Costing issues, how to allocate costs to products and services

The issue of costing is a crucial one for many companies. Indeed to have information about your real product and/or customer costs allows you make a number of educated decisions. You will be able to accept or reject the discount wishes of your customers, you will be able to allocate more resources to the products/services generating the highest margin, you will be able to allocate your production resources (labor and machines) appropriately and increase your overall productivity.

In most companies in Western Europe, the allocation of labor and raw materials to specific products and services is not an issue any longer, due partially to the implementation of ERP systems that do support such allocation. The attention has moved to the allocation of the indirect costs (administration, sales, R&D), to the transformation of the majority of the indirect costs in direct ones (ie in costs that can be directly linked with specific products and services). The theory related to this transformation dates back to the 80s and has been further developed under the name of "activity based costing". More recently, a simplified version of activity based costing has been published. Its name: "Time-Driven Activity Based Costing" by Kaplan and Anderson, 2007, Harvard Business School Press. This last model allows company to allocate their costs with more ease than by implementing a full scale "activity based costing model".

In Bulgaria the situation is still quite different. In most of the companies we have been working for during the last 2 years, the attribution of the production costs to specific products and services is in most cases reduced to the attribution of the direct raw material costs and sometimes to the attribution of the direct labor costs. For the later, the production timing for the different production activities is wrong in most cases, so that the cost calculation is wrong too (ie the necessary time for the different activities is shorter than accepted).

Confronted to the professional West European purchasing organisation of its customers, a typical Bulgarian company is in most cases not in a position to justify its production costs or justify why it cannot accept a further discount. It can only accept the deal and risk loosing money or refuse it and lose an order.

As the margins are constantly reducing, due to the pressure of competitive forces and as Bulgarian companies are still active in labor intensive industries, due to their comparatively low labor costs, it is of utmost importance to "at least" attribute the labor cost and raw material directly to the specific products.

Trust & Value Ltd has implemented such models for its customers in Bulgaria.