Product Costing

Product costing is the commonest use of Activity Based Costing and often forms the basis for product pricing and product profitability.

This is of particular importance in the financial sector where the increasingly competitive environment and the degree of product differentiation necessary to maintain or improve market share require effective information relating to the costs of developing and providing products and services.

Product costing and product profitability measurement use operational and financial information summarised into a form that aids the decision-making process. Product cost and profitability information can be used to analyse and monitor costs, revenues and balances relating to defined products and services throughout the organisation.

The activities in each department that are performed to support particular products or services and measures can be identified and their costs associated with each activity. The direct interest income, fee income, funding costs and operating costs then form the basis of a product contribution towards support costs and provide information that can support product pricing and marketing strategies.

The development of product costs may not always be as simple as it sounds. Operating expenses are not usually associated with products in the financial accounting ledgers unless they relate to a department that is fully dedicated to one product or service.

Definitions of products and services are frequently not established consistently throughout the organisation. A product defined by marketing, may be a combination of a number of products shown in the accounting systems and a number of transactions recorded by the operational systems. The same transaction may be included in a number of different products.

The identification of interest cost by product may be difficult because of the need to identify and analyse the cost of funds utilised over a period of time and the availability of data relating to average balances and rates by product. Claims can normally be identified by product or policy type, but may relate to products undertaken in previous accounting periods.

We have a lot of experience in product costing and can help you to develop detailed product definitions and accurate product costs.

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