The product cost is an important piece of information as the base for pricing but also for evaluation of how efficient the production system of the company is.
In manufacturing and process industry Product Costing aims to reflect what products, during normal circumstances, cost to produce. The product cost is an important piece of information as the base for pricing but also for evaluation of how efficient the production system of the company is.
Different business has different scope for their Product Costing. Most common is to include the cost of raw material or the cost of purchased components (Direct Material), and the cost of labor and machine time (Direct Labor). These cost components can be defined in different ways in different companies. It is also quite common to include other costs and functions such as; material handling, purchasing, shipping and receiving and other production related costs (production planning, production engineering, production management).
Traditional product costing methods concentrates on direct costs, e.g. direct material and direct labor. Indirect costs, e.g. overhead costs, are then allocated with a percentage, as a mark-up, with the result that these costs will be allocated with the same logic as the direct costs. This can be a mistake because most often indirect costs can have other very different logic and cause than direct costs.
The Product Costing model will be more accurate and useful if the indirect costs (e.g. production overhead, planning, material handling, engineering, purchasing, shipping and receiving etc.) are analyzed in order to set and use proper driver logic (allocation logic) for respectively cost.
On common problem with Product Costing in large enterprises with multiple production units is that the Product Costing is not harmonized between plants. It is therefor necessary to define company common Product Costing definitions, principles and scope to make the Product Costing usable and comparable.
Astrada has great experience in helping large and medium sized companies with designing Product Costing models in various segments such as;
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