4.2 Calculation & Pricing
4.2.2 Calculations
There are different methods and areas of application for calculating the costs and price of a service. Calculations in commercial enterprises, in craft or industrial enterprises, in service and consulting companies or those of a freelancer differ significantly from each other.
Costing can take the form of preliminary, intermediate or final costing. As a preliminary costing or quotation costing, it serves to prepare decisions or the acceptance or rejection of projects and orders. Intermediate costing is carried out during the creation of products in order to control the adherence to cost budgets at the same time. In a final costing, the actual costs incurred can be compared to the cost targets. The final costing is a component of controlling.
Costing procedure
Different procedures can be distinguished.
- Full cost accounting
- Overhead calculation, division method, equivalence method
- Industry-specific calculations
Full cost accounting
In full cost accounting, all costs of the enterprise are allocated to the individual products and services. Full costs include all costs incurred in the manufacture of a product or service (full manufacturing costs) or all costs incurred for the products sold in a period (full cost of goods sold).
The calculation of full costs in larger companies is only possible with the help of an allocation of overhead costs, since not all costs incurred in a company have a direct causal relationship with the products manufactured or sold. This results in a fuzziness in the determination of the costs of an individual service. This fuzziness should be included in the decision on the cost price.
If costs and activities can be recorded exactly for each production order, it can be recalculated on an ongoing basis. The choice of the lowest hierarchical level in cost unit accounting (usually the order) determines the possible level of detail of the calculation. Full cost accounting ensures that all costs are covered by the unit price of a quotation.
Example: Full cost accounting
A start-up wants to sell something. His monthly fixed costs amount to:
Monthly fixed costs |
|
|
Entrepreneurial wages |
2.000,00 € |
65% |
+ Share of social security (approx. 25%) |
500,00 € |
16% |
= Total personnel costs |
2.500,00 € |
81% |
+ room costs |
300,00 € |
10% |
+ Overhead costs (general costs) |
300,00 € |
10% |
= Total fixed costs |
3.100,00 € |
100% |
+ variable cost share per order |
Amount x € |
|
= Total costs or full costs |
Sum x € |
|
Table 7: Full cost accounting
If the entrepreneur were to carry out only one order per month, he would have to calculate at least € 3,100 fixed costs for it, plus the variable costs for carrying out the order. If he could do two orders or a multiple thereof, the proportionate fixed costs of each order are reduced by the number of units.
Cost shares per unit of output |
Units |
Fixed costs |
1st order |
1 |
3.100,00 € |
2nd order |
2 |
1.550,00 € |
3rd order |
10 |
310,00 € |
4. order |
50 |
62,00 € |
The variable cost share per unit of output must be added to the fixed cost share. The profit mark-up must not be missing from this, provided it can be achieved on the market.
Example calculation: Break-even
Break-even is the profit threshold. If goods or services are sold, the break-even determines the intersection point from which profit can be made.
Graphical representation
An example from the conference sector:
For conferences, seminars or events, it must be decided with how many customers an event can be carried out to cover costs. Break-even is the point at which the break-even point is reached.
A calculation makes assumptions:
- Turnover: The fee for the conference should be € 250 per day and client plus € 35 for catering and hospitality. This means a total of € 285 per client. While the sales price is fixed, the number of clients who accept the offer is variable.
- Expenses/costs: The fixed costs of holding the conference include: Speaker fees, conference rooms, advertising, administrative costs, costs of running the business including management; these should total € 5,100. These expenses are incurred regardless of the number of participants. The variable costs are dependent on the number of participants, such as catering (35 €) or working materials amounting to 50,- €, which are only claimed if the client actually participates.
The break-even rquestion
is: With how many participants can a seminar calculated in this way break even?
This is shown in the following break-even table. It shows how income and
expenses change in relation to the number of participants. It is only with 22 participants
that the income exceeds the expenses. However, the profit or loss threshold then
rises progressively with each additional participant.
