Originally published in Manufacturer, ARB’s Manufacturing Industry newsletter.
Tracking product-specific cost information can be challenging, but the benefits can be significant. By tracking the costs and profitability of individual products, you’ll have an idea of where to make adjustments.
Drill Down
Determining product-specific costs can require significant work. You’ll need to figure out the direct labor, material and other costs associated with each product and come up with a reasonable method of allocating indirect costs among your products. Examples of indirect costs are overhead (rent, insurance and administrative expenses) and executive compensation.
Once this is done, you’ll gain valuable insights into the actual costs and profit margins of each product. This information can help you make strategic decisions about pricing products and focus your resources on manufacturing and marketing the products with the highest profit margins.
The results occasionally might surprise you. For example, you may discover that a product you thought was profitable is actually losing money. In many cases, it makes sense to discontinue an unprofitable product, but not always. It depends on the product’s contribution margin, which is calculated by subtracting a product’s variable costs from its revenue. If a product’s contribution margin is positive, then it’s contributing to the company’s overall profitability by helping to cover the company’s fixed costs. Because those costs would be incurred regardless of whether the product is produced, eliminating it would likely hurt profits rather than help.
Find New Opportunities
If your company isn’t tracking and analyzing product-specific cost information, you’re essentially operating blind. Examining profit margins on a product-by-product basis can help you identify strategies for boosting your company’s performance.
Detailed cost information can also help you evaluate new business opportunities. Familiarity with product costs can help you determine whether a particular opportunity — a contract manufacturing job, for example — would be worth your while.
Don’t Delay
By tracking the costs of manufacturing each product, you’ll have the opportunity to maximize your profitability by fine-tuning your production, marketing and pricing strategies. In addition, enterprise resource planning systems and other software solutions can help automate the process. Your CPA can help you implement a cost-effective solution.
This publication is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting or other professional advice or opinions on specific facts or matters, and, accordingly, assume no liability whatsoever in connection with its use. ©2025
Manufacturing Team Spotlight
Nick Lagoditz, CPA, joined ARB in 2016 as an associate and became a tax manager in 2022. He provides tax preparation and business advisory services, with a focus on partnerships, real estate professionals, and construction businesses. Previous to ARB, Nick worked at a large international firm for nearly two years.
