Informal or Indigenous Bookkeeping Systems (Grade 10 NSC Matric Accounting): Revision Notes

Determining Prices

Introduction

When running a business, one of the most important decisions an entrepreneur must make is how to price their products or services. Setting the right price ensures that the business covers its costs and makes a profit. Understanding the relationship between cost price, mark-up, and selling price is essential for successful business management.

Selling price and cost of sales

Understanding cost price

The cost price is the amount a business owner pays when purchasing goods that will be resold to customers. This is the original purchase price paid to suppliers or the cost of producing an item.

What is mark-up?

To generate profit from selling goods, a business cannot simply sell items at the same price they were purchased. Instead, the entrepreneur must add an additional amount to the cost price. This extra amount is called the mark-up.

Calculating selling price

The selling price is the final amount that customers pay when they buy a product. It consists of two components:

• The cost price (what the business paid)
• The mark-up (the profit added)

Key formula:

$\text{Cost Price (CP)} + \text{Mark-Up (MU)} = \text{Selling Price (SP)}$

For manufactured items, costs are added at each stage of the production process, and the entrepreneur must carefully adjust the selling price to ensure profitability.

Working with percentage mark-ups

Finding the cost price

When you know the selling price and the mark-up percentage, you can calculate the cost price using:

$\text{CP} = \frac{\text{SP amount} \times 100\%}{100\% + \text{MU}\%}$

How it works: If the mark-up is 30%, the selling price represents 130% (100% + 30%). To find the original cost price (100%), you divide the selling price by 130% and multiply by 100%.

Finding the selling price

When you know the cost price and the mark-up percentage, you can calculate the selling price using:

$\text{SP} = \frac{\text{CP amount} \times (100\% + \text{MU}\%)}{100\%}$

How it works: Add the mark-up percentage to 100% to get the total percentage the selling price represents. Then multiply the cost price by this total percentage.

Worked examples

Labour costs

Labour costs refer to the wages and salaries paid to employees or workers. These costs are an important part of determining the overall cost of producing goods or providing services. Labour costs can be categorised as either direct or indirect.

Direct labour

Direct labour refers to work that is directly involved in creating or producing the product being sold.

These are the workers whose hands physically make, assemble, or manufacture the items. Their labour can be directly traced to specific products.

Indirect labour

Indirect labour refers to work that supports the business but is not directly linked to producing the actual product.

These workers perform important tasks that help the business run smoothly, but they don't physically create the products being sold.

The key difference is that indirect labour costs cannot be directly traced to a specific product, but they are still necessary for the business to operate effectively.

Income

Income represents the money that flows into the business from its operations. It is what the entrepreneur (business owner) earns through the business's activities.

There are different types of income:

• Fee income: Money earned from providing services to customers (e.g., a hairdresser charges fees for haircuts)
• Sales income: Money earned from selling goods to customers (e.g., a shop sells groceries)

Expenses

Expenses are the costs that a business must pay to operate successfully. These are the amounts entrepreneurs spend to keep their businesses running day-to-day.

Common business expenses include:

• Wages and salaries: Payment to employees
• Telephone costs: Communication expenses
• Water and electricity: Utility bills
• Stationery: Paper, pens, and office supplies
• Rent: Cost of business premises
• Transport: Delivery or travel costs
• Marketing: Advertising and promotion

Exam tips

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