Module 1: Introduction to Cost Accounting

Profit =

consequence of Revenue & Costs

_Bg__ Cost Accounting and Corporate Management

Definition -

supports Management of company

provides information necessary for management
↳

entire individual departments

company
-

or

Accounting objectives -

CA
provides information for . . .

Control :

e.g behavior of employees more efficient

Planning e.
future prices
-

:
g.

Documentation know your costs →

compare years months
-

:
. . .

, ,

need to monitor cost otherwise

Monitoring they only go up
-

Cost Accounting, Management Accounting and Financial Accounting

Accounting system Financial includes balance-sheet
Accounting accounting financial statements a cash flow statements
-

Capital Budgeting process of investment planning long-term decisions

-

:
,

Management Accounting together with cost accounting ( information Management

-

needs 1
↳ non -

financial info ↳
only monetary information

Management Accounting vs. Management Accounting Financial Accounting

Financial Accounting A- dresses Members of company /internal) External parties (banks . )

. .

Objectives planning management

, ,
control & decision making Presentation of wealth -

, financial Position & income

situation : calculation of dividend payouts 4 taxes

Rules of Measurement Hardly specification V5 GAAP HGB IFRS
any
-

, ,

for segments I whole

Accounting object Disaggregated accounts for ( smaller) parts of company Aggregated accounts
company
Timespan & frequency Variable( more
often , daily weekly monthly or
, ,
annual Fixed ( annual
, half-yearly 1 quarterly reports)
reports
Focus Future & past oriented
-
Past oriented
-

Cost Accounting vs. Capital Budgeting Forecast Time value of money

cost
Accounting up to one year for operational Neglected
decisions focus on short-term

capital budgeting dong -

term effects of decisions Important ! ! /what will flow later on)

Definition of costs
Costs /monetarily ) valuated consumption of ( not but
.
. .
. . . are resources
buying using
Revenues are valuated production of goods (just
producing
. .
.

. . .

Conceptual Elements are contained in the definition of costs & revenues

eff.VE#EetnI-------on-
- .
.

1. Objective orientation ( oriented at company 's desire to produces

3. Consumption of ( cost) and production (revenue) of

resources
goods

1
 Module 1: Introduction to Cost Accounting
Definition of costs
Costs, expenses, cash outflows Cash outflows
(the major differences
d. Outflows not affecting shareholder's equity leg repayment of a loan , dividend
payment)
2. Cash outflows
affecting shareholder 's equity

Expenses =
cash outflow affecting equity (wealth →
part of financial Accounting
1.
Expenses

expenses not related to business objectives (rent for spare donation

-

room ,

expenses related other periods ( sale of equipment below book value)

-

to

extraordinary expenses (destruction of

-

a
plant by fire
2. I related to business
Operating expenses objectives
Costs =
cost Accounting
d. Basic costs ( salaries of the
employees material
,
costs)

2 Imputed costs f- opportunity costs ; imputed interest cost)

Generally :
cost 1
expenses might deviate ; usually not that much

→
Cash outflows (
affecting equity can be expenses
-
both
type)
Operating expenses basic cash outflows (possible
→
=
costs =

Cost terms and

E- their meaning: total and unit costs, direct and indirect costs, fixed and variable costs

Total costs and unit costs Total costs costs relate to all
:

goods produced within a

given period
(Reference) Unit costs costs of a
single unit of particular good leg specific car
:
a .

Direct costs and indirect costs Direct costs costs that

:
can be traced
directly to a cost object (caused by one cost object ) e.
g. steel of specific car

(Cost assignments) In direct costs: costs that cannot be

assigned directly to a cost object I caused jointly by several cost objects I e.
g. salary for

employee not able to

assign to one can

Artificial indirect cost :

costs that could in principal be traced
directly to a cost object
.
However :

comparing costs a benefits

companies do not trace them to cost objects I would be too

costly to treat as direct

Variable costs and fixed costs Variable costs costs that :

change when the quantity of a cost driver

changes
(not manufacted.no costs)

(Cost behaviour) Fixed costs that

: costs remain constant when the
quantity of a cost driver
changes
Relationship to total costs: -

typically linear

Direct, indirect, fixed and variable costs dental laboratory

eg .

BIe
Average unit costs Tk####tQ_
decreases with total output quantity
-

FC allocated to
larger number of units
output may increase
-

a as

→
Average unit cost decrease =
economies of scale

Average costs and profits used to compare

efficiency 4
profitability of companies within industry
-

revenues, an

2
 Module 1: Introduction to Cost Accounting

Cost terms and their meaning: inventoriable and period costs, opportunity and sunk costs
Inventoriable costs and period costs Inventori able costs :
costs
assigned to a
particular product unit
leg steel for specific cart
.

Period costs costs that cannot be capitalized

:
,
i. e.
they cannot be an asset in the balance sheet

leg general administration costs [salary] 1

.

Opportunity costs and sunk costs Opportunity costs :

contributions to a company 's profit that's foregone by choosing a decision alternative over

the next best alternative (basically

-

a decision ,
foregoing other possibility
some costs costs that are caused and current decisions
in the past can no
longer be
changed by
:

↳
not relevant for future decisions ( decided to built plant can't change it
,
now) often tempted to take into account

Levelized Product costs How expensive a

product is over lifetime
leg . LC0E =
Lerelized Product cost Electricity → cost
per kilowatt produced)

-
The three subsystems of cost accounting
The three subsystems of 1. Cost type accounting (most important

cost accounting Fundamentals !

-

which costs have been incurred? → labor material

, , depreciation → how much ?

2 Cost -

center -

accounting (second
important
-

Where have costs been incurred ? → where in

company department country ; many
:

,
different costs ! no
employee costs !

3. Product and / third

important
service
costing
For which products have the costs been incurred? → what type / series when what sold? What costs!
-

,
was

go Absorption costing versus variable costing

Absorption costing and Absorption costing product :

units are valued at full costs → all costs
assigned
=
material labor R&D
, .
. .
.

variable costing Variable

costing :
product units are valued at variable costs →
lowest possible costs flower =
losses no R&D
,

material labor :)
only , ,

cost object
Absorption costing
=

Cost type accounting Cost center accounting Product and service

costing
- -

indirect costs indirect costs indirect costs (individual)

direct costs direct costs (directly traced)

Profit & loss statement

combining cost + revenue

Revenue
accounting

Variable costing Cost type accounting Cost center accounting Product and service
costing

g_+←t→
- -

Fixed indirect costs Fixed indirect costs Profit I toss statement

Variable indirect costs Variable indirect costs variable indirect costs > Revenues
Direct costs Direct costs > Variable costs of sold
-

goods Koner
=
contribution fix costs
margin I
Revenue
accounting -

fix costs
=
profit or toss It or -1
Module 2: Cost-type Accounting
Introduction to cost-type accounting

Tasks of cost-type accounting 1st of the three subaccounts of cost Accounting

Cost-type accounting and financial → cost

Accounting and Financial
Accounting are linked by
accounting cost type
Accounting
-

↳
close connection

Classification of cost types Classification criterion Examples

Nature of the input goods Material costs , personnel labor) costs ,
machine costs (depreciation interest , .

