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 process, etc.
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 adaptation.
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 Product Costs above can be considered to be product costs.
4. Bulk packing, crating and labelling for export
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 export.
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 loss.
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.
10. 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 basis.
At this point, you have now arrived at your Ex works price
11. 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.
12. 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.
13. 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.
14. 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 freight.
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 included in your costs.
15. 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.
16. 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 cost.
17. Long or heavy load charge
If the shipment is exceptionally long or heavy, an extra charge may be incurred.
18. 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 cost.
19. 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 working capital.
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.
20. 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.
21. 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, etc.
At this point, you have arrived at your FOB price
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 the costs.
22. 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
23. 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 CIF price
24. 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.