CUSMA Rules of Origin Regulations (SOR/2020-155)

Calculation of Cost Ratio

For the overhead to be allocated, the producer may choose one or more allocation bases that reflect a relationship between the overhead and the good based on the criterion of benefit, cause or ability to bear.

With respect to each allocation base that is chosen by the producer for allocating overhead, a cost ratio is calculated for each good produced by the producer as determined by the formula

Allocation to a Good of Costs Included in Overhead

The costs with respect to which an allocation base is chosen are allocated to a good in accordance with the following formula:

Excluded Costs

Under paragraph 7(11)(b) of these Regulations, if excluded costs are included in costs to be allocated to a good, the cost ratio used to allocate that cost to the good is used to determine the amount of excluded costs to be subtracted from the costs allocated to the good.

Allocation Bases for Costs

The following is a non-exhaustive list of allocation bases that may be used by the producer to calculate cost ratios:

Examples

The following examples illustrate the application of the cost ratio method to costs included in overhead.

Example 1: Direct Labour Hours

A producer who produces Good A and Good B may allocate overhead on the basis of direct labour hours spent to produce Good A and Good B. A total of 8,000 direct labour hours have been spent to produce Good A and Good B: 5,000 hours with respect to Good A and 3,000 hours with respect to Good B. The amount of overhead to be allocated is $6,000,000.

Calculation of the ratios:

Good A: 5,000 hours ÷ 8,000 hours = 0.625

Good B: 3,000 hours ÷ 8,000 hours = 0.375

Allocation of overhead to Good A and Good B:

Good A: $6,000,000 × 0.625 = $3,750,000

Good B: $6,000,000 × 0.375 = $2,250,000

Example 2: Direct Labour Costs

A producer who produces Good A and Good B may allocate overhead on the basis of direct labour costs incurred in the production of Good A and Good B. The total direct labour costs incurred in the production of Good A and Good B is $60,000: $50,000 with respect to Good A and $10,000 with respect to Good B. The amount of overhead to be allocated is $6,000,000.

Calculation of the ratios:

Good A: $50,000 ÷ $60,000 = 0.833

Good B: $10,000 ÷ $60,000 = 0.167

Allocation of Overhead to Good A and Good B:

Good A: $6,000,000 × 0.833 = $4,998,000

Good B: $6,000,000 × 0.167 = $1,002,000

Example 3: Units Produced

A producer of Good A and Good B may allocate overhead on the basis of units produced. The total units of Good A and Good B produced is 150,000: 100,000 units of Good A and 50,000 units of Good B. The amount of overhead to be allocated is $6,000,000.

Calculation of the ratios:

Good A: 100,000 units ÷ 150,000 units = 0.667

Good B: 50,000 units ÷ 150,000 units = 0.333

Allocation of overhead to Good A and Good B:

Good A: $6,000,000 × 0.667 = $4,002,000

Good B: $6,000,000 × 0.333 = $1,998,000

Example 4: Machine-hours

A producer who produces Good A and Good B may allocate machine-related overhead on the basis of machine-hours utilized in the production of Good A and Good B. The total machine-hours utilized for the production of Good A and Good B is 3,000 hours: 1,200 hours with respect to Good A and 1,800 hours with respect to Good B. The amount of machine-related overhead to be allocated is $6,000,000.

Calculation of the ratios:

Good A: 1,200 machine-hours ÷ 3,000 machine-hours = 0.40

Good B: 1,800 machine-hours ÷ 3,000 machine-hours = 0.60

Allocation of machine-related overhead to Good A and Good B:

Good A: $6,000,000 × 0.40 = $2,400,000

Good B: $6,000,000 × 0.60 = $3,600,000

Example 5: Sales Dollars or Pesos

A producer who produces Good A and Good B may allocate overhead on the basis of sales dollars. The producer sold 2,000 units of Good A at $4,000 per unit and 200 units of Good B at $3,000 per unit. The amount of overhead to be allocated is $6,000,000.

Total sales dollars for Good A and Good B:

Good A: $4,000 × 2,000 units = $8,000,000

Good B: $3,000 × 200 units = $600,000

Total sales dollars: $8,000,000 + $600,000 = $8,600,000

Calculation of the ratios:

Good A: $8,000,000 ÷ $8,600,000 = 0.93

Good B: $600,000 ÷ $8,600,000 = 0.07

Allocation of overhead to Good A and Good B:

Good A: $6,000,000 × 0.93 = $5,580,000

Good B: $6,000,000 × 0.07 = $420,000

Example 6: Floor Space

A producer who produces Good A and Good B may allocate overhead relating to utilities (heat, water and electricity) on the basis of floor space used in the production and storage of Good A and Good B. The total floor space used in the production and storage of Good A and Good B is 100,000 ft²: 40,000 ft² with respect to Good A and 60,000 ft² with respect to Good B. The amount of overhead to be allocated is $6,000,000.

Calculation of the ratios:

Good A: 40,000 ft² ÷ 100,000 ft² = 0.40

Good B: 60,000 ft² ÷ 100,000 ft² = 0.60

Allocation of overhead (utilities) to Good A and Good B:

Good A: $6,000,000 × 0.40 = $2,400,000

Good B: $6,000,000 × 0.60 = $3,600,000