Costs for external services

Attributability of costs direct costs ,

indirect costs

Dependence on output variation variable costs ,

fixed costs

Position in valve chain Research and Development costs , procurement costs , manufacturing costs,

selling and
shipping costs administrative costs
,
→
parts of Variable costs

Origin of the input goods primary costs ( outside of

company) ,
secondary costs (internal

Important cost types

Material costs Personnel costs Machine costs
other cost types

Cost types in business practice :

on
approximately 800 different types
average companies use cost
-

a
high number of cost types allows very detailed analysis of costs comes with high efforts
-

↳ how many are recorded comes down to whether the benefits for more detailed analysis
exceed the effort of recording
↳
one benefit :

improving quality of decision

making as informations become more precise

Lee
3- Material costs
Important types of materials Material types Example Attri butability (typical
ways)
Raw materials Wood water
,
direct costs
→
normally direct costs but so
cheap too
Auxiliary materials paints adhesives artificial indirect costs
,

,
high effort

Operating materials oils greases

,
indirect costs

Generally lot of materials , material accounting big for some companies

→
:
some companies use a some no
→
cost

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4
Module 2: Cost-type Accounting
Material costs
Methods for recording and valuing Material costs =

quantity
•

price
material consumption Methods for material consumption
recording
Inventory method
-

carrying on method
-

retroactive
accounting method
-

Methods for valuing material consumption

First
}
in First Out IF IF01 important
-

.
most ,

most used
Last in First out (4*0)
-

Ex post
average prices
-

Moving average prices

-

Got
Eg Recording material costs
( purchased)
Inventory Method consumption =

beginning inventory +
acquisitions
-

ending inventory
Example :

Beginning inventory 11.5) 500 units

-

Ending inventory 131.5 ) 760 units +

Consumption (
May ) :
1.240 units

Acquisitions May I ( 1.500 units

Carrying-on method consumption =

directly recorded

Example :

Consumption slip project I 14.5 ) . 400 units

Consumption slip project 2 ( 17.5) 600 units + Consumption ( May) :

1200 units

consumption slip project 3 124.5 ) 200 Units

still need inventory taking

→

differences can measurement stolen

→
occur due to : errors
,
units

→
need person to hand out materials I document them

Retroactive accounting method consumption =

calculated based on the bills of materials for each product
Example :

Bill of material for one wind turbine : A tower

,
3 Oboler blades

> to wind turbines consumption ( May I

10 towers
;
30 rotor blades
still need inventory taking
→

differences measurement stolen

→
can occur due to : errors
,
units

depending on bills produced

↳
bills of materials need to be kept up-to-date

toFTTTz-

5
Module 2: Cost-type Accounting
Valuing material consumption

First In First Out (FIFO) FIFO method assumes that material delivered first is consumed first

Last In First Out (LIFO) FIFO method assumes that material delivered last is consumed last

LIFO and FIFO between LIFO I # FO ocwrr differences in outflows closing

, inventory and total costs

Ex-post average price method Ex -

post average price method uses

average purchase prices for all consumed materials at the end of an accounting

period

Moving average price method

Noting average price method uses the
average price after each material consumption based on

total that
inventory at time

Generally different
NO
right or
wrong ; different companies have needs

Bsg
A-
Personnel Costs
↳
require a lot of detail
Types of personnel costs -

Salaries ( each month ; normally have variable component ; not purely time based )

time 1 hourly wage)

wages
-

piece rate wages ( per piece produced)

-

premium wages ( basic

wage and premium
based
performance ; bonus)
-

on

Fringe benefits ( additional benefits g. cars)

-

e.
;

↳
more details in text

33
3- Machine costs
Types of machine costs -

Depreciation 1 loss of machine valve over time)

-

Interest costs ( finance payments I

teasing or rental
payments (alternative to
buying
-

Acquisition
-

related costs
-

Maintenance costs 1 repairing . . .

)

3-
B-
Depreciation
Tasks and methods Depreciation spreads the purchase price over the years of use of the asset

Depreciation TTT
toF z-
a
methods

Time dependent straight line depreciation

-

declining balance depreciation

-

Arithmetic degreessive depreciation

-

Output dependent
-

units of production depreciation

•
6
Module 2: Cost-type Accounting
Depreciation
Straight-line depreciation most important time-dependent method
-

constant amount of periodic depreciation

-

Amount of periodic depreciation (a) :

a =
(
acquisition value -

residual value ) =
II C) -

Useful life T

Calculating of depreciation value :

acquisition value ( book value beginning of year) a •

calculating of year end valve : book value

beginning of year -

depreciation value
↳
constant amounts over time ; book valve decreases ; percentage of depreciation value increases

Declining balance depreciation time dependent method

-

depreciation valves decrease

gradually overtime
-

Depreciation percentage rate ( p)

p
=
1 -

KEEN
acquisition value
=
I -
If I

Calculating depreciation amount :

acquisition value ( book value beginning of year) .

Calculating year end valve

:
book rake beginning of year -

depreciation amount
↳
always same
percentage but different values

Arithmetic-degressive depreciation -

time -

dependent method

depreciation amounts decrease each year by constant value

-

Depreciation rate (d) :

2 ( acquisition value residual value) 2 (I L )

D=
-
-

useful life .
I useful life + 1) T.IT + d)

Calculating depreciation amount : d. current useful

life 1 declining) IT
,
T -
l
.
.
. .

.
3,2 e)
,

Calculating year end valve : book value of year -

depreciation amount

Units of production depreciation output dependent

-

based on the utilization of the asset

-

Depreciation amount per unit

( acquisition valve residual value) -

=
(I -

L)

Total units of production total units of production

( acquisition value residual value)
Calculating
-

depreciation amount Utilization of the

•

Total units of production

year
:

' acquisition value residual values

Calculating year end value book value of year beginning

-

:
Utilization of the year
•

Total units of production

-

15s Interest costs

Definition Interest costs =
capital required for operations interest rate
.

