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Shares under two drivers side by side, the driver with a causal link to the cost, how far a share moves on that choice alone, and a job costed by its driver rate.
Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.
You will share one cost under two different drivers, test which driver actually makes the cost bigger, and measure how far a product's share moves on the choice of driver alone. You will also turn the chosen driver into a rate and cost a single job by what it uses.
You can spread a pool of overhead equally over every unit sold and add the shares back to the bill. Equal shares are a choice too, and often a poor one: a coffee and a toasted sandwich do not use the kitchen equally, and a wedding cake and a tray of cupcakes do not use the oven equally. This lesson chooses the rule a cost is shared by, and then uses the same rule to cost a single job by what it actually uses.
| Term | What it means |
|---|---|
| Driver | The quantity a shared cost is divided by: floor area, oven hours, kilometers, invoices. |
| Causal link | Using more of the driver makes the cost bigger. |
| Driver rate | The cost divided by the total of its driver: the cost of one unit of the driver. |
| Cross-subsidy | One part of a business quietly carrying a cost another part causes. |
| Activity-based costing | Costing each product by the activities it uses, each at its own driver rate. |
Corner Bean's electricity bill is 1200 dollars a month, to be shared between the kitchen and the counter. By floor area the kitchen has 40 square meters of 100 and carries 480. By the hours the equipment runs, the kitchen's ovens and grill run 150 hours to the counter's 50, and the kitchen carries 900.
$$\text{share} = \text{cost} \times \frac{\text{this part's amount of the driver}}{\text{both parts' amounts}}$$
Same bill, same café, and 420 dollars moves from one side to the other on the choice of driver alone. Which is right? Ask the test question: if the kitchen used twice as much of the driver, would the bill go up? Double the kitchen's floor area with the ovens off and the meter barely moves. Double the hours the ovens run and it moves a great deal. The meter turns when equipment runs, so hours are the driver with a causal link, and 900 is the kitchen's share.
Get the driver wrong and the costing sheet tells a false story. By floor area the kitchen's toasties look cheap to make and the counter's coffees look dear; the counter is paying for power the kitchen burns. That cross-subsidy can lead an owner to push the wrong product or raise the wrong price.
Another way: steps
Another way: table
Two drivers for Corner Bean's 1200 dollar electricity bill.
| Driver | Kitchen uses | Counter uses | Kitchen's share | Counter's share |
|---|---|---|---|---|
| Floor area, square meters | 40 | 60 | 480 | 720 |
| Equipment hours | 150 | 50 | 900 | 300 |
Each row adds to 1200. Only the second row follows the meter.
Read the bill for what it charges. A gas bill counts units burned, a lease counts square meters, a card processor takes a percentage of each sale, a courier charges by the drop or the kilometer. What the supplier counts is usually the driver.
Apply the doubling test. If one part of the business used twice as much of the candidate driver, and nothing else changed, would the bill be bigger? Keep the driver that passes.
Measure the driver for each part. Oven hours from a log, floor area from a plan, kilometers from a mileage book. A rough measure of the right driver is better than an exact measure of the wrong one.
Divide and multiply. The cost over the driver's total is the rate; the rate times each part's amount is its share.
Check that the shares add back to the bill. Then check the result against common sense: the part that runs the ovens all day should carry most of the gas. A share that looks wrong on sight usually means a driver was measured for one month and the cost for another, or a part of the business was left out of the driver's total.
Most shared costs have one obvious driver: the landlord charges by the square meter, the fuel goes with the kilometers. Some have two partial ones. A receptionist's time goes on bookings and on the phone; a van's cost is partly distance and partly the number of stops. Then choose the driver that explains most of the cost, say so on the sheet, and do not pretend the answer is exact to the cent.
What never counts as a reason: that a product can afford it, that revenue is easy to look up, or that the result makes a favorite line look good. A driver chosen for its answer is not a driver; it is the answer wearing a disguise.
Once a cost has a driver, it has a rate: the cost of one unit of the driver. Corner Bean's electricity, shared by equipment hours, costs 1200 ÷ 200 = 6 dollars an hour. That rate can cost a single job as easily as a whole department. A catering order that keeps the ovens on for four extra hours carries 24 dollars of electricity; a coffee order that uses none of the kitchen carries none.
Doing this for several shared costs at once — gas by oven hours, rent by floor area, the van by kilometers, the bookkeeper by invoices — and adding each job's shares together is called activity-based costing. It takes more measuring than one equal share per unit, and it usually changes which products look profitable: simple, high-volume products often turn out to have been carrying costs that complex, low-volume ones cause.