Tabular calculation of the break-even point
Participant |
Remuneration variable Proceeds |
Remuneration variable Proceeds |
Fixed costs |
Variable costs |
Revenue |
Expenditure |
P&L |
|
|
|
250 €/TN |
35 €/TN |
5.100 € |
50 €/ TN |
total |
Total |
€ |
|
|
... 9 |
2250 |
315 |
5100 |
450 |
2565 |
5550 |
-2985 |
|
|
10 |
2500 |
350 |
5100 |
500 |
2850 |
5600 |
-2750 |
|
|
11 |
2750 |
385 |
5100 |
550 |
3135 |
5650 |
-2515 |
|
|
12 |
3000 |
420 |
5100 |
600 |
3420 |
5700 |
-2280 |
|
|
13 |
3250 |
455 |
5100 |
650 |
3705 |
5750 |
-2045 |
|
|
14 |
3500 |
490 |
5100 |
700 |
3990 |
5800 |
-1810 |
|
|
15 |
3750 |
525 |
5100 |
750 |
4275 |
5850 |
-1575 |
|
|
16 |
4000 |
560 |
5100 |
800 |
4560 |
5900 |
-1340 |
|
|
17 |
4250 |
595 |
5100 |
850 |
4845 |
5950 |
-1105 |
|
|
18 |
4500 |
630 |
5100 |
900 |
5130 |
6000 |
-870 |
|
|
19 |
4750 |
665 |
5100 |
950 |
5415 |
6050 |
-635 |
|
|
20 |
5000 |
700 |
5100 |
1000 |
5700 |
6100 |
-400 |
|
|
21 |
5250 |
735 |
5100 |
1050 |
5985 |
6150 |
-165 |
|
|
22 |
5500 |
770 |
5100 |
1100 |
6270 |
6200 |
70 € |
Break-even point |
|
23 |
5750 |
805 |
5100 |
1150 |
6555 |
6250 |
305 |
|
|
24 |
6000 |
840 |
5100 |
1200 |
6840 |
6300 |
540 |
|
|
25 |
6250 |
875 |
5100 |
1250 |
7125 |
6350 |
775 |
|
|
26 |
6500 |
910 |
5100 |
1300 |
7410 |
6400 |
1010 |
|
|
27 |
6750 |
945 |
5100 |
1350 |
7695 |
6450 |
1245 |
|
|
Table 8: Break Even Point
The decision as to whether and under what conditions the event should be held is an entrepreneurial one.
Surcharge calculation
In overhead costing, the unit costs or cost price of a unit of output are calculated. With the help of overhead rates, which can be determined for example in a cost accounting sheet (BAB), an overhead rate is added to the direct costs in order to determine the cost of goods sold by way of a summary or step-by-step procedure.
Overhead calculation I
Scheme
+ |
Direct material costs |
MEK |
+ |
Material overheads |
MGK |
= |
Material costs or cost price |
MK |
+ |
Profit mark-up in % |
G |
= |
Selling price |
VP |
1. calculate material costs |
Direct
material costs |
2. calculate production costs or also creation costs |
+ direct production costs+ |
3. calculate overheads |
+ administrative overheads (overhead) |
4. calculate profit and surcharges |
+ profit surcharge (17 %) Cash
selling price+ |
(cf. cost accounting for start-ups)
Table 9: Surcharge calculation
Overhead calculation II
An example in a company could look as follows: A gross sales price of € 34,652.11 is calculated from € 19,400.00 production costs.
