Why should cost analysis? Market leaders all over the world work with product cost estimation models to determine appropriate prices. Even manufacturers of premium products need to determine their product costs to optimize their margins effectively. Considering high-volume productions and the increasing importance of localized products (e.g. for emerging markets), you need to have the most accurate product cost estimation possible in order to survive long-term in these markets, and this is where should-costing comes into the picture.
Should-cost analysis is the most appropriate way to identify the exact costs for a product, including material, personnel resources and even operational overhead related costs. Such an analysis, when done with sufficient rigor, can provide far more visibility of cost composition and cost drivers, which can support more accurate decisions in managing products and reducing costs.
The traditional difficulty in doing the should-cost analysis is the relatively high effort required to perform the calculation, especially if you want to simulate changes in the production chain or simulate contributions from different locations or the utilization of new technologies.
Fortunately, there are product cost management tools available that enable your organization to use bottom-up, should-costing without the inaccuracies or time investments it takes to perform an Excel-based or even completely manual calculations. Software tools like these make it easy to use a bottom up should-cost calculations and offer several key advantages over traditional cost estimation practices.
For example, with more accurate should-cost calculations, you can:
Meet the high demand for accurate and detailed product cost estimates if you are in an industry with a high production volume
Realize reliable should-cost estimates by using valuable reference data with flexible cost models
Understand cost reduction opportunities
Deliver the cost details to support fact-based negotiations