Costing Checklist

A costing checklist can be an invaluable tool in controlling costs and understanding when to increase or lower prices. When you have to make financial decisions, you need to understand all the costs that go into your product.  In addition to inventory and operations, product costs decisions affect sales, personnel and marketing budgets as well.

MLA has fractional CFOs with experience and expertise in product costing.  We serve companies across the nation from our offices in Southwest Ohio.  MLA provides financial services from bookkeeping up through mergers and acquisitions, and solutions including market segmentation and supply chain management.  Our team brings financial expertise that is broad and deep.

How to Calculate Product Cost

If you are on a cost accounting system, you already have some standard costing information in place. If this system is set up correctly, you should be able to say what it costs to manufacture your products. 

But, because manufacturing is not as precise as standard costing implies.  The differences that affect product costs should be tracked as variances to standard processes and can normally be applied as an adjustment to the costs.

A Simple Costing Checklist

• The cost of the raw materials that go into each product. 
• The amount and cost of the labor to make/install that product. 
• This includes the hourly wage times hours, but add the cost of fringe benefits, PTO, etc.

This will give you a good approximation of the cost of each product.  Give yourself a 10% variance as you refine your system.

To continue to refine your costing analysis, you need to:

• Calculate an amount to cover Overhead, General, Sales, and Administrative costs. 
• To do this look at what percent of sales those costs were per year over the past five years if possible. 
• Review and adjust quarterly to account for seasonal, and other changes.

Benefits of Cost Analysis:

The primary benefit of costing analysis is ensuring your business can operate at a good profit margin.  This allows you to plan for future expansion and create appropriate incentives for your sales and operations team.

It can also help you to decide if you want to sell a product below actual cost for a period of time. This could be an effective strategy when entering a new market, or when matching prices to a competitor.

Another reason to sell below cost would be you have a very specialized labor force.  The cost of laying off and rehiring that labor might be greater than continuing to manufacture at a loss. Having accurate costing data can help you know when, and how long you can sell a product at below cost.

Selling a product below cost is an aggressive strategy that should only be undertaken if you have a good understanding of your costs, and effective controls on your financial and production systems.  Working with a fractional CFO experienced costing like those at MLA can be the thing that gives you an edge on your completion.

That said, many companies sell products at a loss, or at unsustainable margins because they do not properly understand the true cost of those products.  Don’t wait until a competitor shows you your weakness.  Instead, let MLA help you build your strength.

A Longer Costing Checklist:

A variety of checklist templates are available online. Here is one that gives you the process in 10 steps.

1. Determine what product you are costing.
2. Obtain the product bill of material.
3. For each item listed on the bill of material, obtain the cost for each item from the invoice substantiating the cost (which should include freight to deliver and all other acquisition costs).
4. Identify each process during the manufacturing of the product.
5. For each process identified, determine the direct labor associated with each process.
6. Once the direct labor is determined, apply the labor rate associated with the direct labor for each process.
7. Determine all manufacturing overhead* (direct and indirect) to be allocated to the product.
8. Assess the best base (direct labor hours, machine hours, or some other appropriate measure) to allocate the manufacturing overhead to the product.
9. The final product cost will consist of material, direct labor, and manufacturing overhead.
10. Re-evaluate and compute your manufacturing overhead rate annually.