The Significance
Knowing your product’s gross margin is the bridge between Operations and Finance. Company financial success today and into the future is fully dependent on knowing your product cost of goods sold.
The Effect
The accounting calculation of Gross Margin is: (Net Sales-Cost of Goods Sold)/Net Sales. This provides a gross margin as a %
My area of expertise is in the accounting, modeling and isolation of all costs that come together to drive your product cost of goods sold (COGS). The result is a comprehensive current and “what if” modeling tool.
Having an understanding of product gross margins at the outset of a product development project forearms you to understand if the projected product gross margin meets the budgeted margin dollars built into your company’s financial plan.
Key Areas To Be Considered, Discussed And Serviced:
Exposing and understanding the product cost drivers typically consist of some, if not all of the following:
- A costed Bill of Materials (BOM) that accounts for volume pricing levels and forward cost projections based on industry cost curves and negotiated supply agreements with key component suppliers
- Factory assembly and test labor times which are further influenced by factory floor learning curves, process efficiencies and potential capital equipment investments
- Process first pass and final yields
- In-house manufacturing overhead rates
- Contract manufacturer’s overhead rate, SG&A and Profit margins (assuming you are working with a contract manufacturer)
When fully accounted for and modeled into a “what if” format, you will have the ability to isolate cost drivers as driven from design decisions, component supplier selection, material sourcing channels, complexity of assembly & test requirements and value-add services contract negotiations.
The strength of a solid cost modeling tool comes not only from the ability to confidently articulate your COGS, but allows for unemotional fact-based discussions with Engineering, Sales, Marketing, Customer Service and Finance on design, product features and market entry timing trade-off decisions that represent the best needs of the company.
Nothing ruins a good argument like the facts….have the facts!
