Tag Archives: Product Costing
“Maintaining profits and growth is going to be very difficult. However, regardless of the larger economic environment, companies can take actions that can help. Specifically, many companies are seeing the share of general and administrative (G&A) costs increase. From 2008 to 2015, G&A expenses grew more slowly than revenues (41.8 percent versus 61 percent). Since then, the trend has reversed, with G&A expenses rising faster—15.4 percent compared with 6.0 percent revenue growth. Traditional cost-optimization approaches are yielding diminishing returns; if revenues begin to fall, then, so will profits.”
There are several steps businesses can take to develop a structural process for an enterprise cost reduction program in a way that positively impacts every aspect of the organization – not just the bottom line. For decades, businesses have made cost reduction a priority to increase profits and drive growth. In recent years, digital disruption, changing consumer preferences and fierce competition from new market players have entered the mix – posing a threat to margins and profitability. Today, rapid advances in technology are propelling organizations to undertake enterprise-wide cost transformations to remain agile, flexible and profitable in a time of constant change.
For many businesses, spreadsheets are a large part of their costing reality and have proven to do more harm than good when it comes to truly understanding business performance. Establishing a robust costing process doesn’t have to depend on spreadsheets or rigid ERP cost modules. With an integrated costing analytics tool, finance leaders can get access to accurate and actionable performance insights for meaningful business decisions. There are seven areas to consider when establishing a dynamic costing process in your organization.
In the wake of digital transformation becoming a standard business practice, it is no surprise that modern organizations are shifting their costing priorities from cost reduction to cost transformation. Companies that relied on more traditional cost management methods are now finding that dynamic technologies can open the door to a whole new level of savings. These additional cost savings allow businesses to compete more effectively in an increasingly digital environment. This change in business strategy drives finance leaders’ priorities to focus more on implementing the best technology for their business, and ultimately increase product profitability. A best in class tool that caters to specific business needs enables organizations to achieve end-to-end visibility of their costs and use this information to better understand what is driving their profits.
Companies that still rely on their legacy costing systems are putting themselves at more of a disadvantage then they probably realize.
“Many manufacturers have developed overhead rates that are being used long after their “best if used by” dates. The reasons for this include the thought that inflation isn’t all that significant, so how much different can the rate be from last year, and besides it’s so much work to update the rate. After a while, you find the rate hasn’t been updated in a few years and then your costing system has slid into ineffectiveness. Also, cost drivers tend to not be examined that often. Some manufacturers have always used labor hours as cost drivers, so they do not even consider that the significant capital expenditures they have made in the business make the more plausible cost driver machine hours. In standard costing systems, standards are sometimes not updated as often as they should be for some of the same reasons.”
The result of inaccurate cost accounting systems can lead to investing time and effort into products or customers that are either marginally profitable, or actually unprofitable.
“Making effective cost management decisions—those that drive strategic value beyond just producing short-term savings—requires understanding how cost decisions flow through to the top and bottom lines.”
CFOs depend on insights from their analytics for important business decisions, but when faced with the rapidly changing business environments, they must change their approach to cost management. By implementing the right tools and technologies, businesses will better understand their value levers and fundamentally change their company’s cost structs, seize opportunities, and grow profitability. However, technology alone is not enough to accomplish this. Effective digital cost management also requires a far more innovative and strategic approach than traditional approaches to cost management.
According to Deloitte’s global cost management survey, cost reduction is now a global imperative, with 86% of global respondents saying their companies are likely to undertake cost reduction initiatives over the next 24 months. Cost management ha become a strategic enabler with the power to disrupt entire industries and fundamentally change how companies do business and remain competitive. To help avoid falling behind, companies in every part of the world should understand the potential impact of digital so they can position themselves to capitalize on the opportunities, particularly regarding automation, analytics and cognitive technology. Now we are seeing the rise of advanced, next-generation cost management solutions that harness the power of digital technologies to dramatically improve efficiency and effectiveness, and to enable fundamentally new business models and new ways of working.
Customers are ever-evolving and gravitating towards more personalized products that meet their unique specifications. For manufacturers, meeting this demand for high-quality individualized goods is nearly impossible to do in a cost-efficient manner with outdated operational processes based on yesterday’s technology. Therefore, organizations are looking to transform their facilities into open integrated factories – the kind that enable the visibility and flexibility needed to make their customers’ personalization dreams come true. By adopting integrated and dynamic technologies, manufacturers can break down these barriers, connect their processes, and achieve a unified view of the essential information required to improve production performance.
The idea behind cost-plus pricing is simple: the seller calculates all costs (fixed and variable) incurred in manufacturing the product, then applies a markup percentage to these costs to estimate the asking price. This method can lead to powerful differentiation, greater customer trust, reduced risk of price wars, and steady, predictable profits for the company. It is essentially the opposite of value-based pricing, where prices are customized based on their target customer. Every businesses’ goal is to reduce costs, increase profits and retain customers, and the way a business prices its products can have a major effect on that.