For a small business, the useful version is modest: find the two or three largest shared costs, give each its driver, and cost the products that use them most unevenly by their rates. The rest can stay on a simple equal share without changing any decision.
A driver chosen once is not chosen for ever. Businesses change what they do, and a driver that followed a cost well last year can drift away from it.
The way the supplier charges can change. An electricity tariff that adds a large demand charge for the busiest half-hour makes the peak load, not the total hours, the thing that drives part of the bill. A card processor that moves from a percentage to a flat fee per payment makes the number of payments the driver instead of their value.
The mix of work can change. A bakery that starts making more sourdough, which needs long, slow oven time, and fewer quick batches of rolls, may find that oven hours still drive the gas but that the shop's share has swung sharply toward the wholesale round.
A new activity can appear. A café that starts delivering has a new cost — the rider, the bags, the app's commission — that none of its existing drivers follows, and it needs a driver of its own, usually the number of deliveries.
Reviewing the drivers once a year takes an hour: read each large shared bill again for what it charges, repeat the doubling test, and measure each driver afresh for a typical month. Where a driver has drifted, change it, and note on the costing sheet when and why, so that a product that suddenly looks more or less profitable can be traced to the change in the rule and not mistaken for a change in the business.
A print shop does two kinds of work: short runs of business cards and leaflets, and long runs of brochures for a few large clients. Its accountant has always shared the shop's 6,000 dollars a month of press running costs — power, maintenance, the service contract — by revenue. Long runs bring in 70 percent of revenue, so they carry 4,200, and short runs 1,800.
The owner suspects this is wrong. Most of the press's wear comes from setting up — changing plates and inks, running test sheets — and every short run needs a full set-up however few copies it prints. She logs a month: 180 set-ups for short runs and 20 for long runs, and 60 press hours for short runs against 140 for long runs.
The service engineer confirms that set-ups drive about half the running cost and press hours the other half. So she splits the 6,000 into two pools of 3,000. By set-ups, short runs carry 3,000 × 180 ÷ 200 = 2,700 and long runs 300. By press hours, short runs carry 3,000 × 60 ÷ 200 = 900 and long runs 2,100. In all, short runs carry 3,600 and long runs 2,400 — the reverse of the revenue split.
The short runs had been quietly subsidized by the brochure clients. She adds a set-up charge of 15 dollars to every short-run order, which customers accept without complaint, and prices the next brochure contract more keenly to win it back from a competitor.
Manufacturers adopted activity-based costing when they found that products made in small batches, with many set-ups and special orders, were being undercosted by rules that shared overheads by labor hours or revenue. The method is the one in this lesson on a larger scale: many pools, each with its own driver and rate, and each product costed by the activities it actually uses.
The biggest product should carry the most. Only if it uses the most of whatever drives the cost.
Sharing by revenue is always fair. Revenue drives card fees and little else; a high-priced item does not use more rent.
An equal split is neutral. It is a driver too — the number of parts — and rarely the one the cost follows.
Changing the driver changes the cost. The bill is the same. Only who appears to carry it moves.
A driver has to be measured exactly. A rough measure of the right driver beats an exact measure of the wrong one.
A driver chosen once is right for ever. Tariffs, the mix of work and the activities themselves change; review the drivers once a year and note any change on the costing sheet, so that a product's new share is not mistaken for a change in the product.
List the figures: 600 a month; market 400 km and 30 drops, restaurants 800 km and 10 drops.
$400 + 800 = 1200 \text{ km}; \quad 30 + 10 = 40 \text{ drops}$
Two candidate drivers.
Apply the doubling test.
$\text{twice the kilometers} \Rightarrow \text{twice the fuel}$
More drops on the same route barely change the fuel.
Find the rate per kilometer.
$600 \div 1200 = 0.50$
Distance is the driver.
Share by kilometers.
$0.50 \times 800 = 400; \quad 0.50 \times 400 = 200$
Restaurants carry 400, the market 200.
See how far the wrong driver would move the market's share.
$600 \times 30 \div 40 = 450$
By drops the market would carry 450 and look far worse than it is.
Share by floor area: kitchen 40 of 100 square meters.
$1200 \times 40 \div 100 = 480$
The kitchen's share by space.
Share by equipment hours: kitchen 150 of 200.
$1200 \times 150 \div 200 = 900$
The kitchen's share by use.
Find how far the choice moves the share.
$900 - 480 = 420$
The bill has not changed.
Apply the doubling test.
$\text{the meter turns when equipment runs}$
Hours pass; floor area does not.
Find the rate per equipment hour.
