Is the Price Right? Determine Your Product Costs

Very few things in the world of supply chain management happen to be an exact science. This is why supply chain management can make-or-break a business. In addition, those with competent supply chain skills in the US are few and far between. One of the most tedious and irritating tasks throughout the supply chain process is accurately evaluating manufacturing costs.

The first step of manufacturing costing is determining what method (Standard vs. Actual) to use for your company. If you’re more of a mass manufacturing producer, the standard costing model would be your preference to those who produce customized units and instead would use the actual costing model. Overlapping both models are the three primary components of an item: material, direct labor, and overhead. It is within these three categories that prove to be the most difficult costing calculations.

Material costs are, very simply, broken up between raw materials and purchased parts. It is nearly impossible to price all of the raw materials that go into a product, so at best you’re making a rough estimate based on the cost of previous products. Purchased parts are easier to calculate since another facility is providing the parts, but one must always keep into account factors such as technology upgrades, model changes, and depreciation of these parts.

Direct labor tends to be a fairly inconsistent cost throughout the supply chain. People work various hours and to various degrees of efficiency. On a day-to-day basis, how many people are putting in the exact same effort to complete the exact same tasks at the exact same rate? Direct labor is more than just attendance and time punching.

Overhead costs are the final, vague section of manufacture costing. Here, the costs that must be tackled include, well just about everything else you could think of. In the manufacturing business, these costs will infuriate just about any supply chain manager.

To learn more about reducing these costs and additional manufacturing tips, view our free webinar, Standard Product Costing in the Actual World. You can also check out the SBS Group on Twitter and Facebook.

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