Plain and Simple: Bright Business Insights April 2016 | Page 4

DO YOU KNOW THE TRUE COST OF THE PRODUCTS YOU PRODUCE?
Why Knowing is Important
We should all know that when it comes to the economy, anything
is possible. Some businesses vanished during the 2008 economic
downturn, others survived – and some actually flourished! Those
that survived and those that flourished had one thing that others
did not: an understanding of their product cost. While many businesses are seeing their sales volumes return to pre-2008 levels, I
wonder how many of them truly know what it costs to produce
their products.

What Goes Into Product Cost?

I have found that the vast majority of small- to mid-size companies do not totally understand, nor compute, their true product
costs. Most can tell me what their raw materials cost and can give
me an average wage cost. But, they don’t know their overhead
and how to properly allocate it to each product or product line.
Then, there are many people who think that, by simply purchasing a piece of software, the costing of each product will become
automatic. Not true!
Product costing isn’t just a consideration for manufacturers.
Whether you make widgets or sell your services, product costs
impact your bottom line. If you provide services, your product
is your time. What goes into that time? Your salary, obviously,
but also your overhead costs and the costs of anything that you
consume in that time, be it gasoline or office supplies.

Why is Product Costing Important?

None of us in business want to lose money; we all want to make
sure that we’re profitable.

Do You Need Help with Product Costing?

With a depth of experience in product costing, Rea’s manufacturing accounting team can help you to get a handle on your costs …
and on your profits. Specifically, we can:
•

Evaluate your current costing methodology

•

Define your direct costs, indirect costs and overhead

•

Walk through your processes to determine your correct cost
drivers

•

Assist you in determining what reports you should generate
in regards to product cost

PROFIT = REVENUE – EXPENSES
Without understanding our product costs, we can’t figure out if
our products are profitable or what we can to do to make them
profitable.
Understanding product costing doesn’t have to be difficult. To
begin, you need to develop a costing model that fits your company. One of the key components is determining how to allocate
costs among your company’s various products. What is your cost
driver? You then need to determine units of measure. Once you
determine how costs will be calculated and allocated, you need
to determine the ways in which costs fluctuate. Armed with this
information, you have the basics needed to create a product costing model.
Another item to consider is the reporting function of cost accounting. What types of reports are needed and at what frequency? And, what are you doing with the information? Knowing
what information you’ll need later will help you to start tracking
the right data now.

Give me or anyone on our accounting team a call if you need help
with evaluating your business’s true product costs.

by: Gene Spittle

CPA, PFS, CGMA, Lean Six
Sigma Green Belt & Principal
545 N. Market St.
Wooster, Ohio 44691
[phone]