How Cost Centers Affect Overhead Allocation

The Problem with Flat Overhead Allocation

When all overhead is allocated equally across all products, products that use cheap equipment subsidise products that use expensive or high-overhead equipment. The pricing looks simple but is inaccurate.

Example: You make two types of product — hand-stitched leather wallets (no machines beyond a stitching pony) and laser-engraved keyrings (CO2 laser, significant electricity and ventilation cost). If you apply the same overhead rate to both, the wallets are overpriced and the keyrings are underpriced. You could be losing money on every keyring while appearing profitable.

How Cost Center Overhead Is Applied

When overhead is configured at the cost center level, CrafterBy applies it only to products that use machines from that cost center.

The mechanism:

1. A cost center has a monthly overhead amount (e.g., €200/month for ventilation).
2. CrafterBy converts this to an hourly overhead rate based on the total estimated annual hours across all machines in the cost center.
3. When a product uses machine time from that cost center, the hourly overhead rate multiplied by the machine hours is added to the product cost.

Example: Laser Room Overhead

Setup:

• Cost center: "Laser & Engraving"
• Monthly overhead: €200 (dedicated ventilation system + filter replacements)
• Machines in this cost center: CO2 Laser 60W (1,000 h/year) + Rotary Engraver (400 h/year) = 1,400 h/year total

Overhead calculation:

• Annual overhead: €200 x 12 = €2,400
• Overhead per hour: €2,400 / 1,400 = approximately €1.71/hour

Impact on products:

• A laser-engraved keyring that uses 3 minutes of laser time carries: 0.05 h x €1.71 = €0.09 in laser-room overhead.
• A hand-stitched leather wallet that uses no laser or engraver carries €0.00 of laser-room overhead.

The ventilation cost goes only to the products that require it. The leather products are no longer subsidising the laser room.

Cost Centers vs. Organisation-Level Overhead

CrafterBy supports two levels of overhead:

• Organisation-level overhead — costs that apply to all products regardless of how they are made (rent for shared studio space, general insurance, accountancy fees). These are spread across all products.
• Cost-center-level overhead — costs that apply only to products made using machines in that cost center. These are allocated selectively.

Use both in combination for the most accurate product costs: organisation-level for genuinely shared costs, cost-center-level for area-specific costs.

When to Review Cost Center Overhead

Review cost center overhead figures at least annually, or whenever:

• You add or remove machines from a cost center (changes total annual hours).
• A cost (such as a ventilation contract) changes in value.
• Your actual machine usage hours differ significantly from estimates.