Cost Accounting &

Controlling
Module 2:
Decision Making & Controlling

Fall Term 2024/25

GBUS1VO - General Business Administration
1st Semester, Bachelor Informatics
Prof. (FH) Mag. Gerhard Kormann
[email protected]
GBUS1VO - General Business Administration
◼ Chapter 1: Business Objectives and Principles
◼ Chapter 2: Accounting and Controlling
 Module 1: Introduction to Financial Management, Cost Accounting and Controlling
 Module 2: Decision Making & Controlling
◼ Cost Analysis – Total Cost, Fix- and Variable Cost, Marginal Cost Analysis
◼ Cost Accounting – Direct and Indirect Costs, Three Cost Perspectives in a Company
◼ Decision Making - based on Absortion Costing, based on Contribution Margin Accounting
 Module 3: Finance and Investment
◼ Chapter 3: Marketing
◼ Chapter 4: Strategy, Management and Innovation
◼ Chapter 5: Business Ethics and Implications on Informatics
Understanding Trade-offs in Economics
Key Principles Revisited from chapter 1

◼ Scarcity: The foundation of trade-offs in

economics is scarcity – the idea that resources
are limited relative to human wants and needs.
This scarcity necessitates choices and trade-offs.
◼ Opportunity Cost: Opportunity cost is
the value of the next best alternative forgone
when a choice is made. It reflects the cost of not
choosing an alternative option.

Decision Making is much driven by those

economic key principles FourweeksMBA

FourweeksMBA
Understanding Trade-offs in Economics
Key Principles Revisited from chapter 1

◼ Rational Decision-Making: Economic agents,

whether individuals or organizations, aim to
make rational decisions that maximize their utility
or benefit given their limited resources.
◼ Marginal Analysis: Decision-makers consider
the marginal benefit (additional benefit) and
marginal cost (additional cost) when evaluating
trade-offs. Rational decisions involve choosing
options where marginal benefit exceeds marginal
cost.
Decision Making is much driven by those
economic key principles FourweeksMBA

FourweeksMBA
Cost Analysis

• Total Cost & Profit

• Fix, Variable Cost
• Marginal Costs Analysis
Cost Analysis

• Total Cost & Profit

• Fixed, Variable Cost
• Marginal Costs Analysis
What Businesses Do
Take Inputs Process/Manufacture Output

Costs – Fixed and Variable Revenue

Profit

Accounting & Controlling

Cost
Definition:

Costs are the rated consumption of input

factors (goods and services) for the
production of output.
Revenue
◼ Total Revenue – also known as turnover,
sales revenue or ‘sales’ = Price x Quantity
Sold
 TR =PxQ
◼ Price – may be a variety of different prices
for different products in the portfolio
◼ Quantity – could be global sales
Profit
◼ Profit = Total Revenue (TR) – Total Cost
(TC)
Cost Analysis

• Total Cost & Profit

• Fixed, Variable Cost
• Marginal Costs Analysis
Fixed and Variable Cost
◼ Fixed – are not influenced by the amount produced but can change
in the long run e.g., insurance costs, administration, rent, some
types of labour costs (salaries), some types of energy costs,
equipment and machinery, buildings, advertising and promotion
costs
◼ Variable – vary directly with the amount produced, e.g., raw material
costs, some direct labour costs, some direct energy costs
€

output
◼ Semi-fixed – where costs not directly attributable to either of the
above, for example, some types of energy and labour costs
 Fixed and Variable Cost
◼ Mixed Costs
• Contains both variable and fixed cost elements.
• Graphically, the fixed element causes a vertical intercept with a slope
upward as the variable cost element is added to the fixed cost.

• Equation for a straight line

expresses relationship
between mixed cost and level
of activity
• Y = a + bX
• Y - total mixed cost
• a - the total fixed cost (vertical
intercept)
• b - the variable cost per unit of
activity (slope of the line)
• X - level of activity
Source 13
Cost Analysis

• Total Cost & Profit

• Fixed, Variable Cost
• Marginal Costs Analysis
 Cost per Unit
◼ Total Costs (TC) = Fixed Costs (FC)+ Variable Costs (VC)
◼ Cost per Unit = TC/Output (Q)
 The costs per unit (unit costs) indicate how much it costs on average to
produce a production unit at a certain production level (output level).

€
Total costs line

Fixed costs

output
15
 Cost per Unit Analysis
◼ Total fixed costs remain constant within the relevant range of activity.
◼ This means that per unit fixed cost drops at a decreasing rate.
◼ First customers have the greatest impact on the average fixed costs per
unit.
◼ Fixed costs are expressed in total fixed cost.