Four steps of determining interest costs 1. Determine the asset necessary for operations
2. necessary for operations
Valve the assets
toF T TT z-
3. Determine the capital required for operations
4. Determine the interest rate

7-
Module 2: Cost-type Accounting
Interest costs
Step 1: Determine the assets check the operational necessity for each position the active side
-

on

necessary for operations

Step 2: Value the assets necessary Decision valuation based

:
on replacement costs or
acquisition and production costs

for operations estimate the average values of assets over the

accounting
-

year
↳
average describes more
accurately

Step 3: Determine the capital required deduct non interest

bearing liabilities IN IB4 from operating assets
-

- - -

the

for operations valuation based average valves (substractÉ from average)

↳
on

received accounts
→
normally exclude :
provisions ,
revenues in advance , payable

Step 4: Determine the interest rate weighted Average cost of capital ( WACC) :

WACC Cost of Equity Cost of debt

debt
( t
equity Tax rate)
=
.
+ .
-

Equity Debt debt

+
equity +

E D
Wtcc =
re E +
+
r☐ 11 -

t)
☐ [ + ☐

Capital Asset Pricing Model KAPM) :

re
= Risk free interest rate +
company risk factor ( Market risk premium )

re =

rf
+
p ( rm -

rfl

toFTTTz-

8
Module 3: Cost-center Accounting
Introduction to cost-center accounting
Tasks of cost-center accounting Where have costs been incurred?
-

allocation of overhead costs

important for e. bonus payments

-

g.
German firms :
often many small and
very detailed
-

cost centers
↳
very efficient for bringing costs down

Structure of cost centers Four basic requirements when

defining cost centers

1. Homogeneity of cost drivers

2. Matching of cost centers and the
assignment of responsibilities
3. completeness and clarity I define them in such a
way )
4. cost-benefit criterion 1 benefits for cost centers have to exceed the costs

Categorisation of cost centers Two criteria when

defining cost center

1. Definition of cost centers

-

depending on the business function of the departement

(cost centers designed around the business department 1

2. Definition of cost centers depending on how costs are allocated

Bsg The three steps of cost-center accounting

The three steps of cost-center accounting -

Overhead costs =
indirect costs

① primary cost allocation = allocate

to respective cost centers

-

Indirect cost centers →

provide

services to other cost centers

② interdepartment cost allocation

(service cost allocation) allocate

service costs provided by other

cost centers ( e.
Energy )
g.
direct cost centers provide service for customers
-

The cost allocation sheet

toFTTTz-

← most crucial step

g
 Module 3: Cost-center Accounting
Assignment of overhead costs to cost centers
Tasks of primary cost allocation Allocation of the costs as
accurately as possible to those cost centers where the respective costs
were incurred

Two types of primary costs cost center direct costs :

costs that can be directly traced to one cost center
leg salary of the

head of material warehouse )

cost center indirect costs costs :

for which it's not possible to trace them directly to an unique

cost center (e.g .

Salary of the employee responsible for material storage and production preparation
↳ need
allocation procedure

Methods for allocating cost center

indirect costs

Allocation based on overhead costs calculating allocation rate

need :
total amount of ✗

total leg) hours of ✗ f- allocation base)

Allocation Rate total amount price / hour

=
→
get
total hours

of Methods for the allocation of service-department costs

Overview

←
-

cost center allocation method =

simpler method step by step
-

cost center compensation method

of credits & debits

↳
method =

pragmatic approach
↳
reciprocal method based on iterations =
heuristic approach (e.
g. Used by
SAP
systems)
mathematic ( correct)
↳
reciprocal method based on equations
=

approach

toFTTTz-

10
 Module 3: Cost-center Accounting
Reciprocal method based on equations
General characteristics Concept :
determination of transfer prices by solving a system of equations
Accuracy :
Exact method

Recording effort : all internal

exchanges of service
Transfer prices :
Transfer prices for total costs must be recalculated periodically

System of equations with transfer One equation is formulated for each indirect cost center

prices as unknowns quantity department

=
primary cost + what's
being delivered

9J cj
=

Cj +
É 9 ijci Ij = 1 . . .
n )

under the condition

n -1m

9i =

€ 9 ij Ii = 1
.
. .

.
)
n

where
h =
Number of indirect cost centers

i. j =
indexes of cost centers

Cj =
Primary overhead costs of the indirect cost center j

9;
=
total volume of services of the indirect cost center j

qij
=
volume of services transferred from indirect cost center i to cost center j

Ci =
transfer price of indirect cost center i

Cj =
transfer price of indirect cost center j

Calculation of secondary cost =

transfer price .

consumption

Example :

60 . 000
1 .
000

20 0

a =
Transfer price of indirect cost center Energy
↳ =
Transfer price of indirect cost center Property
c
,
=
Transfer price of indirect cost center Maintenance

Equations :

}
I 60 000 C1
.
=
3.000 + Ocr +
OC2 +
10 C3

I 1. 000 cz =
5.000 +
18.000C , + 0oz +
30g
then use simple mathematics
OC3 T1 2OO Cz 6 000
+
2.0004 +
OC2
toFTT Tz-
=
.
+

10
Module 3: Cost-center Accounting
Reciprocal method based on iterations
General characteristics Concept :
Repeated allocation of the costs for internal services in several steps

Accuracy Approximation ; accuracy

:
increases with number of iterations

Recording effort all internal exchanges of service

:

Transfer prices :
Determination of transfer process for allocation of service exchanges not necessary

implementation for
→
easier companies with a lot of cost centers

← 1st : eliminate all costs

of It

} stopping
allocate costs
point
back & forward until you reach

Problem when you :

are already at 0
you often
allocate costs back

1st Iteration :

Calculate Transfer price for each iteration :

overhead costs
Transfer price = Primary
total services of the indirect cost center

Calculate secondary costs of all services

of indirect cost center (

( Primary
costs services
overhead
primary cost) transfer price
)
+ .

secondary cogfg exchange

= service
Total of cost center (secondary ) costs incurred
.

sum -

by cost center (primary ) rate (

not sure if right secondary
formulated

Termination :
as soon as costs on each indirect cost center fall below given price

Example :

60 000 .

1. 000

200

Iteration 1 3. 000 +
900 +100 +750 +1250
toF TTTz-
:
-

3. 000

60000
=

0,05€ 1kWh 118 0000,05)

.
( 2.000-0,05 ) ( 15.000 .

0,051 125.000 0,05) .

Iteration 2 : O
-

5.900 0 +2.360 + 3540

5000 + 900
1400.5 9) 1600 5,91
5,9€1m ' (5000+900)
= .

1. 000 ,

Iteration 3 :
+305 + 915 -6.100 +2440 +2440
• °O° + "°

30,5€/h / 10.30.5 )
=

→
full example :
exercise 3. A 200 130 30,51
.

(6.000+100) 180 30,51

.

(80-30,5)

→
goes on in the same way as we reach costs of indirect cost center are below some value 11
Module 3: Cost-center Accounting
Methods of credits and debits
General characteristics Concept assumption that transfer prices
:

for the internal services already exist 1 at least

rough G)

,µg&ÑÑtÑ
"
Accuracy approximation ; accuracy depending
:
transfer on the prices used how exact they are )

wow Recording effort all internal

exchanges of services
:

Transfer prices
:

predefined
not as
"
"

correct

Last step assign leftover

µ
:
costs ( 50150 to direct cost center )
e.g
-
.

