ZZZZZZZZZZZZZZZZZZZ Cost Accounting Controlling 2010-10-11

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Literature II
List of Abbreviations III
A. Cost Accounting 1
1 Basics of Cost Accounting 1
1.1 Concept and Structure of Accounting .................................................. 1
1.2 Cost Categories ................................................................................... 2
1.3 Groups and Systems of Cost Accounting ............................................ 2
2 Cost Category Accounting 3
2.1 Tasks of Cost Category Accounting .................................................... 3
2.2 Costs of Materials ................................................................................ 5
2.3 Imputed Depreciations ....................................................................... 12
3 Cost Center Accounting 19
3.1 Tasks of Cost Center Accounting ...................................................... 19
3.2 Steps of Cost Center Accounting ...................................................... 20
3.3 Methods of internal performance allocation ....................................... 26
3.3.1 Step-ladder Method or Step Down Allocation........................... 27
3.3.2 Equation Method or Reciprocal Allocation ............................... 33
4 Cost Unit Accounting 40
4.1 Tasks and Types of Cost Unit Accounting ......................................... 40
4.2. Usual Surcharge Rate Calculation..................................................... 42
4.3 Machine Hour Rate Calculation ......................................................... 49
5 Operating Income Statement 57
5.1 Tasks of an Operating Income Statement ......................................... 57
5.2 Expenditure Style of Presentation ..................................................... 59
5.3 Cost of Sales Style of Presentation ................................................... 65
B. Controlling 72
1. Basics of Controlling 72
2. Operations Management 73
2.1. Direct Costing .................................................................................... 73
2.2. Bottleneck-Analysis ........................................................................... 76
2.3. Break-Even-Analysis ......................................................................... 89
IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

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2.4. Cost Control 94

2.4.1. Introduction to Cost Control ...................................................... 94
2.4.2. Cumulative Method ................................................................ 100
2.4.3. Differentiated Method ............................................................. 106
3. Strategic Management 110
3.1 Target Costing ................................................................................. 110
3.2 Value Benefit Analysis ..................................................................... 120
3.3 Balanced Scorecard ........................................................................ 125
Literature
Horngren, C.; Bhimani, A.; et al.: Management and Cost Accounting;

New Jersey USA 1999
Horngren, C.; Foster, G.; et al.: Cost Accounting; New Jersey USA
2000
Neuner, J.; Frumer, S.: Cost Accounting; Homewood 1967

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List of Abbreviations
al depreciation per unit used
at depreciation allowance in period t
A initial value
bi consumption of material for the production of one product unit of

product i
cv variable costs
Cf fixed costs
CC Cost center
CM contribution margin CM = p − c v
d rate of degression
I/J total number counted
L total potential of usage
mij number of u that CC i provides for CC j
Mi total u provided by CC i
n asset life
p price of goods
P Profit P = p×u
p.c. primary costs
PSCi primary costs of CC i

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q price of resources
r total consumption r = x×v
Rn remaining value
Rt value in period t
s.c. secondary costs
t considered period
TCM total contribution margin ∑ CM

tpi transfer price for 1 u of CC i
tp1*m12 individual consumption (transfer price of CC 1 times the number of

u provided from CC 1 to CC 2)
TU time unit
u unit
v consumption per unit
xi output per product
xb output breakeven
?p planning data
?a actual data

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A. Cost Accounting
1 Basics of Cost Accounting
1.1 Concept and Structure of Accounting
In an industrial plant, factors of production (raw materials, machines,

personnel) are used to produce and sell products. This comprises a
lot of activities within the organization as well as interactions with the
environment. To control these activities, a lot of information has to be
provided, e.g. about cash and product flows. This is the task of ac-
counting.
Accounting = systematic determination, description, analysis and in-
terpretation of numbers (amount and value) of single businesses and
their relations with other business subjects.
Concerning the structure, the following division is common:
external accounting (balance sheet, profit and loss statement)
internal accounting (cost and revenue accounting)
Basically, it can be assumed that external addressees (e.g. creditors,
the state) can only inform themselves through published information,
while internal addressees (owners, employees, management) can
use internal data as well. But this is not always true in practice. For
example, a bank which actually is an extern addressee will usually be
able to demand internal data while a small shareholder, who is an in-
ternal addressee, cannot.

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1.2 Cost Categories
1) Variable Costs and Fixed Costs

a) variable costs = change in dependency of the
changes of a cost driver
b) fixed costs = do not change despite changes of a
(certain) cost driver,
2) Direct Costs and Indirect Costs
a) direct costs = can be directly assigned to a cost ob-
ject
b) indirect costs (also overheads) = can not be directly
accounted to a cost object
1.3 Groups and Systems of Cost Accounting
Cost accounting is usually divided into the following

groups according to the information objective:
1) Cost category accounting
2) Cost center accounting
3) Cost unit accounting

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2 Cost Category Accounting
2.1 Tasks of Cost Category Accounting
The system of cost category accounting is used to an-

swer the question of which costs did occur or are ex-
pected to occur.
Æ recording of all costs, that occurred or are expected
during an accounting period (partly divided into
quantity figures und value figures)
Æ structuring of the recorded costs using certain crite-
ria, usually factors of production, e.g. cost of materi-
als, personnel costs, imputed depreciations, imputed
interests; are used for this

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Definitions:
costs of materials = rated consumption quantity of ma-
terial consumer goods, a company buys (especially
raw materials, auxiliary supplies, operating supplies)
personnel costs = costs for personnel
imputed depreciations = the costs that occur by wear
and tear at durable or immaterial goods
imputed interests = in cost accounting, interests are
usually calculated for using capital provided by the
company owners and by creditors
Tasks of cost category accounting:

1) Basis for following calculations (cost center account-
ing and cost unit accounting)
2) Own analysis of cost structure (portions of particular
costs, chronological development)
In this lecture only 2 categories are discussed more
closely. Those will be costs of materials and deprecia-
tions.

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2.2 Costs of Materials
Definitions:
costs of materials = rated consumption quantity of ma-
terial consumer goods, a company buys (especially
raw materials, auxiliary supplies, operating supplies)
raw materials = material goods, a company takes over
from other companies and changes, and which be-
come a main component of the product (e.g. wood in
the wood-processing industry)
auxiliary supplies = material goods, a company takes
over from other companies and changes, and which
become unessential product components (e.g.
screws, nails, glue)
operating supplies = material goods, which a company
takes over from other companies, and which are
used in the production process, but do not enter the
product (e.g. fuel, lubricant)
Æ quantity and value need to be determined each.

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1) Determination of the consumption of material:
a) Inventory method:
Both initial inventory and final inventory are deter-
mined by an inventory (physical inventory taking)
b) Return accounting:
Consumption quantities are derived from the pro-
duced units and their composition, which is recorded
in bills of material or receipts, including an additional
quantity for waste and (factory) rejects.
c) Clearing or perpetual inventory method:
The consumption of material is recorded using mate-
rial stores accounts and receipts (material requisition
slips).

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2) Valuation of material consumption quantities:
a) average valuation:
valuation with the help of a weighted arithmetic av-
erage of the purchase prices (either period related or
permanent)
Evaluation / criticism:
simplification, relative good results when prices fluc-
tuate in both directions
b) method of process costing:
form of collective valuation
valuation with the help of assumptions concerning
the sequences of consumption, either relating to the
date of entry or the prices (period related or perma-
nent, respectively)
• FIFO: first in-first out
• LIFO: last in-first out
• HIFO: highest in-first out
• LOFO: lowest in-first out

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• simplification; assumed sequence of consump-
tion should be equal to the actual
• sequence (e.g. FIFO when silo storing, LIFO
when storing on a dump)

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Example A.1
quantity price
initial inventory 100 22.-
increase in inventory 01/04 140 20.-
quantity withdrawn 01/09 110 ?
increase in inventory 01/15 120 21.-
quantity withdrawn 01/20 100 ?
final inventory 150
period related average valuation:

100 ∗ 22 + 140 ∗ 20 + 120 ∗ 21
= 20.89
360
material costs = 210 ∗ 20.89 = 4,386.90
FIFO-valuation:
material costs = 100 ∗ 22 + 110 ∗ 20 = 4,400
LIFO-valuation:
material costs = 120 ∗ 21 + 90 ∗ 20 = 4,320

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Exercise A.1
For a raw material the following changes in stock occurred:
Change in inventory Amount (kg) Price (€/kg)

Initial inventory 1,000 15.00
Increase in inventory 10,000 12.10
Decrease in inventory 7,000 ?
Increase in inventory 9,000 16.00
Decrease in inventory 5,000 ?
Final inventory 8,000
Calculate the value of the final inventory as well as the value of the
goods used by means of the following methods:
a) period related average valuation,
b) period related FIFO-valuation,
c) period related LIFO-valuation.

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Exercise A.2
For a raw material the following changes in stock occurred:
Change in Inventory Amount (kg) Price (€/kg) Price (€)

Initial inventory 400 24.00 9,600
Decrease 02/03 300
Increase 03/12 250 25.00 6,250
Increase 04/15 150 28.00 4,200
Decrease 06/18 200
Increase 08/20 100 29.00 2,900
Decrease 11/03 150
Calculate the value of the final inventory as well as the value of the
goods used by means of the following methods:
a) period related average valuation,
b) period related FIFO-valuation,
c) period related LIFO-valuation.

