David Krause5.1 The goal of cost-center accounting
Cost-type accounting from Chapter 4 answers: which costs were incurred? The BAB answers the next question: where were they incurred? And it derives from that the rates the cost-object accounting can work with.
Direct costs need no such detour — material and direct labor can be assigned to the order directly. Overhead, by contrast, is incurred for the whole company. Without cost-center accounting only watering-can distribution remains, and that is exactly what produces the miscalculations from Chapter 3.
5.2 Cost center types
| Type | Function | Examples in the reference company |
|---|---|---|
| Auxiliary cost center | provides services to other centers, fully allocated out | 910 building · 920 technical management |
| Main manufacturing center | works on the cost object directly | 200 turning · 210 milling · 240 assembly |
| Material center | procurement, storage, goods receipt | 100 material |
| Administration / sales | surcharge on manufacturing cost | 300 administration · 400 sales |
5.3 Primary and secondary allocation
The BAB runs in two stages. In the primary allocation, the overhead cost types are distributed across all centers by cause — energy by consumption, depreciation by asset assignment, insurance by value.
In the secondary allocation, the auxiliary cost centers are dissolved and distributed to the final centers. The reference company uses the step-ladder method: first building (by area), then technical management (by manufacturing staff). No reciprocal allocation — the sequence decides, and it must be documented.
Rule of thumb: the center that delivers the most to other auxiliary centers and receives the least from them is allocated first. Building costs flow into every other center but themselves receive almost nothing — that is why they come first. The method is an approximation; only the simultaneous equation method would be exact. For practice the step-ladder suffices, as long as you know it is an approximation.
5.4 The complete BAB
Company profile: around 30 employees, 20 of them in manufacturing (8 turning, 6 milling, 6 assembly). Two CNC turning centers in two-shift operation (6,786 productive machine hours), one 5-axis machining center (3,393 MH) and an assembly area with no machine binding.
| Cost type | 910 bldg. | 920 tech.mgmt | 100 material | 200 turning | 210 milling | 240 assembly | 300 admin | 400 sales | Total |
|---|---|---|---|---|---|---|---|---|---|
| Primary costs — overhead | |||||||||
| Indirect wages | — | — | 42,000 | 62,000 | 36,000 | 28,000 | — | — | 168,000 |
| Salaries | — | 98,000 | 58,000 | — | — | — | 330,000 | 140,000 | 626,000 |
| Imputed rent | 105,600 | — | — | — | — | — | — | — | 105,600 |
| Energy | 22,000 | — | — | 28,953 | 32,835 | 2,800 | — | — | 86,588 |
| Maintenance | 12,520 | — | 3,000 | 14,000 | 22,000 | 4,500 | 5,000 | — | 61,020 |
| Tooling | — | — | — | 27,500 | 23,700 | 7,500 | — | — | 58,700 |
| Imputed depreciation | — | — | 9,000 | 40,000 | 51,462 | 6,000 | 8,000 | 7,000 | 121,462 |
| Imputed interest | — | — | 9,350 | 14,700 | 19,598 | 1,000 | 1,500 | 800 | 46,948 |
| Insurance | 5,000 | — | 2,400 | 1,800 | 1,500 | 1,200 | 2,000 | 1,100 | 15,000 |
| Cleaning | 8,000 | — | — | — | — | — | — | — | 8,000 |
| IT/communication | — | — | 3,000 | — | — | — | 14,000 | 6,000 | 23,000 |
| Marketing/travel | — | — | — | — | — | — | — | 28,000 | 28,000 |
| Other overhead | — | 12,000 | 4,000 | 3,000 | 2,000 | 2,500 | 12,000 | 8,000 | 43,500 |
| Σ primary costs | 153,120 | 110,000 | 130,750 | 191,953 | 189,095 | 53,500 | 372,500 | 190,900 | 1,391,818 |
| Secondary allocation — step-ladder method | |||||||||
| Allocate 910 area, €174/m²·y | (153,120) | 6,960 | 31,320 | 33,060 | 24,360 | 20,880 | 26,100 | 10,440 | 0 |
| Allocate 920 per mfg. staff 8/6/6 | — | (116,960) | — | 46,784 | 35,088 | 35,088 | — | — | 0 |
| = center costs | 0 | 0 | 162,070 | 271,797 | 248,543 | 109,468 | 398,600 | 201,340 | 1,391,818 |
Direct costs do not run through the BAB — production material (€1,800,000) and direct labor (€780,000) go straight to the cost object. They appear here only as a surcharge base. In the manufacturing centers the center costs then still have to be split into the machine-related part (MHR) and the labor-related part (residual overhead) — the method for that is in Chapter 6.
5.5 The surcharge rates — the result
From the center costs and their respective reference figures come the rates that every calculation works with from Chapter 10 on:
| Cost center | Reference base | Rate |
|---|---|---|
| 100 material | direct material €1,800,000 | 9.0 % mat. OH |
| 200 turning — machine | 6,786 MH | €20.13/MH |
| 200 turning — labor | direct labor €340,000 | 39.8 % resid. OH |
| 210 milling — machine | 3,393 MH | €46.37/MH |
| 210 milling — labor | direct labor €260,000 | 35.1 % resid. OH |
| 240 assembly no MHR | direct labor €180,000 | 60.8 % mfg. OH |
| 300 administration | mfg. cost €3,371,878 | 11.8 % admin OH |
| 400 sales | mfg. cost €3,371,878 | 6.0 % sales OH |
5.6 Machine station vs. manual station
This is the methodologically most important distinction in manufacturing costing. It determines how a manufacturing center's overhead is allocated — and thus the entire character of the calculation.
