Costs: what is it and how to do it in a simple way?

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Costs: what is it and how to do it in a simple way?
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O apportionment of costs is a method for separate costs, either in the pricing or in the management of the company, according to the elements that participated in it. This usually involves production processes, cost centers, and projects, but it is not limited to these spheres alone.

You, for example, can share costs for a trip with friends, and the criteria can always vary according to what the parties agreed to be the most representative of what happened.

See also: Quick Pricing Guide

Why Rate Costs?

Taking the personal example, I think that no one has doubt, the costs are apportioned to be fair. Already in the business scope, which is the focus of this post, apportionment is vitally important as it allows a more accurate analysis of results.

Let's look at a simple example: In your company, there are two sales teams. One with 5 people and another with 10 people. Throughout the year, each team sold R $ 100.000,00. Which was better? Of course, given that wages are all the same, the staff with 5 people sold double per head. If you put the whole cost into "sales," you would not know that one team performs much better than the other.

Of course, this also has ramifications for the overall costs of your business and also for your pricing. Finally, the apportionment has two main roles: justice in the division of spending and greater visibility of results.

Apportionment is Different from Sort

It is important to clarify that the apportionment of costs is different from management plan of accounts. While the chart of accounts simply aims to say that that financial outflow was for the payment of rent or a salary, the cost apportionment will try to say, for example, how much each area of ​​the business is contributing to the rent.

What is Cost Accounting?

Cost accounting is the area of ​​accounting focused on ascertaining the costs typically involved in the production of products or services. The first point to understand cost accounting is to master the general concepts.

We have a complete and thorough post on cost accounting, so here we will only quickly exemplify each concept.

Fixed Costs: Those that matter regardless of their production and sale. Typically, including rent and salary.

Variable costs: Those that charge according to their production and sale. We usually have raw materials, taxes, commission.

Direct Costs: Those that affect only one production line.

Indirect costs: Those that affect more than one production line and need to be correctly prorated.

That is, of these 4 types of costs, there are two that really are "target" of the apportionment of costs: fixed and indirect. Fixed assets are usually used in more managerial apportions, as the example of the sales team, since the indirect ones are linked specifically to the pricing.

Methods for Charge of Costs

The methods or criteria for cost sharing are many and can not be defined simply in a post because they will depend on the unique activity of each company and also the priority of visualizing the data at the moment. However, there are some more traditional methods used.

Absorption Rate: This is probably the most commonly used method because it simply divides costs equally by the items analyzed. That is, it is the most intuitive of all.

Apportionment by Headcount: This is a variation of absorption costing, but focused on the number of team members. Typically involved with project management and consulting.

Assessment by Activity: Here things start to get more comprehensive and complex. In this type of division, you will really try to gauge the use of a certain cost to make the separation. For example, how much each production line uses one machine per month.

Billing Assessment: Another very common way is to use billing as a criterion for dividing costs. Let's say you have two products A and B. If A invoices double B, it will also be responsible for double costs.

Cost Estimating Examples

Legal, theory and application are already clear. Now, let's go to check out some typical examples of using cost sharing.

Multiple Branch Management

A first classical case of the use of apportionment is when a company owns parent and several affiliates. The items included in the apportionment will vary according to the structure of the operation, such as purchasing and hiring policies. However, there are always services that need to be divided up, such as the salary of a director who works coordinating affiliates, accounting services, lawyers and others.

Consulting Projects

It is very common in consulting firms that one consultant works on more than one project at a time. Of course, this affects in the profitability analysis of projects, because the man-hour consultant is the highest cost of all. In such cases, when possible, one can do a timesheet to record in detail the hours spent on each project. Otherwise, you can also make a simple division of your salary divided by the projects you are involved in.

Cost-Based Pricing

The deeper application of cost sharing is in the context of pricing, especially in industrial production lines. In these cases, it is precisely the indirect cost that brings the greatest challenge. For example, how much does each product use from which machines? How to separate the salaries of professionals working on both products? Let's see a quick case. Imagine that you have a small industry producing rewinds and screws.

Fixed Costs: In your industry, you have the rent of the shed in the amount of R $ 10.000,00 and salaries that total R $ 20.000,00

Variable costs: For each rebinboca, you spend R $ 0,30 on raw material and for each screw, R $ 1,00.

Direct Costs: The rebinboca is made in a machine that costs R $ 2.00 and the screw costs R $ 5,00 in its machine.

Indirect costs: However, both products go through the same machine to do their finishing. This machine can work 100 hours a month, costing R $ 1.000,00. That is, it costs R $ 10 / hour. For simplicity, let's say the bolt needs double the time to finish. So for each screw, let's say the cost is $ 10, that is, 1 machine time and for every rebinboca, only $ 5.00 (30min usage).

Thus, we arrive at the unit production cost of each piece:

  • Rebinbocas: R $ 0,30 + R $ 2.00 + R $ 5.00 = R $ 7,30 per unit.
  • Screw: R $ 1.00 + R $ 5.00 + R $ 10.00 = R $ 16,00 per unit.

Conclusion

The apportionment of costs can be as simple as a division of the total cost for the items produced, as well as a thorough analysis of the times and movements spent in the production line to discover the unit cost in the cents. Either way, it is a complex method and one that is imperative for correct and accurate decision making. If you are wanting to delve into the subject, do not let us test our cost-sharing worksheet!

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