Outlining the Basic Concepts of Product Costing

Objectives

After completing this lesson, you will be able to:

  • Summarize product cost controlling
  • Recall the functions of product cost controlling
  • Describe the value flow in product costing

Product Costing Basics

Lesson Overview

In this lesson we will go over the core functions and processes in Product Cost Controlling (CO-PC).

Business Scenario

As a manufacturer, you are interested in controlling your production costs, also known as cost of goods manufactured (COGM). You want to be able to forecast what your costs should be before production start, monitor your actual productions costs, and understand where any variances come from in order to improve your processes and to be sure you sell your products at the desired profit margin.

Product Cost Controlling

Product Cost Controlling gives you information about a minimum selling price for your product and helps to decide if it’s cheaper to make or buy the product. It helps you perform complex cost analysis and determine your inventory values.

The first step of Product Cost Controlling is to calculate the expected production costs. This calculation serves as a benchmark for when your production is running and actual costs are being generated.

Cost Controlling Functions

Planning the production costs is the first step to be taken from a CO perspective.

As soon as the production is running, there are further actions to be performed.

The following graphic describes a scenario where production begins as soon as a customer orders a product („make-to-order scenario").

It is also possible to produce without having a sales order. The products are then delivered to stock and sold as soon as a customer request comes in („make-to-stock scenario").

Select Next in the figure to learn more about the process:

Product Costing Value Flow

Now that you have a general overview about Product Cost Controlling (CO-PC), it‘s time to have a look at the data flow.

Select the respective areas in the figure to learn more:

Further Reading

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