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2.3 Imputed Depreciations
Definition:
depreciations = the costs that occur by wear and tear at
durable or immaterial goods
usually described as calculatory depreciations, since
a different valuation, compared to the calculation ac-
cording to legal requirements, is used.
Reasons for depreciation:

a) deterioration of time, e.g. at a machine, which
stands outside (even, when it is not used in the
process of production)
b) deterioration of use, e.g. by employment in the proc-
ess of production
c) technical progress, e.g. development of more effi-
cient machines
d) depletion of real estates / property, e.g. at gravel pit
e) expiration of patents

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For the determination of the depreciation allowances,

the following questions have to be answered:
1) depreciation base
2) useful life or potential of usage
3) depreciation method
1) Depreciation base:
• historical costs (purchasing price + purchasing

costs)
• replacement / market prices (value at the time of
machine replacement)
2) Useful life:
• technically possible useful life:
• economic asset life: reasonable asset life under an

economic point of view

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3) Method of depreciation:
a) time-depending methods
depreciation depending on the time of the calendar
• straight-line depreciation
• declining-balance depreciation
• sum-of-the-years digit depreciation

b) usage-depending method
depreciation depending on the usage of the machine

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Example A.2
purchasing price 280,000 €
purchasing costs 20,000 €
useful life 6 years
remaining value 60,000 €
total potential of usage 24,000 h
effective usage t1 4,200 h
a) straight-line depreciation:
A − Rn
at =
n
(280,000 + 20,000 ) − 60,000 = 40,000 €/ year
depreciation =
6
b) declining – balance depreciation:
⎛ Rn ⎞
⎜
p = 100 ∗ ⎜1 − n ⎟
⎝ A ⎟⎠
at = A ∗ p (p = percentage rate)
⎛ 60,000 ⎞
p = 100 ∗ ⎜⎜1 − 6 ⎟ = 23.5275508 %
⎟
⎝ 300 , 000 ⎠
a1 = 300,000 ∗ 0.235275508 = 70,582.65
a2 = (300,000 − 70,582.65) ∗ 0.235275508 = 53,976.28
a3 = (300,000 − 70,582.65 − 53,976.28) ∗ 0.235275508 = 41,276.99

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c) sum-of-the-years digit depreciation:
2 ∗ ( A − Rn )
d=
n(n + 1)
at = (n − t + 1) ∗ d
2 ∗ (300,000 − 60,000 )
d= = 11,428.57
6 ∗ (6 + 1)
a1 = (6 − 1 + 1) ∗ 11,428.57 = 68,571.42
a2 = (6 − 2 + 1) ∗ 11,428.57 = 57,142.85
a3 = (6 − 3 + 1) ∗ 11,428.57 = 45,714.28
d) usage-depending method:
A − Rn
al =
L
at = lt ∗ al
300,000 − 60,000
al = = 10 € / hour
24,000
a1 = 4,200 ∗ 10 = 42,000
a2 = 4,400 ∗ 10 = 44,000
a3 = 3,800 ∗ 10 = 38,000

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Evaluation depends on reason of depreciation, for the us-

age (wear and tear) the depreciation should be shown
as exactly as possible
a) time related methods are good for deterioration of time
b) depreciations depending on usage are good for dete-
rioration of usage
t since usually both reasons are relevant, a combination
of both methods seems reasonable

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Exercise A.3
The following information regarding a machine is available:

Purchasing price 1,000,000 €
Purchasing costs 100,000 €
Useful life 4 years
Remaining value 20,000 €
Total potential of usage 16,000 h
a) Calculate imputed depreciation and book values for the periods t1
to t4 if straight-line depreciation is to be used.
b) Calculate imputed depreciation and book values for the periods t1
to t4 if declining balance depreciation is to be used.
c) Calculate imputed depreciation and book values for the periods t1
to t4 if sum-of-the-years digit depreciation is to be used.
d) Calculate imputed depreciation and book values for the periods t1
to t4 if usage depending depreciation is to be used.

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3 Cost Center Accounting
3.1 Tasks of Cost Center Accounting
The system of cost center accounting is supposed to give an answer

to the question in which business areas costs originated or will origi-
nate. In this system the separation into direct and indirect costs is im-
portant.
Direct assignment of indirect costs to cost units is not possible; with-
out the use of cost center accounting, they could only be assigned to
a cost unit by using a total surcharge
Tasks of cost center accounting:
1) Basis for cost unit accounting as down-stream calculation.
The system of cost center accounting is supposed to allow an ex-
act assignment of indirect costs to cost units; it is considered to
which extent a cost unit has used the capacity of a cost center
2) Supervision of operating activities within the single cost centers
regarding their cost-effectiveness and compliance of cost budg-
ets.

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3.2 Steps of Cost Center Accounting
1st Step: assignment of indirect costs which have been recorded by

the cost category accounting to cost centers
2nd Step: allocation of internal performance
3rd Step: formation of surcharge rates for the cost unit accounting
4th Step: control of cost-efficiency
1st Step: Assignment of Indirect Costs to Cost Centers

The assignment should – if rationally supportable – correspond to the
costs a cost center has caused, i.e. indirect costs should be assigned
to those cost centers that are responsible for their origin.
First of all the question of which of the costs are indirect costs needs
to be solved. For this purpose, we will look at the types of costs again:
1) Material Costs:
are partly direct costs and partly indirect costs
• raw materials: often direct costs; usually they are recorded as

such
• auxiliary supplies: strictly taken, they are direct costs as well,

but for the reason of cost-efficiency they usually are not re-
corded as such (so called fictive indirect costs)
• operating supplies: are mostly real indirect costs

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2) Personnel Costs:
are partly direct costs and partly indirect costs
• direct labor (wages for work directly performed to produce the

products): usually handled as direct costs, although the as-
signment can be difficult (meaning, that often, those wages
are not depending on activity, e.g. time or minimum wages)
• auxiliary labor (wages, that are not directly used for produc-
tion, e.g. wages for maintenance): indirect costs; and as far
as they are not provided for single cost units, they are usually
handled as such.
• salaries: indirect costs
• imputed entrepreneur income: indirect costs
• legally required social costs: can be accounted together with

wages and salaries, i.e. they are partly direct costs and partly
indirect costs
• voluntary social costs: indirect costs
• other personnel costs: indirect costs
3) Imputed depreciations:
usually accounted as indirect costs, but can also be direct costs
(e.g. when depreciations, depending on usage, are used)
4) Imputed interests:
normally indirect costs, since there is no information which kind of
capital is used in the cost center

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Primary costs are those costs which are directly taken over from
cost category accounting.
2 types can be distinguished:

a) Cost center direct costs:
can be directly assigned to the cost center which caused
them, e.g. costs for wages and salaries of personnel that is
only employed at a particular cost center
b) Cost center overheads:
allocation only possible with the help of units of billing, e.g.
salary of a foreman who is leading more than one cost center
(e.g. allocation in proportion to employees employed in a cost
center or to number of machines)
Please note: I have mentioned the concept of direct and indirect
costs before. Those are strictly taken direct cost unit costs
and indirect cost unit costs.

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2nd Step: allocation of internal performances

This allocation is necessary, because some cost centers only produce
what is used within the business unit itself and therefore show no di-
rect relation to the cost units.
2 types can be distinguished:
1) Services, products, performances that are usable for several
years:
e.g. a self-generated machine can be capitalized, and there-
fore, they can be handled as a cost unit
they enter the cost center accounting for several periods as
depreciations and interests
2) Services, products, performances that are used within the
same period:
e.g. energy, maintenance
those performances have to be charged between the receiving and
delivering cost center
• indirect cost center: deliver performances, services to differ-
ent cost centers
• final cost center: performances, services can be directly as-

signed to cost units
Normally the following final cost centers are used: material (supply
and storage of material), manufacturing, administration and selling /
distribution
Therefore, the task of internal performance allocation is to allocate the
primary costs, which are assigned to the indirect cost centers, to final

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cost centers according to provided and received performance. The

allocated costs are called secondary costs.
The assignment should follow the principle that costs are allocated to
that cost center which causes them. Usually, a proportional relation is
assumed between the reference figure and performance delivery, as
well as between the reference figure and performance utilization. (e.g.
number of hours of repair for the cost center repair)
Methods will be introduced and explained further on.
3rd Step: formation of surcharge rates

After finishing the 2nd step, all costs are assigned to final cost centers.
Now, they have to be allocated to cost units. Therefore, the indirect
costs are set into relation with a reference figure (e.g. direct labor
costs, produced output, provided machine hours). This results in a
surcharge rate. With the help of this surcharge rate, the indirect costs
can be allocated to the cost units.
Step 3 is the connection between cost center accounting and cost
unit accounting (Chapter 4). It is necessary when cost unit account-
ing uses a surcharge calculation. Therefore it is only necessary for
specified forms of cost unit accounting.

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4th Step: Control of cost-efficiency

simple form:
comparison of actual total costs and allocated total costs of final cost
centers
• positive difference (underapplied costs): less than actual re

corded indirect costs are allocated to the cost units
• negative difference (overapplied costs)
But: no meaningful cost efficiency control, since the allocated total

costs are only an average of historical costs 3.Internal Cost Allocation

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3.3 Methods of internal performance allocation
This is the 2nd step of the cost center accounting.

