Calculation Scheme: Explanation and Free Excel Template

In our comprehensive guide, you will learn what a costing scheme is and how it is used in retail and industry.

We show you concrete examples of costing schemes and provide you with valuable tips on proven practices.

Download our free Excel template for a costing scheme to begin the costing process now.

TABLE OF CONTENTS

What is a costing scheme?
What elements are included in the costing scheme?
Which types of costing schemes are there?
How is a costing scheme structured?
Costing scheme: Download free template
Costing scheme in the industrial sector: Achieve precision with the right costing software

WHAT IS A COSTING SCHEME?

A costing scheme is a structured overview that enterprises can use to calculate the costs incurred when manufacturing a product or providing a service.

The costing scheme is often integrated into an Excel spreadsheet or software program as a template in which all necessary formulas are embedded. Users then work with Excel or a software solution to go through the costing scheme and calculate the costs.

The most essential facts in brief

The costing scheme is used for cost and/or price calculation.
The scheme shows the various elements that contribute to the total cost of a product.
The costing scheme enables enterprises to set product prices that also account for a profit.
Manufacturers use the costing scheme to determine their products' direct and overhead costs.
In the industrial sector, the scheme calculates the total production costs of a specific component or project.
Forward costing is used in retail.
Reverse costing is most often used in online retail.

WHAT ELEMENTS ARE INCLUDED IN THE COSTING SCHEME?

The costing scheme includes all cost factors that are essential for calculating costs.

FACTON’s costing software, which was specifically developed for the manufacturing industry, predefines the following costs:

Costing scheme in FACTON EPC

The scheme lists these cost items. Additional cost elements (total lines) can be defined as desired.

The total can be calculated variably by totaling the existing values or entering a calculation formula.

The costing scheme makes it easier to clearly document all relevant costs and accurately calculate the costs and/or price. It ensures that no cost elements are overlooked when setting the price.

The most important costs at a glance

Production costs
Production costs include all expenses incurred up to the completion of a product or its storage in the finished goods warehouse, including material and manufacturing costs.
Prime costs
The prime costs in the costing scheme consist of the production costs and the expenses for sales and administration. They include all costs for production and marketing and form the minimum basis for the price.
Sales price
The sales price must exceed the company's original costs to profit.

WHICH TYPES OF COSTING SCHEMES ARE THERE?

In retail, products are purchased and resold, while in automotive production, for instance, complex projects with numerous component parts are realized.

The following explains the differences between retail and industry costing types.

Costing types: Overview

Retail	Industry	Principle
Forward costing This costing type starts with the purchase price and leads to the sales price. It considers additional costs such as logistics or storage costs.	Bottom-up costing This costing type involves a thorough calculation of production costs. It is used for cost optimization and cost control.	Both costing types start with the direct costs and work up to a total value.
Reverse costing This costing type assumes the market price the customer is willing to pay and determines the maximum allowable purchase price.	Top-down costing This costing type sets the maximum target value for products, e.g., for new product developments, and distributes the costs internally.	Both costing methods start with a defined target value and adjust the cost structure accordingly.

Forward costing in retail

Meaning: Forward costing is a method for determining the sales price. It starts with the purchase price and then calculates the final sales price.

Procedure:

Purchase price: The purchase price is determined from the list purchase price after discounts, cash discounts and negotiations have been deducted. The resulting purchase price serves as the basis for the calculation.
Calculation of the prime costs: Further costs are then added, such as procurement costs for transport and handling costs for storage and sale. The sum of these costs results in the prime costs, to which the enterprise adds the desired profit.
Final list sales price: If an entrepreneur wants to reward customers for timely payment, it can factor in cash discounts and discounts to determine the final list sales price.

Context and application: Forward costing is frequently used in quotation calculations when companies already know the costs associated with a product and want to determine the potential sales price before awarding the contract.

This method enables them to ensure costs are covered and a suitable profit is achieved. Forward costing is particularly advantageous when market competition is low as it provides a clear calculation basis for the potential sales price. Furthermore, it allows enterprises to account for their targeted profit percentage regardless of current purchase prices or market conditions.

Bottom-up calculation in the industry

Meaning: Bottom-up costing is based on the minor work units or resources and adds them together to determine the total cost of a project. The project is divided into various processes and sub-processes, and the required hours, material, equipment and overhead costs are estimated for each step.

Procedure:

Identification of components: The first step is to enter all components or activities that are part of a project or production process.
Cost assessment: For each component identified, a thorough cost analysis is conducted. The analysis encompasses material costs, labor costs (from humans and machines), overhead costs and any other direct or indirect costs.
Cost synthesis: After analyzing the costs of the individual components, they are added together to determine the total cost of the project or product.
Continuous adjustment: Cost estimates are continuously adjusted throughout the project to incorporate new information and changes.

