Do you know exactly how much you win with each product?

Not only that, but do you know if you're losing money?

Reliable cost management depends on being able to detect possible money leaks due to an inexact calculation of costs... And it's just as important to know how much we earn, as how much we're failing to earn.

When is cost management reliable?

Reliable cost management includes everything from the cost of materials to costs derived from manufacturing such as labour or handling; through transport and customs; in addition to possible fluctuations in the prices or rates of these goods and services.

Therefore, we will agree that the calculation of costs is variable over time and is not fixed, and that it calls for flexible management, which also automates possible variations in the movements of the life chain of a product.

This means that in order to have reliable cost management, all costs attributable to a product must be able to be included in the costs, without exception. If any of these costs occur when the product is already delivered, it must also be possible to include, and movements in the cost chain must be automatically modified.

In which cases can the costs be modified after delivery?

For example, when we receive the transport invoices or raw materials that have undergone a rate change. If costs go up, it decreases our profit margin on the selling price.

Here's how Tryton's cost management system does it

As Tryton does, the calculation of the cost of a product is variable over time, that is, flexible, and you can include this variation in the expenses that have occurred since delivery. As we already have given a price marked by tariff or product, the profit margin is automatically calculated accurately by tracking all the movements involved. This flexibility in the calculation of costs makes it possible to modify in an automated way all the movements involved in the chain of a product.

It is that simple, with the automation and flexibility in cost management offered by Tryton, at the end you will get the real information of how much a product has cost you, which will give you what is the real profit margin given the sale price you have marked.

It is also possible if you want the Tryton ERP to suggest recommended sales prices based on costs, or even that the sale prices fluctuate based on costs in an automated way before budgeting them to the customer.

The Tryton customization you need with NaN-tic

Tryton is a very powerful, modular and extensive business management software, which you will get the most out of if you have an expert team of consultants and computer developers. It`s here where NaN-tic can make your management tool better than your competition's. With NaN-tic you will not only have the team of expert developers and consultants you need dedicated to your company. In addition, NaN-tic is part of the community that is making Tryton great from the beginning, developing tailor-made for very varied companies. All in a personalized way. NaN-tic is experience and specialized knowledge in Tryton ERP and the testimonials of our clients prove it.

The three methods of valuation and inventory management according to cost calculation

The products we have in the inventory can have different valuations depending on the costs as we have already seen. On the one hand there will be the products that are manufactured, with all the associated costs. On the other hand, products purchased from a supplier. In both cases the costs will vary according to supplier rates, transport, etc. With Tryton you can define the valuation and management of inventory by calculating costs with three standard methods:

1. Manual: The value of the product in the inventory is manually marked in the system.

2. Weighted average: This method consists of adding all the expenses of obtaining the products and dividing the result among all the products that we have in the inventory, no mind about when they were entered or how old they are. It is the most common method. For example:
   We have 10 products that have cost us €10 per unit and we get 10 products that have cost us €20 per unit. To know its value in the inventory we calculate:

[(10x10€)+(10x20€)]/20 = €15
Costs of the first lot: €100
Costs of the second lot: €200
Total costs: €300
Marked sale price: €25
Unit profit margin = €10 regardless of their initial cost
Sale of all inventoried products = €500
Final profit = €200

In the weighted average we lose the information about the different profit margin of each unit depending on its entry, for whatever reason, we are not interested, we just want to know how many products we have and at what price we sell them and how much profit we obtain in total.

3. FIFO: These acronyms stand for "first in, first out", that is, the first to enter are the first to leave. This is usually a preferred method for companies that work with products that have an expiration date. It is calculated as follows:
   We have a first batch of 10 products that have cost us €10 per unit and a second batch of 10 products that have cost us €20 per unit. To know its value in the inventory we calculate:

(10x10€)/10 = €10
Total costs first lot: €100
(10x20€)/10 = €20
Total costs second lot: €200
Marked sale price: €25
Unit profit margin of the first lot = €15
Sale of the first lot = €250
Profit first lot = €150
Unit profit margin of the second lot = €5
Sale of the second lot = €250
Profit second lot = €50
Sale of all inventoried products = €500
Total profit = €200

 

 

The ratio of profit margin to final absolute profit

It may seem that an X% increase in the selling price is a direct X% increase in the final absolute profit, but it is not. Let's see:

(10x10)/10 = €10
(10x20)/10 = €20
Marked sale price: €25
Unit profit margin of the first lot = €15
Unit profit margin of the second lot = €5
Sale of all inventoried products = €500
Total costs = €300
Total profits = €200
Increase in the sale price of 10% = €27,5
Sale of all inventoried products = €550
Total costs = 300€ Total profits = €300
Total profits = €250 Unit
Profit margin of the first batch = €17.5 = Increased profit margin of 16.7%
Unit profit margin of the second lot = €7.5 = Increased profit margin of 50%
Increase in total profits = 25%

Looking at the differences in profit margins in this last example we see how important it is to have reliable information about the profit margins of the company's products.

One last note on profit margins in relation to total profit

By increasing the price of the unit product, the greatest increase in profit margin was obtained precisely in that lot that had a lower initial profit margin, precisely because its cost was higher, as we see in the previous example. That is why not taking into account how the percentage data works showing profit margins can lead us to draw inaccurate conclusions.

 

At NaN-tic we can help you customize your company's management tools so you get what you need. Contact us!