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Product costing: definition & important aspects for buyers
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Product costing in a nutshell:
Product costing is a systematic method for determining and breaking down all relevant costs incurred in the manufacture of a product. It enables the purchasing department to conduct well-founded price negotiations with suppliers and to identify cost drivers and potential savings.
Example: When calculating a metal component, material costs (€45), production costs (€28), tool costs (€12), logistics costs (€8) and overheads (€15) are recorded, resulting in total costs of €108 per unit and a maximum target price of €95 can be set for negotiations with suppliers.
Contents
What is product costing?
Product costing is a central tool in purchasing and procurement that enables the manufacturing costs of a product to be determined. It comprises the detailed analysis of all cost components incurred during production, such as material costs, manufacturing costs, overheads and other expenses. The aim of product costing is to present the total costs transparently in order to be able to make well-founded decisions regarding pricing, supplier selection and cost savings.
Core elements of product costing
- Material costs: Costs for raw materials and purchased parts that are used directly in the product.
- Production costs: Expenses for production, including wages, machine running times and energy.
- Overheads: Indirect costs such as administration, distribution and warehousing that are allocated to the product.
- Development costs: Investments in research and development that are necessary for product creation.
Importance of product costing in purchasing
Product costing is essential in the procurement process to ensure cost efficiency and competitiveness. It enables buyers to evaluate suppliers' price demands and conduct targeted negotiations. Thanks to the transparency of cost structures, potential savings can be identified and make-or-buy analyses can be made on a sound basis.
- Negotiation basis: Better understanding of costs enables effective price negotiations.
- Cost reduction potential: Identification of areas to reduce expenditure.
- Strategic decisions: Support in the selection of suppliers and supplier development.
Product costing: From traditional cost accounting to target costing
Product costing forms the backbone for well-founded decisions in purchasing and the entire value chain. Based on the theoretical foundation, it enables companies to precisely determine manufacturing costs and set competitive prices. In practice, however, traditional methods are reaching their limits, especially in dynamic markets with high cost pressure. There is therefore a growing need for innovative approaches that are more flexible and market-oriented.
Old: Traditional cost accounting
Traditional approach: In traditional cost accounting, the manufacturing costs of a product are determined on the basis of historical data. All direct and overhead costs are added together and allocated to the products. Tools such as cost-benefit analysis or full cost accounting are commonly used. This method focuses on internal cost structures and rarely takes external factors into account. The main features are linear cost distribution and little consideration of market requirements. This often leads to less competitive prices and makes it difficult to adapt quickly to market changes.
New: Target Costing
Target costing: In the modern target costing approach, the market price is at the center of the calculation. Based on the planned sales price and the targeted profit margin, permissible manufacturing costs are calculated backwards. This requires close cooperation between purchasing, production and development right from the early product development phase. Innovative tools such as value analyses, cost structure analyses and benchmarking are used to identify and specifically influence cost drivers. The focus is on optimizing functions and costs while taking customer requirements into account. This enables greater competitiveness and a rapid response to market changes.
Practical example: Automotive industry
A leading car manufacturer was faced with the challenge of launching a new model on the market at a competitive price. By applying target costing, the permissible manufacturing costs were set at €20,000 per vehicle. Interdisciplinary teams identified cost reduction potential of 15% through material substitution, process optimization and supplier integration. supplier integration. The market launch took place on schedule and the vehicle achieved a market share of 10% within a year, increasing sales by €200 million.
Conclusion on product costing
Product costing is an indispensable tool in modern purchasing, enabling precise cost analyses and well-founded decisions. By systematically recording all cost components, companies can strengthen their negotiating position, identify potential savings and make strategic procurement decisions. With increasing digitalization and AI-supported solutions, product costing is becoming even more efficient and dynamic, further consolidating its central role in the procurement process.