Context and application: Bottom-up costing is applied for cost optimization and control.

Bottom-up calculation: A strategic benchmark for cost engineers

Bottom-up costing is the foundation for conducting should-costing analysis. Should Costing examines costs at a granular level and then aggregates all costs to determine the precise “should costs” of a manufactured product. Should costing analysis uses the “bottom-up” methodology because it analyzes a complete list of materials, processes, and service costs for production.

For manufacturers, should costing data combined with detailed information on the manufacturing processes offers numerous advantages:

Strategic sourcing:
Manufacturers can leverage detailed cost information for more targeted procurement of components.
Data-driven negotiations:
The analysis allows negotiations with suppliers to be conducted based on quantitative data and solid manufacturing knowledge, leading to better terms.
Precise cost modeling:
The detailed cost structure allows one to estimate procurement costs for new designs accurately without waiting for quotes from suppliers.
Quick responsiveness:
Bottom-up costing enables enterprises to quickly respond to RFPs regarding potential procurement volumes and promptly obtain, compare and negotiate quotes from suppliers.

Reverse costing in the retail sector

Meaning: Reverse costing works from the selling price. It starts with the price the customer is willing to pay and works backward to determine the maximum allowable purchase price.

Procedure:

First, the planned sales price is determined.
Then the profit and other costs (e.g. overhead costs) are deducted to see how much money is available for production.

Context and application: Reverse costing is recommended for highly competitive environments. It helps enterprises determine the maximum purchase price they are willing to pay for a product while securing their profit. This costing method is aimed at minimizing costs.

Top-down costing in the industrial sector

Meaning: Top-down costing begins with a rough estimate of the total costs of a project or product, which often relies on historical data, industry benchmarks or strategic targets. This estimate serves as a basis for new orders or initiatives.

The costs are allocated to the various parts or departments of a project from this general estimate.

This approach focuses on the big picture and prioritizes speed and simplicity over detailed information.

Context and application: This method can be implemented more quickly than bottom-up costing and is ideal for tight timeframes. It requires less detailed data and analyses, which simplifies the costing process.

Top-down costing is well-suited for strategic targets and can be effectively utilized in higher-level decision-making. It is based on general assumptions and is helpful for initial budgeting.

HOW IS A COSTING SCHEME STRUCTURED?

The following section will provide an overview of the different costing schemes.

Costing scheme in the industrial sector

First, the production costs, including material and manufacturing, are determined. Then, the prime costs are determined by adding the administration and sales costs. Based on this foundation, the sales price can be determined to ensure the enterprise achieves a profit. You can find the corresponding costing scheme here:

Costing scheme in the retail sector

Retail enterprises don’t manufacture their own products. Instead, they purchase merchandise from wholesalers or production companies and resell it. As a result, the costing scheme for the retail sector often works as follows:

Calculation schema in retail (calculation of the gross sales price)

COSTING SCHEME: DOWNLOAD FREE TEMPLATE

COSTING SCHEME IN THE INDUSTRIAL SECTOR: ACHIEVE PRECISION WITH THE RIGHT COSTING SOFTWARE

The manufacturing industry frequently faces huge bills of materials and complex products, resulting in large data volumes and complicated models. Costing often needs to be performed at the Bill of Materials (BOM) level, and many enterprises use Excel to manage their calculations, which can pose additional challenges:

Manual entry and formatting errors: Manual data entry carries a high risk of typos, which can lead to incorrect calculations.
Corrupt formulas: Complex formulas can easily produce inaccurate calculations, especially when changes are made and the affected cells are not updated correctly.
Version control: Multiple versions of Excel files are often not centrally stored. This can lead to confusion and make identifying and using the most current data difficult.
Lack of traceability: Changes to the calculations are often not traceable, which limits transparency and the ability to review adjustments.
Limited collaboration: Excel files can cause problems in collaboration between different departments or team members.

FACTON’s integrated costing software combines all necessary data into a single application, ensuring all employees can access the latest information and work with the same data. FACTON offers you the following advantages:

Highest transparency in product costs across all phases of the life cycle and strategic insights to operate successfully within the supply chain.

From product development to controlling, FACTON EPC standardizes your costing enterprise-wide. Always have access to the latest data and calculations.
Centralized data administration of calculation parameters minimizes errors and makes it easier to understand and trace calculations.

Book a free demo today and find out,
how FACTON EPC can optimize your calculation processes.

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Information about Enterprise Product Costing, software and more.

Calculation Scheme Explained: Everything You Need to Know

WHAT IS A COSTING SCHEME?

WHAT ELEMENTS ARE INCLUDED IN THE COSTING SCHEME?