Product Cost Management: better information for better decisions

Product Cost Management is the art of reaching the highest product margin by producing with the lowest possible costs at the best possible quality. This article focuses on Product Cost Management (or Product Life Cycle Cost Management) and using CostPerform to manage product costs.

Product Cost Management example 1: do we need this refinery?

A big oil and gas company asked us to demonstrate that we can calculate the expected unit costs of gas and oil over each installation’s complete lifecycle (between 30 to 40 years) for all future investment projects/plans. Each plan for a new refinery starts with calculating the cost of the design and construction phase, followed by the cost for the startup years, production costs, and finally, the costs of shutting down. CostPerform showed a very detailed and precise allocation of costs, materials, and activities of the refinery – for each phase and for the complete lifecycle. With this information and the predictions of future oil and gas prices, the oil company was able to make fact-based decisions on whether to start the project or invest in a project with a higher lifecycle profit.

Product Cost Management example 2: can we deliver this order and still make a profit?

Due to the lack of product cost management, manufacturing companies tend to accept any order they can get, even if they are running at full capacity. New orders can trigger capacity problems that – in most cases – are solved by hiring temporary workers or extra machine capacity at higher costs than usual. The big question ‘Is this new order profitable?’ can only be answered if the company has a trustworthy and true cause-and-effect based cost model, preferably modeled around resources and activities (Activity-Based Costing). This model must be capacity-aware, so the effect of an extra order on the needed capacity and its additional costs is known upfront. With this type of model, powered by CostPerform, and by performing product cost management, the company can make an educated decision whether to take or decline any new orders.

By performing product cost management, the company can make an educated decision on whether to take or decline any new orders

Product Cost Management: single-dimensional or multidimensional?

Product cost management is necessary to make educated decisions on investment plans or even new orders. In some cases, cost-allocation can produce a false image of the actual costs. Suppose your company is based in Europe and you also sell product A in the USA. Your product might be the same, but transportation and selling can make the orders from the States less profitable than an order delivered close to your factory. Because you have a sales office in the USA, the country itself will produce the costs, regardless of the products you sell. Both product and country can be seen as independent dimensions with their own cause-and-effect relationship with costs. With multidimensional cost models, you can calculate the profit of different dimensional combinations. Product A sold in Europe shows a big profit, Product A sold in the USA a small loss. Multidimensional cost models tend to provide even better performance improvement than single-dimensional models.

The perfect Product Cost Management system

You can imagine that cost-modeling your refineries, products, or orders and using these models to find out if (and when) its output-products return the investments needs powerful and flexible cost allocation software. CostPerform has an excellent track record when it comes down to complex, precise, and timely calculations. Our software is used in many industries to discover the actual profit of products or orders by allowing several unique cost allocation mechanisms to reflect the real-cost cause-and-effect relationships. Only by modeling these can you gain insight into the real costs of the product, the actual profit, and – most importantly – allow you to improve each product’s cost performance.

Summary

By using CostPerform for Product Cost Management, you gain insights into real product costs and actual profits, allowing you to improve each product’s cost performance.

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