per month.

The group costs the product as follows:

The product is sold for 250 Baht in Bangkok. The margin keptby most dealers is 10 percent, but the dealer pays a unit price of 150 Baht tothis group, as this is the price that they asked for. The group believes that itis making a good profit at this sales price.

Calculate the cost of production of each basket and decidewhether the group is making a good profit and a good pricingdecision.

Calculating the cost

Variable cost of producing a basket in Baht

Thus the total cost per basket is 131.5 Baht (i.e. variablecost plus fixed cost)

Q1. Has the group made a correct calculation of cost? Isthe costing of overheads and administrative cost at 5 Baht accurate? Calculatethe overhead cost of the group when the production level is 1 200 units. What isthe price at which the group breaks even, if it makes 1 200 units?

Solution

NO. The group did not calculate the fixed costs and charged anad hoc amount of 5 Baht. Their fixed costs are 6.5 Baht per unit. They shouldcharge a unit price of at least 131.5 Baht to break even.

Q2. If the price is 150 Baht, what is the quantity at whichthe break-even point is achieved?

Solution

If price = 150

How many baskets need to be sold to cover fixed costs of 7 800Baht?

7 800/25 = 312

When does the group break even, if the price is 150Baht?

At break-even point, total revenue (TR) is equal to total cost(TC), thus

Therefore,

150 x Q = 7 800 + 125 x Q

or

(150 x Q) - (125 x Q) = 7 800
i.e. 25 x Q = 7 800

Therefore

Q = 7 800/25 = 312

Thus when the price is 150 Baht, break-even point is achievedat a quantity of 312 baskets.

Q3. If the price is 200 Baht, what is thequantity at which break-even is achieved?

Solution

If the price is increased to 200 Baht, the group will recoverall its costs when it has sold only 104 baskets.

At break-even point, the total revenue should always be equalto total cost. Thus, if Q is number of baskets needed to be sold to recovertotal costs:

The group can, in fact, charge the dealer a much higher price.As the dealer sells the product at 250 Baht and expects a normal commission of20 percent, (s)he would be willing to pay a price of 200 Baht to the group. Thusthe market can bear a price of 200 Baht, while the group is only able to realizea price of 150 Baht.

Session 2 - Pricing: concept andpractice

• Pricing is one of the most important decisions in a business. It is important that participants understand the simple concepts given in this session and are able to apply them.

• Start by asking them the meaning of profit and how they can make a profit. After some participants have answered, write the key words on the board.

Profit = Total revenue - Total cost
Total Revenue = Price x Number of products

• Emphasize the fact that price fixation is an important decision in a business.

• Ask the women how they fix the price for their products. They may say that they put their mark up on the "cost plus". At this point, explain the first method of "cost plus" pricing as given in the handout.

• Explain to them the next method of 'Price that a customer can bear'.

• Tell them that they can deepen their understanding of pricing this way from the case study.

• Divide the participants into groups of four each and tell them to work on the case study. Talk with every group during their work.

• Convene the groups in a plenary after half an hour. When participants share their experiences during group work, ensure that all have understood the two ways of pricing.

• Emphasize that members must be aware of marketing prices to take good pricing decisions.

Handout 1: concept of pricing

The primary motivation in starting a business is to make aprofit. This is also true of a rural women's cooperative group starting abusiness. If the group makes a profit, it is successful in business. Whether thegroup makes a profit or not depends on the pricing of the product/servicesold.

Therefore, one of the most important decisions that the groupmust take is about the pricing of the product. In order to be able to do so,members must first know the cost of the product/service. They must also know atwhat price the customers will be ready to buy their product/service.

Profit can be calculated using the formula below.

Profit = Total revenue minus Total costs

Profit margin = Total revenue minus Total costs ofarticle

The price should be fixed such that it covers full costs,earns the group some profit and gives good value for money to thecustomers.

The following explains the concept of profit and the differentways of fixing prices.

Method 1: 'Cost Plus' pricing

The first method of fixing price, which is followed by manywomen's groups, is the 'cost plus' method. The women decide what profit marginthey can add to the cost and fix the sales price. For instance, the cost ofproduct is 150 Baht. They may decide to add a margin of 10 percent and fix thesales price at 165 Baht.

Total costs + Profitmargin = Sales price

Method 2: Pricing at 'What the market canbear'

Another way of pricing is to price at what the market canbear.

Judging or understanding what the customer is willing topay

+ profit margin
= sales price

Women must know the current sales price in the local market inorder to calculate the price using this formula. Therefore, it is important thatthey know the prices prevailing in the local market. In fact, for good pricingdecisions, they need to know the prices in urban markets as well.

Handout 2: case study on costing andpricing

The four-year-old Thumbole Mahardthai Women's CooperativeGroup has 30 members and makes artificial flowers. The production cost of theflower made most by the group is calculated as follows:

• The raw material used is sal paper, glue, metal stick, etc.
• Five members make one type of flower
• Five members produce 40 flowers in a day
• Each person is paid 100 Baht per day

The cost of producing 40 flowers is given in the tablebelow:

Cost of one flower = 1 400/40 = 35 Baht

This 35 Baht includes

Especially important for women to remember

• Have you calculated and included the cost of your labour for production, management and marketing in the total cost of your product or service?

• Have you priced your time at the current market value? Are you using this calculation as a means of determining the final price of your product?

What you have learnt in this module

Costing is important to ensure that all expenses are covered and the group fixesa price that ensures a profit.

The first and mostimportant step is to identify ALL the costs of a business: production, sales,administrative, overheads, etc.

The next step is toclassify costs into fixed and variable costs.

Break-even analysishelps with decisions regarding pricing and production levels.

Pricing can be doneon the basis of 'Cost Plus' thinking and this ensures a minimum margin overcosts.

Marketconsiderations are important in pricing and are taken into account by pricing at'What the market can bear'.

The price fixed lieswithin this range of possibilities. Therefore, it is important that groupscalculate the costs and have an understanding of the final market for theirproducts.

If the group dependson intermediaries such as agents, middlemen or traders, the latter's costs andprofits must also be taken into account.

The services theyprovide include working capital advances, stocking, storage place, marketinformation and linkages.

Marketing linkagesand contacts are important to bring the group closer to its finalcustomers.

Groups must assignat least two or three people for the marketing work so that they are constantlyaware of the demand for their product, and its strengths andweaknesses.