The product that looks cheapest often isn't.
One standard overhead rate spreads the cost of complexity evenly across everything you make. The long, simple run carries cost it never caused; the short, fiddly special escapes the setups, changeovers and scrap it actually drives. We rebuild product cost with TDABC, so the SKU that looks cheap on the standard sheet stops hiding the work it really takes, and mix and pricing rest on real numbers.
Cost and Profitability Consulting · 150+ models since 2010 · TDABC
A standard rate smears complexity.
Standard costing spreads overhead by a single volume measure, usually labour or machine hours. That tells the truth only when every product causes work in proportion to its volume, which on a real shop floor almost nothing does. A high-volume line that runs for days on one setup absorbs cost as if it were as disruptive as the low-volume special that needs a fresh setup, a changeover and a quality check for a handful of units.
So the workhorse looks expensive and the special looks cheap, and both numbers are wrong in the same direction. Sales discounts the line that quietly funds the plant and chases the orders that drain it. Because the distortion is baked into the standard cost, nobody in the room can see it happening.
STANDARD RATE VS TRUE COST
Illustrative. A standard rate reports both SKUs as profitable. Once setup, changeover and scrap are attributed, the short, complex run flips into loss while the long, simple run earns more than the sheet shows.
Two SKUs, same price, opposite truth.
Identical on the standard sheet
Two SKUs sell 100,000 units a year at the same price and almost the same standard margin. On the costing report they are equals, and the special is often the one sales is told to push.
Different on the floor
SKU A runs in long batches: 12 setups a year, little scrap. SKU B runs in short, urgent batches: 140 setups, frequent changeovers, a 6% scrap rate and regular expediting.
True cost tells them apart
Trace setup, changeover, quality and scrap to the work each one causes and SKU A nets +24%. SKU B, the apparent twin, lands at −13%, funded by the line it was supposed to beat.
The fix is rarely "drop it"
Re-batch B into fewer, longer runs, reprice the urgency, or set a minimum order. The volume can stay. The loss does not have to, once you can see it.
On the sheet, twins. In the model, one funds the other.
| SKU A | SKU B | |
|---|---|---|
| Annual units | 100,000 | 100,000 |
| Price per unit | €4.20 | €4.20 |
| Standard margin | +19% | +21% |
| Setups / year | 12 | 140 |
| Scrap rate | 1.1% | 6.0% |
| True margin (TDABC) | +24% | −13% |
B is probably in line for a volume discount at the next review. A product cost model puts its real margin on the table before that decision, not in the post-mortem a year later.
EVERY SKU, BY SIZE AND TRUE MARGIN
Illustrative. Plot the whole portfolio by volume and true margin and the loss-makers a single rate kept hidden separate clearly from the SKUs that carry the plant.
Cost lands on the work, not the average.
Map the production activities
Setup, run, changeover, quality, scrap, material handling and expediting: the work overhead actually pays for, named and timed.
Cost each one per minute
TDABC attaches a cost per minute from practical capacity, so unused capacity shows up as unused capacity instead of inflating the rate on everything you make.
Attribute to the SKU
Each product carries the real cost of how it is made: batch size, complexity and changeover frequency, not just the units that left the line.
Rank, then act
SKUs sort by true margin. The losers become candidates to reprice, re-engineer, re-batch or retire, with the number behind each call.
Better mix decisions, and defensible ones.
Manufacturers who price and plan on true cost stop chasing volume that does not pay and stop discounting the products that quietly carry the plant. The same model feeds the quote desk, so every tender goes out grounded in real cost rather than a standard rate that flatters complexity.
The model is built on your data and handed over, so the costing stays current as your mix changes.
Frequently asked questions
- Why is standard costing a problem in manufacturing?
- A single volume-based overhead rate ignores setups, short runs, changeovers and scrap, so it over-costs simple high-volume products and under-costs complex low-volume ones. Pricing and mix decisions taken on those numbers erode margin without anyone seeing why.
- How does TDABC apply to a factory?
- It times each production activity (setup, run, changeover, quality, scrap, handling) and costs it per minute of practical capacity, then attributes it to the SKU that consumed it. It captures the cost of complexity that a standard rate averages away.
- What share of SKUs are usually margin-negative?
- Across most discrete and process manufacturers we model, 15 to 25 percent of SKUs turn out to be margin-negative once overhead is traced by real consumption rather than volume.
- Will this work with our existing ERP?
- Yes. We build the model on the cost and production data you already hold, in the formats your systems export. No new system and no lengthy data-collection project are required.
Find out which SKUs quietly carry the plant.
The Profit Check takes five minutes and no data upload. It tells you where the distortion in your product cost is likely to be, and what it is worth to correct.
