Look At The Real Cost To Your Firm

Date: 11/01/2014

People view cost in various ways. Consumers usually pay more attention to price than the actual cost that they really incur. For example, they may drive their car a number of miles to buy gasoline for a few cents a gallon cheaper. They overlook the amount of gasoline used to travel to a distant station. Even when they calculate the cost of the fuel used, they may neglect the cost of the wear and tear on their vehicle or the value of the extra time used.

Many business people are not much different. They pay more attention to price than the cost of a product or service. For example, they may pay a lower price for a particular product even though the product use requires more labor. They fail to calculate the cost of the additional labor which may far exceed any savings from the lower priced product.

Business people often neglect to consider the time value of money when making a purchase. It costs more to pay upon delivery than it does to pay in thirty days. It costs more to pay in thirty days than it does to pay in sixty days. Professional buyers negotiate payment terms to obtain a lower cost.

Comparing short-term and long-term costs is important for making a busing decision. For example, it is worthwhile to pay a higher price for paint for your building that will last many years if you know you are going to be in the building for many years and you will be satisfied with the color. The longer lasting coating will avoid the need to spend extra labor for repainting more frequently. On the other hand, if you know you are going to be moving, it is wiser to pay less for the paint.

Total long-term costs includes product price, packaging cost, quality needed, delivery cost, any labor required, inventory cost, and all other costs.