The ten most expensive costing errors

3.1 What these errors cost

Cost rates that are 10 to 30 percent off mean, for a company with €2.5m revenue, between €125,000 and €375,000 of margin lost every year — either because prices are too high and orders go away, or because prices are too low and every order costs substance.

The error is rarely felt

Costing that is too high shows up in lost quotes — and you blame the competition. Costing that is too low you don't notice at all, because the orders do come in. Only the annual accounts reveal that utilization was fine and the result still wasn't. By then the year is over.

3.2 The ten errors at a glance

  #01–#04 · accounting classics
  #05–#06 · from the shop floor
  #07–#10 · methodological breaks

#01 Income taxes booked as costs hour rate 3–8 % too high

Corporate and trade tax are profit appropriation, not costs. They belong in the neutral reconciliation. → Chapter 4

Worked example: €3.2m total cost, income taxes €186,000 → 5.8 % on every rate. At €85/h = €4.93/h too much.

#02 Depreciation on acquisition cost instead of replacement value depreciation 15–40 % too low

Costing must earn the replacement, not the historical purchase price. → Chapter 6

Worked example: CNC turning center, acquisition €320,000, replacement value 2026 €412,000. Tax €22,857/y vs. imputed depr. on replacement value €22,889/y — three-shift €34,333/y.

#03 Tax instead of technical useful life €4–8/h wrong

The depreciation table serves the tax office, not costing — in three-shift operation the error doubles. → Chapter 6

Worked example: replacement value €400,000. Tax life 14 y = €28,571/y, technical life 20 y = €20,000/y → €5.71/h difference at 1,500 h; three-shift reversed +€11.43/h.

#04 Capacity overestimated fixed cost 40–60 % too low per hour

Calculating with 2,000 instead of a realistic 1,400–1,700 hours spreads fixed costs over hours that never existed. → Chapter 7

Worked example: fixed cost €75,000/y. At 2,000 h (wrong) €37.50/h, at 1,500 h (real) €50.00/h → €12.50/h = €18,750 hidden loss per machine.

#05 Spindle running time confused with machine-on time 30–50 % tooling-cost error

Tools wear only when the spindle is cutting — not while the machine is switched on. → Chapter 14

Worked example: 5-axis machining center: tooling flat €18/h × 2,000 h = €36,000. In reality the spindle turns 1,200 h at €30/h — a 2 h setup job carries €36 of tooling it never consumed.

#06 Tool and coolant cost spread with a watering can assembly subsidizes roughing

A station without machining carries tooling cost it never caused. → Chapter 15

Worked example: 5 milling centers + 5 assembly stations, tooling €120,000/y spread flat over 10 cost centers = €12,000 each. In reality titanium roughing consumes €38,000 — assembly subsidizes it.

#07 Flat overhead surcharge instead of a machine hour rate per cost center CNC subsidizes manual work

The most expensive single error on this list — it distorts every calculation in the company. → Chapter 5 and 7

Worked example: flat overhead 150 %: 5-axis CNC real €92/h, flat €62/h → €30/h too cheap; manual welding real €28/h, flat €62/h → €34/h too expensive.

#08 Imputed costs missing €5–12/h too cheap system-wide

Imputed entrepreneur's salary, interest on capital employed, risk allowances — they aren't in the P&L. → Chapter 4

Worked example: three missing items: imputed salary €72,000/y, imputed interest €800,000 × 5.5 % × 0.5 = €22,000/y, imputed depr. difference replacement value vs. books.

#09 No period allocation of one-off costs hour rate jumps monthly

An annual insurance booked in March inflates the March rate — and makes it useless for quotes. → Chapter 4

Worked example: annual insurance booked fully in March: March rate spikes once, all other months too low — the rate becomes useless for quoting.

#10 Manual stations without their own resource hour rate cross-subsidy in both directions

Assembly stations need no machine rate, but their own surcharge rate. → Chapter 5

Worked example: January: major repair €42,000 → overhead +35 %, rate jumps €68 → €92/h. February without the one-off → €58/h. Month by month a lottery.

Where the three groups come from

Errors #01 to #04 arise at the interface between financial and cost accounting — where the tax advisor stops and costing should begin. Errors #05 and #06 come straight from the shop floor: anyone who has never stood at a CNC machine makes them almost inevitably. Errors #07 to #10 are methodological breaks that run through the entire system.

3.3 The cumulative effect

The real danger lies not in the single error but in the combination.

Cumulative impact with all ten errors
Group	Effect
#01–#04 · accounting classics	hour rate system-wide €8–20 wrong
#05–#06 · shop floor	tooling-cost allocation 30–50 % off
#07–#10 · methodological	cross-subsidy between cost centers — invisible but constant
Total deviation	15–35 % of the actual cost rate
At €2.5m revenue	€375,000–875,000 of margin systematically missing or given away

The stable equilibrium of error

Make all ten errors and you calculate with structurally distorted rates — and the distortion acts in both directions at once. You win the orders you lose money on, and lose the ones you would have earned on. The system is internally consistent and delivers plausible figures for years. That is exactly why it goes unnoticed.

How it continues

Each of these errors has a clear solution, and each is described in this book with a complete calculation. If you follow the "quick start" reading path, it continues with Chapter 8 — where all ten errors are corrected on the reference company, with before/after calculations. Anyone wanting the structure from the ground up starts at Chapter 4.

David Krause

Industrial engineer (Dipl.-Wirtschaftsingenieur FH) · 15+ years of cost accounting, plant controlling and maintenance in CNC and die-casting manufacturing. Writes down here what has proven itself in practice.

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