Problems:
• large number of cost centers
• mutual performance interweaving

Different methods have been developed for the internal
performance allocation
1) no consideration of performance interweaving: ex-
pense distribution method
2) consideration of one-sided performance interweav-
ing: stepladder method
3) consideration of mutual performance interweaving:
equation method, iterative methods

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3.3.1 Step-ladder Method or Step Down Allo-

cation
a) assignment of costs (indirect cost center) to final

cost centers using other indirect cost centers, i.e.:
• consideration of performance relations of down-
stream cost centers
• no consideration of performance relations of pre-
liminary cost centers
Please note: sequence of cost centers should be se-
lected in a way, that, if possible, minor performance
relations are neglected
b) assignment of primary costs in proportion to the per-
formance utilization
Definition
transfer price = a cost centers primary costs: total of
provided performance units

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Please note: only performances provided to down-

stream cost centers count
Indirect Indirect
Final cost Final cost Final cost Final cost
cost cost
center 1 center 2 center 5 center 4
center center
Primary
p.c. p.c. p.c. p.c. p.c. p.c.
costs
Allocation
indirect
CC 1
Primary
and
p.c. + s.c.
secondary
costs
Allocation
indirect
CC 2
Primary
and p.c. p.c. p.c. p.c.
secondary + s.c. + s.c. + s.c. + s.c.
costs

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Example A.3
Example: (CC = Cost Center)
Primary costs CC 1 (cost center) (repair shop) 134,000
Primary costs CC 2 (production planning) 64,500
Primary costs CC 3 (final cost center) 112,000
Primary costs CC 4 (final cost center) 97,500
Total 408,000
Reference figure CC 1: provided hours of repair
Total hours of repair provided 3,000
Hours of repair for CC 2 150
Hours of repair for CC 3 1,300
Hours of repair for CC 4 1,550
Reference figure CC 2: number of prepared jobs
Total of prepared jobs 900
Prepared jobs CC 1 200

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1st Step: Determination of cost center sequence

a) in any case, indirect cost centers prior to final cost
centers
b) sequences within indirect cost centers:
approximate determination of value of comparative
performances (1 to 2 as well as 2 to 1)
primary costs
∗ performanc e provided for intitial cost centers
∑ provided performanc es
c) The sequence of final cost centers is optional, since

there are no performance relations between them.
Continuing Example A.3:
performance of CC 1 for CC 2:
134,000
* 150 = 6,700
3,000
performance of CC 2 for CC 1:
64,500
* 200 = 14,333.33
900
Since the performance of cost center 2 for cost center 1 shows a

higher value than the return service, CC 2 is placed prior to CC 1

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2nd Step: Allocation

allocation occurs gradually, e.g.:
a) the primary costs of CC 2 are allocated to down-
stream cost centers 1, 3 and 4 according to the per-
formance provided for those cost centers
b) the primary and the secondary costs of CC 1 are al-
located to the downstream cost centers 3 and 4
Please note: only performances for downstream cost
centers will be considered
Indirect CC 2 Indirect CC 1 Final CC 3 Final CC 4

64,500.-- 134,000.-- 112,000.-- 97,500.--
14,333.33 21,500.-- 28,666.67
148,333.33 133,500.-- 126,166.67
67,660.82 80,672.51
201,160.82 206,839.18
64,500
q2 = = 71.67
900
148,333.33
q1 = = 52.05
3,000 − 150

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• relatively simple calculation
• performances of downstream cost centers for pre-

liminary cost centers are neglected
• at least one-way consideration of performance rela-
tions

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3.3.2 Equation Method or Reciprocal Alloca-

tion
Simultaneous allocation of all cost centers costs with

the help of a system of equations, i.e. consideration of
all mutual performance interweaving
one equation for each cost center:
• known figures: primary costs, provided and received
performance units
• unknown figures: transfer costs for a cost centers
performance
Please note: number of transfer prices equal number of
equations, i.e. clear solution

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Basic structure of equations:

Total value of provided performance = cost center pri-
mary costs + total value of performance received
Whereas:
Value of received performance = Σ values of indi-
vidually received performances
Value of provided performance = Σ values of indi-
vidually provided performances
Value of individual performance relation = number of
performance units * transfer price

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CC 1: 134,000 + 200 q2 = 3,000 q1
CC 2: 64,500 + 150 q1 = 900 q2
430 + q1 = 6 q2
q1 = 6 q2 - 430
CC 3: 112,000 + 1,300 q1 + 300 q2 = q3
CC 4: 97,500 + 1,550 q1 + 400 q2 = q4
For CC 3 and CC 4 the provided performance is declared to be 1, be-

cause for this is example, no information, concerning the type as well
as the height of performances of those cost centers, is given, i.e. q3
and q4 equal the total costs for CC 3 and 4.
First of all, the solution for the first 2 equations (2 equations with two
unknown variables):
134,000 + 200 q2 = 3,000 * (6 q2 – 430)
134,000 + 200 q2 = 18,000 q2 – 1,290,000
1,424,000 = 17,800 q2
q2 = 80 €/unit
q1 = 50 €/unit
In the next step, the determined transfer prices will be used in the
other equations:
CC 3: 112,000 + 1,300 * 50 + 300 * 80 = 201,000
CC 4: 97,500 + 1,550 * 50 + 400 * 80 = 207,000

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• in this case, variations are minimal; but this state-
ment cannot be generalized
• determination of exact total costs of final cost cen-
ters as all performance relations are considered
• high compute time, especially with complex cost
center systems (direct solution often difficult)

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Exercise A.4
The following information is given:
to CC1 CC 2 CC 3 CC 4 Sum
from
CC 1 30 50 80 70 230
CC 2 200 0 120 180 500
CC 3 0 0 0 0 800
CC 4 0 0 0 0 500
CC 1 CC 2 CC 3 CC 4
primary costs 66,000 51,000 120,000 200,000
a) Conduct an internal cost allocation by means of the step-ladder

method and calculate the cost of services for the final cost cen-
ters.
b) Set up the complete system of equations in order to simultane-

ously allocate internal costs. Calculate the cost of services for the
final cost centers.

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Exercise A.5
The following data is given:
primary overall From CC 1 From CC 2 From CC 3

costs performance received received received
performance performance performance
[kWh] [km] [h]
CC1 50,000 € 30,000 kWh -- -- --
CC2 100,000 € 500,000 km 6,000 -- 24,000
CC3 72,000 € 80,000 h -- 150,000 --
CC4 140,000 € 8,000 units (X) 24,000 300,000 40,000
CC5 200,000 € 10,000 units (Y) -- 50,000 16,000
a) Conduct an internal cost allocation by means of the step-ladder

method and calculate the cost of services for the final cost cen-
ters.

ously allocate internal costs. Calculate the cost of services for the
final cost centers.

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Exercise A.6
A company consists of three indirect cost centers (CC1, CC2, CC3)

and two final cost center (CC4, CC5). The relations between those
cost centers are shown in the following table:
to CC1 CC2 CC3 CC4 CC5 Sum

from
CC1 10 20 25 35 20 110
CC2 20 15 0 70 60 165
CC3 30 20 0 80 70 200
The following primary costs are given:
CC1 CC2 CC3 CC4 CC5

Primary costs 100,000 200,000 250,000 400,000 600,000
a) Determine the cost center sequence which leads to the best re-
sults when using the step-ladder method.

ously allocate internal costs.

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4 Cost Unit Accounting
4.1 Tasks and Types of Cost Unit Accounting
The system of cost unit accounting is supposed to answer the ques-

tion for which purpose costs did occur or will occur.
Definition:
Cost units = produced goods or other operational services, which ac-
tivated or will activate wear and tear, e.g.:
• Jobs of single unit production
• Product units or lots of batch, serial or mass production
• Consulting, research, transport or other services for company ex-

ternals
• Internal performance (e.g. self provided facilities)

- 41 -
Tasks of cost unit accounting: (calculation)

Generally: Cost determination for individual units, e.g. unit related
manufacturing costs and unit related prime costs
1) Evaluation whether the profit target for individual products was
achieved or not as well as regulation of production and sales with
regard to a better target achievement
2) Basis for the selection of prices as well as of production and sale
units
Please note: This is just the view of cost accounting. For reaching
a decision you need to consider other aspects as well.
3) Basis for decisions making concerning the question of producing
or not producing, when prices are given / known.
4) Basis for the selection of lot sizes while producing more than one
product
5) Valuation of finished and unfinished products as well as self pro-
vided facilities
Types of cost unit accounting:

1) output costing: for one product
2) weighting figure calculation: for different versions of one particular
product
3) surcharge calculation: for different products

- 42 -
4.2. Usual Surcharge Rate Calculation
System of surcharge rate calculation:
Direct material costs

+ material overheads
= Material costs
Direct labor costs
+ Special direct costs of manufacturing
+ Manufacturing overheads
= + Manufacturing costs
= Costs of production
+ Administrative overheads
+ Selling overheads
= Prime costs

- 43 -
Determination of surcharge rates:
Surcharge rate for material overheads [%] =

material overheads
∗ 100
direct material costs
Surcharge rate for manufacturing overheads [%] =

manufactur ing overheads
∗ 100
direct labor costs
Surcharge rate for administrative overheads [%] =

administrative overheads
∗ 100
production costs of units sold
Surcharge rate for selling overheads [%] =

selling overheads
∗ 100
production costs of units sold

- 44 -
Example A.4
Information about all products:
Direct material costs 120,000 €
Material overheads 36,000 €
Direct labor costs cost center 1 200,000 €
Manufacturing overheads cost center 1 160,000 €
Direct labor costs cost center 2 84,000 €
Manufacturing overheads cost center 2 134,400 €
Administrative overheads 55,080 €
Sales overheads 58,752 €
Information about product X:

Direct material costs 160 €/unit
Direct labor costs cost center 1 180 €/unit

- 45 -
Calculation:
Material overheads 48 €/unit
Material costs 208 €/unit
Manufacturing overheads cost center 1 144 €/unit
Manufacturing costs 675 €/unit
Costs of production 883 €/unit
Administrative overheads 66.23 €/unit
Selling overheads 70.64 €/unit
Prime costs 1,019.87 €/unit

- 46 -
Determination of surcharge rates:

36,000
for material overheads: 120,000 = 30%
160,000
for manufacturing overheads cost center 1: 200,000 = 80%
134,400
for manufacturing overheads cost center 2: = 160%
84,000
55,080
for administration overheads: = 7.5%
734,400
58,752
for selling overheads: = 8%
734,400
Determination of indirect costs for product X:
Material overheads 160 ∗ 0.3 = 48 € / unit
Manufacturing overheads cost center 1 180 ∗ 0.8 = 144 € / unit
Manufacturing overheads cost center 2 135 ∗ 1.6 = 216 € / unit
Admin. overheads (160 + 180 + 135 + 48 + 144 + 216) ∗ 0.075 = 66.23 € / unit
Selling overheads (160 + 180 + 135 + 48 + 144 + 216) ∗ 0.08 = 70.64 € / unit