Source 16
 Marginal Costs Analysis

Key economic principle:

◼ Marginal Analysis: Decision-makers consider the marginal benefit
(additional benefit) and marginal cost (additional cost) when evaluating
trade-offs. Rational decisions involve choosing options where marginal
benefit exceeds marginal cost.

17
 Marginal Costs Analysis
◼ Marginal Costs
◼ Marginal Costs (MC) – the cost to produce the next unit
 MC = TCn – TCn-1
The Importance of Marginal Cost
 MC =
Marginal costs are important in economics as they
help businesses maximise profits. When marginal
◼ Profit Maximisation: MR = MC costs equal marginal revenue, we have what is
known as ‘profit maximisation’.

This is where the cost to produce an additional good,

is exactly equal to what the company earns from
selling it. In other words, at that point, the company
is no longer making money.

Source 18
 Marginal Costs - Example
◼ John Monroe owns a privately owned business called Monroes
Motorbikes. In his first year of business, he produces and sells 10
motorbikes for $100,000, which cost him $50,000 to make. In his second
year, he goes on to produce and sell 15 motorbikes for $150,000, which
cost $75,000 to make.

◼ First, we work out the change in the total cost. In this case, there was an
increase from $50,000 to $75,000 – which works out as an increase of
$25,000. Then we calculate the change in quantity which increases from
10 to 15; an increase of 5. We then divide the change in the total price
($25,000) by the change in quantity (5), which equals a marginal cost of
$5,000 per motorbike.

Source 19
Cost Accounting

• Direct and Indirect Costs

• Three Cost perspectives
Cost Accounting

• Direct and Indirect Costs

• Three Cost perspectives
Cost Accounting
Direct and indirect costs
◼ Another important distinction has to be made between
direct costs (Einzelkosten) and indirect costs
(Gemeinkosten).

◼ Direct costs: costs that are related to the particular cost

object and that can be traced to it in an economically
feasible way.

◼ Indirect costs: costs that are related to the particular

cost object but cannot be traced to it in an economically
feasible way.
Examples
Fixed variable

• Advertisement for a • Raw materials

special product

• Salaries for • Heating, electricity

Headquarter
• Rent for a factory

building
Cost Accounting

• Direct and Indirect Costs

• Three Cost perspectives
Cost Accounting
3 cost prospectives in an enterprise
◼ Cost type accounting (Kostenartenrechnung)
 Key question: Which costs have been incurred?
◼ Cost center accounting (Kostenstellenrechnung)
 Key question: Where have costs been occurred?
◼ Product costing (Kostenträgerrechnung)
 Key question: for which products?

Friedl, Kuepper and Pedell

And how it is connected...
◼ Cost type accounting feeds product costing with direct cost,
directly
◼ All the rest goes through cost center accounting into product
costing
◼ Indirect cost are usually split into material, production, sales
and administration
Direct cost
Cost type Product Costing
accounting
Material
Production
Indirect cost Profitability
Sales Analysis

Cost center Administration

accounting
26
Cost type accounting
◼ Cost type accounting serves to collect and break
down all the different cost elements within a
given period.
◼ Cost type accounting is not a special kind of
accounting, but merely a systematic way of
registering costs.
◼ The collection of costs happens through the
posting of the vouchers (= Belege) to cost types
in the forefront accounting systems (accounts
payable, salary accounting, materials
accounting, etc.).
Cost type accounting
The most important groups are:
◼ Personnel and labour costs (wages and
salaries,...)
◼ material costs (raw materials and supplies,...)
◼ Services provided from outside
◼ repair and maintenance costs
◼ imputed depreciation
◼ ...
Cost center accounting
◼ Cost center accounting serves as the cost
center‘s planning and controlling tool and as a
basis for the calculation of cost rates and
allocation rates for product costing.
◼ The cost center is a place where costs occur.
◼ Cost centers are established in accordance with
the tasks that need to be performed.
◼ The first criterion to designate cost centers is the
company‘s organisation plan.
◼ At least one cost center is set up for each area
of responsibility.
 Cost Center Accounting
Typical Cost Center structure
◼ Marketing
◼ Sales – quite frequently split up by channel or customer segment,
e.g Direct Sales versus Partner Sales, Business versus Consumer
◼ Production
◼ Customer Service
◼ Research & Development
◼ Finance
◼ IT
◼ GM (General Manager)

50% of companies work with 6 to 20 cost centers (1)

(1) Peter Atrill, Eddie McLaney: Managment Accounting for Decision Makers, 2009, p. 111).
30
Cost center accounting
Examples of company structures
◼ The cost center is a place
where costs occur. Cost
centers are established in
accordance with the tasks
that need to be
performed.
◼ The first criterion to
designate cost centers is
the company‘s
organisation plan. At least
one cost center is set up
for each area of
responsibility.
Product costing

◼ The idea of product costing is to show for which

products and services which costs are incurred.
Thus, with product costing it will be possible to
see how high the costs are that a product
causes or has to bear through allocated costs.

