I’m an intern at a small publishing company, and I’ve been tasked with finding out the cost of each product to ultimately create a costing model and to calculate profitability of each product. We have a large number of products, and each product takes some amount of money to initially create (graphics for the cover, paying editorial staff, etc.). This is a one-time cost. Then there are costs to actually print/distribute the books. For example, book 1 costs $20,000 to initially create and costs $10 per unit to manufacture. My question is: how do I allocate (or account for) this initial one-time fixed cost in the final per unit cost of the product? Everything I read online assumes that you know the number of units sold (or will sell) when figuring out the costs per product. However, since we don’t know how much each product/book will sell, I don’t know to figure these initial costs into the costing model. Thanks!
Allocating fixed costs when unsure about how much product will be sold
Answers
In nearly every case you won't actually know the final number of units sold. You'll have to determine a "planned" volume to arrive at the allocation for the model purposes. Fixed costs are typically allocated this way and then trued up quarterly/yearly with actual volumes.
1
Ron - I too work in FPA and I'm having trouble convincing a controller that we need to wait until year end to trueup to actuals. Can you provide any more support, literature, guidance as to why we shouldn't true up every month.
My thought is that many of these 'variances' should wash out over the year and by trueing up you're actually creating more variances to explain month/month.
When must we true up quarterly vs yearly?
Thanks,
Ryan
Therefore, your budget must be built bottom up, i.e. # of budgeted units sold times budgeted sales price per unit = Budgeted Sales.
# of budgeted unit sold times budgeted cost per unit = Cost of Sales.
This way, you can calculate the total Gross profit variance between Budget and Actual, and break it down between "price/cost variances and volume variances.