Support costs refer to the indirect costs associated with producing a product or delivering a service that are not directly traceable to a specific product or service but are essential for the overall operation of a business. These costs are also commonly referred to as overhead or indirect costs.
While direct costs can be traced directly to a specific product (e.g., raw materials or labor directly involved in production), support costs are distributed across multiple products or services.
Here are some examples of support costs:
- Rent or Lease: The cost of renting or leasing a facility. Whether a company manufactures products, offers services, or sells goods, it needs space to operate.
- Utilities: This includes water, electricity, heating, and cooling required to maintain the facility.
- Depreciation: The decrease in value of assets over time, such as machinery, equipment, and buildings.
- Salaries and Wages: Salaries of staff not directly involved in production but essential to the business, such as administrative staff, management, human resources, and IT support.
- Insurance: Protection against potential risks like theft, damage, or liabilities.
- Property Taxes: Taxes paid for property owned by the business.
- Maintenance and Repairs: Keeping equipment, machinery, and the facility in working order.
- Office Supplies: Items like paper, pens, and other office essentials that don’t directly contribute to the creation of a product but are necessary for the functioning of the business.
- Marketing and Advertising: Costs associated with promoting the business, its products, or its services.
- Training: Costs related to training staff, whether it’s onboarding, skills development, or continuous learning.
Support costs can be significant and, therefore, need to be carefully managed. They are typically allocated to individual products, services, or departments based on various allocation methods. This ensures that the price of a product or service adequately covers not only its direct costs but also a portion of the indirect support costs.
Example of Support Costs
Let’s use the example of a fictional company called “TechGlow Laptops,” a manufacturer of high-end laptop computers, to illustrate support costs.
Scenario: TechGlow Laptops manufactures a specific model – the “GlowBook Pro.” While they have direct costs like raw materials (e.g., metals, chips, and batteries) and assembly labor, they also incur various support costs.
Support Costs for TechGlow Laptops:
- Rent: TechGlow pays $20,000 per month to lease a factory where laptops are assembled and an office space for administrative tasks.
- Utilities: The monthly bill for electricity, water, and internet totals $5,000.
- Depreciation: TechGlow invested in machinery worth $240,000 that depreciates over 10 years. So, the monthly depreciation is $2,000.
- Salaries and Wages: Their administrative staff includes HR personnel, accountants, and management. These salaries amount to $30,000 per month.
- Insurance: TechGlow’s business insurance, covering potential damages or theft in the factory, costs them $1,000 monthly.
- Property Taxes: Annual taxes on the property they own amount to $12,000, so the monthly cost is $1,000.
- Maintenance and Repairs: Maintenance of machinery and occasional repairs cost an average of $3,000 per month.
- Office Supplies: Purchases of items like printer paper, pens, and stationery total $500 monthly.
- Marketing and Advertising: To promote the “GlowBook Pro,” they’ve been running ads online and on television, costing them $10,000 monthly.
- Training: TechGlow sends its staff for training twice a year, amounting to an annual cost of $12,000 or a monthly equivalent of $1,000.
Total Monthly Support Costs: $75,500
If TechGlow produces 1,000 GlowBook Pro laptops every month, the support cost allocated to each laptop would be $75.50.
When pricing the GlowBook Pro, TechGlow needs to ensure that the selling price covers the direct production cost per laptop, the $75.50 support cost, and provides a profit margin.
This example demonstrates the importance of accounting for support costs in pricing and budgeting decisions. Overlooking these costs can lead to underpricing products or services, which can erode profit margins.