| Machine station CNC, die casting, injection molding | Manual station assembly, welding, inspection | |
|---|---|---|
| Cost driver | machine time (machine hours) | working time (direct labor) |
| Surcharge | MHR rate €/MH | overhead % on direct labor |
| Reference figure | productive machine hours | direct labor in € |
| Example in the company | 210 milling · €46.37/MH | 240 assembly · 60.8 % OH |
| Runs on with no one present? | yes — depr., interest, space accrue | no — no work, no cost |
Assembly has no significant machine binding — its overhead arises with working time, not with a machine. A machine hour rate would be pointless there; the classic surcharge on direct labor is correct. At the 5-axis machining center it is the reverse: the majority of the center costs hang on the machine and run on whether an operator stands next to it or not. This distinction — machine station or manual station — is the most important structural decision in the entire BAB.
5.7 Reading guide: what does each row show?
The BAB is divided into five sections. The table explains each section and its methodological meaning — so you don't just read the BAB but understand it.
| Section | Label in the BAB | Methodological meaning |
|---|---|---|
| A | Direct costs (for information) | Direct material and direct labor run straight to the cost object — in the BAB they appear only as a later surcharge base, they are not distributed across cost centers. |
| B | Primary costs — overhead | Direct capture from the cost-type plan by the causation principle, including imputed costs. |
| C | Secondary allocation | Dissolution of the auxiliary cost centers onto the final centers by the step-ladder method. |
| D | Center costs | Sum per final cost center after allocation — the auxiliary centers now stand at 0. |
| E | Surcharge rates | Center costs divided by the respective reference figure — the usable result. |
5.8 Secondary allocation step by step
The secondary allocation is the most complex step in the BAB. The allocation flow from the sample BAB, step by step — which auxiliary cost center is allocated first, by which key, and onto which main cost centers.
| Recipient | Share | Allocation |
|---|---|---|
| 920 technical management | 4.5 % | €6,960 |
| 100 material | 20.5 % | €31,320 |
| 200 turning | 21.6 % | €33,060 |
| 210 milling | 15.9 % | €24,360 |
| 240 assembly | 13.6 % | €20,880 |
| 300 / 400 admin + sales | 23.9 % | €36,540 |
| Recipient | Staff | Allocation |
|---|---|---|
| 200 turning | 8 | €46,784 |
| 210 milling | 6 | €35,088 |
| 240 assembly | 6 | €35,088 |
After both steps, 910 and 920 stand at 0 — their costs are fully distributed to the final centers. The sequence (first 910, then 920) is documented and part of the method.
5.9 Over- and under-absorption
The surcharge rates arise from planned values. At year-end the comparison with actual costs shows whether the allocation worked out. Under-absorption means: less overhead was charged than incurred — every order was too cheap.
over-/under-absorption = charged overhead − actual overhead
Example cc 210 at 3,100 instead of 3,393 MH:
3,100 × 46.37 = €143,747 charged against €157,325 incurred
= −€13,578 under-absorption — pure volume variance
The cause here lies not in costs being too high but in utilization being too low: the center's fixed costs spread over fewer hours. This difference — costs too high or activity too low — is the starting point of flexible standard costing.
5.10 From over-/under-absorption to flexible standard costing
Over-/under-absorption tells you that a cost center is off — but not why. Flexible standard costing closes this gap: it splits the total variance into a part the shop floor is responsible for (consumption) and a part that comes from sales (activity level). Only this separation makes the variance controllable.
The prerequisite is splitting the cost rate into a fixed and a variable part. At the 5-axis machining center (€46.37/MH at 3,393 planned hours) it looks like this: time-dependent costs (imputed depreciation, interest, space, planned maintenance) are fixed, output-dependent costs (energy, consumable tools) are variable.
| Cost component | €/h | €/year (3,393 h) | Character |
|---|---|---|---|
| Imputed depr. + interest + space + maint. | 31.95 | €108,390 | fixed |
| Energy + consumable tools | 14.42 | €48,935 | variable |
| Total planned cost rate | 46.37 | €157,325 | — |
target cost (fixed + variable × actual): 108,390 + 14.42 × 3,000 = €151,650
= −€12,540 volume variance — the 393 missing hours
The volume variance is not the shop floor's fault — it arises because too few orders were there. The consumption variance, by contrast (actual costs against target costs at actual activity), measures whether the center worked economically with its resources. Only both figures together say where to act: at sales or on the shop floor.
5.11 Common misreadings of the BAB
| # | Misreading | Correct interpretation |
|---|---|---|
| 1 | Using primary costs as a cost rate | The Σ primary-costs row is not the rate — only after secondary allocation and division by the reference figure does the rate emerge. |
| 2 | Reading aux.-center values after allocation as costs | Auxiliary cost centers stand at 0 after secondary allocation — the value in brackets is the allocation, not a loss. |
| 3 | Confusing actual rate with charged rate | The charged rate is the planned rate from the BAB; the actual rate emerges only at year-end. The difference is the over-/under-absorption. |
| 4 | Pulling direct costs into the surcharge | Direct material and labor run straight to the cost object — they are a surcharge base, not part of the distributed overhead. |
Chapter 6 takes the manufacturing centers from this BAB and splits them: which costs belong to the machine, which to the person? And which value do you depreciate against? That is where the machine hour rate is built.