- 47 -
• Using differentiated surcharge rates leads to result,
which are more meaningful than the results arising
from only a single surcharge rate
• Precision of results depends on the accurate re-
cording of direct costs:
small rate of direct costs compared to indirect costs
leads to high surcharge rates, which can result in the
fact that mistakes from recording direct costs have a
strong influence on indirect costs
• Precision of results depends on the fact, whether the
assumed proportional relation between indirect costs
and the basis for the surcharge rate (direct costs or
manufacturing costs) really exists or not:
often a proportional relation does not exist; it may
exist between material overheads and direct mate-
rial costs, but not with e.g. manufacturing overheads
and direct labor costs (especially as part of an in-
creasing automation)

- 48 -
Exercise A.7
Calculate the prime costs per unit of products X and Y by using the
following (simplified) data, following the approach of surcharge rate
calculation (all data refers to one period).
Amount of production and of units sold for product X 1,000 u
Amount of production and of units sold for product y 2,000 u
Cost of raw materials product X 1,000,000 €
Cost of raw materials product Y 600,000 €
Direct labor costs for product X 1,400,000 €
Direct labor costs for product Y 1,600,000 €
Straight-line depreciations for machines in production 600,000 €
Wages for workers of the raw materials warehouse 200,000 €
Wages for workers in administrative department 400,000 €
Wages for workers in selling department 200,000 €

- 49 -
4.3 Machine Hour Rate Calculation
Advancement of usual surcharge rate calculation, for the reason, that

the proportional relation between direct labor costs and manufacturing
overheads, which was assumed above, hardly ever exists in reality
(increasing automation).
t The aim is an exact allocation of manufacturing overheads, by
distinction between machine-depending and machine-indepen-
dent manufacturing overheads
The system of machine hour rate calculation is often described as an
individual method. Strictly taken it is version of surcharge rate calcula-
tion since the basic approach is identical. The only difference lies in
the more exact allocation of some manufacturing overheads.

- 50 -
Steps of Machine hour rate calculation:

1) Separation of manufacturing overheads into ma-
chine-depending and machine-independent costs:
• machine-depending: e.g. imputed depreciations,
imputed interests, energy costs, operation supply
costs, maintenance costs
• machine-independent: e.g. salaries, auxiliary
supply costs, rent
Example A.5
(For the basic data see Example A.4)
Additional information about CC1:
imputed depreciations 36,000 €
imputed interests 10,400 €
energy costs 10,700 €
operation supply costs 9,600 €
maintenance costs 7,400 €
costs of tools 30,400 €
other costs 31,000 €
TOTAL 135,500 €

- 51 -
2) Allocation of machine depending costs on the basis

of machine hours:
a) determination of costs per machine hour
machine - depending manufactur ing overheads
= costs per machine hour
capacity
whereas the capacity equals the total machine

hours
b) determination of machine-depending indirect
costs:
costs per machine hour ∗ machine hours for the
product =
machine-depending indirect costs for the product

Assumption:
total of 3,440 hours per period; 4 hours for product X
135,500
machine hour rate = = 39.39 € / hour
3,440
machine-depending costs of product X = 39.39 ∗ 4 = 157.56 € / unit

- 52 -
3) Allocation of machine-independent costs on the ba-

sis of direct
labor costs:
machine − independin g indirect costs
∗ 100 = surcharge rate
direct labor costs

remaining manufacturing overheads = 160,000 – 135,500 = 24,500 €
24,500
surcharge rate = = 12.25 %
200,000
machine-independent costs of product X = 0.1225 * 180 = 22.05 € /

unit
4) Allocation of remaining overheads (material, admin-

istrative and sales overheads):
as in usual surcharge rate calculation

- 53 -
5) System of machine hour rate calculation:

Direct material costs
+ material overheads
= Material costs
Direct labor costs center
+ special direct costs of manufacturing
+ machine-depending
manufacturing overheads
+ machine-independent
manufacturing overheads
= + Manufacturing costs
= costs of production
+ Administrative overheads
+ Sales overheads
= Prime costs

- 54 -

Material overheads 48 €/unit
Material costs 208 €/unit
Direct labor costs center 1 180 €/unit

machine-depending manufacturing overheads CC 1 157.56 €/unit
remaining manufacturing overheads cost center 1 22.05 €/unit
Direct labor costs center 2 135 €/unit

Manufacturing costs 710.61 €/unit
Costs of production 918.61 €/unit
Administrative overheads 68.90 €/unit

Sales overheads 73.49 €/unit
Prime costs 1.061 €/unit

- 55 -
Evaluation / criticism of the machine hour rate calcula-

tion:
• Using differentiated surcharge rates for manufac-
turing overheads leads to results, which are more
meaningful than the results arising from only a
single surcharge rate
• Separation into machine-depending and inde-
pendent costs is often difficult and only possible
with primary costs
• More complex system than surcharge rate calcu-
lation

- 56 -
Exercise A.8
A company has obtained the following information about two prod-

ucts:
Product A Product B
Amount of production and of units sold in u/period 1,000 1,500
Costs of raw materials in €/period 80,000 30,000
Costs of production wages in €/period 120,000 200,000
Sales price in €/u 1,000 350
Overhead costs of cost centers in €/period:
Purchasing 220,000
Production 600,000
Administration 125,000
Sales 62,500
The company also calculates that 80 % of overhead costs of produc-

tion are dependent on the usage of machines. The potential of usage
of the machines during a period is 1,600 h. For product A 1,200 h is
used, for product B 400 h.
Calculate the prime cost per unit of products A and B using the nor-
mal surcharge calculation and the method of machine hour rate calcu-
lation.

- 57 -
5 Operating Income Statement
5.1 Tasks of an Operating Income Statement
Shall answer the question, which operating revenue a

company reached within a period
t comparison of revenues and costs of a period to de-
termine the operation income
also called cost unit period accounting or short term in-
come statement (the term cost unit period accounting is
ambiguous since you consider not only costs but also
revenues)
Tasks of a operating income statement:

1) Evaluation whether the profit target of the company
has been reached or not
2) Analysis of reasons for success or failure for short
term regulation

- 58 -
Period of time:
Normally relatively short (1 month), else regulation
would be impossible
t problems to assign costs, which occurred for a
longer period to a shorter period (e.g. Christmas
gratification, usually constant assignment)
Classification:
To increase the informative value, a differentiated clas-
sification of costs and revenues seems reasonable, e.g.
by factors of production, operating units or products
Methods:
• expenditure style of presentation (ESP)
• cost of sales style of presentation (CSSP)

- 59 -
5.2 Expenditure Style of Presentation
Characteristics: assignment of costs and revenues

within the period, the products are produced
Profits:
• sales proceeds, i.e. profits for sold products (sales
prices as valuation basis)
• inventory increase of finished and unfinished goods
(costs of production as valuation basis or market
price if it is lower)
determination can be problematic if sold products
come from different periods, i.e. an inventory existed
at the beginning of the period
t use of average costs of production
t application of collective valuation methods, e.g.
FIFO
• self generated assets (analog inventory increase,
shall be neglected in this lecture)

- 60 -
Costs:
• operating expenses for all units produced within the
period (finished and unfinished goods, self gener-
ated assets)
• inventory decrease, surely a negative figure, but no
costs; only a correcting entry to sales proceeds, be-
cause costs for incoming inventory and a revenue
(inventory increase) in equal amount have already
been assessed within the period
Structure:
• revenues are usually structured as seen above; as
well as a division of sales proceeds by types of
products
• costs are usually structured by types of production
factors, i.e. material costs, personnel costs, depre-
ciations
• in cost accounting, an account structure is normal:
- left side (debit): costs

- 61 -
- right side (credit) : revenues

- operating income to balance both sides (need to
be identical), i.e.
- profit on the left side (revenues > costs)
- loss on the right side (costs > revenues)
operating income account according (ESP)

• period costs, differentiated by • sales proceeds, differentiated by
types of costs types of products
• inventory decrease of finished and • inventory increase of finished and
unfinished goods valuated with unfinished goods valuated with
costs of production costs of production
• operating profit • operating loss

- 62 -
• costs and revenues are related to the units produced
within the actual period, i.e. all costs and revenues
of the period are assigned
• evaluation of expenses:
a) ESP can be easily integrated into the system of
financial accounting (there, usually applica-
tion of total cost method)
b) changes in inventory need to be determined
• using a structure according to types of production
factors, as it is usually done, operating income reve-
nue for individual products can not be determined
But: basically, using the expenditure style of presenta-
tion, costs can be structured differently as well (typi-
cal for the method is only the relation to produced
units)

- 63 -
Example A.6
For the X-corporation, the following facts are known about product A
for the year 2002:
raw material costs 600 €/unit
direct labor costs 700 €/unit
depreciations for machines 500,000 €/period
administration salaries 400,000 €/period
distribution salaries 250,000 €/period
Initial inventory of product A 0 units
produced units of product A 1,000 units
sold units of product A 500 units
selling price 2,800 €/unit

- 64 -
To set up an operating income statement according to the ESP, first

of all, it is necessary to valuate the inventory.
In this case, all units are produced in 2002 (leaving an initial inventory
of 0). Therefore it is not necessary to take into account whether there
are still products left in inventory of the former period(s).
Here, a valuation based on cost of production is used. Generally, oth-
er valuation bases are imaginable.
This results in the following:
raw material costs (direct costs) 600 * 1,000 = 600,000
direct labor costs (direct costs) 700 * 1,000 = 700,000
depreciations (indirect costs) 500,000
costs of production (PC) of produced units per period 1,800,000
PC of produced units per unit 1,800
PC of sold units per period 900,000
PC of inventory 900,000
operating income account according (ESP)

material costs 600,000 revenues 1,400,000
personnel costs 1,350,000 inventory increase 900,000
depreciations 500,000 operating loss 150,000
2,450,000 2,450,000

- 65 -
5.3 Cost of Sales Style of Presentation
Characteristics: assignment of costs and revenues

within the period, the products are sold
revenues:
• sales proceeds, i.e. revenues for sold products
(sales prices as valuation basis)
• no assessment of value of inventory increase of fin-
ished and unfinished goods as well as self gener-
ated assets
Costs:
• operating expenses for all units sold within the pe-
riod
• inventory decrease, is contained in the costs for
units sold

