Chapter 13 Attribution/Allocation of Costs

Chapter 13 deals with direct versus indirect costs; the allocation of all costs. The issue: what is the cost price? After this chapter you should know which cost prices are indeed true and which are not really true (when certain costs are reliable and when not). What you want to know, measure! One can distinguish between direct and indirect costs. DIRECT COSTS: Documented costs associated with a certain product. These can be fixed costs as well as variable costs and all those costs can and must immediately be included in the (standard) cost price of that particular product. INDIRECT COSTS: Not (yet) belonging to a certain product. In the latter case there are two possibilities: 1. Yet to make special costs associated with a certain product; then to include in the cost price of that product. 2. NOT attributable to a specific product: GENERAL COSTS. The general costs must finally be contested from the raw profit (the margin between the sales price and the then incomplete cost price).

In earlier times there were usually few or no problems here. Most costs were usually to made for particular products. This means that the integral cost price was well known, and we have seen in paragraph 8.1 how important this is in view of the sales price. The general costs remained limited and they could be deducted from the (raw) profit without any problem; after all, it was only a small amount. Nowadays, however, the indirect costs often rise very high. They are often a multiple of direct costs. In retrospect, not just like that to settle anymore. Very high general costs make it possible that raw profits disappear as snow in the sun. Worse still, the integral (sic) cost prices to be determined are only a fraction of the real cost prices, which, for the most part, remain unknown. It is therefore important to allocate everything that is possible, as much as can be done.

In practice it is often a straight fight. Between the department heads. Who gets what to pay? From the cost of the expensive car of the director. Or between the division managements, who is contributing which part of the costs of the head office? About the best method in theory: If the allocation keys are good, then the production centre method is an excellent method. Activity Based Costing plus a tailored budgeting is acceptably better than a departmental approach. Activity Based Costing revolves around a logical classification of activities, a clever set-up of lists (as detailed as is useful), pieces of paper on which the costs must be noted down. Activity Based Costing underlines the importance of these lists, but does not bring any news in theory. ABC is old wine in new bags.

In the past it was quite a hassle to measure and especially to record the measurement data. It meant high additional indirect costs. The medicine being worse than the disease. But nowadays? Once money is spent somewhere, it can be measured and recorded quickly and easily for on what and exactly how much money is spent. Piece of cake. Only a little computer power is needed. MEASURING is KNOWING, GUESSING is MISSING and GAMBLING is PAYING. Read my article https://ceoworld.biz/2021/04/22/indirect-costs-ex-ante-commitment-rather-than-allocating-and-apportioning-ex-post/

This book harshly criticizes out-of-date Business Economics textbooks.

The Profit Formula® i.e. The Way to Easy Profit Measurement (EXACTLY, QUICKLY and EASILY) is 1 of 8 ‘Scientific Perfections’ completely explained in ‘Business Economics VI Groundbreaking’. Schools / Universities ignoring this book, they train students totally wrong in Business Economics.

A self-study book, hardly needing a teacher. Necessary also for many managers in companies to improve their own performance.

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