 Calculationof products
 product costing per period
 ...
Decision Making
Methods

• Absorption Costing
• Contribution Margin
Decision Making
Methods

• Absorption Costing
• Contribution Margin
Absorption costing
(Vollkostenrechnung)

◼ Absorption costing is the form of costing in which

all costs incurred by the business are charged
to the individual products or services.
◼ Area of application
 Profit calculation (see income statement: revenue
minus costs)
 Budgetary planning and control (will be discussed
later)
 Productivity/efficiency calculation and comparison
(remember Output/Input calculations in business
administration lecture)
Direct and indirect costs
◼ Another important distinction has to be made between
direct costs (Einzelkosten) and indirect costs
(Gemeinkosten).

◼ Direct costs: costs that are related to the particular cost

object and that can be traced to it in an economically
feasible way.

◼ Indirect costs: costs that are related to the particular

cost object but cannot be traced to it in an economically
feasible way.
Examples
Fixed variable

• Advertisement for a • Raw materials

special product

• Salaries for • Heating, electricity

Headquarter
• Rent for a factory

building
Allocation of indirect
costs to cost centers
Direct cost
Cost type Product Costing
accounting
Material
Production
Indirect cost Profitability
Sales Analysis

Cost center Administration

accounting

• “Indirect cost“ means indirect in relation to the cost object “product“

• In relation to a cost center, these cost consist of direct and again of indirect cost
center cost
38
Reading & Examples

Peter Atrill, Eddie McLaney:

Managment Accounting for Decision Makers,
10th edition, 2021

39
 Example for absorption costing
Activity 4.6

Source: Peter Atrill, Eddie McLaney: Managment Accounting for Decision Makers, 2009, p. 103-104
40
Example - continued

Source: Peter Atrill, Eddie McLaney: Managment Accounting for Decision Makers, 2009, p. 103-104
43
 Allocation basis
◼ Most frequent allocation basis is labour hours
◼ Nevertheless, it is usual practice to use different
loading factors in order to allocate indirect cost
center costs (overhead) to a product (or cost
object)
◼ Example: For a robot production line in
automobile the optimal load factor will be
machine hours. Whereas, the finishing line
(assembly of complex parts in the in-cabin room
of a car or visual quality control) is much better
allocated on the basis of labour hours

45
Decision Making
Methods

• Absorption Costing
• Contribution Margin
 Profit measured by means of...
Contribution Margin (Accounting)

47
 Why Contribution Margin
Accounting
◼ The concept of Contribution Margin Accounting is based on
the idea to sustain from apportioning indirect cost
◼ Rationale
 Absorption costing actually let us assume that we get a precise end-
to-end picture. Which is not the case since auxiliary factors (labour
hours, machine hours, etc.) are used to apportionate cost. These
factors do not represent the “real“ cost drivers in the business
 The concept of Contribution Margin is building a pragmatic bridge
between being as precise as possible and looking at the relevant
facts to take management decisions

48
Contribution Margin (Deckungsbeitrag)

◼ Contribution margin (CM) = Revenues - variable

costs
◼ In words: The excess of revenues over all
variable costs related to a particular sales
volume. (e. g. CM per unit)

◼ If CM > fixed costs => profit

◼ If CM < fixed costs => loss
The basic concept
mn EUR Product A Product B Total
Sales 360 120 480
Variable cost 180 66 246
Contribution margin 1 180 54 234
Direct fixed costs 80 14 94
Contribution margin 2 100 40 140
Indirect fixed costs 39
Operating profit 101

50
 Key benefits of
Contribution Margin
◼ Save Controlling resources, compared to Absorption
Costing or ABC
◼ Save time; processing of Contribution Margin based
reporting is faster. So that reporting becomes available
earlier
◼ Bring focus into management, Contribution Margin helps to
focus management on the cost that they can mainly
incluence

51
The basic concept
mn EUR Product A Product B Total
Sales 360 120 480
Variable cost 180 66 246
Contribution margin 1 180 54 234
Direct fixed costs 80 14 94
Contribution margin 2 100 40 140
Indirect fixed costs 39
Operating profit 101

Assume the pitfall...

