Thursday, April 9, 2009

Understanding Product and Service Costing in Canada

Whether you produce a product or provide a service, knowing and understanding your costs is imperative to remaining profitable.

You may cruise along for months or years, thinking business is good and believing everything you do is contributing to your profit and then one day you will ask yourself “What happened? Why am I suddenly less profitable?”

To avoid this situation, it is best to get a handle on your costs today. Don’t wait until it’s too late.

Product and service costing assists in the determination the true costs of your products and services. Knowing the true costs is important if you want to know which of your products or services are profitable.

Product and service costing is the process of setting realistic cost standards for all products produced or services provided. Standard costs are budgeted costs that identify the value of the resources used in a specified product or service.

Standard costs are usually based on prior years’ costs and discussions with managers regarding the expectancies for the next year. Standard costs usually include the allocation of material costs including freight, duty, and brokerage as well as labour costs and often overhead costs.

Standard costs reflect the effective and efficient use of resources. The process of standard costing gives a company the costs to use when budgeting and comparing to actual costs. This determines the extent to which expectations are realized. Variances that are significant are then analyzed.

Product and Service Costing is an important function that needs to be performed. This step ensures your understanding of the costs incurred, and how those costs affect the profitability of your company.

When was the last time you reviewed your costs?
Tracy Wright, CMA
Tel: 250-470-8421

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