Bog Step-ladder method

General characteristics Concept :
consideration of services between indirect cost centers ,
but only in one direction

Accuracy Exact it only

:
sided
exchanges of services exist / between indirect cost
,
one -

centers otherwise only approximation

,

7
Recording effort internal exchanges of services in one direction only
off
:

Transfer

µ
prices recalculated
:

periodically ; amount varies according to the sequence of the settled indirect cost centers

wÑ
g.gg
,ogog&Ñ& no

↳ can

adv
going

.
[email protected]
once
back!

allocate
order

costs
of ,☐ to cover most costs

Example :

primary overhead costs and quantities of the

exchanges of services

Allocation rates :

Ca =
( 10 .
000 -101 :
(120.000-0) =
€0.0833 per kWh

(3.000-0.08) subsequent own

Cz = 1100.000 -1 250 ) :
(6.400-500 -

400) =
E- 18.23 per m
'

12000 0.08) (500-18.23)

.

( 120.000 + 167 + 9.114 ) :

(4.700-350-650 200) 36.94 perh
↳
-

= =

toFTTTz-

13
Module 3: Cost-center Accounting
Direct method
General characteristics Concept :
no consideration of exchanges of services between indirect cost centers

Accuracy Exact it exchanges of services exist / between indirect cost centers otherwise only approximation

,µg&ÑÑEÑ
:
,
no ,

what Recording effort internal exchanges of services only at direct cost centers
:

Transfer prices recalculated

:

periodically ,
relation of primary costs and
activity output to direct cost centers

indirect to direct
↳
further simplify step ladder method

µ
-

neglect costs between costcenters !

Example :

primary overhead costs and quantities of the

exchanges of services

Allocation rates :

Cr 10.0001 (120.000-0 3.000 2.000) €0.09 1kWh

- -

: =

Cz : 100.000 /(6.400 -

500 -

400 -

500) =
€ 20 .
-
1m 2

cg 120.000×4.700 350 650 -200) € 34 29 1h

-
- =
:
.

Determining overhead rates (for costing)

General When ? after the allocation of overhead costs from indirect to direct cost centers

HOW ? determination of the allocation bases leg corresponding

. direct costs)

why ? Overhead rates are used to calculate the product costs

Example :

Overhead costs after the interdepartment cost allocation

Determination of overhead rates for the material overhead costs

Total overhead costs (material cost center) =

€193.945,04
-

Direct material costs =

€ 560.00 →
allocation base
-

Overhead rate 1 material overhead costs ) =

total overhead costs / direct material costs

=
193.945 ,
04 / 560.000 =
34 63 % I
.
=
overhead rate)

toFTTTz-

13
 Module 4: Product and Service Costing
Tasks and design of product and service costing
Tasks of product and service costing -

most important part of cost

Accounting
Q How expensive
.
is it to produce one unit
of product

Tasks and design of product and Task of Product and service

costing
: the cost incurred in the production process are recorded and allocated

service costing to the company 's products

Purpose :

↳
↳
very important ! did the planned performance ↳ How valuable is the
inventory
actually occurs

Result :

Manufacturing cost = material costs +

production costs

Total costs =

manufacturing costs + research & development cost + administrative cost +

selling and shipping costs

Sales costing in industrial companies Cash sales price =

total costs +
profit mark up
-
1 in % of total costs)

Target sales price =

Cash sales price + discount ( wi % of target sales price
Net list sales price =

target sales price + rebate ( in % of net list sals price )

Gross list sales price =

net list sales price + sales tax ( in % of net list sales
price)

Classification of cost objects

Relationship between program type and

É
{
costing method →
once or twice produced ,

individual for A product

ÉÉ →
pretty individual but larger
quantity (cars wines)
,

→
pretty similar

only type ( homogeneous)

→
one

a lot of same product

toFTTTz-
product determines what
→

costing system to apply

15
Module 4: Product and Service Costing
Tasks and design of product and service costing
Relationship between program type, Product characteristics Calculation procedure
product characteristics and costing Individual and series production job costing unit costs =

job costs / order volume

model

Variant/ variety and mass production large quantities and largely unit costs =
sum of costs per production department /

homogeneous products production quantity

Production of tangible goods change in inventory value

change in inventory value =

manufacturing costs of
goods manufactured -

manufacturing costs of goods

sold

Production of intangible goods NO

change in inventory value

g. Product and service costing for job shop production

The general approach to job costing Direct costs Overhead costs

characteristics can be directly traced to an Cannot be directly traced to an individual job

individual job ↳
application of cost allocation bases
-

,
e.
g.
a
single
overhead rate

Example direct material cost Depreciation

-
-

direct labor cost

-

Cost of lubricants or
operating materials for
the use of plants

Example 1 A
single overhead rate in volume terms

Production time las cost allocation base )

-

→ i. e. overhead rates in volume terms

Annual total overhead costs

=
€9
Production
hourly rate =
Annual production time 1in hours)

Overhead costs =
production hourly rate hours .

in use

Total costs =
direct material + direct production / labor +
special direct manufacturing costs + overhead costs +
special
direct and
shipping costs
selling

Example 2 A
single overhead rate in volume terms

Direct labor Ias cost allocation base)

-

i. e. overhead rate in value terms

Annual total overhead rate

Overhead rate 1in %I
=

Annual direct costs

.

100 = %
overhead rates
Overhead costs =
eoo
.

direct labor

Total costs =
direct material + direct production / labor +
special direct manufacturing costs + overhead costs +
special
direct and
shipping costs
selling

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16
Module 4: Product and Service Costing
Product and service costing for job shop production
Job costing and multiple overhead rates →
exact allocation of indirect costs =
more exact with multiple

↳
decide yourself ask yourself what's
:
the cost driver in the particular cost center

Job costing in industrial companies

of
=

Selling general
.
1 administrative cost

distinguish total cost in manufacturing & SGA cost

-

Product costing using multiple overhead Breakdown of overhead costs by cost centers

rates

Example 1 Conduct product costing

using multiple overhead rates

Breakdown of overhead costs by cost centers →

way more reliable than just use 1 overhead rate

Bag

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Ef
17
 Module 4: Product and Service Costing
Product and service costing for job shop production
Machine-hour costing →
indirect cost allocation becomes more

exact with Machine hour

-

costing

Example 1 conduct product costing using machine hour rates

-

→
improved level of detail

Overview of approaches to calculate the -

4
different approaches to calculate the costs for the job with different outcomes
cost for the job -

goal is an outcome as exact as

possible

Times and forms of job costing Times :

before completion before accounting after accounting

Normal / preliminary costing :

until job completion

production program negotiation or price policy planning

-

Interim
costing
:

prompt after job completion

-

cost and profit control

↳
also learning to respond to customer requests /needs

post costing Actual /

toF TTT z-
:

after the end of the accounting period

-

inventory valuation costs and profit control

,

↳ exact profit

18
Module 4: Product and Service Costing
Product and service costing for job shop production
Time-dependent overhead rates Actual overhead costs

