Costing and Margin
Margin is the Selling Price less Direct Costs
To calculate the cost of a product or service, the costs involved can be classified as:
• direct (or variable) cost
• overheads (fixed costs)
A direct cost is one which increases directly and measurably with each new product or service supplied. This will include the cost of purchasing a product for resale, other components, power usage in construction, direct labour, transport, etc.
Overheads are those costs, which are relatively fixed, and will not vary significantly or measurably with each new product sold or service supplied.
When calculating margin, it is advisable to include direct (variable) costs and not to include overheads (fixed costs).
It is helpful to understand the calculation:
Selling Price minus Direct Cost = Margin
Margin should then be seen as a Contribution to Overheads and Profit.
In other words, the first aim of margin is to cover overheads, the second objective is to create profit.