The owner of a 120-person plastic components manufacturer told me, with real confidence, that his margins were healthy at around 22%. Two weeks later the costing review showed that 34% of his active products were selling below full cost, and 12% were below the raw material price.
He wasn’t lying. He was reading a report built on numbers that hadn’t been true since 2019.
The quote that hadn’t moved in four years
We pulled every active product and compared the standard cost in the system against what the last six months of production actually consumed.
For 61 of about 900 SKUs, the gap was over 15%. Those were mostly small, awkward parts — the ones nobody wanted to quote, so they’d been priced years ago using an old material cost and a scrap rate of 2%, when the real rate was closer to 11%.
Nothing about this is unusual. Resin prices moved, machine speed assumptions drifted, and the products that get the least attention are the ones quietly bleeding.
Standard cost versus actual: the gap that hides in plain sight
Most plants track material variance closely and treat labor and overhead as a rounding exercise. That’s backwards in a business with high setup times.
On a part with a 45-minute changeover and a 6-minute cycle, setup is a bigger cost driver than the resin. If your standard cost assumes setup is absorbed across the batch, and you actually run batches of 200 instead of 2,000, the true cost of that part is roughly 40% higher than the system says.
Batch sizes shrink, but standard costs don’t follow. That’s where the money hides.
A three-step costing reset you can do this quarter
- Pick the 50 SKUs with the highest revenue and the 50 with the highest volume. Ignore the rest for now — that’s 10% of the file and most of the money.
- For each, pull actual material consumption and actual machine hours from the last 12 months, then rebuild the cost from scratch on one spreadsheet. No system changes yet.
- Sort by margin and look at the bottom 10. Ask one question per part: raise the price, change the batch size, or stop selling it?
What they did about the losers
They discontinued 41 products — 4% of the file. Those parts had consumed 15% of machine capacity and generated a combined margin of almost nothing. Freeing that capacity let them bring in two new accounts without buying a machine.
Another 28 got a price increase of 6% to 12%, and 19 of those held. Two customers left. The revenue lost was $340,000; the margin gained was $410,000. That’s the kind of trade a lot of owners can’t bring themselves to make until they see it on one page.
If you’re bringing in ERP Consulting to work on profitability, insist that the first deliverable is a rebuilt cost for your top 50 parts — not a dashboard. Dashboards built on wrong costs just make the wrong answer look credible.
This week, pick your five lowest-margin products and rebuild the cost from actual consumption. You’ll either find a pricing decision you’ve been avoiding or a process assumption that’s costing you real money. Both are worth the afternoon.