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Three Core Concepts in Building a Cost Model - FocusCFO
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“Your Cost Model is the framework for calculating costs.” In manufacturing it’s very common to define all the manufacturing processes and collect and measure the cost to manufacture. There are however other processes involved in getting the product to the customer. Selling costs can be included (rep commissions, sales wages), royalties and licensing fees, and often very important outbound freight costs for products shipped FOB customer dock. In a custom or semi-custom build environment (think special equipment or even items such as residential doors and windows) there is an engineering cost to fulfilling each order, and often an engineering cost for simply quoting even if the order is not won. In a design services firm, the cost is heavily weighted to professional staff tasks. Choosing the right processes to include in your cost model is the second concept in building your Cost Model. The familiar issues of granularity and materiality will drive these decisions. Is the process a significant part of cost? Does it vary meaningfully across customer/product types or is an average good enough? Can you identify the costs so that you can provide meaningful inputs to the cost model? Traditional concepts in financial accounting reporting are often not very helpful once you step outside very direct costs (material and labor in a manufacturing environment, or billed hours in a services environment). GAAP rules often will record costs in lumped categories of overhead that meld specific costs and general overhead. Freight is often one of the most problematic, both on inbound and outbound costs as many ERP costing systems do not give good tools for capturing landed cost, or outbound freight cost. Getting good cost inputs for the important processes may require reconfiguring your financial reporting systems at lower granularity, creating challenges within the organization. An important consideration is understanding if the process costs vary across product/customer segments. If it does than it’s an important Cost Model candidate.
“Captures the costs (wages, expenses, capital costs) of your business” In manufacturing it’s very common to define all the manufacturing processes and collect and measure the cost to manufacture. There are however other processes involved in getting the product to the customer. Selling costs can be included (rep commissions, sales wages), royalties and licensing fees, and often very important outbound freight costs for products shipped FOB customer dock. In a custom or semi-custom build environment (think special equipment or even items such as residential doors and windows) there is an engineering cost to fulfilling each order, and often an engineering cost for simply quoting even if the order is not won. In a design services firm, the cost is heavily weighted to professional staff tasks. Choosing the right processes to include in your cost model is the second concept in building your Cost Model. The familiar issues of granularity and materiality will drive these decisions. Is the process a significant part of cost? Does it vary meaningfully across customer/product types or is an average good enough? Can you identify the costs so that you can provide meaningful inputs to the cost model? Traditional concepts in financial accounting reporting are often not very helpful once you step outside very direct costs (material and labor in a manufacturing environment, or billed hours in a services environment). GAAP rules often will record costs in lumped categories of overhead that meld specific costs and general overhead. Freight is often one of the most problematic, both on inbound and outbound costs as many ERP costing systems do not give good tools for capturing landed cost, or outbound freight cost. Getting good cost inputs for the important processes may require reconfiguring your financial reporting systems at lower granularity, creating challenges within the organization. An important consideration is understanding if the process costs vary across product/customer segments. If it does than it’s an important Cost Model candidate.
“Allows an understanding of the relationship between costs and volume produced and sold.” In manufacturing it’s very common to define all the manufacturing processes and collect and measure the cost to manufacture. There are however other processes involved in getting the product to the customer. Selling costs can be included (rep commissions, sales wages), royalties and licensing fees, and often very important outbound freight costs for products shipped FOB customer dock. In a custom or semi-custom build environment (think special equipment or even items such as residential doors and windows) there is an engineering cost to fulfilling each order, and often an engineering cost for simply quoting even if the order is not won. In a design services firm, the cost is heavily weighted to professional staff tasks. Choosing the right processes to include in your cost model is the second concept in building your Cost Model. The familiar issues of granularity and materiality will drive these decisions. Is the process a significant part of cost? Does it vary meaningfully across customer/product types or is an average good enough? Can you identify the costs so that you can provide meaningful inputs to the cost model? Traditional concepts in financial accounting reporting are often not very helpful once you step outside very direct costs (material and labor in a manufacturing environment, or billed hours in a services environment). GAAP rules often will record costs in lumped categories of overhead that meld specific costs and general overhead. Freight is often one of the most problematic, both on inbound and outbound costs as many ERP costing systems do not give good tools for capturing landed cost, or outbound freight cost. Getting good cost inputs for the important processes may require reconfiguring your financial reporting systems at lower granularity, creating challenges within the organization. An important consideration is understanding if the process costs vary across product/customer segments. If it does than it’s an important Cost Model candidate.
“Allows calculation of cost (and hence margin) that are reasonably accurate.” In manufacturing it’s very common to define all the manufacturing processes and collect and measure the cost to manufacture. There are however other processes involved in getting the product to the customer. Selling costs can be included (rep commissions, sales wages), royalties and licensing fees, and often very important outbound freight costs for products shipped FOB customer dock. In a custom or semi-custom build environment (think special equipment or even items such as residential doors and windows) there is an engineering cost to fulfilling each order, and often an engineering cost for simply quoting even if the order is not won. In a design services firm, the cost is heavily weighted to professional staff tasks. Choosing the right processes to include in your cost model is the second concept in building your Cost Model. The familiar issues of granularity and materiality will drive these decisions. Is the process a significant part of cost? Does it vary meaningfully across customer/product types or is an average good enough? Can you identify the costs so that you can provide meaningful inputs to the cost model? Traditional concepts in financial accounting reporting are often not very helpful once you step outside very direct costs (material and labor in a manufacturing environment, or billed hours in a services environment). GAAP rules often will record costs in lumped categories of overhead that meld specific costs and general overhead. Freight is often one of the most problematic, both on inbound and outbound costs as many ERP costing systems do not give good tools for capturing landed cost, or outbound freight cost. Getting good cost inputs for the important processes may require reconfiguring your financial reporting systems at lower granularity, creating challenges within the organization. An important consideration is understanding if the process costs vary across product/customer segments. If it does than it’s an important Cost Model candidate.
“Is simple enough you can gather the proper input data, and update it periodically.” In manufacturing it’s very common to define all the manufacturing processes and collect and measure the cost to manufacture. There are however other processes involved in getting the product to the customer. Selling costs can be included (rep commissions, sales wages), royalties and licensing fees, and often very important outbound freight costs for products shipped FOB customer dock. In a custom or semi-custom build environment (think special equipment or even items such as residential doors and windows) there is an engineering cost to fulfilling each order, and often an engineering cost for simply quoting even if the order is not won. In a design services firm, the cost is heavily weighted to professional staff tasks. Choosing the right processes to include in your cost model is the second concept in building your Cost Model. The familiar issues of granularity and materiality will drive these decisions. Is the process a significant part of cost? Does it vary meaningfully across customer/product types or is an average good enough? Can you identify the costs so that you can provide meaningful inputs to the cost model? Traditional concepts in financial accounting reporting are often not very helpful once you step outside very direct costs (material and labor in a manufacturing environment, or billed hours in a services environment). GAAP rules often will record costs in lumped categories of overhead that meld specific costs and general overhead. Freight is often one of the most problematic, both on inbound and outbound costs as many ERP costing systems do not give good tools for capturing landed cost, or outbound freight cost. Getting good cost inputs for the important processes may require reconfiguring your financial reporting systems at lower granularity, creating challenges within the organization. An important consideration is understanding if the process costs vary across product/customer segments. If it does than it’s an important Cost Model candidate.