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A share of overhead a unit, the full cost it gives, where the pool lands, why dropping a product does not drop its share of the bill, and why the share rises in a quiet month.
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 spread a month's shared overhead over the units sold, work out each product's full cost and its part of the pool, and tell a share worked out on paper from money that actually moves when a product is dropped or an extra order is taken. You will also see why the share rises when fewer units are sold.
You can tell a direct cost, spent for each unit made, from an overhead, paid for being open at all. The last lesson kept only the costs that differ between two options. This one asks what an overhead is doing on a costing sheet at all, when no single unit causes it. The arithmetic is one division; the harder part is holding two true things together — that the share is useful for pricing, and that it is not money any single decision saves or spends.
| Term | What it means |
|---|---|
| Pool | The overhead being shared out: a month's rent, insurance, power. |
| Allocation | Dividing the pool between the units sold by a rule. |
| Share | What the rule gives each unit. |
| Direct cost | A cost spent again for every unit made. |
| Full cost | A unit's direct cost plus its share. |
| Under-recovery | Part of the pool the year's prices failed to cover, because fewer units sold than planned. |
Fixit Mobile pays 2400 dollars a month for rent, insurance and the van. In March it did 120 screen replacements and 80 battery swaps: 200 jobs. The simplest rule gives every job the same share.
$$\text{share a unit} = \frac{\text{pool}}{\text{units sold}} = \frac{2400}{200} = 12$$
A screen with 32 dollars of parts and fees then has a full cost of 44; a battery swap with 18 has a full cost of 30. The screens carry 1440 of the pool and the swaps 960, and 1440 plus 960 is 2400 again.
That last check is the whole idea. The shares always add back to the one payment, because they are that payment cut up on paper. Dan paid 2400 once. He did not pay 12 dollars two hundred times, and a two hundred and first job would not have cost him another 12.
Why do it, then? Because over a year every dollar of the pool has to be paid out of what customers pay. A price that covers the parts and nothing else keeps the bench busy and the shop closing. The full cost says what a price has to clear, on average, for the business to cover the cost of being open.
Another way: steps
Another way: table
Corner Bean, one month, 3000 dollars of rent, power and insurance spread over 5000 items.
| Product | Units | Direct cost a unit | Share a unit | Full cost a unit | Part of the pool |
|---|---|---|---|---|---|
| Coffees | 4000 | 1.20 | 0.60 | 1.80 | 2400 |
| Sandwiches | 1000 | 2.50 | 0.60 | 3.10 | 600 |
| Together | 5000 | 3000 |
The last column adds to the bill. Every other column is per unit.
Decide what is in the pool. The overheads that no single unit causes: rent, insurance, power for the premises, the van, the accountant. Leave out anything a unit does cause — ingredients, parts, card fees — which belongs in direct cost.
Choose the period and count its units. A month's pool over a month's units, or a year's over a year's. Mixing the two — a month's rent over a year's sales — gives a share twelve times too small.
Divide, then add. The pool over the units is the share; each product's direct cost plus the share is its full cost.
Check that the pool comes back. Each product's units times the share, added across the products, must equal the pool. If it does not, a product has been left out of the unit count or counted twice.
Use the answer for the question it fits. Full cost for setting and reviewing prices over a year; direct cost and the relevant costs of the last lesson for any single decision.
A useful second check is to compare the full cost with the price. A product priced below its direct cost loses money on every sale; one priced between direct cost and full cost helps pay the pool but does not carry its share; one priced above full cost carries its share and adds profit.
A full cost answers slow questions: is the menu, taken over a year, priced to cover the whole business? Which product looks thin once its share of the premises is counted? Those are real questions and allocation is how to ask them.
It gives the wrong answer to fast ones. Should Alexa take one more catering order next week, with the kitchen idle on Tuesday? The rent is paid whether she does or not, so the order only has to beat its direct cost. Should she stop selling sandwiches? The 600 they carry does not go away; it moves on to the coffees. For a decision, go back to the last lesson's rule: which costs actually change?
Because the pool does not shrink when sales do, a quiet month spreads the same bill over fewer units, and every unit's share rises. A café whose rent adds 0.60 to each item in a 5,000-item month adds 0.75 in a 4,000-item month. Nothing has become more expensive; there are simply fewer items to share the bill.
This creates a trap. An owner who sees full cost rise may raise prices to cover it. Higher prices can mean fewer sales, which raises the share again, which suggests raising prices again. Businesses have priced themselves out of their market this way, one sensible-looking step at a time.