52
Rule of Thumb: Corporate cost footprint
fixed variable

Error<< 20%

Indirect variable cost still

need to be apportioned 53
Contribution margin in
corporate organisations
Corporate/ Corporate/
headquarter headquarter
organisation organisation

Business
Business Business Sales Sales Sales
Unit
Unit Unit Subsidiary Subsidiary Subsidiary
Consumer
Healthcare Lighting EMEA Asia US
Electronics

◼ Contribution 1 and 2 is usually applied on organisation levels below

Corporate (Business unit, business group, sales subsidiary, etc.)
◼ Only on Corporate level full operating profit is in Controlling scope
◼ Corporate expectation is normally expressed in Contribution margin %

EMEA = Europe Middle East and Africa 54

Example
Product group 1 2 3
Product A B C D E

Sales 396.000 105.600 1.080.000 331.200 300.000

Variable costs - Material 82.000 29.200 206.040 89.960 5.1600

Variable costs – Production 164.000 58.400 412.080 179.920 103.200

Variable costs – Sales 24.000 8.400 54.000 30.000 13.200

Contribution margin 1 126.000 9.600 407.880 31.320 132.000

Product Fixed Costs 60.000 14.400 168.000 42.000 66.000

Contribution margin 2 66.000 -4.800 239.880 -10.680 66.000

Contribution margin 2 by Product group 61.200 229.200 66.000

Product group Fixed Costs 24.000 54.000 -

Contribution margin 3 37.200 175.200 66.000

Contribution margin 3 by Business group 212.400 66.000

Business group Fixed Costs 36.000 -

Contribution margin 4 176.400 66.000

Contribution margin 4 Company total 242.400

Company Fixed Costs 9.600

Operating Profit 232.800

55
Contribution margin %

◼ In the core of corporate target setting, headquarter sales targets cascade

down closely linked to Contribution Margin % targets (also called
Contribution Margin Ratio in literature)
◼ Contribution Margin percent describes a relative profitability expectation
◼ Contribution Margin % in a range of 30 to 60% before Research &
Development and Manufacturing cost are quite usual expectations
towards a healthy performance
◼ Advantage of Contribution Margin % targets: Increasing sales above
original budget/plan allows business units to raise as well
cost/investments above budgeted level. On the other hand, in case of
sales underperformance Contribution Margin % is a self regulatory in
terms of budget cut for spendings

56
From Contribution Margin to Break
Even Analysis

57
 Background to Break-even
Variable cost not being a linear function
◼ Attention: Variable cost are not necessarily a linear function.
◼ Economies of scale (like increasing discounts on purchased materials)
propose that the variable cost should rather not be a straight line
Time in scope
◼ In practice, Break-even is used for analysis within one finanical period but
as well across a number of financial periods, i.e. 3 or 5 years
◼ For multi period analysis, Break-even is a valid approximation. As long as
you take into consideration, that interest rate effects are not taken into
account => Capital investment decisions

58
Graph of total cost against volume of activity

Revenue/
Costs
in €
Total costs line

Variable costs

Fixed costs

Output, e.g. sales units

59
 Break-even chart
Revenue/ Revenue/Sales
Costs
in €
Total costs line

Variable costs

Fixed costs

Output, e.g. sales units

Break-even point

60
 Break-even chart
Revenue/ Profit area Revenue/Sales
Costs
in €
Total costs line

Variable costs

Fixed costs

Output, e.g. sales units

Break-even point

Loss area
61
How to calculate
Break Even Point (BEP)

62
Achieving a target profit
Revenue/ Target profit Revenue/Sales
Costs
in €
Total costs line

Variable costs

Fixed costs

Output, e.g. sales units

63
How to calculate target
profit sales volume

64
 Reflection
◼ Break-even analysis is a “quick & dirty“ way to support
management decisions
◼ Break-even is most commonly used to identify sales
volumes of a product which are necessary to become
profitable or to achieve a certain profit
◼ The volume of activity whre profitability is reached, is
called BEP =Break-even point

65
Example Break even analysis
Price per unit 1400

Cost per unit 1210

Fixed Cost (FC) 10000

Break Even Point in terms of quantity

Output Revenue Contribution

(Quantity) (Sales) Fixed Cost Variable Cost Total Cost Profit margin Marginal Cost

0
10
20
30
40
50
60
Example on Profit and Cost Calculation
All questions refer to the following information

Price 117,00
Units sold 920,00
Max. capacity 1.500,00
Direct cost (fix) 40.000,00
Direct cost (variabel per unit) 13,00
Indirect cost (fix) 26.000,00
Indirect cost (variabel per unit) 18,00

1. Calculate the profit

2. Calculate the contribution margin per unit
3. Calculate the break-even capacity (price is fix)
4. Calculate the break-even price (capacity is fix)
5. Variable costs increase. How has capacity to change (if the profit should
remain at the original level? - new direct cost (variable per unit): 14,95; new
indirect cost (variable per unit): 21,60
6. Should an additional order be accepted, assuming that the sales price for this
additional order is 34,00 and the order volume is 450 units. Please calculate
the total contribution margin for this additional order.