Establishing a Product Costing System

As we have previously discussed, our company assists suppliers through production line assessment to ensure quality in manufacturing products and this goes the same way when it comes to setting a product costing system. We make sure products are priced the right way which is why we have established a product costing system in this company.

Components of a Product Costing System

1. Material Expenses

This product costing system component must be the basic when it comes to calculating product costs since material expenses are where most of the capital goes in terms of production. Material costs also include freight expenses, storage fees, import duties and other expenses directly attributable to the material acquisition.

2. Labor Expenses

This component involves overhead labor costs and all the personnel costs required to get the product done. Salaries, payroll costs, and third-party services fall under this product costing system category as well.

3. Factory Overhead

These are expenses that cannot be categorized under direct material costs nor labor costs but are still vital to manufacturing the final product. This component may include manufacturing supplies, utilities, rentals, repairs and other indirect material or labor expenses.

4. Taxes, Duties, and Fees

This used to be a minor factor in our product costing system when we started the sourcing business but has fully come to play when we started doing business in China. Unlike most countries, China has a very complex structure when dealing with their customs. Even though they also apply the 3 main type of taxes (value added tax or VAT, consumption tax, and customs duties) for importing products much like in most countries, the rules for each type of tax are very much different compared to what is traditional in other countries. This is why you need to have a complete understanding of the fees you will be paying for at the customs so you can incorporate them as part of your product costing system.

Calculating Product Costs

Companies follow different formulas for establishing a product costing system. Here in our company, we follow the standard product costing system in the industry which is to divide the total production cost to the number of units produced. The quotient is the production cost per unit and should be the basis for the actual sales price of the product upon considering other factors such as competition, availability and a lot more. Any amount applied beyond the production cost per unit is already considered as your potential profit and values below the production cost per unit are the loss to the company. This process is how our product costing and pricing is established.


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