Costing

What it means

Costing assigns costs to a unit of output: a product, a job, an hour of work or a single processed document. Direct costs attach straight away; indirect ones follow a chosen allocation base.

Choosing that base is a management decision and it changes the answer. The same company can show the same job as profitable or loss-making depending on how overheads are spread.

There is the preliminary costing, done before the quote from planned quantities and feeding pricing, and the final costing after completion from actual costs. Only comparing the two shows whether the error lay in the estimate of the work involved or in the prices of inputs.

How it works in practice

The practical minimum is the contribution margin: price less variable costs. It needs no overhead allocation and is enough for pricing decisions.

The data is in the books if costs are tracked by cost centre or job. Without that, costing lives in a spreadsheet and drifts away from reality over the year.

A construction or trade s. r. o. often knows what it earned in the year but not on which jobs. We therefore set up the job as an analytical dimension on costs and revenue, so that when each job closes its result is available without recalculating it by hand in a spreadsheet.

What to watch out for

A costing built on last year’s energy, material and wage prices is dangerous. Refresh it at least annually, or the company sells at prices that were true when someone last did the sums.

A common mistake is leaving out the owner’s own work. A sole trader who does not cost in their own hour compares prices with firms that must pay wages and contributions, and the calculated profit is really their unpaid wage. Depreciation of machines and vehicles gets forgotten the same way.