The Mystery of ‘WHAT IS MY REAL NET COST’ and how to solve it….

Image result for product costing template


I am a member of the Linked In group ‘FSN’.  It is comprised of accounting and finance professionals from all over the world.  How amazing that a Controller in South Africa may be struggling with the same problems a controller in Georgia struggles with.

So, let’s talk about one of the most challenging topics of all.  ‘What is my real true cost of product ‘x’?’ There have been thousands of pages, posts, classes, books written on costing.   Job costing software is challenging but if not set up properly is a waste of time and money.

Don’t forget that the true cost of the products and services you sell must be defined in order for selling decisions to be made, especially in industries with very fluid markets.  Cost really matters. Many of these industries sell commodities like food, where the market moves several times a day.  Knowing the real cost is critical to measuring profits.  The question is HOW DO WE ARRIVE AT THAT NUMBER? How would I?

  1. Remember, accounting is as much art as it is science.  If it wasn’t we wouldn’t be arguing as much as we do on how to get to the correct numbers.  There are many and varied philosophies about the proper method of cost accounting.
  2. Legacy systems and costing methods may be outdated, especially if you inherited it.  If you did not develop the system, you need to understand how costs are applied.  Perform your own due diligence on the cost system and methods.
  3. Form a ‘Cost Advisory’ group which includes your staff accountant(s) and managers from the production side and put them to work exploring whether costs make sense.  The advisory group must become experts on cost.  Have them review Monthly Costing reports to be sure the costs make sense.  Next week’s topic will be ‘Sales Exception Reporting’ .  With Sales Exception reports you can isolate where products were sold for less than their cost or whatever criteria you designate (less than 0% Gross Margin, etc).
  4. Do you have the option for Transactional Posting?  Some companies do not post by transaction.  But transactional posting is the life blood of cost analysis.  Without it, you are looking into a barrel of costs, none identifiable.
  5. Consistency is the key to meaningful cost reporting.  Maybe I should have put this as #1 but if your cost methods apply freight cost inconsistently you have a really big problem.  (I am referring to inbound freight). For example, companies that own their own trucks might not apply freight cost to product their trucks deliver to their inventory point.  The only freight added is when a third party carrier is paid.  I run into this from time to time and I can assure you, this is the wrong method.
  6. You must get into agreement with management on what costs will form the building blocks of your net cost by product.  Generally speaking, it is the indirect costs of overhead that are the sticking point.
  7. Finally, make sure you confer with your outside accounting firm and involve them in these conversations prior to making any major changes.

My recommendations to you are based on how I would approach a consulting project with a client who needs help determining his real costs.  Inspect the template I imaged for this post to further understand the vital need to know your cost.  And remember, “one man’s true cost can be another man’s garbage”.




Calling all Controllers & Accountants to reply!!!

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

SDF Applications

Exceptional Apps.

Dennis Dean Smith

Cross From Your Ideas to Success

Crochet with Raymond

The mad adventures of a lesbi@n hooker and her siamese cat!

Dr Marla Gottschalk

Great work begins with a strong core.

Law At Work

HR, employment, and health & safety advice in Jersey and Guernsey, Channel Islands

Live to Write - Write to Live

We live to write and write to live ... professional writers talk about the craft and business of writing

The Daily Post

The Art and Craft of Blogging


News and reviews from the world of gadgets, gear, apps and the web

TED Blog

The TED Blog shares interesting news about TED, TED Talks video, the TED Prize and more.

Philadelphia Estate and Tax Attorney Blog

Philadelphia tax, estate, corporate, small business attorney providing IRS tax representation, estate planning & administration, small business, probate, wills, trusts, tax planning

WordCamp Central

WordCamp is a conference that focuses on everything WordPress.

Leadership Freak

Empowering Leaders 300 Words at a Time

Late Blooming Entrepreneurs

Making it big in business after age 40

Small Food Business

The Soup to Nuts Resource for Artisan Food Entrepreuers


A voice for private company controllers

The Blog

The latest news on and the WordPress community.

%d bloggers like this: