Costing method by division using relative numbers is costing method, or rather approach to costing, under which are indirect costs (overheads) allocated to the product by using a weight factor that is derived from the feature in which the products differ (e.g. size, time necessary for the production, price, quality).
It is used when several types of very similar products differing only in e.g. size or quality are manufactured. The parameters in which the products differ make the weight for overheads allocation.
The calculation is as follows
- Set the criterion in which the products differ (size, price, quality, production time….) and ascertain the value for all products (quality can be based on subjective ranges).
- Sum up all the criterion values over all products.
- Ascertain the allocation % by dividing the value of selected criterion of certain product by the sum of all values.
- Calculate indirect costs per product by multiplying total indirect costs with the allocation %.
The company manufactures 3 products differing only in size: 10, 15 a 25 cm. Total indirect costs are EUR 1 000.
- Selected criterion = size.
- Product no. 1 – 10 cm.
- Product no. 2 – 15 cm.
- Product no. 3 – 25 cm.
- Sum of criterion values over all products = 10 + 15 + 25 = 50
- Allocation %:
- Product no. 1 = 10/(10+15+25) = 20%
- Product no. 2 = 15/(10+15+25) = 30%
- Product no. 3 = 25/(10+15+25) = 50%
- Indirect costs per products:
- Product no. 1 = 20% * 1 000 = EUR 200
- Product no. 2 = 30% * 1 000 = EUR 300
- Product no. 3 = 50% * 1 000 = EUR 500
More about other costing methods and approaches here.