Cost price is important in establishing a company's sales prices and even more significant within a manufacturing company.

In fact, its implementation in this sector allows a better understanding of the profitability of each product and helps in establishing the objectives of each of the teams involved in the different spheres of the organization.

First of all, let's define what cost price is.

The cost price corresponds to the sum of the costs incurred in a company to produce a good or offer a service.

There are several concepts to distinguish when establishing costs:

• Variable costs versus fixed costs:

  • Variable costs (raw materials, direct labor costs, transportation costs) are the same per unit, but vary depending on the level of production. As for fixed costs, they do not necessarily change depending on the level of production, but tend to decrease when production is greater (for example: rent, salaries of management employees).

• Direct costs versus indirect costs:

  • Direct costs are those directly related to production and may vary depending on the level of production or the currency in which the transaction is made. As for indirect costs, they refer to the costs of managing and operating the company.

One thing is certain, you have to make sure you understand the entire process to include all the costs necessary to produce each unit.

Let's take for example a company ABC that produces biscuits. ABC has a sales and marketing team, production, distribution, accounting and administration. You will quickly understand that it is not only the accounting team that is affected by the cost price, far from it!

PRODUCTION DEPARTMENT

The production team has production targets and budgets to meet. If it does not adequately monitor costs, it will not be able to understand or anticipate the impact of price variations on pre-established budgets. It is therefore important to be able to act quickly and to analyze the impact of such variations on costs in an agile manner.

This makes it much easier to adjust the shot in a timely manner and adjust the selling price of the products accordingly.

For this team, the cost price will therefore include the price of raw materials, the costs of the factory (depreciation of a building, rent, electricity, depreciation of equipment, labor wages, etc.). It is therefore important for them to quickly know the impact on the cost price if the price of raw materials increases.

SALES AND MARKETING DEPARTMENT

For the sales team, it is important to know the floor selling price for the sale of cookies. In general, this team will negotiate long-term contracts for the supply of grocery stores or distributors. For this, it also needs a certain stability in the sales prices even if it is common to include a price adjustment clause based on certain criteria (increase in raw material costs, in particular).

For this team, it is therefore important to have an agile system to adjust costs quickly if the markets experience major variations as we have seen in the last 18 months, and this, without waiting until the end of the year. The sales team will then be able to adjust the prices of new contracts and also adjust prices according to the clauses of contracts already signed.

DEPARTMENT OF ACCOUNTING AND ADMINISTRATION

The accounting team is the one that compiles the costs of all departments and also determines which costs are directly related to the production of cookies. It is also the team that will analyze the discrepancies and must recommend adjustments to respect the budgets and avoid significant impacts at the end of the year.

To be able to perform its analyses efficiently and quickly, this team must have a skillful accounting and analysis system. Its implementation must take into account its needs in terms of cost price, but also in terms of reports and performance indicators.

In my experience in small and medium-sized businesses, many clients use a simple Excel sheet to do cost calculations. This method may be suitable for a company that offers few different services or that produces only one type of good.

However, it is rare that such a system can cover all the costs that need to be included to reflect an adequate cost price calculation. And above all, the risk of calculation error is very high.

In conclusion, the costing process is important in a company because it allows profitability gaps to be properly targeted, provided, of course, that it is properly established. This is not a process to be taken lightly. Its implementation allows for a better understanding of product profitability and supports the company's growth with rigor and finesse. As a bonus, it allows for better integration of the different teams internally to achieve common objectives in a company: profitability and performance.