Actual overhead rate

=
Actual production time 1in hl

Average overhead costs

Normal overhead rate time 1in h )

Average production
=

Planned overhead costs

Planned overhead rates =

planned production time Linh)

Times and forms of job costing -

the chosen form of job costing does not affect the general structure
of job costing
Normal / preliminary planned direct costs planned overhead total planned costs future
costing : + = →

planned overhead planned overhead rate planned production time

•

Interim costing :
Actual direct cost + normal overhead = total normal costs

Normal overhead normal overhead rate .

actual production time

Actual /post costing Actual direct

:
cost + actual overhead =
total actual costs

Actual overhead =
actual overhead rate .

actual production time

Example 1 Conduct product costing using normal overhead rates

→ look at past & take

average

Bookkeeping for job shop production →

3T Accounts
-

successive
recording of material consumption direct labor and overhead costs
-

. ,

examples work in process to material

-

:
raw

work in process to and salaries

wages
Schematic flow of manufacturing costs

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19
 Module 4: Product and Service Costing
Product and service costing for mass and batch production: Single-stage process costing
Single-stage process costing Examples for single product production electricity forestry water industry
-

- :
a
, ,

↳
Total cost per unit =
total host of the period / produced
quantity

§ and service costing for mass and batch production: Multi-stage process costing
Product
Multi-stage process costing =

Application it the manufacturing process meets different quality standards ,

stock
changes occur to
varying degrees or the
'

products degree of completion differ

starting point physical flow of products and quantities between different production stages
:

Example →
carpets produced in 4
manufacturing stages and with different quality standards

Task :

Multi-stage process costing while not distinguishing between finished and unfinished intermediate products within production
flow

1245 =

Special feature at the end of an different levels of completion of

→
intermediate products possible

accounting period →
material and
production costs may change over time

↳
adjust calculation procedure

Example -

producer of 4 diff carpets

. wants to take different unfinished products degree of completion into account

Task :
analyze production progress in production stop 1

intermediate
considering unfinished
→

products affects stage related unit costs

toFTTT z -
-

of all subsequent production stages

→ Calculation of costs for next accounting

period :

cost for unfinished intermediate product .

830 10 +1,688.76 7=20.121 32

. .

100% 70% ↳ flows in next

prod .

stage
20
Module 4: Product and Service Costing
Product and service costing for mass and batch production: Equivalence number method
Equivalence number method Determination of costs of . . .

. . . related products which are . . .

. . .

produced on similar
manufacturing equipment and . . .

similar materials
. . .

using raw

Examples breweries that brew several types of beer

: -

Foundries that cast similar types of models

-

companies that produce several types of

-

screws

Basic assumption
-

fixed relationship between the related products

Manufacturing costs per unit of series ✗ Equivalence number of series ✗

=

Manufacturing costs per unit of basic type Equivalence number of the basic type

Example -

a foundry casts different sites of gear wheels which have a fixed relationship to each other

Task :
use the equivalence number method to determine the cost of the related products

:
25 = A =
a)

i 25
=
.

0.75 =
b)

: 25
=
.

1,3
=
C)
i
25 =

-1,5 =
d

9. costing for mass and batch production: Cost allocation for joint products and byproducts
Product and service
Cost allocation for joint products and Production of joint products and byproducts occurs when several products are produced simultaneously in

byproducts a
production process
Practical examples

Procedures to calculate costs of joint Main product method -

:

products and byproducts breakdown into main products and

by-products
-

the profits of byproducts are deducted from the total costs incurred before the decoupling point f- neutralize byproducts)

Distribution method based on production volumes

:

allocation of costs in aired before the decoupling point aa.to produced quantities or weights f- basis of quantity I
-

determination of profit for all products

Distribution method based on market values

of costs value allocation incurred market

toF before
T decoupling
T point T z-
the aa to
-

lower market value lower cost

charge
=

higher market value =

higher cost
charge

21
 Module 5: Cost functions and determining how costs behave
Identifying typical cost functions: Elementary cost functions
Fixed costs Fixed costs stay constant when the level of units varies
=

Fixed costs per unit =

decrease when the level of activity increases ( distribution on machines →
higher numbers

are better )

Exp Fixed costs

:
Exp Fixed costs per unit
:

Variable costs Variable costs =

change when the level of activity varies

Variable costs per unit usually stay constant when the level of activity
=

varies

Exp Variable
:
costs Exp Variable
:
costs per unit

Proportional, convex and concave cost Proportional costs :

increase in the same proportion as in the level of activity ( linear
functions convex increase in
costs : a
higher proportion compared to the increase in a chilly leg .

pay overtime
concave costs increase in :
a lower proportion compared to the increase in achiity

Those
Identifying typical cost functions: Combinations of elementary cost functions
Semi-proportional costs →
consist of a fixed and a proportional component (variable prod .
costs)

)
( linear

proportional
toFI TTTz-
É

22
 Module 5: Cost functions and determining how costs behave
Identifying typical cost functions: Combinations of elementary cost functions
Costs with an upper or lower limit Costs with limits =

costs can have an

upper or lower limit I stay constant to a specific point)

constant

constant proportionate

Step fixed costs →

increase by leaps and bands Ie.g. need another machine for
higher capacity )

9 "

3 Men
2 men

A man

S-shaped costs →
are characterised by a mixture of fixed and proportional costs

353
Identifying typical cost functions: Cost functions, cost drivers and the time horizon
Cost functions and cost drivers Cost functions =
describes the cause-and-effect relationships between the cost drivers and the costs
C =

flx) ✗ → cost driver lamont)

cost drivers =
constitute the independent ( explanatory variables of the cost function
e.
g. level of achiity
Different types of cost drivers

Cost drivers and time horizon single cost driver :

the level of activity is the only cost driver

e.
g. cost of auxiliary and
operating materials → C- -

fl machine times

Multiple cost drivers :

several machines drive the costs
costs
g. machine operator C f-I set up time machine time)
e. → = -

fixed term
longz vary with Time horizon :
short term costs can be variable in the medium to and one
toFT TT -
-

or more cost drivers

↳ cost function differs with the time horizon

23
 Module 5: Cost functions and determining how costs behave
Identifying typical cost functions: Cost functions, cost drivers and the time horizon
Learning and experience curves Learning curves

average working time decreases with the number of products manufactured

-

concave cost function of wage or

salary costs

e.
g. direct labor cost per unit decreases with the output quantity
-

assume manual activities

Experience curves
-

unit costs ,
and not only the direct labor costs per unit decrease with the increase in
,
output
quantity
-

concave
manufacturing costs function
e.
g. consumption of auxiliary and
operating materials decrease with the number of repetitions .

or that scrap is reduced

-

also
apply to automated activities

Egg
Determining cost functions: Simplifying cost functions and the relevant range
Methods simplified cost functions reduce the
high complexity of cost forecasting
:

