How do you analyze manufacturing costs for different product life cycles?

1 Cost-Volume-Profit Analysis

Cost-volume-profit (CVP) analysis is a method of estimating how changes in production volume, selling price, variable costs, and fixed costs affect the profit margin of a product. It is useful for products that have a relatively stable and predictable demand, such as mass-produced consumer goods. To perform a CVP analysis, you need to identify the break-even point, which is the level of output where the total revenue equals the total cost. You can also calculate the contribution margin, which is the difference between the selling price and the variable cost per unit. By using these metrics, you can evaluate how different scenarios of output and pricing affect your profitability and make informed decisions.

2 Activity-Based Costing

Activity-based costing (ABC) is a method of allocating overhead costs to products based on the activities they consume, rather than using a single rate or a proportion of direct costs. It is useful for products that have a complex and diverse production process, such as customized or specialized goods. To perform an ABC analysis, you need to identify the cost drivers, which are the factors that cause the overhead costs to vary, such as labor hours, machine hours, or number of orders. You also need to assign a cost pool, which is a group of related overhead costs, to each cost driver. Then, you can calculate the overhead rate for each cost driver and apply it to the products based on their activity level. By using this method, you can more accurately trace the overhead costs to the products and improve your cost management and pricing strategy.

3 Total Quality Management

Total quality management (TQM) is a method of reducing manufacturing costs by improving the quality of products and processes, eliminating waste and defects, and increasing customer satisfaction. It is useful for products that have a high level of competition and customer expectations, such as innovative or premium goods. To perform a TQM analysis, you need to adopt a continuous improvement philosophy, which involves setting quality goals, measuring performance, identifying problems, implementing solutions, and evaluating results. You also need to involve all the stakeholders, such as employees, suppliers, and customers, in the quality improvement process. By using this method, you can enhance your product quality, reduce your rework and warranty costs, and increase your customer loyalty and market share.

4 Life Cycle Costing

Life cycle costing (LCC) is a method of estimating the total cost of owning and operating a product over its entire life cycle, from design to disposal. It is useful for products that have a long and complex life cycle, such as durable or capital goods. To perform an LCC analysis, you need to identify the cost elements, which are the categories of costs that occur at different stages of the life cycle, such as acquisition, operation, maintenance, and disposal. You also need to estimate the present value, which is the current worth of a future cost or benefit, of each cost element, using a discount rate that reflects the time value of money. Then, you can calculate the total life cycle cost and compare it with the expected benefits or revenues of the product. By using this method, you can optimize your product design, selection, and management, and minimize your total cost of ownership.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?