The cost of manufacturing is never a mystery when the costs of materials, labour and administration are known. Make sure you know all the costs involved in bringing your goods to your foreign customers. An "educated guess" on costs is not enough. Precision is needed as costs can change frequently. There is no single "correct cost concept" to apply in all situations.

Calculating Accurate Export Costs

Costs can be described most simply as the volume of dollars paid to secure a good or service to be resold at a profit. Costs can be broadly classified into:

• production costs such as raw materials and direct labour
• factory overhead (burden) cost directly associated with production (e.g., electricity, depreciation, etc.)
• administration costs related to both manufacturing and selling
• selling costs including warehousing, sales promotion, sales solicitation, sales management, marketing, packaging and shipping
• financial costs to conduct manufacturing, selling and administration

The prices paid for cost inputs will likely stay the same over short periods of time but change over longer periods. You must be prepared to reject significant cost changes in your pricing procedures.

Among the simpler tasks is keeping a record of material and labour charges in the production process. More difficult, however, is keeping track of overhead costs.

All factory overhead (burden) costs must be added together and allocated on a determined standard. Overhead costs that neither increase nor decrease for any specified level of production must be considered. Property taxes, for example, must be paid regardless of the number of manufactured units produced.

A number of methods exist to develop overhead costs. By far the easiest to use is related to the number of units produced. This is the formula that applies:

Estimated Total Overhead / Estimated Units of Production = Overhead rate per unit

This method is accurate only when realistic figures are used. When calculating your per unit cost, be sure to be realistic. Factor into your assessment:

• the unavoidable idleness of people and machines
• maintenance and repairs
• machine set-ups
• vacations
• statutory holidays
• possible illness or labour difficulties
• possible downturn in orders

Not allowing for these situations could mean unit costs for overhead might be too low. Projects will suffer accordingly. Calculating these factors into your projected cost and production output will expose opportunities for improvement.

Pricing Considerations

To determine your export price, use a careful, step-by-step pricing system. Each export order should be considered individually. Reducing costs can help to gain an advantage even in highly competitive markets. You could gain a market edge by providing "best price" available. Beware, however, that anti-dumping laws in the country where the exports are destined could be a factor in your pricing policy. It pays to know the rules before offering "best prices" available.

In pricing your service, you need to take into account both "what the market will bear" and what your break-even point is.Your price needs to include hidden communication/ transportation costs and other non-domestic expenses such as possible currency fluctuations prior to the end of the contract. If the payments are sizable (over $35,000 at a time), one of the chartered banks will offer you "hedging" options so that you can reduce your exposure if the client is paying you in a currency other than Canadian dollars.

Pricing for Payment Withhold

If the country requires a certain percentage (usually between 15 to 30 percent) of your professional fee be withheld at source for tax purposes, you will need to build into your price your cost of capital or else find a local presence option to avoid the withhold. As a result of tax treaties signed by Canada with various countries, you will eventually be able to recover the withheld amount–but that could take up to 18 months.

Note: The Goods and Services Tax (GST) is not applicable on foreign sales, though it may be applicable on the portion of the work performed in Canada for a foreign client.

Goods and Services Tax

The Federal Goods and Services Tax (GST) is collected at a single rate (7 per cent) on virtually every transaction of goods and services throughout the production and distribution chain. Most producers, distributors and exporters pay GST on business costs can claim it for refund. This means GST should not be included in your company expenses or in your projet and loss statements. It should be accounted for and shown as a separate balance sheet account.

Most companies are now familiar with the accounting for GST. You should note that exports are considered a zero-rated supply (sale). This means you do not collect the GST on the amount charged on exports, but you may claim an input tax credit for the GST paid on virtually all your inputs (purchases).

You are required, however, to have proof that the supply (sale) went out of Canada to support your claim for not charging tax on an invoice. The proof must enable departmental officers to track the entire shipment of tangible personal property from its origin in Canada to its destination outside Canada. The responsibility to maintain this evidence of export rests with the registered supplier (vendor). For this reason you will need to keep any:

• invoices
• purchase contracts
• transportation documents
• customs broker's invoices
• import documentation required by the country to which the goods are exported

For more detailed information get GST Technical Information Bulletin, B-062 - Export Documentation from your local Canada Revenue Agency Office. Visit the Canada Revenue Agency web site.

Ontario Retail Salex Tax

The Ontario Retail Sales Tax should not apply to the sale of goods shipped outside Canada by the exporter if the details of such shipment are supported by suitable documentary evidence. For further information on this, contact the Ontario Ministry of Finance may be contacted for further information at: 1-800-263-7965.