In this article, we offer you a comprehensive example of Full Cost calculations for marketed Services. To do this, the reciprocal method for allocating Costs applies to auxiliary and primary Analysis Centers.
To learn more about the Direct, Step-down, and Reciprocal Methods, see the article: Distribute Direct and Indirect Costs to Analysis Centers.
EuroTrans Logistics, a fictional road transport company in Europe, offers a range of innovative services supported by its departments: administration, finance, sales, IT, and human resources. With an annual turnover of 500 million euros, EuroTrans Logistics stands out for its operational efficiency and its ability to meet the diverse needs of its customers.
EuroTrans Logistics provides comprehensive and reliable transport and logistics solutions, tailored to the varied needs of its customers across Europe:
Main service that ensures the delivery of various goods throughout Europe with exemplary punctuality and reliability
Specialized in the handling and safe transport of hazardous materials, complying with all European regulations
Offers complete storage and inventory management solutions, enabling fast and efficient distribution
Accelerated delivery service for urgent shipments, guaranteeing very short delivery times
Provides fleet management and preventive maintenance services to optimize the lifespan and performance of vehicles.
EuroTrans Logistics uses a management model focused on cost efficiency and resource optimization. To do this, the company is divided into several analysis centers, each with its initial costs, specific to them and therefore before any allocation:
If you want to know how to identify your Primary and Auxiliary Centers, we recommend consulting: Identify your Primary and Auxiliary Centers from the Value Chain of your organization.
The table below shows in percentage how much each Analysis Center consumes from other Analysis Centers. Here is how to read this table:
Each row represents a consuming analysis center, that is, the center that receives costs from other centers. For example, if we look at the "Administrative" row, it indicates the costs that this center consumes from other centers (for example, 10% of the costs of the Financial Center are consumed by the Administrative Center).
Each column represents a supplying analysis center, that is, the center that allocates part of its costs to other centers. For example, the "Financial" column shows how the costs of the Financial Center are distributed to other centers (for example, 10% of the costs of the Financial Center are allocated to the Administrative Center).
| Analysis Centers | Administrative (%) | Financial (%) | Sales (%) | IT (%) | HR (%) | Maintenance (%) | Transport (%) |
|---|---|---|---|---|---|---|---|
| Administrative | - | 10 | - | 20 | 10 | - | - |
| Financial | 10 | - | - | 25 | 10 | - | - |
| IT | 20 | 25 | - | - | 10 | - | - |
| HR | 10 | 10 | - | 10 | - | - | - |
| Maintenance | 15 | 10 | - | 10 | 10 | - | - |
| Transport (Primary) | 15 | 20 | - | 25 | 40 | 100 | - |
| Sales (Primary) | 30 | 25 | - | 10 | 20 | - | - |
To solve full costs including reciprocal parts, we use mathematical equations for each cost center.
For each Auxiliary Center, we define an equation that includes reciprocal allocations by taking the initial costs and consumption rates:
For each Primary Center, we have:
By solving the System of Equations, we obtain the Full Costs for the Auxiliary Centers:
And for the Primary Centers, the calculations give us:
The first table below shows in percentage the consumption of Primary Analysis Centers by the 5 Services provided to customers. The second table shows the Full Costs of these Services by allocating the Full Costs of the Primary Centers according to their consumption:
| Services | Sales Center (%) | Transport Center (%) |
|---|---|---|
| General Goods Transport | 30 | 50 |
| Hazardous Materials Transport | 10 | 10 |
| Logistics and Warehousing | 20 | 10 |
| Express Transport | 20 | 20 |
| Fleet Management and Maintenance | 20 | 10 |
| Services | Full Cost |
|---|---|
| General Goods Transport | 250.07 million € |
| Hazardous Materials Transport | 51.13 million € |
| Logistics and Warehousing | 73.76 million € |
| Express Transport | 102.27 million € |
| Fleet Management and Maintenance | 73.76 million € |
With only 7 Centers, these calculations are already complex, time-consuming, and error-prone: imagine modeling 50 centers and 200 services!
With Easy Orga, you no longer have to do any calculations, everything is simpler: create a model, add the centers and services, establish the relationships, consume the centers and add the initial costs... And that's it! You can then view and analyze the Consumption and Full Costs
