Business Automation and Software Blog

Are You Using the Right Manufacturing Costing Method?

Posted by Robert Baran on Wed, Jul 10, 2019 @ 11:00 AM

Most of us like to think that we are savvy shoppers. We read Amazon reviews, talk to friends, and price compare across the internet. Some even search for coupons, promo codes, and holiday weekend sales events. But contrary to our own popular belief, it’s actually emotion that drives purchasing behaviors. One Harvard professor’s research goes so far as to document that 95 percent of purchasing decisions are actually subconscious.

As shoppers, that might give you pause; but as a manufacturing costing expert, it might bring a sigh of relief that what you charge for your products might not be as make-or-break as you think. Still, it’s necessary to land on a fair price, for both the consumer and your business. To help you out, we’ve gathered some of the best costing methods for manufacturers.

Short-term and Long-term Pricing

When it comes to manufacturing costing, the easier pricing decision is a short-term one. Short-term pricing decisions are fairly straightforward and look chiefly at the direct costs of production, but most companies have more to pay for than just production costs. There is overhead, too, from both manufacturing (plant maintenance, rent, etc.) and administrative (utilities, salaries, office supplies). All that must be covered by a company’s income, which is directly related to the price points of its products. Selling your products for a fantastic price gains you nothing if your prices don’t garner you enough revenue to keep your lights on.

Inventory vs. Production Costing

Determining the best costing for your manufacturing business must include consideration of several factors, including the type of products, the administrative work of determining overall business costs, and the preferred rate of return. You might need to decide between a method that gives to-the-decimal accurate cost rates but spends overhead on three people to arrive at those rates versus a method that is “close enough” and can be accomplished by one part-time employee.

Costing methodology can be broken into two categories: inventory costing and production costing. Inventory costing connects the actual cost to an identifiable unit of product and adjust as items are sold or used in the production process. Inventory costing methodologies include FIFO (first in, first out), LIFO (last in, first out), average/weighted average cost, and specific identification. But no matter what method you use for inventory costing, the basic equation involves adding beginning inventory plus purchases resulting in what’s available for sale, then subtracting the ending inventory to find the cost of the good sold.

Production costing, on the other hand, reflects all of the expenses associated with conducting business, not just those that are necessary for making the product. Production costing takes into account the total expenses of doing business, including labor, materials, supplies, and overhead. Popular production costing approaches include job costing, ABC costing, direct costing, and target costing.

No matter which approach you take to production costing, gathering the appropriate information requires the ability to track real-time data and organize it into a central repository for review. If you follow target costing, you’re using a forward-looking future cast costing approach that is proactive in product cost estimation. That means access not only to historical data, but analyzation of historical trends to help predict future trends.

Find the Best Solution for YOU

While this all might seem overwhelming, the good news is that the best manufacturing costing for your organization really comes down to cost/benefit for your particular business. Which means there’s really no wrong answer, so long as the decision is in line with your business’ needs and goals.

As you determine manufacturing costing for your company, look especially at the cost of accumulating information against the ease of a method for reaching your profit goals. What works for a manufacturer of relatively few products will not work the same way for a business with a larger catalog, or even one that mass produces very similar products. Each manufacturing costing method has pros and cons depending on the particular business. It’s up to you to determine which method is right for your business needs.

The Right Software Support for Costing With PositiveVision

Once you land on a costing philosophy, it’s important to find software solutions that support your needs for that costing decision. The good news is that once you make the decision on how you’ll figure and track your manufacturing costing, the hardest work might be over for you. Software experts, like PositiveVision, can then partner with you to connect you to the right software and programs to gather data, review trends, and make more informed pricing decisions.

Since 2002, PositiveVision has worked with manufacturers and other organizations to meet business objectives, including profitable manufacturing. We do that by helping you get the right software in place, specifically through ERP manufacturing solutions. We’ll base our recommendations of your business needs and leverage our expertise to streamline systems and processes to get you all the information necessary to make smart manufacturing costing decisions.

Find the right business management software for your manufacturing and business needs. Contact PositiveVision today.

Topics: manufacturing costing