- 66 -
Structure:
• sales proceeds are usually structured by types of
products
• costs are usually structured by areas of activity (pro-
duction, administration, selling / distribution) and
types of products or only by types of products (i.e.
prime costs)
• in cost accounting, an account structure is normal:
operating income account according to CSSP

• costs of products sold, • sales proceeds, differentiated by
differentiated by types of products types of products
(if necessary, split into area of • operation loss
activity)
• operating profit

- 67 -
• costs and revenues are related to the units sold
within this period, i.e. not all costs and revenues are
assigned
• evaluation of expenses:
a) CSSP can hardly be integrated into the system of
financial accounting (there, usually application of
expenditure style of presentation)
b) Cost unit accounting for sold products necessary
c) Following the information in the literature,
changes in inventory need no determination
but this is only valid, if manufacturing costs are
assessed with average values; else, inventory
needs determination as well to determine the
manufacturing costs for sold products
• using a structure according to areas of activity and
products, as it is usually done, operating income re-
sults for individual products can be determined

- 68 -
But: characteristically for the costs of sales style of

presentation is the relation to units sold, i.e. the ad-
vantage counts only for a certain design of presenta-
tion
operating income account according to CSSP

PC (of units sold) 900,000 sales proceeds 1,400,000
Administrative costs 400,000 operating loss 150,000
Distribution costs 250,000
1,550,000 1,550,000

- 69 -
Comparison of ESP and CSSP:
1) Results are always equal

• having an increase in inventory in the ESP, costs
and revenues are higher by this amount
• having a decrease in inventory in the ESP, costs
and revenues are lower by this amount (if de-
crease in inventory is seen as a correcting entry)
2) Differing assignment of costs and revenues
to the periods for the reason of different interpreta-
tions
3) Usually different structure of costs and revenues

- 70 -
Exercise A.9
The following data of an industrial enterprise is established for the

year 2003:
Product A Product B
Initial inventory [u] 0 0
Amount of production [u/period] 15,000 5,000
Sales [u/period] 15,000 4,500
Sales price [€/u] 25.- 20.-
Material costs [€/u] 10.- 4.-
Manufacturing costs [€/u] 6.- 8.-
Costs of distribution €/u] 4.- 1.-
Assume the costs of production per unit of the initial inventory to be

the same as the costs of production of 2003. The valuation is to be
carried out at production costs.
a) Draw up the operating income statement using ESP style.
b) Draw up the operating income statement using CSSP style.

- 71 -
Exercise A.10
The following data of an industrial enterprise is established for the

year 2003:
Product A Product B
Initial inventory [u] 1,000 500
Amount of production [u/period] 10,000 4,000
Sales [u/period] 9,200 4,500
Sales price [€/u] 36.- 16.-
Material costs [€/u] 8.- 5.-
Manufacturing costs [€/u] 12.- 7.-
Costs of distribution €/u] 4.- 2.-
Assume the costs of production per unit of the initial inventory to be

the same as the costs of production of 2003. The valuation is to be
carried out at production costs.
a) Draw up the operating income statement using ESP style. If nec-
essary, use FIFO and LIFO valuation.
b) Draw up the operating income statement using CSSP style. If
necessary, use FIFO and LIFO valuation.

- 72 -
B. Controlling
1. Basics of Controlling
Controlling consists of 3 parts:

1) Industrial information system
2) Industrial budgeting and management system
3) Industrial control system
typically divided into

- operations management ⇒ short run
- strategic management ⇒ long run

- 73 -
2. Operations Management
2.1. Direct Costing
Definitions:
Full costing = all costs are assigned to the product or to
a product unit
Direct costing = just a part of the costs are assigned to
the product or a product unit
Implementation of Direct Costing
Feature: cost division into variable and fixed compo-

nents
variable costs: change when a cost driver changes

fixed costs: do not change when a cost driver changes

- 74 -
Example B.1
A company uses the surcharge calculation. For products A and B, the
following information is given:
Product A Product B
Output (units/TU) 100 200
Operating expenses for raw materials 1,000 3,000
Wages for production workers 800 2,200
Imputed interest for capital bound for inventory 4,000
Operating expenses for auxiliary supplies 1,500
Depreciations on machines 4,500
Salaries for administrative employees 1,700
Salaries for selling / distribution employees 3,400
a) Determine the relevant prime costs for product A and B according

to the system of full costing.
b) Determine the relevant prime costs for product A and B according
to the system of direct costing.

- 75 -
Full Costing:
Product A Product B
Direct material costs 1,000 3,000
Material overheads [4,000/4,000=100%] 1,000 3,000
Direct labor costs 800 2,200
Manufacturing overheads
1,600 4,400
[(1,500+4,500)/3,000=200%]
Costs of production 4,400 12,600
Administrative overheads [1,700/17,000=10%] 440 1,260
Selling overheads [3,400/17,000=20%] 880 2,520
Prime costs 5,720 16,380
Prime costs per unit 57.20 81.90
Direct Costing:
It is probable that only auxiliary supplies are variable costs (possibly
imputed interest).
Product A Product B
Direct material costs 1,000 3,000
Variable material overheads 0 0
Direct labor costs 800 2,200
Variable manufacturing overheads
400 1,100
[1,500/3,000=50%]
Variable costs of production 2,200 6,300
Administrative overheads 0 0
Selling overheads 0 0
Prime costs 2,200 6,300
Prime costs per unit 22.-- 31.50

- 76 -
2.2. Bottleneck-Analysis
Bottleneck-analysis is part of a planning of production in

a multi-product operation and is used to resolve the
problem of one or more bottlenecks when producing
more than one product.
Steps for a bottleneck-analysis:

1) Determination of unit contribution margins per unit
2) Determination of available capacity
3) Determination of unit contribution margins per
bottleneck unit
4) Determination of an order of priority
5) Determination of (temporary) output
6) Considering different facts
7) If needed, additional actions

- 77 -
To determine a bottom price for an additional prod-

uct, the following steps are necessary:
1) Determination of variable costs for the new product
2) Determination of contribution margins for the
replaced products
3) Determination of the lower limit on returns
4) Comparison of lower limit on returns with possible
returns

- 78 -
Example B.2
A company has to plan their production program for the next period. It
is possible to produce 4 different products, which require a certain
packing machine, respectively. For the coming period, the following
information exists:
Products
A B C D
Possible sales [unit/TU] 1,000 900 1,500 700
Sales price [€/unit] 20 100 70 145
Variable costs [€/unit] 11 60 50 95
Duration in the packing machine [min/unit] 1 5 20 2
Within the next period, the packing machine has a running time of
100 h maximum. Fixed costs of the coming period will be 45,000 €.
a) Determine the optimal production program and calculate the net
proceeds of the coming period.
b) Specify possible changes of the optimal production program and
net proceeds, if, with other parameter staying constant, the com-
pany receives an additional inquiry for delivering 150 units of
product E for the price of 90 €/unit.
Product E can be produced with the existing machines. It has
variable costs of 45 € per unit and uses the packing machine
4.5 min per unit.

- 79 -
1) Optimal production program and net proceeds:

a)Determination of the priority order:
Product Product Product Product

A B C D
Price 20 100 70 145
Variable costs 11 60 50 95
Unit contribution margin per unit 9 40 20 50
Order of priority 4 2 3 1
Bottleneck utilization 1 5 20 2
Specified unit contribution
9 8 1 25
margin per time unit
Order of priority 2 3 4 1
Order of priority using specified unit contribution margins:

D–A–B–C
b)Determination of the optimal production program:
Possible Bottleneck Used Remaining

Product Output
sales utilization capacity capacity
6,000
D 700 2 700 1,400 4,600
A 1,000 1 1,000 1,000 3,600
B 900 5 720 3,600 0
C 1,500 20 0
The inquiry for D and A can be satisfied completely, the inquiry for
B only partly and for C not at all.

- 80 -
2) Decision about the inquiry for product E:
a) decision using a new bottleneck analysis:

specified unit contribution margin of E: 10 €, i.e. rank 2
b) decision based on the determination of a bottom price:

variable costs of product E 45 ∗ 150 = 6,750
+ replaced contribution margin of product B
[(150 ∗ 4.5) ∗ 8] = 675 ∗ 8 = 5,400
= lower limit on returns 12,150
return of order 90 ∗ 150 = 13,500
return of order > lower limit on return t accept order
c) Determination of net proceeds:

Old net proceeds + difference between return of order and lower
limit on return: 27,800 + (13,500 – 12,150) = 29,150

- 81 -
Exercise B.1
The fun company has to plan their production program for next pe-
riod. It is possible to produce 2 different engines, one for a snowmo-
bile and one for a boat. Both engines must be tested on a very ex-
pensive machine before they shipped to the costumers. Production
data are as follows:
Available Capacity in hours:
Testing Department 120 testing-hours
Production Department 600 machine hours
Use of capacity in hours per unit of product
Snowmobile Boat
Production Department 2 5
Testing Department 1 0.5
Operating Data for fun company:
Selling Price Variable costs Contribution margin

Snowmobile 800 € 560 € 240 €
Boat 1,000 € 625 € 375 €
Material shortages for boat engines will limit production to 110 boat
engines per period.
Try to find the optimal solution by using graphic approach and linear
programming.

