Question

Explain in your view, four limiting factors for material cost determination in a major university like the University of Ghana and what process would you use to collect the cost.

Answer 1

Raw material, whether wood, minerals, crude oil or even meat, all often have varying price points rising and dropping like the stock exchange. There are many variables at play causing this to happen. Each variable affects the price point of raw materials, causing it to increase or decrease for manufacturers, distributors and consumers. Here are several contributing factors to the shifting price of such materials.

Sourcing the Material

One of the most expensive aspects of obtaining and distributing raw materials is sourcing it. If a mine runs low on the source material, if a harsh winter kills crops or if a forest fire takes down acres of lumber, readily available material is reduced, which in turn causes the price of raw material to go up. The demand remains, but as the supply is reduced, prices increase.

Transportation

The transportation of goods is another major expense to moving raw materials to different regions both within a country and around the world. This is especially true when importing or exporting the goods. As new levies and taxes are placed on goods brought in from other countries, the price for the raw material goes up. Additionally, if transporting lumber by truck or train, an increase in the cost of fuel will increase the cost to transport the goods, which causes the cost of raw material to shift.

Labor

Between transportation, sourcing the material, carrying for the material before it is ready to harvest or any other labor position along the way, if there is a shift in the work force there can be a shift in raw material pricing. If a union goes on strike, it affects raw material pricing as less of it can be transported or sourced from the earth. Other times, if the labor union reaches a deal and this includes an increase in pay, benefits or other aspects of their work, it in turn increases the price of raw material. Just about any shift in labor will have an impact on the cost of raw material.

Acts of God

Most other aspects involved in the shifting cost of raw material can, to some extent, be forecast. Acts of God typically cannot. This is a sudden and often devastating event that affects not just part of raw material sourcing and distribution, but an entire region, city or nation. The exact definition for an act of God may shift, depending on insurance purposes. But, typically, tornadoes, flooding, hurricanes, earthquakes, violent winds, volcanic eruption, tidal wave or near any other natural phenomenon that happens with little warning can shut down production and transportation instantly and for an extended period of time.

Forecasting the shift of raw material pricing is not an exact science. Like identifying a potential chance in a stock’s value, different variables are always at play. By understanding what factors impact the cost of raw material pricing, a manufacturer or user of the material can determine the best point of time in which to buy added material or when to hold off before buying additional supplies.