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
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 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:
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.
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.
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:
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.
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:
Context and application: Bottom-up costing is applied for cost optimization and control.
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:
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.
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.
The following section will provide an overview of the different costing schemes.
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:
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:
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:
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:
Book a free demo today and find out,
how FACTON EPC can optimize your calculation processes.