Have you ever launched a new vitamin/supplement product in the market, with the hopes of making “a killing” in the market, only to have it priced wrongly?
Enter cost accounting for nutraceuticals.
Cost accounting is the method of measuring the cost of production. It is an essential method that gives us valuable feedback in managing a lot of pricing and liquidity problems.
Why? Here is a list of reasons why cost accounting is essential for your nutraceuticals business:
Cost Accounting provides information about the total cost for each product
Let’s assume you are a supplements manufacturer. The first thing consider is the rent or the cost of land and the building (i.e. your warehouse, office etc). The second thing consider is all the machinery and labor costs (salaries, sales bonuses, associate fees etc.) Moreover, the cost of raw materials, energy, utility services etc. And finally, advertising, promotion, bank loan interests and distribution costs.
All these expenses need to be added to a spreadsheet which shows how much does each one of your product costs and which is the cost of your total production.
Here is an example of a Cost Accounting Spreadsheet:
Finally, let’s assume that each supplement has an output of one million boxes per year. So the total cost of each bottle of vitamin will be:
To understand this better we divide the total cost of each supplement (i.e. 3.23) to the number of boxes manufactured (i.e. 1.000.000)
Cost Accounting shows the current financial state of the business. This is useful to executives, supervisors and members of the board of directors in order to take the right decisions for the company.
In order to achieve the company’s goals, managers must take into consideration all the financial information that cost accounting provides them. From the CMO to the President of the Board of Directors, cost accounting is a measuring tool used to implement any future projects or help senior management explore how does the firm performs now or in the future.
Moreover, many managers avoid reporting negative information about their department or use company financial information for personal gains. In that case, the firm may face serious legal problems in the future due to the fact that cost accounting reveals company’s handicaps for each department. That’s why business owners and executives request extremely accurate financial information when reviewing firm’s operations and decision making.
The Vital Role That Cost Accounting Plays in Marketing
When a company is able to provide high quality products with the lowest cost available, the marketing has the opportunity to allocate extra budget for promotions and advertisements in order to attract new clients and increase the firm’s volume
Furthermore, a marketer will be able to provide multiple offers by creating new needs to the current and future customers.
For example: in the table above we have three kinds of vitamins. Suppose CoQ10 sales increases rapidly and B -Complex vitamins remains the same. In that case we can create a bundle which will combine both CoQ10 and B-Compex and sell it at a lower price.
If the retail price of a package of CoQ10 is £ 15.00 and B-Compex is £16.55 the new package for the combination will be £20.00 instead of £31.55
So, we give the opportunity to our customers to discover the benefits of both vitamins at the lowest price.
Cost Accounting In Controlling Materials
Cost accounting helps a nutraceuticals manufacturing firm to control the availability of the materials in order to help the production process. Simply put, production will be managed according to the availability of the materials and the new stock will be ordered a few days before the firm runs out of the material. If the availability of the materials will not managed properly a part of the stock will be destroyed due to carelessness οr misappropriation.
For example, let’s assume that a firm which provides Omega-3 vitamins receives a huge order from a key account client. In order to meet its obligations it needs extra fish oil. If the procurement supervisor orders a higher quantity than needed, and assuming that the excess quantity will not be used into any production, then we are at loss.
This will be considered as an extra expense for the firm because it was not estimated by the finance department.
Secondly, in the same example the procurement supervisor should first use the quantity already at hand – if any – and add any extra, by organising the ordering to match the order.
Cost Accounting & Supply Chain Management
How is cost accounting being connected with the Supply chain Management?
In order to receive the lowest price available, the nutraceuticals manufacturing firm is obligated to check how global prices perform. Every procurement officer should receive offers from at least 10 suppliers in order to achieve lower cost value.
For example: ACME Nutritionals is a wholesaler and packaging company, selling to retailers. They are looking for Krill and Cod Liver oil and as such, they get five offers from different manufacturers:
Supplier 1: 1.000.000 pills for €0,0105. Total cost = €10.500,00
Supplier 2: 1.500.000 pills for €0,0102. Total cost = €15.300,00
Supplier 3: 2.000.000 pills for €0,009. Total cost = €18.000,00
Supplier 4: 1.000.000 pills for €0,0108. Total cost = €10.800,00 and cod liver oil 800.000,00 pills for €0,015 with total cost of €12.000,00.
Supplier 5: 1.000.000 pills for € 0,0105. Total cost = €10.500,00 and cod liver oil 1.200.000,00 pills for €0,012 with total cost €14.400,00.
In the previous example we are able to see a lot of differences in the cost value prices. But how are we going to choose what’s best for us?
Suppose ACME Nutritionals needs approximately 1.000.000 pills for a six month period. Choosing the first offer makes the most sense, because of the expiration date and warehouse costs – if we order more than anticipated/need, then the company will have to face distribution and storage issues. If ACME Nutritionals anticipates that the client’s orders will grow approximately 50% in a year, then they will choose the second one. Moreover, if you can see that the future sales will increase rapidly you should take the risk and prefer the third offer regarding the decrease of the cost value.
Cost Accounting And Influencer Marketing
Wait, what? Can influencers affect cost accounting?
Well, influencer marketing is a cost-effective way of reaching hundreds or thousands of new customers without investing in paid advertising.
Many supplement firms believe that influencer marketing is just a brand awareness tactic with no measurable impact on sales. This totally depends on your individual situation and what your company’s goals are.
However, influencers are not always celebrities. Influencers can also be doctors that either are recognised or have a lot of credentials. Utilising the expertise and credibility of a doctor or a scientist that is directly related to the products at hand, is generally known as a firm’s “goodwill” and whilst it is not easily measurable, it contributes towards increasing sales.