- 82 -
Exercise B.2
Combustion Ltd supplies components to a major aircraft manufactur-

er. A new aircraft is now being produced and Combustion Ltd can
supply either component Alpha or component Beta. However, it does
not have the production capacity to supply both.
Both components are made from the same metal, of which there is
only 10,000 kg available at € 10 per kg. Both components must pass
through two high-technology machine lines - Line P and Line R - each
of which has capacity limitations.
Sales prices have been set and the following data are available for
Budget Period 1 of 1995:
ALPHA BETA
Maximum number of components 4,250 6,100
required by aircraft manufacturer
Sales price per component € 195 € 160
Metal use per component 2 kg 2 kg
Machine line times per component
Line P 0.75 hours 0.40 hours
Line R 0.50 hours 0.60 hours
Machine line details
LINE P LINE R
Total hours available 3,000 hours 3,600 hours
Variable overheads per machine hour € 90 € 110

- 83 -
Required:
(a) Calculate which component should be manufactured by
Combustion Ltd. to maximize contribution.
(b) Calculate the contribution which Combustion Ltd will earn and,
based on (a) above, whether the company will be capable of
meeting the maximum capacity required for either of the two
components.
(c) The aircraft manufacturer has offered an alternative pricing struc-
ture per component as follows: Sales price less 10% per compo-
nent plus € 60 per hour for each hour any of the production lines
are unused.
Indicate how this alternative pricing arrangement might affect your
choice, in (a) above, of component to be manufactured and, if it
does affect your choice, calculate the new contribution.

- 84 -
Exercise B.3

Product A Product B Product C
Maximum Sales [u/period] 3,000 4,800 1,600
Sales Price [€/u] 100 40 160
Variable Costs [€/u] 40 10 80
Fixed Costs [€/period] 140,000
Total Capacity of Bottleneck [min/period] 35,600
Usage of Bottleneck [min/u] 6 2 16
a) Compute the optimal production program and the earnings of the

period. Explain your calculations.
b) Discuss other aspects that have to be taken into account when
computing a production program.

- 85 -
Exercise B.4
Products A and B have to be processed on the same machine. On

average the machine can be used 7 hours a day, 20 days a month.
Monthly fixed costs are 600 €.
The following data is given about products A and B:
Usage of Variable Sales Price Sales
Product
Bottleneck [min/u] Costs [€/u] [€/u] Forecast [u/month]
A 20 8.00 10.00 300
B 30 5.00 8.00 150
a) Discuss how the production program can be determined.

b) Product A now needs to be processed on the machine 25 min/u
because of a product change. The other data is still the same.
b1) Compute the new production program.
b2) Compute the bottom price of product C. It is planned to sell
80 units per month. Variable costs per month are 5.00 €/u,
the usage of the bottleneck is 40 min/u.
b3) Discuss measures that could be taken by the organization
in order to prevent the existence of a bottleneck.

- 86 -
Exercise B.5
A manufacturer of sports supplies produces jerseys for the sale of

merchandise of BSC Freiberg and Erzgebirge Aue.
The jerseys of the Aue team are made with long sleeves. 3 m of cloth
is necessary to produce them. To produce a short-sleeved jersey of
Freiberg 2 m of cloth is needed. In a period, 1,800 m of cloth is avail-
able.
Producing an Aue jersey takes 2 time units. The jersey of the BSC
Freiberg takes 4 time units due to the complicated design. Working
time of 1,600 time units is available during a period.
According to market analysis a maximum of 300 jerseys of BSC
Freiberg can be sold, while there are no restrictions for the sale of jer-
seys of Erzgebirge Aue. The variable costs from producing a jersey of
Aue is 80 €, producing one of Freiberg costs 70 €. A sales price of
100 € is projected for both types of jerseys.
Compute the optimal production program using a graphical solution
method.

- 87 -
Exercise B.6
A manufacturer of trouser produces jerseys for the sale of Esprit and

SÓliver.
The jerseys of Esprit are made with shorter legs. 5 m of cloth is ne-
cessary to produce them. To produce a trouser of SÓliver 8 m are
needed. In a period 4,000 m of cloth is available.
Producing an Esprit trouser takes 2.5 time units. The trouser of
SÓliver takes 2 time units. Working time of 1,500 time units is availa-
ble during a period.
According to market analysis a maximum of 400 Esprit trousers can
be sold, while there are no restrictions for the sale of SÓliver trous-
ers. The variable costs from producing a jersey of Esprit is 60 €, pro-
ducing one of SÓliver costs 50 €. A sales price of 120 € is projected
for both types of jerseys.
a) Compute the optimal production program using a graphical solu-
tion method.
b) Discuss other aspects that have to be taken into account when
computing a production program.

- 88 -
Exercise B.7
Product A Product B Product C Product D

Maximum sales (u/period) 1,000 600 1,500 300
Sales price (€/u) 30 40 15 75
Variable costs (€/u) 18 25 9 45
Fixed costs of the coming period will be 25,000 €. All of these prod-
ucts have to be produced on the same machine. Within the next pe-
riod the machine can be used 20 days. The maximum running time
per day is 7.5 hours. Following data about machine usage is given:

Usage (min./u.) 3 5 4 12
a) Compute the optimal production program and the earnings of this

period. Explain your calculations.
b) The company receives an inquiry for delivering 900 units of prod-
uct E for the price of 50 €/unit. Product E has to be processed on
the same machine as all other products and requires 5 min./unit
on this machine. Variable costs are 25 €/unit. Discuss, if, with all
other parameters staying constant, the company should accept
this inquiry. Determine possible changes of the production pro-
gram and the earnings of this period.

- 89 -
2.3. Break-Even-Analysis
also called cost-volume profit analysis
Break even point = point from which a profit is gained,

i.e. the point at which the turnover covers the full
costs or the unit contribution margin covers the fixed
costs
Break-Even-Analysis in a Single-Product-Operation
Break-even point means
P = 0, whereas P = sales proceeds – costs
straight-line sales and cost functions
p ∗ x b – cv ∗ xb – Cf =0
(p – cv) ∗ xb – Cf =0
Cf
CM per unit
= xb

- 90 -
Additional information:
Coefficient of safety =
(total sales – break-even sales) / total sales
Indicates, by which percentage the planned sales
can drop, before the company reaches the break-
even point and therefore the loss wedge
Safety distance =
given quantity of sales – critical quantity sold
Please note: term is also partly used for the coeffi-
cient of safety

- 91 -
Exercise B.8
Knitwear, Inc., is considering three countries for the sole manufactur-

ing site of its new sweater - Singapore, Thailand, and the United
States. All sweaters are to be sold to retail outlets in the United States
at € 32 per unit. These retail outlets add their own markup when sell-
ing to final customers. The three countries differ in their fixed costs
and variable costs per sweater.
Annual Fixed Variable Variable Marketing &

Costs Manufacturing Costs Distribution Costs Per
Per Sweater Sweater
Singapore € 6.5 million € 8.00 € 11.00
Thailand € 4.5 million € 5.50 €11.50
United States € 12.0 million €13.00 € 9.00
1. Compute the breakeven point of Knitwear, Inc., in both (a) units

sold, and (b) revenues for each of the three countries considered
for manufacturing the sweaters.
2. If Knitwear Inc. sells 800,000 sweaters in 1999, what is the budg-
eted operating income for each of the three countries considered
for manufacturing the sweaters? Comment on the results.

- 92 -
Break-Even-Analysis in a Multi-Product Operation

In a multi-product operation it is not easy to determine
the break-even-point, since all unit contribution margins
help to cover the fixed costs.
Solutions
1) Fixed ratio between the products:
- Critical sales quantity
- Critical turnover
2) No fixed ratio between the products:
Determination of product sequence, e.g.
- by unit contribution margins (CM per unit)
- by product contribution margins (CM)
- by the ratio of unit contribution margin vs. price
(CM per unit/p)
- by production or selling duration (CM per unit/TU
or CM/TU in total)

- 93 -
Exercise B.9
a) Using the given data compute the break-even point and break-
even sales of product X explaining your calculations:
- production and sales 1,000 u/period
- sales price 500 €/u
- variable costs 300 €/u
- fixed costs 120,000 €/period
b) Discuss the computed break-even point using also the coefficient
of safety.
c) Explain the assumptions that have to be considered in break-
even analysis.
d) Show the problems that occur in a company with more than one
product and describe how they can be solved.
Exercise B.10
The following information is given:

Production and Sales
45,000 25,000 9,000 27,000
[units/time unit]
Price [€/unit] 2.00 3.50 4.50 3.00
Turnover [€/unit] 90,000 87,500 40,500 81,000
Variable costs [€/unit] 1.00 1.50 2.00 1.50
Fixed costs [€/time unit] 71,100
Compute the break even point for this multi-product company.

- 94 -
2.4. Cost Control

2.4.1. Introduction to Cost Control
Steps of Cost Control

1) Planning of costs at the beginning of a period Æ
Planned Costs
2) Documentation of costs at the end of the period Æ
Actual Costs
3) Control of the costs at the end of the period
a) Computation of the total variance
b) Division of the total variance into partial vari-
ances (decomposition)
1st Step: Setting of Planned Costs (Standard Costs)

standard costs ( Cp ) = specific standard quantity per
unit (vp ) * planned quantity of units (xp ) * standard
price (qp )

- 95 -
2nd Step: Recording Actual Costs

actual costs (Ca) =
specific actual quantity per unit ( va)
* actual quantity of units produced ( xa)
* actual price ( qa)
3rd Step: Computing the Total Variance
total variance = ΔC = actual costs – planned costs
4th Step: Computation of Partial Variances

V = Ca – Cp
= qa * ra - qp * rp
= ( qa - qp ) * rp price variance
+ ( ra – rp ) * qp materials quantity variance
+ ( qa – qp )* ( ra – rp )mixed variance (price/materials
quantity)

- 96 -
1) Alternative Method:
The mixed variance is assigned to the person in charge
of purchasing as well as the person in charge of pro-
duction quantities. The variances correspond to the ac-
tual cost differences.
Æ The sum of the partial variances > total variance
Æ The method is arbitrary, as all the persons in charge
are assigned some variances for which they are not
responsible.
Æ The method is not significant.

- 97 -
2) Cumulative Method:
The variance is assigned to one person in charge.
a) Oriented towards production:
The mixed variance is assigned to the person in
charge of purchasing. Therefore the person in
charge of the production quantities is only assigned
variances that he is responsible for.
b) Oriented towards price:
The mixed variance is assigned to the person in
charge of the production quantities. Therefore the
person in charge of purchasing is only assigned
variances that he is responsible for.
Æ The sum of the partial variances = total variance
Æ The method is arbitrary, as some of the persons in
charge are assigned variances for which they are
not responsible.
Æ The method is better than method 1.

