4.2 Calculation & Pricing

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 + material overheads= total material costs
2. calculate production costs or also creation costs	+ direct production costs+ production overheads + special production costs + total production costs= production costs (= material costs + manufacturing costs)
3. calculate overheads	+ administrative overheads (overhead) + sales overheads (marketing) + other special direct costs+ total administrative + sales overheads = Cost of goods sold (= manufacturing costs + (administrative and/or sales overheads)) (V+V)
4. calculate profit and surcharges	+ profit surcharge (17 %)    Cash selling price+ discount (x= 3%) + agent commission = target sales price 100% + discount (z= 10%) = list sales price (= net offer price) + sales tax (19%) = Gross sales price (= Gross offer 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.

 

(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

 

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

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.