Let’s now clarify the meaning of “goodwill” in business. Goodwill is an intangible asset which influences the firm’s brand name. For example an asset like the rights of a software program, the level of quality, a solid customer base, the good customer relations, the good employee relations, and any patents or proprietary technology.
The Role Of Cost Accounting In Project Management
How can you find if a new project will be profitable?
Suppose a vitamins firm wants to create a new product for its clients.
This will be a new project for the firm which demands additional efforts in order to succeed. That’s why firm’s executives need to know the profits and losses for every profit center, every department and each project within the business.
We are using Cost Accounting in order to gain detailed cost information about the firm’s current operations and have a plan to control the company’s financial futures.
For example, let’s assume that the firm is planning to launch a new range of B-Complex vitamins.
What are the factors to consider in order to make a successful penetration to the market?
First of all, the global level of sales.
Secondly, the competitors which is going to face.
Moreover, the pricing of the new product regarding the prediction in level of sales and production.
Also, how aging consumers were used as part of the development process to identify functional food concepts.
In order to have a successful product launch in the nutraceuticals industry you should first estimate the cost value of the product as accurately as possible. If you have an accurate prediction of the total cost production, you will be able to compete in terms of quantity and possibly, price.
Cost Accounting Can Improve Cost Efficiency
Generally speaking, the most important benefit of implementing cost accounting is the opportunity to reduce costs and improve cost-efficiency. It can streamline processes to help identify waste factors, such as wasted time or surplus resources, enabling you to cut back in key areas and improve the cost-effectiveness of the operation.
For example, many firms spend a lot of money in advertising without controlling the impact in sales. Or they use specific providers in raw materials without checking or receiving offers from the global market.
In that case cost accounting will provide you the necessary feedback in order to manage your expenses efficiently.
For example, in our previous example, using Omega-3, if the cost of advertising is increasing from £386.000,00 to £450.000,00 without any impact in the level of sales then the cost value of the product will increase from £3.23 to £3.30 which is approximately a 2.2% percentage change delivered to customer.
Cost Accounting Can Inform Better Decision Making
How does cost accounting methods reflects on decision making?
An experienced cost accountant can use different techniques of cost accounting to create an indispensable financial tool that helps decision making in a nutraceuticals business. For example, to adjust the price of product, to reduce the cost of the product and to increase overall profitability of the business.
The most commonly known tools of cost accounting for successful decision making are the following:
Cost Sheet is a very helpful tool to find the cost of each product unit. By comparing it with the previous years’ cost sheet or previous month’s cost sheet, senior management can take valuable decisions that can help reduce the cost of their products. If your costs are increasing, which has been shown in cost sheet, then you can identify where your company is wasting money. Also, the cost sheet helps you reduce wastage by using quantity product techniques, by dropping cost-eating production processes and also standardization of raw materials.
An example of cost sheet is the table above which provides information of every cost center (such as advertising, labor cost, energy etc.) in order to have a detailed financial plan not only for the cost of productivity but also for promotion, distribution and logistics.
Labor Cost Reports
Labor cost reports helps you reduce labor turnover and idle time cost. For example, if your production is season-depended, then perhaps in the off-season your production falls to zero, resulting in having labor costs that simply do not produce anything.
This can be calculated from a statement of time utilization for each worker and you decide whether it would be worthwhile to transfer some workers to busier departments, utilizing human resources more effectively.
A detailed example of labor cost report is the following table:
As we can see we have six categories of employees based on their level of salary. The human resources director should provide a detailed statement, such as the above, every year to the cost accountant in order to be able to estimate the total labor cost in the total report.
Overhead Utilization Reports
These reports are helpful to let the organisation pay only the necessary expenses. They also help you calculate the correct cost of overhead and to control indirect expenses of your business, whether you are a supplements manufacturer or a vitamins retailer.
Cost Accounting Can Guide Pricing
How can cost accounting influence pricing?
The pricing strategy has a direct impact on the level of sales as if you are not able to effectively and competitively price your supplements against your competitors, you will either see a drop in sales or operate on thin margins, leaving no room for error.
Cost accounting captures financial and non-financial data to produce accurate inventory costs. The management can use this information to help set competitive and profitable product prices. Good cost accounting provides necessary information, such as the break-even selling price of your products and how product costs change as volume increases or decreases.
Taking again the previous table as an example, if a nutraceuticals manufacturing firm offers CoQ10 at £3.80 per bottle and its competitors price it at £ 3.20 then obviously, unless they have better and more effective marketing, they will experience a drop in sales. To avoid the drop, management should review its cost accounting schedule and check which of the financial figures creates this gap of approximately 15%.
How can you estimate the efficiency level of each department at your nutraceuticals business?
Simply put, cost accounting assess the costs associated with all aspects of the business. You can use cost accounting to develop targets for each department, as well as periodic milestones. This will improve financial accountability, providing each department with the blueprint they need to remain within their budget.
Constantine Tsatalbas is a financial advisor and currently serves as CFO for Centis Digital. With an extensive 15 years experience in major banks like Barclays, he is responsible of making the numbers make sense.
Interested in learning more about cost accounting, budgeting and financial services for nutraceuticals? Centis Digital is the only marketing agency globally that offers these services to the nutraceuticals industry. Contact us to schedule a free, strategy session here.
We offer digital marketing specifically for the nutraceuticals industry. Unlike any other generic agency, we are highly specialised and we know all the players, the market and how we can best help you achieve your goals.