Using Cost Analysis to Improve Product Pricing
Posted 10-11-2009 | By Megan Johnson | Download Article
As seen in Minnesota Business Experts' Forum
In a down market, product pricing for new business often gets more and more competitive. But how low is too low? Do you know the answer to this question for your product?
If you are not properly allocating direct and indirect/overhead costs associated with your product, you may think you are achieving a high margin on your sales. Proper cost allocation may tell you otherwise.
Here are a few cost allocation considerations:
1) Is your labor fully burdened? When calculating labor costs, items such as workers compensation, payroll taxes, unemployment taxes, health insurance, retirement costs and union costs (if applicable) need to be included.
2) Are you including all direct material costs? Direct material costs not only include raw materials, but also freight-in and tooling charges.
3) Are all indirect/overhead costs accounted for? Items such as equipment depreciation, insurance costs, utilities, repairs, maintenance, and certain indirect labor costs need to be included. As companies continue to lay-off workers, lower prices, and/or cut costs in this economy, it’s critical to know all costs associated with your product in order to evaluate additional efficiencies and offer competitive pricing.
In addition, appropriate cost allocation leads to better profitability now and in the future. If you’re interested in a cost analysis study or would like more information, please contact Megan McDonough Johnson, CPA.
MEGAN MCDONOUGH JOHNSON, CPA
HLB Tautges Redpath, Ltd.
mmcdonough@hlbtr.com