Methods to simplify cost functions

1
Aggregation 1several costs)

2 .
Linearization 1 costs
generally not linear -

reform)
3.
Homogenisation I make cost functions more
homogeneous )
Relevant Range cost forecasts
:
are only made for meaningful time frames

Cost type and cost pattern

Example

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23
 Module 5: Cost functions and determining how costs behave
Determining cost functions: Analytical methods

Analytical methods →
analyze cause-and-effect relationships between outputs and inputs in terms of quantity and time

Resources
-

bills of material

work schedules and functional analysis

-

time -

and -

motion studies
-

empirical values
-

technical documentation
contractual documents
legal regulations or
-

Egg Determining cost functions: Statistical methods

Overview →
use the costs of past periods to estimate cost functions and , on this basis to .
forecast the costs

of a future period
Three common methods
1. Account analysis method
2.
High -

low method

3. Univariate multivariate
or
regression
Cost use benefit consideration precision of the cost forecast balance
versus
necessary information need
→
:
a

between those

Example

Account Analysis Method →

costs of each
category are classified as fixed proportional or
,
mixed
↳
provides a subjective cost function distinguish between proportional &
fixed

cost function :

costs of repair =
257 185 + €39
,

per repair now .

repair hours

proportional cost =
proportional cost /reference valve
(fixed
"

Cost function
"

C. hours
repair
= + -

proportional

toFTTTz-
Module 5: Cost functions and determining how costs behave
Determining cost functions: Analytical methods
Example High-low-method →
consider only two past observations lowest
highest 4
:

↳
provides an objective estimate of the cost function
↳
Outliers can lead to a distorted picture

cost function :
y
=
a + b- ✗ 1 linear)

Difference between costs for the

highest and the lowest
quantity of cost drivers

lost functions slope (b)

:

Difference between the

highest and lowest quantity of the cost driver

constant (a) :
calculated by transforming the cost function → a =
y
-
b. ✗

cost
quantity

line between highest and

lowest point =
relevant range

Linear regression → Uses all available observations to estimate the cost function
↳ method provides an objective estimate of the cost function
↳ more precise but requires a
larger number of observations
Linear regression analysis :
one dependent and one independent variable
e.
g. repair costs depend on the number of repair hours
Multiple regression analysis :
one dependent and several independent variables

the number of
e.
g. repair costs depend on repair hours and repair orders

toFTTTz-

26
 Module 5: Cost functions and determining how costs behave
Determining cost functions: Documenting cost forecasts
Documentation of overhead cost Differentiated approach :
cost functions are determined and documented separately
forecasts by cost category →
for each overhead cost category
Overhead cost
categories
overhead cost of operations
-

auxiliary material , operating material ,

and tool costs
-

Maintenance costs

imputed depreciation
-

imputed interest
-

taxes and insurance

Cost-center Summary sheets →

are used to document overhead cost forecasts
that there is cost driver for each cost
assume
only center
→
one

fixed a variable cost

Extension of cost-center Summary sheet 1. Differentiated reporting of fixed and variable costs

2.
Step-by-step plans =
more transparent

you can see each possible scenario

↳ how to deal with

uncertainty

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27
Module 6: Profit and loss calculation
Purposes of the income statement
Tasks of the profit and loss calculation Linkage of cost and revenues
comparison of cost and revenues to reveal a company 's profit
-

↳
only possible for private companies that generate revenues I need to make profit
for public institutions other indicators must be found to determine the output
•

Determination of the profit per unit

contribution that a product or service makes to a company 's profit
-

↳ determination of unit costs and

prices on a per unit basis necessary
Determination of the net profit for a period
comparison of costs and revenues of an
accounting period to determine the net profit also be
-

can

calculated for an individual product

companies prepare internal income statements more

frequently than required ( by financial accounting rules)
-

to support decision
making leg . on a
monthly basis)

33g Methods for preparing an income statement

Methods for preparing an income Basic problem
statement -

allocation of costs to manufactured and to products sold

↳ the quantity produced influences the Mani
factoring costs

↳
yet the quantity sold has a
greater effect on
selling and shipping costs

Methods to calculate the net profit of a period

Differentiation between quantity produced and quantity sold as the basis for calalating product related costs
-

Nature of expense quantity produced as cost basis

↳
method :

↳ Cost of sales method

-
- :

quantity sold as cost basis

Nature of expense method Characteristics

comparison of the total costs ( of all produced products) with the total revenue ( of all sold
-

products) of a period

any changes in
inventory 1 deviations between quantity produced and sold I must be taken into account
-

Structure of the income statement

Profit = Total revenues +

inventory increases) -

total costs +

inventory reductions

LOSS

Example

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28
 Module 6: Profit and loss calculation
Methods for preparing an income statement
Nature of expense method Advantages
simple calculation structure
-

into the double

easy integration entry bookkeeping system
-
-

overview of cost type structures

-

rewgnitability of inventory changes Isee them easily )

-

classification of cost categories Iusually already done in financial accounting necessary information
-

and

already visible
Disadvantages
-

determination of inventory reductions and increases via inventory recording

recording and
valeting of changes in
inventory
consumingis time
-
-

unit cost calculation is required for determining the manufacturing costs of inventories
-

no indications for profit product functional area level

-

on or

no differentiation of cost structure between functional departments (no control purposes ! I

Cost-of-sales method Characteristics often used internationally typically large

, enterprises
-

comparison of costs and revenues on product level ,

not category level
-

application of product costing to eat alot unit costs for all products
the total costs of a product include :

manufacturing costs as well as administration ,

selling and
-

shipping cost ( SG4H

Structure of the income statement

Profit =
Revenue -

cost

Example

only product sold !

Advantages
stock
no
taking necessary
-

very fast profit determination

profit analysis product level possible Kubica when using full costs)
-

on

Disadvantages
toFTTTz-
difficult to
integrate into the double entry bookkeeping system
-

calculation of total costs

necessary
-

29
Module 6: Profit and loss calculation
Income statements and financial accounting: comparison
Income statements and financial Characteristics
accounting -

FA :
companies structure their income statement either nature of expense or cost of sales method
according to :
-
-

Companies reporting in accordance with BGB frequently structure their income statement using nature of expense
↳
cost -

of -

sales :
more internationally used

valuation of inventory changes is also

necessary for financial accounting
-

However :
finished and unfinished goods are valued ace . to so called
manufacturing costs =
precisely defined by
specific regulations

In financial
accounting, the
income statement is
presented in a vertical
form

3g Absorption and variable costing: comparisons of operating income

Absorption and variable costing →

many companies distinguish between fixed and variable costs not only in cost accounting ,
but also

when
preparing their income statement

Income statements based on…

absorption valuation of product units at full cost lie the of fixed and variable cost)
costing sum
→
. . . .

