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01.31.25

Tracking Individual Product Costs to Maximize Profits
Kenneth Tornheim

Tracking product-specific cost information can be challenging, but the benefits can be significant. By tracking the costs and profitability of individual products, you will have an idea of where to make adjustments.

Drill down

Determining product-specific costs can require significant work. You will need to figure out the direct labor, material and other costs associated with each product and come up with a reasonable method of allocating indirect costs among your products. Examples of indirect costs are overhead (indirect labor, rent, insurance, utilities, etc.) and certain administrative expenses.

Once this is done, you will gain valuable insights into the actual costs and profit margins of each product. This information can help you make strategic decisions about pricing products and focus your resources on manufacturing and marketing the products with the highest profit margins.

The results occasionally might surprise you. For example, you may discover that a product you thought was profitable is actually losing money. In many cases, it makes sense to discontinue an unprofitable product, but not always. It depends on the product’s contribution margin, which is calculated by subtracting a product’s variable costs from its revenue. If a product’s contribution margin is positive, then it is contributing to the company’s overall profitability by helping to cover the company’s fixed costs. Because those costs would be incurred regardless of whether the product is produced, eliminating it would likely hurt profits rather than help.

Find new opportunities

If your company is not tracking and analyzing product-specific cost information, you are essentially operating blind. Examining profit margins on a product-by-product basis can help you identify strategies for boosting your company’s performance.

Detailed cost information can also help you evaluate new business opportunities. Familiarity with product costs can help you determine whether a particular opportunity such as a contract manufacturing job, for example, would be worth your while.

Do Not delay

By tracking the costs of manufacturing each product, you will have the opportunity to maximize your profitability by fine-tuning your production, marketing and pricing strategies. In addition, enterprise resource planning (ERP) systems and other software solutions can help automate the process. Your CPA can help you implement a cost-effective solution.

For more information, contact Ken Tornheim at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing and Distribution Group. Sign up here to receive our blogs, newsletters and Client Alerts.

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