It's difficult to calculate the true cost of a product when the same resources are used to generate different goods, says Sarah Perrin. Activity-based costing may be the answer.
Businessmen may think they already know how profitable their widgets are. They know the materials and labour costs which, hopefully, are covered by the price. But what about those extra indirect costs? For example, does the marketing department spend a major percentage of its time on one product line, devising promotions to shift stock? Does the finance department have to keep chasing one customer for payment? All these activities incur a cost. Whenever the same resources are being devoted to different goods you need to look harder to calculate the true cost of a product.