Ask most SME promoters what their gross margin is and you will get an answer in seconds. Ask what it is on their third-largest product line, and the conversation slows down considerably.
Overheads absorbed by convenience
Factory overheads are commonly allocated as a flat percentage of material cost or of turnover, because that is easy. If one product consumes twice the machine hours per rupee of material, that product is being subsidised by the others, invisibly, every month.
The costs nobody books to a product
- Rework and scrap, often written off as a general expense rather than traced to a line
- Freight on urgent replacement dispatches caused by quality rejections
- Interest on working capital blocked by one customer's ninety-day payment habit
- Sales incentives and discounts settled outside the product costing sheet entirely
Customer-level profitability
The largest customer is often the least profitable one. Longer credit, higher service expectation, deeper discounts and priority dispatches are all real costs that never appear against that customer's name. When they are properly loaded, the ranking frequently reverses.
What a costing system changes
Not the accounting, which continues as before. It changes pricing, discount authority, the product mix the sales team is asked to push, and the decision on which orders to decline. Businesses usually find the recovered margin sitting inside their existing volume, not in new customers.
