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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
Product costing
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 decisions 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.
Application of product costing
Product costing is used to record and analyze all the costs incurred for a product in detail. This gives purchasing teams the opportunity to understand cost structures and conduct targeted price negotiations with suppliers.
Calculation example
Calculate the manufacturing costs of a product:
Material costs: 50 € (raw materials and purchased parts)
+ production costs: 30 € (wages, machines, energy)
+ overheads: 20 € (administration, sales, warehousing)
+ Development costs: 10 € (research & development)
= Total costs: 110 €
Through this calculation, the buyer recognizes that the product costs €110 per unit. With this knowledge, they can evaluate price offers from suppliers and identify potential cost savings, e.g. through cheaper materials or more efficient production processes.
Evaluation and strategic findings
✓ Critical success factors
→ Cost accuracy: Precise recording of all direct and indirect costs for realistic calculations
→ Process integration: Systematic integration of product costing into negotiation strategies
→ Market knowledge: sound understanding of industry standards and supplier cost structures
⚠ Challenges
→ Cost dynamics: Volatile commodity prices and fluctuating market conditions make long-term calculations difficult
→ Data availability: obtaining reliable cost data from suppliers is often problematic
→ Complexity management: detailed calculations are more time-consuming for products with many variants
Future trends and strategic implications:
"Digital transformation is increasingly enabling dynamic real-time calculations and predictive cost analytics."
→ AI-supported cost forecasts for proactive cost management
→ Automated should-cost models for more efficient negotiations
→ Integration of sustainability costs in overall costing
→ Digital collaboration platforms for transparent cost exchange
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.
