The product price will always be a determining factor whether the consumer buys a product or not. This is the reason why companies are very critical of their product costing system and make sure the prices they come up with, justify the quality of their products, including the demand of their products in the market today. Having a too expensive price would not translate success for the product while selling it a much cheaper price would also mean a loss for the company. Getting the right price through the established product costing system will solve this issue.
In our introductory blog series on product costing system, we gave you a basic overview on how to establish a product costing system for your company. We gave away the standard formula on how to calculate for product costs and identify components of a product costing system. In this blog post, we look at different product costing systems used by manufacturing companies today and the specifications why they could be perfect for your OEM company.
Two of the most common product costing systems used in manufacturing companies are process costing and job order costing. These two product costing systems are very popular because they are based on records with actual or estimated values of the production cost that can easily be translated for product costing. The values out of these product costing systems can easily be adjusted later as part of the production planning and control. There are also other manufacturing companies who prefer to use a product costing system such as activity-based costing or backflush costing due to certain factors which cannot be covered by the first two product costing systems mentioned above.
Different Product Costing Systems
Job Order Costing
This product costing system is commonly used by manufacturers of unique products such as furniture, dressers, boats, and other customized items that aren’t mass produced or each unique to its own. Job order costing is computed by calculating the cost of a unit in a given order. Materials, labor, and overhead costs of each job are listed to find the total value of the order’s production cost then is adjusted for final price with added value for profit.
This product costing system is usually used by companies who are into mass production of similar products. Instead of calculating production costs per order, process costing calculates production costs per production process. Since materials, labor and overhead costs are constants for each product then it is easier for manufacturing companies to use this product costing system.
Backflush Product Costing System
Backflush costing is a product costing system perfect for companies utilizing the just-in-time (JIT) inventory system. In this scenario, inventories are only sent by clients to the manufacturing company when needed. The product costing system is much simpler with this production planning system because a lot of factors are eliminated in the process. The product costing system only focuses on labor and overhead costs after manufacturing the finished product upon receiving the inventory.
Activity-Based Product Costing System
This product costing system is a complex version of the traditional one as several bases known as cost drivers would come into play. If the production planning and control involve several manufacturing processes then all these processes are put into consideration as separate bases with each one accumulating different costs.
There are a lot more product costing systems in the world of OEM but the ones mentioned above are most commonly used. You can choose one and modify it according to your company’s needs as part of your production planning management. Simply make sure your modified formula is just and fair for consumers to keep a decent foothold in the market.