- 98 -
3) Symmetrical Method:
The mixed variance is assigned to the persons in
charge in equal shares, that is half the variance for
each in case of two persons in charge, and so forth.
Æ The sum of the partial variances = total variance
Æ The method is arbitrary, as all of the persons in
charge are assigned variances for which they may
not be solely responsible.
Æ The method is better than method 1). From a theo-
retical point of view this method is only in parts suit-
able, even more if there are more variables the
method becomes increasingly complex.

- 99 -
4) Differentiated Method:
The variance is not assigned to any person in charge.
Æ The sum of the partial variances = total variance, but
some variances are not assigned to any persons in
charge.
Æ The method is not arbitrary, as all of the persons in
charge are assigned only those variances for which
they are solely responsible.
Æ The method is best from a theoretical point of view.
But in companies it is seldom used, as some vari-
ances are not assigned to any persons in charge.

- 100 -
2.4.2. Cumulative Method
Commonly the mixed variance is assigned to the person in charge of

purchasing.
ΔC = Δr * qp person in charge of production
+ Δq * rp + Δq * Δr person in charge of price
or, as (rp + Δr = ra )
ΔC = Δr * qp person in charge of production
+ Δq * ra person in charge of price
quantity variance ΔCr = ( ra - rp ) * qp = Δr * qp
price variance ΔCq = ( qa - qp ) * ra = Δq * ra
This result is somewhat simplifying, as it only takes into account a

general demand for a production factor. But as long as these costs
are variable costs, the demand for a production factor varies depend-
ing on the quantity of production. That has to be taken into account in
the standard cost system.
The demand for a production factor depends on the specific standard
quantity per unit (v) and the quantity of production (x). For example
the materials quantity variance can be broken down into the following:
ΔCr = ( va * xa - vp * xp ) * qp

- 101 -
The materials quantity variance can result in two different variances:

1)Difference of specific standard quantity per unit and actual
quantity per unit
2)Difference of actual and standard production quantity
ΔCr = ( va * xa - vp * xp ) * qp
= ( va - vp ) * xp * qpperson in charge of factor consumption

+ ( xa - xp ) * vp * qpperson in charge of production quantity
+ ( va - vp ) * ( xa - xp ) * qp consumption / production quantity
Again it is difficult to decide whom to assign the mixed variance.

Usually it is assigned to the person in charge of factor consumption,
but it is rather hard to reason this.
ΔCr = ( va - vp ) * xp * qpperson in charge of factor consumption
+ ( va - vp ) * ( xa - xp ) * qp person in charge of factor consumption

or, as (xp + Δx = xa )
ΔCr = ( va - vp ) * xa * qpperson in charge of factor consumption

- 102 -
As a result we arrive at:
factor consumption variance = ΔCv = Δr * qp = (ra – rp ) * qp =

Δv * xa * qp
production quantity variance = ΔCx = Δx * vp * qp
price variance = ΔCq = Δq * ra = Δq * va * xa

- 103 -
Price Variance
possible causes:
- the purchase department chose suppliers who
charge rather expensive prices
- the skills of negotiation of the purchase department
- the powerful position of the supplier(s) or of our
company
- short term orders at higher prices, e.g. because the
production department did not plan the material
needs early enough
Depending on the cause different departments are re-
sponsible for the price variance. In most cases the re-
sponsible department is the purchasing department. In
the last case, the production department should be held
responsible for the price variance.

- 104 -
Production Quantity Variance

possible causes:
- unrealistic forecast
- declining demand
- increasing competition in the market
- too much downtime in production
Only in case of the last item the production department
would be held responsible for the production quantity
variance.

- 105 -
Factor Consumption Variance

possible causes:
- causes related to production and efficiency, e.g. too
much material wasted by the production department
- causes related to contracts, e.g. alterations of the
products due to special orders of buyers
- causes related to raw material, e.g. bad quality of
raw materials or changes in the materials to be used
in production
- causes related to composition, e.g. changes in the
production process
Generally the production department is responsible for
the factor consumption variance. This is not the case if
the variance has occurred for special reasons, as would
be the case with the last item.

- 106 -
2.4.3. Differentiated Method
When using the differentiated method the mixed vari-

ances are not assigned to other persons in charge. The
variances can either be pure or mixed, or they can be of
first, second, or third order.
first order variances
1) pure price variance
2) pure production quantity variance
3) pure factor consumption variance
second order variances
4) mixed price and production quantity variance
5) mixed price and factor consumption variance
6) mixed production quantity and factor consumption
variance
third order variances
7) mixed price, production quantity, and factor con-
sumption variance

- 107 -
1) pure price variance

( qa - qp ) * vp * xp
2) pure production quantity variance
( xa - xp ) * vp * qp
3) pure factor consumption variance
( va - vp ) * qp * xp
4) mixed price and production quantity variance
( qa - qp ) * ( xa - xp ) * vp
5) mixed price and factor consumption variance
( qa - qp ) * ( va - vp ) * xp
6) mixed production quantity and factor
consumption variance
( va – vp ) * ( xa - xp ) * qp
7) mixed price, production quantity, factor
consumption variance
( qa - qp ) * ( xa - xp ) * ( va - vp )

- 108 -
Exercise B.11
The following costs of the manufacture of product A were planned /

detected:
• standard quantity per unit of A [kg/u] 20
• standard price per kg [€/kg] 8.50
• planned production of A [u/period] 12,000
• actual price per kg [€/kg] 7.00
• actual production of A [u/period] 15,000
• total quantity of raw material used [kg/period] 345,000
Compute the total variance. Calculate partial variances using the dif-
ferentiated method.

- 109 -
Exercise B.12
In order to manufacture the product X in the production department

the overhead cost D is needed. The following data is given:
• standard price of D per m³ [€/m³] 20
• standard quantity of D per unit of X [m³/u] 40
• planned production of X [m³/period] 10,000
• actual price of D per m³ [€/m³] 25
• actual quantity of D per unit of X [m³/u] 50
• actual production of X [u/period] 8,000
Compute the total variance. Calculate partial variances using the cu-
mulative method.

- 110 -
3. Strategic Management
3.1 Target Costing
Objective: costs should be stronger based on prices,

reachable on the market (to increase the company’s
competitiveness).
Characteristics:
a) market orientated cost management
b) strategic cost management
Areas of application: especially on markets with

a) intense competition
b) short product life cycles
c) high pressure on prices

- 111 -
Steps of Target Costing:

1) Preparation of a product design:
Example B.3:
product features for a disc man
Sound
Stability
Reliability
Power consumption
2) Determination of target costs for the product:

a) Market into company
b) Out of company
c) Into and out of company
d) Out of standard costs
e) Out of competitor

- 112 -
Determination of target costs by form of market

into company:
a) Determination of allowable costs:

Continuing Example B.3:
Determination of the price-demand-function for the product life
cycle:
1
p(x) = 400 - x
1,500
b) Determination of the drifting costs:

Assumption: 204.- €
c) Determination of the target costs:

Average would be (164 + 204) / 2 = 184.- €
Here, the target costs are set equal with the allowable costs, i.e.
the strict specification is selected (164.- €)

- 113 -
d) Determination of costs for the target costs di-

vision:
Assumption: indirect costs for development, administration and
distribution without relation to the components of 16,200,000 €
total target costs 49,200,000 €
- indirect costs for development, … 16,200,000 €
= target costs for the target cost division 33,000,000 €
per unit 110 €
total standard costs 204 x 300,000 61,200,000 €
- indirect costs for development, … 16,200,000 €
= standard costs for the target cost division 45,000,000 €
per unit 150 €

- 114 -
3) Determination of target costs for product com-

ponents (target cost division):
typically the method of features is used
Sound 40%
Stability 10%
Reliability 30%
Power consumption 20%
Features Power
Sound Stability Reliability
Components Consumption
Encasement 0% 60% 25% 0%
Scan system 30% 20% 45% 10%
Board and
50% 5% 15% 40%
intensifier
Driver 20% 15% 15% 50%
Σ 100% 100% 100% 100%
Determination of utility proportions

Utility proportion = importance according to customer view ∗ con-
tribution to feature fulfillment
e.g. encasement / stability: 60 % * 10 % = 6 %

- 115 -
Features Power
Sound Stability Reliability Utility
Consumption
(40%) (10%) (30%) proportion
Components (20%)
Encasement 0% 6% 7.5% 0% 13.5%
Scan
12% 2% 13.5% 2% 29.5%
system
Board and
20% 0.5% 4.5% 8% 33%
intensifier
Driver 8% 1.5% 4.5% 10% 24%
Determination of target costs:

Encasement 0.135 x 110 = 14.85
Scan system 0.294 x 110 = 32.45
Board and intensifier 0.330 x 110 = 36.30
Driver 0.240 x 110 = 26.40
4) Determination of standard costs per product

component:
Encasement 30 €
Scan system 35 €
Board and intensifier 30 €
Driver 55 €
Total 150 €

- 116 -
5) Comparison of target costs and standard costs

per product component
a) Determination of need for cost reduction
Result figure Target Standard Need for cost

Components costs (1) costs (2) reduction (1 – 2)
Encasement 14.85 30 - 15.15
Scan system 32.45 35 - 2.55
Board and intensifier 36.30 30 + 6.30
Driver 26.40 55 - 29.60
b) Determination of target cost indexes

Result figure Cost Target cost index

Utility proportion
element accord. to Tanaka
in % (1)
Components in % (2) (1 : 2)
Encasement 13.5 20 0.675
Scan system 29.5 23.33 1.26
Board and intensifier 33 20 1.65
Driver 24 36.67 0.65

- 117 -
Target cost index according to Tanaka

= ratio of utility proportion and portion of current stan-
dard costs (cost element)
Thesis: costs should equal the achievable customer
utility
target cost index < 1 t component is too expensive,
compared to others
target cost index > 1 t component is too plain,
since costs do not equal the importance of the
component according to the customer

- 118 -
Exercise B.13
The corporation RC-AG produces a car that is divided into the com-
ponents “engine”, “interior”, “chassis” and “brakes“. The marketing
department has determined allowable costs of 20,000 €. The RC-AG
has calculated the following standard costs:
Engine Interior Chassis Brakes

6,692 5,497 10,038 1,673
The product functions were weighted as follows:
Product Function Safety Comfort Design Value

Importance in % 30 20 40 10
How each component contributes towards the fulfillment of the above

functions can be seen in the following table:
in % Safety Comfort Design Value

Engine 25 50 - 55
Interior 31 10 30 15
Chassis 33 30 60 20
Brakes 11 10 10 10
a) Determinate the need for cost reduction.

b) Calculate the target cost index according to Tanaka.

