What a Process Costs: Calculating Process Costs Roughly but Reliably

Why hardly any company knows what its workflows cost

An order's calculation lists material, production time, and an overhead surcharge. Whatever happens in the office is hidden in the surcharge: the quote, the order confirmation, the query to the supplier, the invoice, the reminder. As long as all orders are similar, nobody notices. As soon as they differ, the surcharge distributes costs incorrectly. The small order with three follow-up questions then carries as little office cost as the large order without a single question.

This article answers one question: how does a small company calculate what a recurring workflow costs without building a corporate-style cost accounting system? To do so, we first clarify the terms, then present time-driven activity-based costing, examine what research says about its use in small companies, and finally work through a complete example.

A surcharge on everything distributes costs fairly, but wrongly.

What are process costs, and what is time-driven activity-based costing?

Process costs are the costs incurred in a single run of a workflow, such as a quote or a complaint. In the office they consist almost entirely of the time of those involved and the cost of their workplace. Traditional activity-based costing was developed in the 1980s to allocate overhead according to what causes it. However, it requires employees to state regularly what percentage of their time they spend on which activity. That is laborious and inaccurate.

Kaplan and Anderson (2004) therefore proposed time-driven activity-based costing. It needs only two estimates. The first is the capacity cost rate: what does one minute of the capacity a department provides cost? The second is the time required: how many minutes does one run of the workflow take? The product of the two numbers is the process cost.

Practical capacity is the time that actually remains for work after breaks, meetings, training, and idle time. It is lower than paid time. Worked examples often set it at around 80 percent of paid time. This article adopts that value as an assumption. If you want to be more precise, you can derive it from one week of time records.

What research shows about process costs in small companies

That small companies rarely use activity-based costing is well documented. Vieira Machado (2012) surveyed small and medium-sized enterprises in Portugal: none used the method, and the majority of respondents did not know it. Whether someone knew it depended on the hierarchical level, age, and education of the person responsible for cost accounting. Nartey (2026) surveyed 443 managers of small and medium-sized enterprises in Ghana. There, too, adoption was low. The method was more likely to be introduced when its benefit was visible and it could be tried out on a small scale. Where it was used, it was associated with better operational and financial performance.

Afonso and Santana (2016) describe what an introduction looks like in practice, using a distribution center for wood and carpentry supplies in Portugal. The project team consisted of the researchers and three employees from accounting, logistics, and the warehouse. It described the workflows of internal logistics and delivery with time equations and determined separate capacity cost rates for the two areas, because different resources work there. This made it possible to analyze the costs and profitability of individual products, customers, and distribution channels, and the cost of unused capacity became visible. The authors themselves stress that the results of a case study cannot be generalized. What is transferable is the approach: a small team, few areas, time equations instead of time tracking.

How to cost a process in four steps

1. Define the workflow and department

   Choose a workflow with a clear start and end, such as “prepare a quote,” and the department that carries it out, such as the sales back office.

2. Calculate the capacity cost rate

   Add up the department's annual costs: salaries with benefits, a share of rent, equipment, software. Divide by the practically usable minutes per year.

3. Set up the time equation

   Ask the people doing the work how long the standard case takes and which variants cost extra time. Write it as an equation: standard minutes plus minutes per variant.

4. Check with a sample

   For two weeks, have the actual time noted for every run. If the average deviates from the equation by more than a quarter, adjust it.

The time equation is the heart of the method. It saves you from creating a separate process for every variant. A quote with a custom build is not a different workflow but the same workflow with an additional term. If you want to describe the workflow anyway, the article on one-page process documentation helps. The “pitfalls” field there often already provides the variants that cost time.

Worked example: what does a quote cost in the back office?

A company has two full-time employees in its sales back office. The numbers in the following example are freely chosen and rounded. Salaries including employer contributions total 120,000 euros per year, workplace, share of rent, and software another 20,000 euros. Paid time is 2 × 1,720 hours. At 80 percent practical capacity, 2,752 hours or 165,120 minutes remain. The capacity cost rate is therefore 140,000 euros divided by 165,120 minutes, or about 0.85 euros per minute or 51 euros per hour.

The time equation for a quote is: 45 minutes for the standard case, plus 60 minutes if a custom build has to be coordinated, plus 15 minutes per follow-up question with the customer. A standard quote thus costs about 38 euros, a quote with a custom build and two follow-up questions 135 minutes or about 115 euros.

What the number is worth only shows in comparison. If a small order brings a contribution margin of 40 euros and the office costs 25 euros, little is left before the workshop has lifted a finger. The article on contribution margin per order describes how to determine it. And if 200 standard quotes per year cost 38 euros each, that is 7,600 euros. A quote template that saves 15 minutes per quote is therefore worth a good 2,500 euros a year. The article on how to standardize your quoting process shows what such templates look like.

How precise does the calculation need to be? Two views

The first view says: a process cost calculation is only as good as its time estimates, and those are uncertain. Sancovschi and Coutinho Silva (2018) go further. They argue that the time-driven variant again shows features of the conventional cost accounting that activity-based costing was originally meant to overcome, such as allocation by a single base, here time. Anyone who demands precision would therefore have to measure more elaborately again.

The second view says: for most of an owner's decisions, the right order of magnitude is enough. Whether a quote costs 35 or 42 euros rarely changes a decision. Whether it costs 38 or 115 euros changes many. This view fits Nartey's finding that a method is more likely to be used if it can be tried out on a small scale.

I consider the second view more viable for daily business, with one caveat from the first: the calculation has to be checked against a sample before it supports a larger decision. This yields a simple rule for when rough is enough and when it is not.

What unused capacity reveals

A by-product of the calculation is often more valuable than the process costs themselves. If you multiply all workflows of a department by their frequency and add them up, you get the time used. The rest of the practical capacity is unused or goes into activities nobody has written down. Afonso and Santana highlight exactly this cost of unused capacity as a result of their model.

If the time used is well below capacity, there are two explanations: the department really has slack, or there is work that does not appear in any described workflow, such as searching, asking around, and correcting. The second explanation is more common, and it is the starting point for every improvement. The article on lean in the office describes how to find such hidden activities. How to then improve a workflow step by step is shown by the four-step loop in the article on process optimization step by step.

Conclusion: how does a small company calculate its process costs?

We began by asking
a small company calculates what a recurring workflow costs without building an elaborate cost accounting system. The answer is time-driven activity-based costing in its simplest form: one capacity cost rate per department, one time equation per workflow, one sample for checking. The result is an estimate, not bookkeeping. For the decisions an owner makes in daily business, a checked estimate with the right order of magnitude is worth more than a surcharge that treats all orders the same.

What you can put into practice right away

1. Choose a department, such as the back office, and add up its annual costs for salaries, workplace, and software.
2. Divide by 80 percent of the paid minutes. That is your capacity cost rate.
3. Set up a time equation for each of the department's three most frequent workflows, together with the people doing the work.
4. Calculate the process costs and compare them with the contribution margin of small orders.
5. Have the actual times noted for two weeks and adjust the equations.

After two weeks you have a number for three workflows that you did not have before. Usually one of them is enough to change a rule, such as a minimum order value or a template.