Why was this page written?

It is important to pass quickly to costs and benefits of products and services. But, it is just not favourable to make a condensed form for this website. Thus, only a few aspects are touched upon. This page was added to pique your interest.  

For details look into the PDF, 'i Business Management - Basics, Indicators and Planning Systems'. You are invited to download it.

The second step in assessing a business is often referred to as 'controlling'. In English, 'controlling' does not mean 'to control', but to steer, to  guide or to manage. 

The following is a chronological list of the key terms:

Analysis:      It covers the past, including many years gone by.
Controlling: It concerns the present, the very recent past, and the very near future.
Planning:     It is directed towards the future and often covers several years.

More and more sensors can be used for production controlling. However, it is a hort-term indicators. Nevertheless, entrepreneurs must look for them. In horticulture, for example, you can compare current sales with those from the same month a year ago, and then adjust your advertising strategy accordingly. The following diagram compares the controlling of heating systems with the controlling of businesses.

The terms “benefits” and “costs” are used in reference to a company's business sectors (or production processes). Intercompany transactions between business sectors are included as internal turnover.

    Benefits = income according to accounting records    + internal turnover generated

    Costs     = expenses according to accounting records + internal turnover consumed

Costs are divided into variable costs and fixed costs. Variable costs are proportional to the volume of production. Fixed costs include depreciation and insurance expenses. Overhead costs, e.g. interest and wage expenses, are sometimes listed separately but are often counted as fixed costs.

     Notice:     Contribution margin = benefits – variable costs

     The total contribution margin serve to cover fixed costs and generate a profit.

It is advantageous to calculate contribution margin in the same way for future developments as for the current situation. So you can compare the current contribution margin and the planned contribution margin. This means that you have to consider cost planning when you are analysing past figures.

In general, calculating partial costs and contribution margins is also central to business planning. Remember the diagram on the 'Home' page. It is taken from the JUP PS programme, which was developed by the author.

Usually, costs are determined using a 'company allocation sheet'.

However, it is often possible to obtain sufficiently accurate costs without an allocation sheet. This is possible in agriculture and in breweries, for example. There individual partial costs are available. For example, if the cost of fertiliser per hectare of potatoes is known, the total fertiliser expenses for the entire farm can be extrapolated. This extrapolation can then be compared or reconciled with the expenses according to the company’s P&L statement for all production processes

Perhaps the second method of cost-benefit analysis is also applicable in your sector of the economy. If so, you will save a lot of time. Instead of taking several days with company allocation sheet, it may only take a few hours with extrapolations.

However, the second approach is actually quite common. For example, if a company wants to establish a new line of business, it will calculate the variable and fixed costs that the expansion will entail, as well as the expected returns. Startups, in particular, will need to perform such calculations.

The following calculation system has one column for partial costs (and contribution margin) and another for full costs. A third column shows the numbers per month. For field production, this third column would show numbers per tonne.

The sequence of costs is often different in the partial and full cost systems, as it is in agriculture. In the first column, the variable costs of machinery appear before the contribution margin line. However, in the second column, the variable costs of machinery are part of the cost of work performed. This kind of double-column system makes it easy to explain the different handling of partial and full costs. The example shows a calculation for stable rentals for a riding horse.

It should be noted that this table with two cost columnes can be used for all agricultural branches. In the case of horse rental, you will not find entries in each positions. For example, under 'veterinarian', you won't find a figure. This is why such costs are paid directly by the horse's owner.

For several years, I converted a colleague's business segment analysis into the standard contribution margin accounting system and, at the same time, into the full-cost accounting system in accordance with the German DLG.

Again, if you are more interested in these subjects, see the file "i Business Management - Basics, Indicators, Examples.pdf".