. . . variable costing → valuation of product units at variable cost

→
fixed costs of the period shown separately
Differences in valuation of inventory changes

Example :

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30
 Module 6: Profit and loss calculation
Absorption and variable costing: comparisons of operating income
Absorption and variable costing Example :

→
change in inventory
Example 2 :

3g
Absorption and variable costing: comparing operating income for multiple periods
Comparing operating income for multiple Comparing operating income for multiple periods with…
periods constant levels of inventory profit according to absorption profit according costing
costing to variable
: =
. .
.

. . .
increases in inventory profit according
: to absorption
costing > profit according to variable costing
. . . decreases in
inventory :
profit according to absorption
costing
<
profit according to variable costing

Example Terra ✗ for 3 :

sitssequent months

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31
 Module 6: Profit and loss calculation
Absorption and variable costing: comparing operating income for multiple periods
Comparing operating income for multiple Example 2 :

periods
inv start
built
sold
inr .
end

£3B always the same Ifixed ! )

Absorption and3g
variable costing: Incentives for undesirable buildup of inventory (under absorption costing)
Incentives for buildup of Inventory

Example :

+50 +50

-150 +50

toFTTTz-

+ 560 +4 go

32
 Module 6: Profit and loss calculation
Absorption and variable costing: Incentives for undesirable buildup of inventory (under absorption costing)
Measures against false incentives -

conduction of a variable costing income statement ( instead )

under absorption costing -

consideration of imputed interest costs on inventories

-

limitation of storage capacity

-

close control of planning of production volumes and inventories

-

implementation of variable compensation systems I linked to multi year incomes) -

thinking of bonuses to
reaching or falling below certain inventory levels 1 incentive to keep it small)
-

33
Contribution-margin Accounting: Simple contribution-margin Accounting
Contribution-margin accounting Definition :

↳
refers to a special income -

statement format displays :

variable and fixed costs separately
contribution revenues variable costs
margin
- = -

describes extended 1in vertical form )

an cost of sales method under variable
costing
-
-
-

Income statements… based on

Simple contribution margin accounting summary and allocation
→
of all fixed costs in one block
- -

Multi leveled contribution of fixed costs

margin accounting gradual allocation product product group
-
- -
→ on -

, ,

divisional and company level

-

Example:

Bag
Contribution-margin Accounting: Multi-level contribution-margin Accounting
Example

Advantages of contribution-margin -

indication of the amount each individual product contributes to cover the company 's fixed costs
accounting
Gaining of T
toF profitability of
insights into T products
T z-
additional the individual
-

Creation of company's profit

a better
understanding of the two sided effects of short-term decisions on the
-

Provision of important information for decisions

medium and
long-term
-
-

33
Module 7: Cost volume profit analysis
Introduction: Objectives of cost-volume profit analysis
Objectives of cost-volume profit →
is used to calculate the
quantity of products that a
company needs to sell to break -

even

analysis ( profit =D

Other Questions
how many products does
company need to sell in order to achieve a certain target profit ?
-

how does the profit change it we sell a certain amount of additional products ?
-

what influence do the levels of fixed and variable costs have on the company's risk ?
-

Should
company manufacture product less automated machine with low acquisition costs and
-

a a new on a

high variable costs or on a

highly automated machine with
high acquisition costs and low variable costs ?

in which cases in in-house production cheaper than external procurement ?

Bbq Cost-volume profit analysis for a single product

Profit equation as starting point Basic concept :
comparison of the costs for a product with it 's revenue

Profit equation :
starting point for a cost volume
-

profit analysis is a
company's profit equation ,
which

compares revenue with costs

Profit =
revenue
-

variable costs -

fixed costs =
contribution
margin
-

fixed costs

P p q ev g Cf cm 9 Cf
= - '
- = .
-
.

with :
PI Profit) ; p ( constant prices) ; Cv ( constant variable unit costs) ; at Output quantity) ; Cf I Fixed costs) ;

( contribution per unit

cm
margin

Break-even point and critical sales Break-even point 19B£ ) i

point at which the company realizes a zero profit
revenue -

0 =
cm
-

q
-

Cf

resolving :
9B€
=
Em

critical sales IRBE ) the critical quantity function yields

revenue
entering in the revenue
:

R BE =

P 9
.

BE

Example

disadvantages z 1has )
toFTTT -
or

cost profit
;
.

more units ,
more profit 34
Module 7: Cost volume profit analysis
Cost-volume target profit
Target profit →
How many products does a
company need to sell in order to achieve a certain target profit

Critical quantity

Target Profit (TP) TP cm q Cf

= .
-

critical quantity 9Tp = ( Cf +

TP) on

Example

an =

0,25-0,05

Target return on sales →

How
many products does a
company need to sell in order to achieve a certain target return on sales ?

Critical quantity

Target return on sales IR05

P R0S R F- R0S
or p q
= . . -

with initial profit equation .

P =p q this yields R0S

Cray Cf p 9 =p g- Cv q Cf
- - .
.
. . -
.

Critical quantity :
Gros =

Cf ( cm
-

R0S .

p)

Example

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35
Module 7: Cost volume profit analysis
Cost-volume profit analysis for multiple products
Calculating the break-even line
"
"
→
how can we determine the break even point for multiple products ?

Break -

even line :

Profit function in the two -

product case

TP =

pn
.

oh +
pz 92 .
-

Ch
.

91
-

cuz -92
-

Cf
(ma CM2 92 Cf
=

9,
' -

+
-

critical quantity 9, depends on the quantity on

9 BE A =
( Cf +
TP ) cm n -

92 CM2
.

0MN

Example

3- Cost-volume profit analysis with a constant sales mix

Calculating the break-even lone with a →
firms often assume a certain sales mix of products sold for the break-even analysis
constant sales mix
"
92=9
'
Break-even line if we assume a constant sales mix r= qz r

TP =
cmi 91 +
cmz
.

91 r
-

Cf
(Cf +TP) / ( cm ,
the anticat
quantity q
BE1 is 9 BE a r )
=
+
Cme

Example

toFTTTz-

36
Module 7: Cost volume profit analysis
Assumptions of cost-volume profit analysis
Assumptions 1. costs and revenues depend only on the quantity .

other factors Ie. g.

changes in
wage costs or prices I are not taken into account
-

2. Costs and revenues

linearly increase in quantity
non linear increases in costs
leg due to
capacity expansions) require an extended version of the analysis
-

-
.

compared to the basic model

3. Variable costs per unit ,

fixed costs and sales prices are assumed to be known and constant

the and of money by different payment dates

4.
entity maximises profit disregards any time value

3k
Cost-volume profit analysis with uncertain input parameter: Sensitivity analysis
Objectives of cost-volume profit Sensitivity analysis → can be used to how profits or the break -

even point will

change it assumptions about an

analysis
underlying parameter change
Questions that can be answered: -

how much does the profit change if the quantity sold decreases by 200 units ?
-

what effect does a 10% increase in fixed costs have on the break-even point ?

