Multi-dimensional Costing (MDC) by CostPerform
Better insights into true costs and profitability
CostPerform’s Multi-dimensional Costing (MDC) is one of today’s most advanced and precise costing methods, giving better insights into true costs and profitability. With those insights, it’s easier to make better decisions to improve business performance.
What is multi-dimensional costing?
Whereas costing methods as Activity-based Costing and Direct Costing are single-dimensional, MDC is a costing method that lets you allocate various costs to multiple dimensions, like products, countries, locations, clients and sales channels. The reason for this is that these dimensions cause or trigger the costs.
This is how multi-dimensional costing works
First, by precisely allocating costs for materials, marketing, shipping, et cetera to the dimensions mentioned above, and then secondly, by allocating the costs of each dimension to the sales transactions, you end up with a significantly more precise cost allocation. And best of all: better insights into the true costs and profitability. Not of just one dimension, but of the combinations of all your dimensions, resulting in more data that can be used for easier decision making when improving business performance.
Most important Multi-dimensional Costing (MDC) features
One of the most advanced and precise costing methods
Made for significantly more precise cost allocations
Gives better insights into true costs and profitability
Offers exclusive insights into cost and performance flows
This is what multi-dimensional costing does
Let’s assume you produce bikes and you calculate unit costs in a traditional, single-dimensional way. The frame and other components cost 500 Euros per bike, and in order to produce and sell those bikes, you run a factory and spend money on marketing, sales and managers, costing you 500.000 Euros. In case you sell 2.000 bikes at 800 Euros apiece, the cost per unit is 750 Euro, resulting in a unit margin of 50 Euros and a total margin of 100.000 Euros.
Single-dimension calculation example
2.000 bikes sold at 800 Euros apiece
Now, let’s introduce more dimensions and multi-dimensional costing to this example. You’ve produced 2.000 bikes and decide to sell 1.500 of them in the Netherlands and 500 in the US to open up the American market. Because you’re selling bikes outside the Netherlands and don’t have a factory in the US, 440.000 Euros have been spent on marketing and shipping and travelling to the US. As a result, the margin on the bikes sold in the Netherlands is 260 Euros apiece (390.000 Euros in total), while the margin on American bikes is negative due to high amount of overhead costs (440.000 Euros). To be precise: -580 Euros per bike and -290.000 Euros in total, making the US operation unprofitable. Thanks to multi-dimensional costing, you now have the insights into where improvement is needed and you can decide to build a factory in the US to reduce shipping costs, or maybe you should export to Germany.
Multi-dimension calculation example
1.500 bikes sold in the Netherlands at 800 Euros apiece
500 bikes sold in the US at 800 Euros apiece
Note: although the example above has a limited number of dimensions and a limited number of transactions, CostPerform can work with almost an unlimited number of dimensions and transactions.
Multi-dimensional Costing (MDC) is one of the most accurate costing methods CostPerform has to offer
When to use multi-dimensional costing
Below is a selection of business situations in which MDC is very useful for allocating the rights costs to the rights dimensions and vice versa.
- When selling to a wholesale channel
Selling to a wholesale channel requires less packaging, transaction and shipping costs than selling to retail. In this situation, those costs are caused by an order, not a unit. An order drives costs regardless of the number of products sold with that order, so the bigger the order, the lower unit costs.
- When sales managers visit clients and/or leads
In this situation and without MDC, there’s no way to tell how the costs of those visits relate to the products. What is clear is that the cause of the costs is the visits and not the products sold. This means that the costs of the visits should be directly allocated to the client, which can be done very easily with multi-dimensional costing.
- When you launch a marketing campaign in, for example, the US
A marketing campaign in the US doesn’t affect the costs of products sold in, say, the Netherlands, so only US products sold should absorb the marketing costs. With MDC, the right allocation can be made.
- When you promote products in your webshop
In this case, the promotion costs should only be allocated with MDC to the products sold via the webshop.
Thanks to Multi-dimensional Costing (MDC) it’s easier to make better decisions to improve business performance.
CostPerform Multi-dimensional Costing (MDC) in short
Multi-dimensional Costing (MDC) is one of the most accurate costing methods CostPerform has to offer. By using it to allocate various costs to multiple dimensions, you end up with:
This is how CostPerform’s Multi-dimensional Costing makes clear where business performance improvements are needed.