The way out is to set the share from a normal year's volume, not from the latest month, and to treat a quiet month's higher share as what it is: part of the pool that the month's sales did not cover. The response to that is a question about volume — how to sell more, or whether the premises are too large for the business — not a reflex rise in every price.
A business that quotes for work — a caterer, a printer, a repair shop taking a corporate contract — needs its quotes, taken together over a year, to pay for the premises and the van. So a standard quote adds the share to the direct cost, and then a margin on top. A quote built from direct cost alone wins a lot of work and leaves the rent to be found from somewhere else.
But not every quote has to carry a full share. A job that fills an empty Tuesday, a one-off order from a new customer, work in a quiet month: each adds profit whenever its price beats its direct cost, because the share it does not carry was going to be paid anyway. The discipline is to know which kind of quote is being written. Most of the year's work should be priced above full cost, so that the pool is covered; a little can be priced between direct cost and full cost to fill capacity that would otherwise sit idle.
The danger is letting the second kind become the first. A regular customer who is always quoted below full cost, month after month, is being given the premises for free, and if enough of the work is priced that way the pool is never covered at all. Keeping a note of which quotes carried their share, and which did not, is enough to see that happening before the year's figures show it.
A garden center's owner reviews her café's prices each January. The café occupies about a fifth of the building, so her accountant allocates a fifth of the building's rent, rates, heating and insurance to it: 18,000 dollars a year. The café sold 45,000 items last year, so each carries 0.40.
A pot of tea has 0.35 of tea, milk and cup, so its full cost is 0.75, and it sells for 2.60: comfortably above. A slice of cake has 1.10 of direct cost, a full cost of 1.50, and sells for 3.20. A children's meal has 3.40 of direct cost, a full cost of 3.80, and sells for 3.90 — barely above.
Her manager suggests dropping the children's meal. She runs the numbers the other way. The meal sells about 4,000 a year and contributes 3.90 − 3.40 = 0.50 each: 2,000 a year toward the café's share of the building. Dropping it saves none of the 18,000 and loses the 2,000 — and the families who buy it also buy teas and cakes, and plants on the way out.
So she keeps it and uses the full cost for what it is good for: she raises the children's meal to 4.40, so that it carries its share like everything else, and checks next January whether sales held. The share told her the price was thin; the relevant costs told her not to drop the product.
Hospitals, city governments and universities often price services to one another at full cost, so that each department's charges cover its share of the buildings and management. The same caution applies at that scale: when a service is withdrawn, its share of the buildings is not saved but moved onto the services that remain, and their full costs rise even though nothing about them has changed.
The share is a cost the unit causes. It is the pool divided by the units; the pool was paid anyway.
Dropping a product saves its share. The bill stays the same, and the share lands on what is left, which now looks more expensive than it did.
An order below full cost loses money. With room to spare and the pool unchanged, it adds profit whenever the price beats the direct cost.
Allocation is pointless because it is not cash. It is how an owner learns whether prices cover the business over a year, which no single order can show.
A higher share means costs have risen. In a quiet month it means fewer units are sharing the same bill.
Every quote must carry a full share. Most should; a few, filling idle capacity, can be priced between direct cost and full cost.
Total the pool: lease, polytunnel and van.
$1800$
The month's overhead.
Total the units: 1,200 salad bags and 300 veg boxes.
$1200 + 300 = 1500$
Every unit shares the pool.
Divide for the share.
$1800 \div 1500 = 1.20$
Each unit carries 1.20.
Add it to a veg box's direct cost of 9.50.
$9.50 + 1.20 = 10.70$
The veg box's full cost.
Check that the parts add back.
$1200 \times 1.20 + 300 \times 1.20 = 1440 + 360 = 1800$
The shares are the one bill cut up.
Find the share: 2,400 over 200 jobs.
$2400 \div 200 = 12$
Each job carries 12.
Find a screen's full cost: 32 of parts and fees.
$32 + 12 = 44$
What a screen's price must clear over a year.
Find a battery swap's full cost: 18 of parts.
$18 + 12 = 30$
The same share, a smaller direct cost.
Compare with the screen price of 80.
$80 - 44 = 36$
The screens carry their share and add profit.
Compare with the battery price of 28.
$28 - 18 = 10; \quad 28 - 30 = -2$
Swaps help pay the pool but do not carry their full share.
Say what the comparison is for.
$\text{a price review, not a decision to stop swaps}$
Dropping swaps would lose their 10 a job of contribution and save none of the pool.
Note the pool and a usual month's items.
$3000 \div 5000 = 0.60$
The usual share.
Count February's items.
