What is the impact of incidental services like assembly, testing, marketing, etc. on the total cost?

krishna-agrawala | Student

There appears to be some confusion in the question about the meaning of incidental services. An activity like assembly is usually a core manufacturing activity. For many products, the testing is also a part of manufacturing process. Then marketing is a major business function, and it is not appropriate to group it a one of the activities under incidental services.

In any case the nature of any activity related to manufacture and marketing of any product including any incidental service is to increase the cost of sale. What does vary is the exact quantum of impact, and how this cost is ascertained and apportioned to different product. The quantum of impact depends of the quantum of cost incurred. Regarding the method of ascertaining and apportioning the costs there are almost unlimited options possible depending on design of costing system used.

goofyryan | Student

If I understand your question correctly, you are wondering how the cost of things such as assembly, testing, and marketing affect the final selling price of a product.  All of these, with the exception of possibly marketing which I will further discuss later, are actually variable costs as opposed to fixed costs.  That isn’t to say they don’t have a direct impact on the price of a product though.  It depends individually on the business plan to determine how great an impact each has.  I currently work for a company in the Audio Visual industry that acts as a manufacturer, an OEM, and as a reseller.  Our average markup, not considering volume orders or “Premium” customers, is 60 points.  Our products are low cost but have a high mark up.  With products we manufacture, assembly and testing are the responsibility of our production staff.  Production workers are paid an hourly wage which makes them a variable cost but in this instance they directly affect the selling price.  This is our labor cost which we calculate at a per hour, per product rate.  Combing labor cost with cost of raw materials and adding 60 points is how we determine the selling price.

Marketing is something that can be a variable or fixed cost but in the example I stated above has the least affect on the selling price.  Marketing can be a variable cost if you are spending directly per campaign.  More commonly, if you hire a marketing coordinator or staff, they are usually salaried employees which would then make them a fixed cost.  The reason this has the least affect on the selling price in my example is that these positions weren’t added until our sales volume justified the company to budget for these positions.  The company didn’t raise their prices as a result though.  Our marketing plan until these hiring’s had only been direct sales and trade show participation.  Our sales staff is constantly embattled with management to raise our marketing budget.  Neither side wants to raise prices though.  Sales believes that if you sacrifice profit in the short run, it will yield you more in the long.