Two Identical Lines, Two Different Prices?
Jun 08, 2015
We have all run into a similar situation: You are at a store where an item costs $20, and then you go to another store where the same item costs $35. The same can be found in a manufacturing environment with regard to assembly lines, work centers, etc. You may have more than one line which does exactly the same thing in a process. These lines may be located right next to each other, or they may be in different cities, but they are still doing the same thing. Should they cost the same or different?
You certainly do not want to pay more for the exact same item in a store, so how can you justify a line doing the exact same thing costing more, or less? Typically when lines are side-by-side we have a hard time understanding how they would have a varying cost, but in a completely different city the difference is more difficult to justify.
One line may be newer and therefore have depreciation assigned where an older line may be fully depreciated. If you cost the lines differently, you are going to have a bottleneck at the cheaper and nothing going on at the more expensive line. Sales are not going to want their product running on the more expensive line effecting their profit margins.
If two identical lines are in two different locations, then maybe there can be some justification for a different cost, but only if the product you are creating has a different profit margin. If you are achieving the same margin and there is no difference in anything, I think the lines need to cost the same.
Two identical processes should cost the same. I am sure you are saying, “but in reality they do not.” I do not disagree, but you do need to cost them the same. This avoids swings in profit margins, and bottlenecks on the “cheaper” line. The easiest way typically to achieve this is by averaging the two (or more) costs together.
Have you had any experiences where you have not costed one or more identical lines the same? If so what happened? What did you do to fix any issues?
Categories: Cost Accounting