Chapter 15: Pricing Strategies and Cost Analysis
15.4 Costs Elements Applicable to International Trade
To better understand and account for them, cost elements for international trade can be divided into three categories: product cost, export sales costs, and distribution costs.
Product cost consists of raw materials, labour, manufacturing overhead costs (rent, utilities, maintenance, administration, etc.) and product modification costs, which may incur if the international market has different standards. For example, the voltage or size of a product may differ from one country to another.
Export sales costs consist of extra costs associated with packaging, labelling, marking boxes or cases, and strapping. All these costs also apply to domestic sales; however, some countries have special requirements, which result in extra costs.
Distribution costs These costs are associated with delivering the product from the manufacturer’s location to the buyer’s location. In international trade, shipping costs vary based on the agreed-upon Incoterm. It is important to understand all costs and obligations associated with each Incoterm (see Figure 15.1: Incoterms 2020 in section 15.3). Aside from incoterms, companies should also account for freight forwarding costs.
Freight forwarders are intermediaries between manufacturers and shipping companies and can advise on the most cost-efficient shipping options (DSV, n.d.). The services these agencies provide are invaluable when it comes to international trade, especially for small and medium-sized businesses that can’t afford to hire logistics specialists. The services they provide include the following (Indeed Editorial Team, 2023):
- Preparing all documents for exporting or importing goods
- Help with custom clearance
- Advise on proper packaging and labeling
- Product arrival handling, storage, and warehousing arrangement
When calculating costs, companies should also account for the duty drawback on their imported products.
A duty drawback is a refund of duties, taxes and fees paid on certain product categories of goods imported to a country. This is a trade incentive program that encourages companies to participate in international trade. The selection of products and the amount of the refund vary from one country to another.
Let’s Explore: Distribution Costs
To learn more about freight forwarding, read “What Is Freight Forward? Definition, Benefits and Key Stages” on the Indeed website.
To learn more about the duty drawback program in Canada visit the Trade Incentives Programs: Drawback Program page of the Canada Border Services Agency website.
References
DSV. (n.d.). What is freight forwarding? https://www.dsv.com/en-ca/support/faq/what-is-freight-forwarding
Indeed Editorial Team. (2023, March 3). What is freight forwarding? Definition, benefits and key stages. Indeed. https://www.indeed.com/career-advice/career-development/freight-forwarder-meaning
consists of raw materials, labour, manufacturing overhead costs, administration costs, etc.
consist of extra costs associated with packaging, labelling, marking boxes or cases, and strapping
costs associated with delivering the product from the manufacturer's location to the buyer's location
are intermediaries between manufacturers and shipping companies
refund of duties, taxes, and fees paid on certain product categories of goods imported to a country
