1. The importance of costing

As an end buyer you face a rather simple yes or no decision when thinking about whether to buy a product. The assumption is that you pay for all the costs for the product including taxes and overhead costs for the manufacturer, middlemen and sellers. If you are a seller, the question is much tougher. Can you be sure that you have sold the product with a sufficient net profit, covering all your actual cost, or are you in fact subsidizing some of the products you sell?

The only way to answer this question is to identify all costs a product accrues along the way until it is put on the store shelf. Those costs include more than just the cost for material, the cost for operations involved in manufacturing the product and overhead costs such as the cost of capital, of space, of administration, and so on. Perhaps some parts of the product are purchased from external vendors instead of being produced by the company itself. Or, an item is distributed from one part of the company to another. In both scenarios, there are additional costs involved than just the cost of the goods itself.

Since more companies acquire material from overseas sources, the process of determining the cost of an item is becoming increasingly difficult. In many cases, logistics-related costs have a big impact on the final cost of the end product. Actually, the landed cost of an item is often much higher than just the cost of the goods. (With landed cost we mean the total cost of a product from one location to another, including cross-border fees like duties, taxes, freight costs, insurance costs, and quality inspection costs, to name a few.)

That is why purchase costing and distribution costing play such a critical role in ensuring that the company maximizes its profit margin.