$1200 \div 200 = 6$
Six dollars an hour.
Cost a catering order using four oven hours.
$6 \times 4 = 24$
The order carries the electricity it causes.
Note the rent and the two parts.
$900 \text{ a month: bench and counter}$
The shop's rent.
Measure floor area: bench 30, counter 60 square meters.
$30 + 60 = 90$
The landlord charges by the square meter.
Find the rate per square meter.
$900 \div 90 = 10$
Ten dollars a square meter a month.
Share by floor area.
$10 \times 30 = 300; \quad 10 \times 60 = 600$
Bench 300, counter 600.
Check the tempting driver: staff, bench 2 and counter 1.
$900 \times 2 \div 3 = 600$
By staff the bench would carry 600.
Apply the doubling test to staff.
$\text{a second technician does not raise the rent}$
Staff fail the test.
Say what the wrong driver would have done.
$600 - 300 = 300$
The bench would have looked 300 a month worse, and the counter 300 better.
Add the floor areas.
$30 + 60 = 90$
The driver's total.
Find the rate per square meter.
$900 \div 90 = 10$
The rent over the area.
Share by floor area.
Long Row Gardens shares $600$ dollars a month for the van's fuel and wear between market runs and restaurant deliveries. By kilometres driven, they use $400$ and $800$. By number of drops, they use $30$ and $10$. Fill in each part's share in dollars under each driver.
| Share for market runs | Share for restaurant deliveries | |
|---|---|---|
| By kilometres driven | ||
| By number of drops |
Complete the worked solution: a bakery's gas bill of $860$ dollars is shared by oven hours between its shop and its wholesale round. The shop's baking runs the ovens $96$ hours a month and the wholesale round's $119$. What does each part carry?
Add the oven hours.
$96 + 119 =$ t
The driver's total for the month.
Divide the bill by the hours.
$860 \div (\text{hours}) =$ h
The rate for one oven hour.
Find the shop's share.
$(\text{rate}) \times 96 =$ s
The rate times the shop's hours.
Find the wholesale round's share.
$(\text{rate}) \times 119 =$ w
The rate times its hours.
Check that the shares add back to the bill.
$(\text{shop}) + (\text{wholesale}) = 860$
A driver divides the bill; it does not change it.
Corner Bean has to share the card processing fees between counter sales and the catering account. The two candidates are number of transactions and value of sales in dollars. Which should it share the cost by?
Long Row Gardens pays $600$ dollars a month for the van's fuel and wear. By kilometres driven, market runs and restaurant deliveries use $400$ and $800$; by number of drops, $30$ and $10$. By how many dollars does the share for market runs change if the owner switches from one driver to the other?
Answer:
A bakery with a shop and a wholesale round shares five costs between them. Match each cost to the driver it should be shared by.
| Hours the ovens run for each part | Floor area each part occupies | Kilometers driven for each part | Value of card sales in each part | Invoices raised by each part | |
|---|---|---|---|---|---|
| Gas for the ovens | |||||
| Rent on the premises | |||||
| Fuel and tires for the delivery van | |||||
| Card fees charged as a percentage of each sale | |||||
| A bookkeeper paid for each invoice processed |
A cake maker's oven gas costs $910$ dollars a month, and the ovens run $182$ hours in the month. A three-tier wedding cake takes $7$ oven hours to bake. Sharing the gas by oven hours, how many dollars of it should the wedding cake carry?
Answer:
A physiotherapy clinic pays its receptionist $3924$ dollars a month. Most of the receptionist's day goes on booking appointments: $104$ home visits and $223$ clinic sessions a month. Sharing the cost by appointments booked, fill in the rate per booking, what each service carries, and the check.
| Amount | |
|---|---|
| Rate per booking, dollars | |
| Home visits carry | |
| Clinic sessions carry | |
| The two together |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
Corner Bean must share $1200$ dollars a month for the electricity bill between the kitchen and the counter. By floor area in square meters, they use $40$ and $60$; by hours the equipment runs, $150$ and $50$. Choose the driver the cost actually follows, and mark the share for the kitchen on the line, which runs from nothing to the whole cost in dollars.
0 |——————————| 1200
Mark the position with a cross, then write the value:
You can share a cost by a driver, defend the driver by what makes the bill bigger, and cost a job at the driver rate. Tell someone why an equal split is a driver too. Next: the economics of a single unit — price, variable cost and contribution.
15. Your turn: rent of 900 shared by floor area, 30 and 60 square meters, step 3
$10 \times 30 = 300; \quad 10 \times 60 = 600$
The two shares add back to 900.