The efficiency based costing method – using a sawmill as example

Abstract

Purpose: Generally in a factory it is not straight forward to discern the true, individual manufacturing costs. Thus, the necessity arouse for a calculation method that would collect and include relevant technical details along the way of each product. Design/Methodology/Approach: The data received could then get associated with the pertinent book-keeping records. An equation has been developed which combines the technical details of the production process with the relevant accounting data. The method is called Efficiency Based Costing (EBC). Findings: The EBC method, which incorporated essential processing details - such as product recovery, production rate, volume flow velocity through the production line, man-hour input, the physical size of the products, and, of course, overheads – delivered significantly differing manufacturing costs per unit volume for the individual products. Also, the exact value of wastes has been determined. Practical Implications: The efficiency based cost calculation (EBC) is a powerful tool in searching for the true individual processing costs. With the suggested equation it is possible to combine important technical details of the production process with the accounting data. Originality/Value: Using the EBC method, the minimum product selling price at any point of the production process can be computed. Product portfolio decisions and next year´s planning shall rely on more truthful data.