$4000$
A fifth fewer.
Divide the same pool by February's items.
$3000 \div 4000 = 0.75$
Each item carries more.
Find a coffee's full cost in February.
$1.20 + 0.75 = 1.95$
Up from 1.80.
Find the pool February's sales did not cover at the usual share.
$(5000 - 4000) \times 0.60 = 600$
The under-recovery.
Check what a price rise would do.
$\text{fewer sales} \Rightarrow \text{a higher share again}$
Raising prices to chase the share can make it worse.
Decide how to read February.
$\text{a volume question, priced on a normal year}$
Keep prices on the 0.60 share and look for ways to sell more in the quiet months.
Find the share each unit carries.
$1500 \div 600 = 2.50$
The pool over the units.
Find the full cost of a unit.
$4 + 2.50 = 6.50$
Direct cost plus the share.
Check the pool comes back.
Corner Bean spreads its $3000$ dollars of rent, power and insurance equally over every unit sold. It sold $4000$ coffees, each with $1.20$ dollars of direct cost, and $1000$ sandwiches, each with $2.50$. Fill in how much of the pool each product carries for the month and its full cost a unit, in dollars.
| Part of the pool for the month | Full cost a unit | |
|---|---|---|
| coffees | ||
| sandwiches |
Complete the worked solution: a shop pays $3492$ dollars a month for rent and insurance. It sold $157$ units of one product, each with $12$ dollars of direct cost, and $231$ units of another. Spread the pool equally over every unit sold.
Add the units sold.
$157 + 231 =$ u
The pool is spread over every unit.
Divide the pool by the units.
$3492 \div (\text{units}) =$ s
The share each unit carries.
Add the share to the first product's direct cost.
$12 + (\text{share}) =$ f
Its full cost a unit.
Find the first product's part of the pool.
$157 \times (\text{share}) =$ t
What its units carry between them.
Check that the parts add back to the bill.
$\text{both parts together} = 3492$
A share is the one bill cut up on paper.
On the costing sheet at Long Row Gardens, the veg boxes carry $360$ of the $1800$ dollars a month paid for the land lease, the polytunnel and the van. The owner stops selling veg boxes and changes nothing else. What happens to the monthly bill for the land lease, the polytunnel and the van?
Corner Bean pays $3300$ dollars a month for rent, power and insurance. This month it sold $4500$ coffees and $1000$ cakes. Spreading the pool equally over every unit sold, how many dollars of it does each unit carry?
Answer:
Four figures from the costing sheet at Corner Bean. Match each one to what it is.
| Cash that leaves the account whatever is sold | A share worked out on paper that moves no money | A cost that each extra unit really adds | An estimate for pricing, part real cost and part share | |
|---|---|---|---|---|
| The $3300$ dollars for rent, power and insurance this month | ||||
| The $0.60$ dollars of the pool written against each unit | ||||
| The $1.20$ dollars of direct cost in each of the coffees | ||||
| The $1.80$ dollars on the sheet as the full cost of each of the coffees |
Fixit Mobile pays $2400$ dollars a month for rent, insurance and the van and usually sells $200$ units a month, so each carries $12.00$ dollars of it. Next month it expects to sell only $160$ units. How many dollars of the pool will each unit carry then?
Answer:
A home baker rents a commercial kitchen for $1265$ dollars a month and sells about $253$ items a month from it. A batch of brownies costs $8$ dollars an item in ingredients and boxes. Fill in her costing sheet: the rent each item carries, a brownie's full cost, the rent she would save by dropping wedding cakes, and what an extra batch of $17$ brownies adds to profit if she sells them for $16$ each in a kitchen already paid for.
| Amount | |
|---|---|
| Rent each item carries, dollars | |
| A brownie's full cost | |
| Rent saved by dropping wedding cakes | |
| Profit added by the extra batch |
Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.
The costing sheet at Long Row Gardens gives the full cost of one of its salad bags as $2.30$ dollars: $1.10$ of direct cost and $1.20$ as its share of the land lease, the polytunnel and the van. A customer offers to buy $120$ extra salad bags this month at $1.70$ dollars each. There is room to make them, and the bills for the land lease, the polytunnel and the van will not change. By how many dollars does the order change the month's profit?
Answer:
You can spread a pool of overhead over the units sold, read a full cost, and explain a quiet month's higher share. Tell someone why dropping a product does not save the share it carried. Next: choosing the rule the pool is shared by.
15. Your turn: a pool of 1500 spread over 600 units, direct cost 4, step 3
$600 \times 2.50 = 1500$
The shares add back to the bill.