Questions & Answers
from "On Ice Cream" featured in Dairy Foods magazine
and sourced from "On Ice Cream" technical short courses.

Line Cost Averaging:

Question: What is meant by "line cost averaging"?

Answer: "Line cost averaging" is the method by which cost can be estimated for a product line (e.g., full fat ice cream) with multiple items (i.e., flavors), costs, and production volumes. Since the selling price of each item of a line is normally the same and costs of each differ, some type of "average" cost is useful. Actual costs at any given time for any given item can be difficult to assess. To calculate the "line cost average", the expected cost of each flavor is determined. This cost includes fixed (costs that apply no matter what volume is produced) and variable (costs that change with production volume) costs. This calculated cost is then multiplied by the actual, or expected, volume of the specific flavor. All such calculated costs are added and divided by the total actual, or expected, volume. This determines the "line cost average." "Line cost averaging" can help set sales and volume expectations, aid the development of new product lines, and calculate return on invested capital. For product development, the "line cost average" sets limits so that any new flavor does not negatively change overall pricing strategies. Comparing actual costs to the "line cost average" can alert operations to the impact of cost avoidance and reduction opportunities, and when pricing changes might be necessary.