Costing, Cost Management & Pricing of Products

Cost management is more than just accounting, it is a focus on the continuous control of costs in all parts of a company.

Costing, Cost Management & Pricing of Products

Businesses have only 3 options when it comes to increasing profits: lower costs, increase prices or change sales or the sales blend. At the outset, it should be noted a number of small and midsized and even large companies do not have a thorough understanding of their product costs nor do some of them have a procedure for analysing these costs. The control, monitoring and assessing of both organization and product cost drivers is one of the most important functions of management. There is also a direct relationship between a company’s cost structure and the pricing and profitability of the company’s product or service. Product or service pricing is considered one of the most critical decisions made in a company. However, a number of small and medium sized companies have no process in place to assess competitive or market pricing nor do they have a pricing strategy or plan. The “opening” or “first price point” for a product or service is probably one of the most important decisions that a company will make. Yet often this decision is based on financial criteria without consideration of factors such as market pricing, line pricing, bundle pricing, penetration pricing tactics, zone pricing, promotional pricing or other pricing strategies.

In order to understand the impact of various costs on a company’s financial performance, it is first necessary to gain some knowledge of the type of costs associated with a product or service. The knowledge of what makes up these costs is fundamental in determining the product price that is necessary to cover the company’s fixed and variable cost and generate a profit. This information is also required in order to reduce or eliminate some of those while helping the company develop a sustainable competitive advantage in the marketplace.

Knowing your cost is one side of the coin, while the other side is to have a continuous process of Cost Analysis and Cost Management. The process of undertaking a cost analysis usually starts with the identification of the fixed and variable costs in each company and then progresses to a determination if the cost is justified, or if the cost contributes to adding value to a product, activity or service, or if it is an investment in current or future productivity or other criteria established by the company. The determination and understanding of the various fixed and variable costs in a company is fundamental to establishing a sustainable and competitive business. For start-ups and small companies, with limited resources, it is even more important that management have a thorough understanding of each significant cost driver.

Cost management is more than just accounting, it is a focus on the continuous control of costs in all parts of a company. In many small and medium sized food companies, the focus is on increasing sales and production and capturing market share. However, a focus on controlling costs can free up the resources need to “pull” products off the shelf. Cost management is about freeing up limited resources to increase sales and profitability.