When consumers buy services or products, they assess the price the company assigns to that service or product. One way of ensuring these prices are fair is to ask the company for a cost breakdown, ...
Cost breakdown is the systematic process of identifying the individual elements that comprise the total cost of a good, service or package. It assigns a specific dollar value to each element. Alternately, the value of the individual elements are expressed as a percentage of the total cost. For instance, if you visited your mechanic and got a $100 bill, $25 or 25 percent might be the cost of parts, while the remaining $75 or 75 percent of the bill might be labor. If the price of a good, service or package is significantly higher than the breakdown, the company may be charging exorbitantly. If the price is significantly lower than the breakdown, the company likely is taking a loss for working with the client.Process
Breaking down the costs associated with a good, package or service is a four-step process, as described by the European Institute of Purchasing Management. The first step is to establish the cost structure -- that is, to gather all the information you need to understand the elements involved and what drives the costs of those elements. Second, check that the offers received for the elements are consistent -- that is, do some price comparisons and try to figure out the reasons for variance. Third, negotiate based on your findings, and follow up with additional negotiations, analyses and management of the factors that impact cost fluctuation.Uses
Cost breakdowns are useful in justifying the price charged to the client and keeping sellers and providers accountable. If the client doesn't know exactly what the total for a good, service or package will be, he can estimate the total by looking at the individual elemental costs. Knowing how the total price breaks down is also a benefit in comparing prices and negotiating better rates. Sellers and providers also can use cost breakdown to verify that they charged the client for everything. And cost breakdowns allow both companies and consumers to identify specific reasons for fluctuations in price.