- 119 -
Exercise B.14
A company produces a MP3-player, which consists of the following

components: “Case”, “Hard Drive”, “Battery” and “Board and Intensifi-
er”. The marketing department has determined an optimal sales price
of 300 €. The company aims at an operating margin of 10%.
Product function Sound Design Weight Usability

Component
Case 10% 85% 15% 10 %

Hard Drive 0% 5% 30% 40%
Battery 0% 5% 35% 40 %
Board 90% 5% 20 % 10 %
The product functions were weighted as follows:
Product function Sound Design Weight Usability

Importance in % 25% 20% 20% 35%
The company calculated the following standard costs:
Component Case Hard Drive Battery Board

Standard costs 50 € 120 € 106,30 € 83,70 €
a) Determine the need for cost reduction. Assume that the target
costs are equal to the allowable costs.
b) Calculate the target cost index according to Tanaka. Discuss the
results.

- 120 -
3.2 Value Benefit Analysis
Objective: selection between different alternatives with

the use of a “dimensionless” figure (utility value)
Steps of a value benefit analysis:
1) Selection of evaluation criteria:
a) Determination of possible criteria
b) Checking the criteria for multiple entries
c) Checking the criteria for benefit dependence
d) Combination of the remaining criteria
Example B.4:
Site selection for foundation of an industrial site
Locations: Freiberg, Dresden, and Hamburg
Criteria: (here, given)
land price (quantitive criterion)
purchase power within the region (qualitative criterion)
labor cost level (qualitative criterion)
price for raw material X (quantitive criterion)
infrastructure (qualitative criterion)

- 121 -
2) Selection of the weighting coefficients: e.g. by

a) direct weighting
b) indirect weighting

Determination of a criteria ranking:
Results from the importance of the criteria for the judging person
t land price > labor cost level > purchase power = price for raw ma-
terial > infrastructure
Evaluation Comparison of Preference Weighting

No.
criteria evaluation criteria frequency coefficient
1 1 1 1 1
1 Land price 5 0.333
1 2 3 4 5
2 2 2 2
2 Purchase power 2.5 0.167
2 3 4 5
3 3 3
3 Labor cost level 4 0.267
3 4 5
Price for raw 4 4
4 2.5 0.167
material X 4 5
5
5 Infrastructure 1 0.067
5
Total: 15 1.0

- 122 -
3) Determination of feature characteristics:

Dresden Freiberg Hamburg

Land price 1,000,000 € 500,000 € 1,200,000 €
Purchase power Good Poor Better then for 1
Labor cost level Low Higher than for 1 Lower than for 1
Price for raw
600 € / unit 350 € / unit 500 € / unit
material X
Infrastructure Very good Poor Moderate
4) Object comparison per criterion:


Land price 2 3 1
Purchase power 2 1 3
Labor cost level 2 1 3
Price for raw material X 1 3 2
Infrastructure 3 1 2

- 123 -
5) Calculation of sub-benefit values and total bene-

fit values for the individual objects:
sub-benefit value = rank or distance figure ∗ weight-
ing coefficient
total benefit value =Total of all sub-benefit values for
an object

Criteria WC
Rank SBV Rank SBV Rank SBV
Land price 0.333 2 0.666 3 0.999 1 0.333
Purchase power 0.167 2 0.334 1 0.167 3 0.501
Labor cost level 0.267 2 0.534 1 0.267 3 0.801
Price for raw material 0.167 1 0.167 3 0.501 3 0.334
Infrastructure 0.067 3 0.201 1 0.067 2 0.134
Total benefit value 1.902 2.001 2.103
Position 3 2 1
6) Decision

- 124 -
Exercise B.15
An organization wants to open a new market. To help in the decision

making process it wants to conduct a value benefit analysis. The fol-
lowing data is known about the criteria:
price > brand name recognition > number of potential customers >
distance to the production plant = intensity of competence
meaning:
“=” is as important as ..............,
“>” is more important than ...........
No. Criteria Market I Market II Market III

1 Price 20 30 10
2 Number of Potential Customers 150,000 100,000 300,000
Distance to the Production
3 50 km 500 km 150 km
Plant
Number of Competitors in the
4 8 5 2
Market
5 Brand Name Recognition high average weak
Which market is preferable?

- 125 -
3.3 Balanced Scorecard
Objective: The balanced scorecard translates an or-

ganization’s mission and strategy into a comprehen-
sive set of performance measures that provides the
framework for implementing its strategy.
Key Perspectives of a Balanced Scorecard
1) Financial
Operating income; revenue growth; revenues from
new products, gross margin percentage; cost reduc-
tion in key areas; EVA; return on investment
2) Customer
Market share; costumer satisfaction; customer reten-
tion percentage; time taken to fulfill customers re-
quest

- 126 -
3) Internal business process

- Innovation process
Manufacturing capabilities; number of new products
or services; new product development times and
number of new patents
- Operations process
Yield, defect rates; time to deliver products to cos-
tumers; percentage of on-time deliveries; average
time taken to manufacture orders; setup time; manu-
facturing downtime
- Post sales service
Time taken to replace or repair defect products;
hours of customer training for using the product
4) Learning and growth

Employee education and skill levels; employee satis-
faction scores; employee turnover rates; information
system availability; percentage of employee sugges-
tions implemented

- 127 -
Concepts in Action:
The Balanced Scorecard for Chipset, Inc., for the Year 2000
Objectives Measures Initiatives Target Per- Actual Per-
formance formance
Financial Perspective
Operating income from Manage costs & unused $ 2,000,000 $ 2,100,000
productivity gain capacity
Increase sharehold- Operating income from Build strong customer $ 3,000,000 $ 3,420,000
er value growth relationships
Revenue growth Build strong customer 6% 6.48%
relationships
Customer Perspective
Increase market Market share in commu- Identify future needs of 6% 7%
share nication networks seg- customers
ment
New customers Identify new target cus- 5 6
tomer segments
Increase customer Customer satisfaction Increase customer focus 90% of cus- 87% of cus-
satisfaction survey of sales organization tomers give tomers give
top two ratings top two ratings
Internal Business Process Perspective
Improve manufac- Percentage of processes Organize R&D/ manufac- 75% 75%
turing capability with advanced controls turing teams to imple-
ment advanced controls
Improve manufac- Yield Identify root causes of 78% 79.3%
turing quality and problems and improve
productivity quality
Reduce delivery Order delivery time Reengineer order deli- 30 days 30 days
time to customers very process
Meet specified deli- On-time delivery Reengineer order deli- 92% 90%
very dates very process
Learning and Growth Perspective
Develop process Percentage of employees Employee training pro- 90% 92%

skill trained in process and grams
quality management
Empower workforce Percentage of front-line Have supervisors act as 85% 90%
workers empowered to coaches rather than deci-
manage processes sion makers
Align employee and Employee satisfaction Employee participation 80% of em- 88% of em-
organization goals survey and suggestions program ployees give ployees give
to build teamwork top two ratings top two ratings
Enhance informa- Percentage of manufac- Improve off-line data 80% 80%
tion system capabili- turing processes with gathering
ties real-time feedback
Improve manufac- • Number of major im- Organize R&D/ manufac- 5 5
turing processes provements in process turing teams to modify
controls processes

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IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

2.4. Cost Control 94

Horngren, C.; Bhimani, A.; et al.: Management and Cost Accounting;

Neuner, J.; Frumer, S.: Cost Accounting; Homewood 1967

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

al depreciation per unit used

at depreciation allowance in period t

bi consumption of material for the production of one product unit of

I/J total number counted

L total potential of usage

mij number of u that CC i provides for CC j

p.c. primary costs

PSCi primary costs of CC i

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

r total consumption r = x×v

s.c. secondary costs

TCM total contribution margin ∑ CM

tp1*m12 individual consumption (transfer price of CC 1 times the number of

v consumption per unit

xi output per product

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

1 Basics of Cost Accounting

1.1 Concept and Structure of Accounting

In an industrial plant, factors of production (raw materials, machines,

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

1.2 Cost Categories

1) Variable Costs and Fixed Costs

1.3 Groups and Systems of Cost Accounting

Cost accounting is usually divided into the following

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

2 Cost Category Accounting

2.1 Tasks of Cost Category Accounting

The system of cost category accounting is used to an-

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

Tasks of cost category accounting:

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

2.2 Costs of Materials

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

1) Determination of the consumption of material:

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

2) Valuation of material consumption quantities:

• LIFO: last in-first out

• HIFO: highest in-first out

• LOFO: lowest in-first out

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

period related average valuation:

material costs = 210 ∗ 20.89 = 4,386.90

material costs = 100 ∗ 22 + 110 ∗ 20 = 4,400

material costs = 120 ∗ 21 + 90 ∗ 20 = 4,320

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

For a raw material the following changes in stock occurred:

Change in inventory Amount (kg) Price (€/kg)

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

For a raw material the following changes in stock occurred:

Change in Inventory Amount (kg) Price (€/kg) Price (€)

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

2.3 Imputed Depreciations

Reasons for depreciation:

IMRE Cost Accounting & Controlling 2010 M.Sc. Angela Freche

For the determination of the depreciation allowances,

• historical costs (purchasing price + purchasing