Cost type |
Subsidiary account |
Amount in € |
Direct material costs |
|
10 500 |
+ Material overheads |
500 |
|
=Material costs |
11 000 |
|
+ Direct production costs |
|
6 000 |
+ Production overheads |
400 |
|
+ special costs. Manufacturing |
2 000 |
|
+ Manufacturing costs |
8 400 |
|
= Production costs |
19 400 |
|
+ Administrative overheads |
|
750 |
+ Sales overheads |
1 300 |
|
+ Special direct costs |
380 |
|
+ V u. V* |
2 430 |
|
= Cost price |
21 830 |
|
+ profit surcharge 17 % |
100 % = 21830 |
3 711 |
|
17 % = x |
|
= cash selling price |
x = 3711 |
25 541 |
+ discount 2 % |
100%-3%-2%=95% |
1 344,26 |
+ commission 3 % |
95% = 25 541 |
|
|
5% = x |
|
= Target selling price |
x = 1 344,26 |
26 885,26 |
+ discount 10 % |
100 %-10%=90% |
2 987,25 |
|
90% = 26 885,26 |
|
= List sales price |
10% = x |
|
(net offer) |
x = 2987,25 |
29 872,51 |
+ VAT (19%) |
|
5 675,77 |
= gross sales price |
35 548,28 |
(cf. cost accounting for start-ups)
Table 10: Example: Surcharge calculation
Pre- and post-calculation
In any case, the sales price must first be calculated, that is a preliminary calculation. If it is reviewed after some time, a post-calculation is made. In principle, this applies to all services that a company produces and sells.
In production, pre- and post-calculation is of particular importance because direct material costs and overhead costs cannot yet be determined exactly, especially during the introductory phase. The deviations must be determined and taken into account for future orders.
The following table shows exemplary values that can illustrate deviations.
- For example, the post-calculation shows a cost of goods sold of € 23,230. The difference of € 1,400 to the preliminary costing of € 21,830 represents a cost under-recovery.
Amounts in |
Pre-calculation |
Post-calculation |
Cost recovery |
Direct material costs |
10 500500 |
10 500700 |
|
= Material costs |
11 0006 |
11 |
- |
Production costs |
19 4007501 |
20 6508001 |
+ /- |
Proportionate calculated cost price |
21 830 |
23 230 |
- 1 400 |
(cf. cost accounting for start-ups)
Table 11: Pre- and post-calculation
In simple overhead costing, the total overhead costs of a business are added to the total direct costs for materials and wages and then divided by the sum of the output quantity produced.
In differentiated overhead costing, costs are determined step by step for the areas of materials, production, sales, administration, personnel, etc.
Example: Percentages of an overhead calculation
Cost unit accounting |
|
|
|
Production quantity in pieces |
10,000 piece |
Cost price per piece |
Percentage of cost price |
Production material |
100.000 € |
10 € |
18,5% |
+ Production wages |
200.000 € |
20 € |
37% |
= Total direct costs |
300.000 € |
30 € |
55,5% |
+ Overheads |
240.000 € |
24 € |
44% |
= Cost price |
540.000 € |
54 € |
100 % |
Table 12: Percentages of an overhead calculation
Division procedure
The division method is suitable for calculating unit or direct costs. The method is generally applicable. To determine the cost of a unit, the total cost is divided by the quantity produced.
Example: Simple division calculation
Total cost of production Quantity produced: |
= Production costs |
Equivalence procedure
Equivalence costing is used when a company produces "several similar" products, e.g. bricks, drinks, dairy products, which go through the same production process but differ in shape, size, colour, etc. in the final stage. These differences are tried to be determined with the help of valuation or ratio figures. The unit costs of the different, similar products are determined with the aim of identifying the relationship between them. With the help of the equivalence number, the calculation can be considerably simplified.
Example: Scheme of an equivalence calculation
Variety |
Power quantity |
Ratio = |
Power unit
|
Total costs Euro |
Cost of the |
A |
1250 |
0,8 |
1000 |
1500 |
0,8*1,5 = 1,2 |
B |
2000 |
1,0 |
2000 |
3000 |
1,0*1,5 = 1,5 |
C |
4000 |
1,5 |
6000 |
9000 |
1,5*1,5 = 2,25 |
|
|
|
9000 |
13500 |
|
|
|
|
1 |
1,5 |
|
Table 13: Equivalence calculation
The ratio is calculated by dividing the unit of output by the amount of output: 1000:1250 = 0.8, etc. The unit of output relates to the total cost as 1:1.5 (13,500: 9000= 1.5). Thus, the ratio of the output quantity to the output unit is 0.8 * 1.5 = 1.20 Euros.
In all cases, the business needs information regarding material costs, production costs, manufacturing costs, personnel costs and total cost of goods sold to make decisions.