RELIABLE COST MANAGEMENT: how Tryton calculates costs so you do not lose money
Do you know exactly how much you earn from each product?
Not only what you earn from each product, but do you know whether you are losing money?
Reliable cost management makes it possible to detect potential leaks of money caused by an incomplete cost calculation... And knowing how much we earn is just as important as knowing how much we are failing to earn.
When is cost management reliable?
Reliable cost management includes the cost of materials as well as manufacturing-related costs such as labour and handling; transport and customs; and possible fluctuations in the prices or rates of these goods and services.
Therefore, we can agree that cost calculation varies over time and is not fixed, and that it requires flexible management that also automates possible changes in the movements along a product’s life cycle.
This means that, in order to have reliable cost management, all costs attributable to a product must be includable in the costs, without exception. If any of these costs arise after the product has already been delivered, they must also be includable, and the movements in the cost chain must be modified automatically.
In which cases can costs change after delivery?
For example, when transport invoices arrive or when raw materials have undergone a rate change. If costs increase, our profit margin on the selling price decreases.
This is how Tryton’s cost management system works
As Tryton does it, a product’s cost calculation varies over time, in other words, it is flexible, and you can include expenses incurred after delivery in this variation. Since we already have a price set by tariff or product, the profit margin is calculated automatically and accurately by tracking all the movements involved. This flexibility in cost calculation makes it possible to automatically modify all the movements involved in a product’s chain.
It is that simple: with the automation and flexibility in cost management offered by Tryton, you will ultimately obtain accurate information about what a product has really cost you, which will tell you the true profit margin based on the selling price you have set.
It is also possible for the Tryton ERP to suggest recommended selling prices based on costs, or even for selling prices to fluctuate automatically according to costs before you quote them to the customer.
The Tryton customisation you need with NaN-tic
Tryton is a powerful, modular and extensible business management software solution. You will get the most out of it if you work with a team of expert consultants and software developers. This is where NaN-tic can make your management tool better than your competitors’ tools. With NaN-tic, you will not only have the team of expert developers and consultants dedicated to your company. In addition, NaN-tic has been part of the community that has helped Tryton grow from the beginning, developing customised solutions for a wide variety of companies. All of them receive a personalised approach. NaN-tic offers experience and specialised knowledge of Tryton ERP, and our customers’ testimonials demonstrate it.
The three inventory valuation and management methods based on cost calculation
The products we keep in inventory may have different valuations depending on their costs, as we have seen. On the one hand, there are manufactured products, with all their associated costs. On the other hand, there are products purchased from a supplier. In both cases, costs will vary according to supplier rates, transport, and so on. With Tryton, you can define inventory valuation and management when calculating costs using three standard methods:
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Manual: The product’s inventory value is entered manually in the system.
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Weighted average: This method consists of adding up all the expenses involved in obtaining the products and dividing the result by all the products in inventory, regardless of the order in which they entered or how old they are. It is the most common method. For example:
[(10x10€)+(10x20€)]/20 = 15€ Cost of the first batch: 100€ Cost of the second batch: 200€ Total costs: 300€ Set selling price: 25€ Unit profit margin = 10€, regardless of its initial cost Sale of all inventoried products = 500€ Final profit = 200€
With the weighted average method, we lose information about the different profit margin of each unit depending on when it entered. For whatever reason, this is not relevant to us: we only want to know how many products we have, the price at which we sell them and the total profit we obtain.
- FIFO: These initials stand for “first in, first out”; that is, the first products to enter are the first to leave. This is often preferred by companies working with products that have an expiry date. It is calculated as follows:
(10x10€)/10 = 10€ Total cost of the first batch: 100€ (10x20€)/10 = 20€ Total cost of the second batch: 200€ Set selling price: 25€ Unit profit margin of the first batch = 15€ Sale of the first batch = 250€ Profit from the first batch = 150€ Unit profit margin of the second batch = 5€ Sale of the second batch = 250€ Sale of the second batch = 250€ Profit from the second batch = 50€ Sale of all inventoried products = 500€ Total profit = 200€
Relationship between profit margin and final absolute profit
It may seem that an X% increase in the selling price directly increases the final absolute profit by X%, but this is not the case. Let us look at it:
(10x10)/10 = 10€ (10x20€)/10 = 20€ Set selling price: 25€ Unit profit margin of the first batch = 15€ Unit profit margin of the second batch = 5€ Sale of all inventoried products = 500€ Total costs = 300€ Total profits = 200€ 10% increase in the selling price = 27.5€ Sale of all inventoried products = 550€ Total costs = 300€ Total profits = 250€ Unit profit margin of the first batch = 17.5€ = 16.7% increase in profit margin Unit profit margin of the second batch = 7.5€ = 50% increase in profit margin Increase in total profits = 25%
Observing the differences in the profit margins in this last example shows how important it is to have reliable information about the profit margins of a company’s products.
One final note about profit margins in relation to total profit
When the unit product price increases, the greatest increase in profit margin will occur precisely in the batch that had the smallest initial profit margin, precisely because its cost was higher, as we can see in the previous example. Therefore, failing to take into account how data works in percentages and profit margins can lead us to draw inaccurate conclusions.
