Why product costing is important in every manufacturing business?

(5 minute read)

Most small business owners don’t realize how expensive production can be. Understanding the importance of costing can help your business avoid running into troubles such as loss of profits, time mismanagement, and over budgeting –  to name a few.

Product costing is more than just setting a normal price; determining the right price for a certain product can help the business to make data-driven decisions in the process.

Pricing Decisions

Knowing how much the company spends to produce a product is not enough when it comes to figuring out the product’s sales price. Selling a product with a wrong value can have a great impact on your company’s sustainability.

In order to keep up with other businesses, the common technique is to be competitive by selling your product lower than your competitors’ price. However, selling it less than its real value won’t help you stay in the business for long.

To make a data-driven decision, you should invest in a software that capture accurate data for fast and better computation. Once done, you can empower your people to make smart, confident decisions that captures all critical information across sales, customers, operations, and finance faster than manual computing.

Sell or Process Further

Costing method is important for the company’s decision to sell an intermediate product or to process products further. For instance, the coconut industry is considered to be “the lifeblood of Philippine agriculture”.

With this, a coconut farm could sell harvested coconuts to coconut mills and refinery and turn these coconuts into milled products, to make flour or sugar, or produce oils and soaps.

This costing technique called relevant cost analysis helps the coconut farm owner to know what amount of processing is the most profitable for their product, which are coconut fruits. With automated process and analytics, you can see your business clearly with business intelligence reporting. In addition, you should look for a software that can provide a complete set of tools to help manage and streamline your financial operation.

Company Performance

Costing methods have fixed rules that’s why most managers rely on the consistency of costing techniques to evaluate performance across related companies. For instance, if you’re a manager of a small coconut manufacturer, you can look at a publicly traded competitor for a rough ballpark estimate (a method to estimate current or future results of a company) of how that company is doing. By examining the company’s filings, you can determine how many units of product the company sold and what cost. Through this, you can then determine the cost per unit, and compare this to your company’s cost per unit. Take note that a larger company could be expected to have a lower cost per unit compared to smaller company, figuring out if the two companies are in the same ballpark can help.

In this challenge, comparing two different companies’ ballparks is not enough to totally know how your company is currently doing. And, let’s be honest, it’s hard to monitor your company if you’re not using the right tools. There are several things to take note to maximize your company’s potentials: a) find the right software that can manage cash flow, track budgets, and compare actuals versus plans to see where your business stands at the moment, b) integrate your financial operation in real-time, c) it should have automated responses when important business events occur allowing you to focus on the most critical events, and etc.

In other words, to run a successful manufacturing business, you need to think ahead against your competitors; and one way of doing that is to understand what product costing is in the market.

Costing techniques can be tricky and complicated to understand especially for starting businesses. Also, just because you’re in the industry for years, it doesn’t mean that you’ve already maximized the possibilities without exploring other options. Every small and mid-sized businesses need a systematic approach in managing the procurement process, from requesting vendor quotes, to creating purchase requests and paying vendors. In line with this, a business software like SAP Business One offers a vast list of functionalities, including parallel accounting that can help you grow your business smoothly and productively.

Here’s a run-down of the things you need to find in a software and that SAP Business One can offer:

• SAP Business One is a world-class leading business solution designed for small and midsized companies to grow with you.
• SAP Business one covers areas of financial and management accounting, purchasing, sales, and inventory and warehouse.
• Through its easy user-friendly  User-Interface (UI), SAP Business One helps its clients to adapt easily to the system.

There are a lot of ways to fully implement costing, and one of it is trusting a reliable manufacturing business software that can help you manage your company efficiently. Put in mind that a production functionality should be integrated into software’s inventory, financial, and material requirements planning (MRP) features, giving end-to-end visibility of the production process from sales order to finish goods.

Looking for a dependable manufacturing business software? SAP Business One delivers integrated manufacturing and production functionality right out of the box. Contact us by talking to our experts and let us help you run your business smarter and simpler.