What are Actual Costs in E-Commerce?
Actual costs in e-commerce refer to the total costs incurred by a business for products or services. It includes the cost of goods sold, labor, shipping and handling, taxes, and other products. These costs are used to determine the price of the product or service, as well as the overall profitability of the business.
Significance of Actual Costs in E-commerce
The actual cost of a product in e-commerce is the product’s true cost, including production, shipping, and other associated costs. This information is important for pricing and budgeting purposes and gauging a product’s profitability.
- Knowing the actual cost of a product can help e-commerce businesses better understand their margins and adjust their pricing accordingly.
- It can also help them spot potential opportunities, such as price reductions or discounts, to help them remain competitive and maximize their profits.
Prerequisites to Calculate Actual Costs and How It Works
The formula for actual cost is –
Actual Cost = (Direct Costs + Indirect Costs + Variable Costs + Fixed Costs + Sunk Costs)
Prerequisites to calculate actual costs –
- Direct costs are associated with the direct manufacturing of the item. However, if a business buys wholesale products for its store, the wholesale price will be considered the direct cost in such cases.
- Indirect costs are incurred for maintaining the products. Indirect costs include packing costs, delivery costs, storage costs, etc.
- Variable costs are additional costs incurred depending upon business outcomes like market demand, sales structure, etc.
- Fixed costs include all the business expenses that don’t change, irrespective of situation or outcomes. Fixed costs include rent, salaries, daily wages, technical costs like software management, wifi charges, etc.
- Sunk costs are incurred with no potential for recovery. Such costs include damage costs or costs associated with any employee mistakes.
Use Case With Actual Costs
Assume a company, ABC, deals with shoes. The direct cost is AUD 2,000; indirect costs amount to AUD 500. The fixed cost is AUD 1,000, and the variable costs and sunk costs are AUD 800 and AUD 200, respectively.
Thus, according to the formula, actual cost = AUD (2000+500+1000+800+200)
= AUD 4500