How to perform sensitivity analysis?

apply simulations
using computer spreadsheets
-

differentiate the equation for the value of interest such as the break even
quantity with respect to
-
-
- -

the parameter value that we consider uncertain

Example

units

3g profit analysis with uncertain input parameter: Margin of safety percentage

Cost-volume
Margin of safety percentage captures how decrease expected sales for
in the
quantity the
→ severe a is
company
Questions that can be answered →
by which
percentage may the sales volume decrease before the break-even

point is reached ?

Calculation Margin of safety percentage

: M0S % =

I9-9BE ) 9
with q I expected sales volume) ; 9 BE 1 break-even Quantity )
:

Example

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37
Module 7: Cost volume profit analysis
Cost-volume profit analysis and cost-structure flexibility: insourcing vs. outsourcing
Insourcing versus Outsourcing Outsourcing → is an important instrument that substitute fixed costs for variable costs

Questions that can be answered

-

at which volume is it preferable to produce a

product or perform a service within the company

rather than from external parties ?

-

at which volume is it preferable to transfer the supply of products or services that were
previously
produced within the company to external companies
don't consider
→ we
strategies
Example

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38
 Module 8: Cost and revenue information for operative decisions
The decision making process for operative decisions
The decision-making process

1. know that a certain decision has to be made

2. 3 C 's :
Customer competition Cost
, ,

3 . Look at different alternatives of prices

4. Choose l of several
5. keep track of decision outcome

org
The decision making process: planning objects, horizon, objectives and constraints
Planning objects, horizon, objectives and Planning objects
:

constraints determination of product and production or service

program
-

selection of a suitable production process

-

Choice between in-house production and external procurement

-

determination of lower price limits and list prices

Planning horizon
:

operative decisions up to A year

-

varies by planning object

Planning objectives
:

typically multidimensional
-

include both
monetary and qualitative criteria
-

Planning restrictions

3gThe decision making process: quantitative and qualitative information

Classification of relevant information Quantitative information
Recordability
numerically recordable
-
:

Examples Monetary daily rates total costs

-

:
→
,

Non-monetary → work load of a employee

Qualitative information
Record
ability only :
measured 1 describes numerically to a extent
Examples Moral :

of employees
→
hard to translate to numerical

General :
both information types are important for decision making
toFTTTz-

3g
Module 8: Cost and revenue information for operative decisions
The decision making process: quantitative and qualitative information
Characteristics of accounting systems Characteristics :
provision of quantitative figures
. . .
on a monetary basis
. . .
but representation of only one information system among others

shortcomings :

usually only approximation of the consequences

-

are difficult to
quantify or cannot be captured at all
↳ some

positive or negative synergies of decisions are not fully reflected

-

Decision
supporting information
-

support of decision-making process with the information provided

-

In some cases :
application of simple decision rules

characterized by fixed relationship between

↳ :
the quantitative values (provided by accounting) and the decision

to be made
→
the more important non -

monetary or qualitative information is less often a simple decision robe is applied

Bbq
The decision making process: Characteristics of decision making under uncertainty
Characteristics consequences of decisions lie in the future therefore uncertain
generally
-

Accounting options for dealing with 1. Information on expected revenues 1 costs

uncertainty 2. Identification of different scenarios and determination of for each scenario (
revenues and costs
separately)

Egg costs of operative decisions: requirement for information from accounting

Relevant
Requirements for information from 2

accounting

:
Relevant33gcosts of operative decisions: sunk costs, opportunity cost and operative decisions
Sunk costs and operative decisions Sunk costs

. . . are irrevocably set

by past decisions
cannot be
. .

changed
. . . do not vary with alternatives
↳ not relevant information
↳ not to be considered in a calculation

Opportunity costs . . .

correspond to the lost advantage of the foregone alternative

. . .

presuppose the existence of multi product restrictions

-

=
relevant information
Example :

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Module 8: Cost and revenue information for operative decisions
Relevant costs of operative decisions: the effects of using full-cost information
Characteristics and effects of using full- Variable costing
cost information fixed costs
variable and presented
separately
↳
are

Effect provision of
:
relevant information supports rational operative decisions
↳
more relevant in short run

Absorption costing
↳
variable and fixed costs are presented jointly
Effect :
consideration of irrelevant components leads to distorted operative decisions
↳
not relevant in short run ;
-

absorption could lead to false picture fix not relevant for decision making
Example

distortion

B- Product mix decisions: Determining the optimal product mix

Determining the optimal product mix -

Decision criteria
vary in terms of the number of binding multi -

product constraint

positive

↳ per usage / time

optimisation more complex

1: Optimal product mix with no binding product constraing

criterion for product decision :
contribution
margin per unit
=

price per unit

-

costs per unit

Indications of contribution
a
negative margin
:

may not make sense to produce the product

↳
should check whether there are
synergies with other products
company
sales
synergies
:
extent to which the sales of one product has a positive (or negative ) effect on the

sales of other product

Example

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Module 8: Cost and revenue information for operative decisions
Product mix decisions: Determining the optimal product mix
Determining the optimal product mix 2: Optimal product mix with one binding product constraint
Criterion for product decision :

revenue per unit costs per unit

-

Relative contribution
margin of products necessary capacity
=

Procedure
1. only products with a positive contribution margin are considered

2. these products are ranked based on their relative contribution margin in descending order

3 .

they are then scheduled in this order on the machine with production bottleneck

existing single product the multi product

4. their production quantity is based on either an constraint or on -

constraint

Example

3: Optimal product mix with >= two binding product constraint

criterion for production decision :
total contribution
margin
Multiple simultaneous restrictions: increased complexity in soilution finding
1. Analytical / graphical solutions
2. Computer algorithms based determination of the solution for particularly complex problems (simplex)
331 Pricing decisions: price setter vs. price taker
Price setter vs. price taker Price setter
-

companies in industries with few competitors

with customer specific orders and
strong market power
-
-

can influence selling prices of their products

Price taker
-

branches of industries with a

large number of companies
relatively homogeneous products
-

only a limited influence on prices

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 Module 8: Cost and revenue information for operative decisions
Pricing decisions: lower price limits for negotiations and tenders
Lower price limits for negotiations and Initial situation
tenders
for inquiries and tenders the
company making the offer needs information on the lower price limit
-

C , of the order

Definition of offer price

-

depending on the attractiveness of the order ,

the customer's presumed willingness to pay IWTPI and
,

the expected follow -

up orders and offers from competitors

↳ sales employees determine a profit mark up ✗
-

Offer price :
p
=
( I + ✗I C ,

Practical example - TENDERS

Example

&e Pricing decisions: long term pricing decision

Long-term pricing decisions Objective
definition of the average target price ( for a period of several months or
longer)
-

dong -

term influencing factors

long term effects of prices on demand
-
-

Customers WTP

ability to adjust capacities to changing demand

-

Differences to short term pricing -

fixed costs of capacity are relevant for long-term decisions

-

Decisions often based on total costs

absorption costing for long -

term
pricing decisions

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