The main methods of allocating cost to the sales object are direct costing, absorption costing, and ABC costing (Activity-Based Costing).
Other costing methods, such as RKW (Reichkuratorium fur Wirtschaftlichtkeit) and UEP (Production Effort Unit), in addition to being of restricted use, considering their essence, are nothing more than variations of the three previous methods.
Each allocation method has its application and can generate a different result. Hence, the price manager needs to know them.
Direct costing
Direct costing is the method of allocating the spending incurred or to be incurred directly proportional to the good or service that originated it.
In other words, direct costing allocates the cost of the materials and services consumed directly and proportionally to the sale object without using any calculation device. For example, if a product package is a plastic jar that costs $0.05, this amount is allocated to the unit cost of the product.
The direct costing method is the most accurate and, for that, preferable to the others. However, it is only applicable when there is a direct causal link between the portion of expenditure incurred and the product or service generated.
Absorption costing
Absorption costing is the method used to allocate indirect costs and indirect expenses (production overhead and corporate overhead) to the sale object.
To do so, it uses one or a few generic appropriation parameters, such as the revenue generated, quantity produced, quantity sold, and labor or machine hours applied.
This way, when choosing the electrical energy expense of an industrial plant as an indirect cost appropriate to a family of products, absorption costing will allocate it proportionally to one of those generic parameters (for example, the monthly quantity produced) without taking into account the actual consumption in kilowatt-hours (kWh) of each particular item.
ABC costing
ABC costing, in turn, using more specific parameters called cost drivers, approximates the allocation of indirect costs and expenses to the direct costing method.
In this case, it uses one or a few generic appropriation parameters such as the revenue generated, quantity produced, quantity sold, and labor or machine hours applied.
Exemplifying: for the same expenditure with electric energy, ABC costing could apply the driver’s time of each operation, electric power of the equipment, and kWh cost to determine the value to be absorbed by each manufactured item. So, beyond promoting a more precise allocation of the expenditure incurred, its result allows the company to identify the operations that do not add enough value and might be convenient to change or eliminate.
C. L. Eckhard, author of Pricing in Agribusiness: setting and managing prices for better sales margins.
Claudio Luiz Eckhard is a former professor, business consultant, and author of the books “Ajustando o Rumo”[Adjusting the Business Course], “Gestão pela Margem”[Management by Margin], “A Empresa Saudável”[The Healthy Company], and “Pricing no Agribusiness”[Pricing in Agribusiness].
