Actual Cost System: The Daily Definition
What is an actual cost system?
Actual cost systems are the means used to determine accurate production costs over time. Such a system tabulates costs historically, then applies those totals to their respective products. Many production costs are indirect or part of overhead — this is why an actual cost system is needed for true cost calculations.
A piece of inventory’s true cost is more than simply what the materials to make it cost. Materials are part of the cost, but so is labor, overhead, or other business costs that you incur while the inventory is under your roof.
So, let’s say that you sell umbrellas. If it costs your company $100 to make 50 umbrellas, and $500 to keep the lights on during that process, that’s $12 per umbrella. But you still have to pay your employees, market the umbrellas, pay for business software to process the orders, etc.
Say all of those extra expenses add up to an additional $300 for those 50 umbrellas, spent over the course of the umbrellas’ life cycle within your company. That translates to an actual cost of $18 per umbrella.
Our two cents:
Actual cost systems are similar to normal cost systems, to the point that they’re essentially the same if your overhead doesn’t fluctuate much from month to month. Be aware of the differences, though, when crunching those numbers.
Keep in mind, too, the effect that economy of scale can have on your production costs. If your customers don’t want to purchase $18 umbrellas, look at lowering your production costs. Producing more umbrellas at one time might be just the ticket.
Cost management is a valuable skill. Product-centric companies looking to stay competitive must pay close attention to their production costs. And if you’re not able to easily and accurately access company data that contributes to production costs, that’s going to hinder your growth efforts in a big way. Invest in an ERP solution that gives you that visibility, then start chipping away at those costs.