Myth: Our Company is Too Small For Costing

Aug 17, 2015

There is not an exact size of business, process, or product line for costing. Cost accounting does not offer a perfect mold in which you neatly place your business and all right answers appear. Every situation is unique and different and each every situation requires an in-depth review to accurately determine the best possible course of action.

All too often, I hear owners, controllers, and CEO’s, etc. say:

“Knowing our company’s costs sounds great, but I do not think we your mold. Our processes are very unique and we only sell so much in products. We are just not a good fit for your program.”

This couldn’t be further from the truth! Some costing consultants may offer solutions in a set program and attempt to force their clients into that mold. However, our costing professionals pride ourselves on not having a “cookie cutter” approach.

No matter what size your organization, it is always important to know your costs. Obviously, the size of your company may determine the impact  of costing information. It is essential to know if your company is making money and from where your costs are coming. In order to make optimum business decisions about the future direction of your organization, you must know your costs!

Some of you may say, “I know what it costs to make widget – it required 20 lbs of xyz to produce each widget and xyz is $.25 a pound, and I know it takes .50 hours to make each widget and labor is $15 an hour. So,  it costs $12.50 to make each widget. If want a 40% margin, I will sell my widget for $17.50!

But do you know what is in your labor cost? Are you including cost of insurance, vacation, etc., or just average wage? Don’t forget the costs of utilities, insurance, rent, property taxes. These all impact your profitability and ultimately determine your price. What about your overhead?

It is essential to understand what drives your costs. Is your operation labor driven? Is your operation machine driven? On what basis are you allocating? If you said yes to machine driven and you are allocating on labor hour, this is a significant problem. Having a reasonable allocation base and method is critical. Otherwise, you are simply guessing.

Don’t fall victim to the myth that your company does not fit the mold of costing. Each situation is unique and requires analysis. Knowing your costs is not just limited to materials, labor and time. Other factors determine your costs. It’s time to stop guessing and truly KNOW your costs.

Categories: Cost Accounting