Procurement Glossary
Product costing: definition, methods and strategic importance in Procurement
November 19, 2025
Product costing forms the basis for strategic purchasing decisions and enables a precise evaluation of supplier offers. It includes the systematic determination of all product-related costs and creates transparency regarding the actual procurement costs. Find out below what product costing means, which methods are used and how you can use them strategically in Procurement .
Key Facts
- Systematic recording of all direct and indirect product costs for well-founded purchasing decisions
- Basis for supplier evaluation, price negotiations and make-or-buy decisions
- Includes material costs, production costs, overheads and profit mark-ups
- Enables cost transparency and identification of potential savings
- Supports strategic procurement decisions and budget planning
Contents
Definition: Product costing
Product costing is a systematic procedure for determining all costs incurred in the manufacture or procurement of a product.
Basics and components
A complete product costing covers all cost components of a product. This includes material costs for raw materials and components, production costs for labor and machine time as well as overhead costs for administration and sales.
- Direct material costs (raw materials, parts, components)
- Production costs (wages, machine costs, energy costs)
- Overheads (administration, sales, development)
- Profit mark-up and risk premiums
Product costing vs. price analysis
While market analysis examines external price structures, product costing focuses on internal costing. It supplements the supplier's open calculation with its own calculations.
Importance of product costing in Procurement
In the procurement context, product costing enables an objective evaluation of supplier offers and supports the procurement strategy. It creates the basis for well-founded negotiations and strategic decisions.
Methods and procedures
Various calculation methods enable precise costing depending on the product type and available information.
Full cost accounting
Full cost accounting records all costs incurred and allocates them proportionally to the products. This method is particularly suitable for complex products with a high proportion of overheads.
- Recording of all direct and indirect costs
- Proportional distribution of overheads
- Consideration of capacity utilization
Partial costing
With variable costing, only variable costs are allocated to the product. This method supports short-term decisions and the evaluation of alternative procurement.
Target costing
Target costing works backwards from the market price to the allowable costs. This method is optimally integrated into the requirements analysis and supports strategic procurement decisions.
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Key figures for controlling product costing
Systematic key figures make it possible to monitor the calculation quality and support continuous improvements.
Calculation accuracy
The deviation between calculated and actual costs measures the precision of the calculation. An accuracy of over 95% is the target value for strategic procurement decisions.
- Absolute deviation in euros or percentage
- Frequency of over- or underestimation
- Development of accuracy over time
Cost Transparency Index
This index evaluates the level of detail of the cost breakdown. A high level of transparency supports the negotiation of conditions and enables targeted optimization.
Calculation efficiency
The ratio of calculation effort to procurement volume shows the cost-effectiveness of the process. Integration into the return on investment of procurement optimizes the use of resources.
Risk factors and controls in product calculations
Incomplete or incorrect calculations can lead to costly mistakes and require systematic risk controls.
Data quality and completeness
Incomplete or outdated cost data can significantly distort costing results. Regular data validation and systematic variance analysis minimize these risks.
- Outdated cost rates and prices
- Missing cost components
- Insufficient data sources
Complexity and transparency
Complex products make it difficult to fully record costs. Implementing standardization in costing processes reduces sources of error and improves traceability.
Market dynamics and volatility
Fluctuating raw material prices and exchange rates have a significant impact on calculations. Regular updates and scenario analyses based on market observation ensure an up-to-date cost base.
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Practical example
An automotive supplier recalculates the costs for a plastic component. The previous calculation was only based on material costs of 12 euros. The detailed product calculation also includes tool costs (2 euros), production costs (8 euros) and pro rata development costs (3 euros). The total costs therefore amount to 25 euros instead of the originally assumed 12 euros.
- Complete cost recording uncovers hidden cost drivers
- Precise calculation enables realistic price negotiations
- Sound basis for make-or-buy decisions
Current developments and effects
Digital technologies and new analysis methods are revolutionizing product costing and creating more precise cost transparency.
Digitization of calculation processes
Modern ERP systems and specialized software automate data collection and evaluation. Integration with digital procurement enables real-time calculations and dynamic price adjustments.
AI-supported cost analysis
Artificial intelligence analyzes large amounts of data and automatically identifies cost drivers. AI in Procurement supports more precise forecasts and continuously optimizes costing models.
- Automatic pattern recognition in cost data
- Predictive analytics for cost trends
- Optimization of calculation parameters
Sustainability aspects in the calculation
Environmental and social costs are increasingly being factored into product costing. The Supply Chain Act reinforces this development and requires extended costing approaches.
Conclusion
Product costing forms the foundation for strategic purchasing decisions and creates indispensable cost transparency. Modern digital methods and AI support significantly increase precision and efficiency. Companies that implement systematic product costing demonstrably achieve better negotiation results and optimize their procurement costs in the long term. The continuous development of costing methods remains a decisive competitive factor.
FAQ
What is the difference between product costing and price analysis?
Product costing systematically determines all cost components of a product, while price analysis evaluates market prices and supplier offers. Both methods complement each other for well-founded procurement decisions and together create complete cost transparency.
Which cost types belong in a complete product costing?
A complete calculation includes material costs, direct production costs, overheads, development costs and profit mark-ups. Logistics costs, quality costs and, if necessary, sustainability costs should also be taken into account.
How often should product costings be updated?
The update frequency depends on the market dynamics. Monthly updates are recommended for volatile markets, while semi-annual reviews are sufficient for stable products. Significant cost changes require immediate adjustments to the calculation.
Which software supports product costing in Procurement?
ERP systems such as SAP or Oracle offer costing modules, while specialized tools such as Costimator or aPriori focus on product costing. Cloud-based solutions enable real-time costing and integration with supplier data for optimized procurement processes.
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