At WiseGEEK, we're committed to delivering accurate, trustworthy information. Our expert-authored content is rigorously fact-checked and sourced from credible authorities. Discover how we uphold the highest standards in providing you with reliable knowledge.
Product cost management is an approach that aids in the process of evaluating and keeping product costs within range that is considered acceptable for the company manufacturing the products. The idea behind this type of management is to obtain the most benefit from the product, usually by limiting the total expenses involved in the production of the product while offering goods or services that are of high quality and capable of competing with similar products in the marketplace. Product cost management helps to enhance the potential of the business to operate at a profit, since the management process does seek to keep production expenses within a reasonable range.
The general goal of product cost management is to study all the factors that go into the production effort and determine if those costs are justifiable in terms of allowing the company to generate the highest profits from the sale of each individual product. This means that the manager will look closely at factors such as the cost of raw materials used to create the products, the cost of direct labor on the assembly line used to manufacture the products, and any overhead costs associated with the production process. Doing so makes it possible to determine the company’s cost for each unit produced, which in turn can be compared to the total cost involved with the creation of those units. From there, the task of determining a sale price for each unit that covers all relevant costs and allows the company to earn a profit from each unit sold can be determined.
In a competitive market, the process of product cost management is extremely important. As a means of increasing the profit margin on each unit produced, the manager may look for ways to trim product costs by considering alternative raw materials or finding some way to streamline the labor costs associated with the line production. This process is normally ongoing, and requires finding the ideal balance between quality and cost that will allow the company to be competitive in the marketplace while still providing what consumers want and need.
For ideas on how to manage product cost more effectively, managers will sometimes compare the current process with methods used by competitors. Feedback from consumers may also provide valuable clues in how to alter the production process as a means of reducing costs while maintaining quality. Product cost management often involves the creation of a team that can constantly monitor each aspect of the manufacturing process, provide input into how to make improvements that save money, and ultimately allow the business to produce goods and services that generate more profit per unit produced.