U4

• Cost accounting as information source within the company
• Cost information needs in business

  • Documentation
  • Inventory Valuation
  • Transfer prices
  • Management reporting
  • Public tenders
• Cost accounting information uses

  • Planning
  • Decision Making
  • Monitoring and feedback
• Documentation tasks


  Keeping records of what has happened or how certain decisions have been made in the past
• Planning tasks


  Creating a need for cost information whenever financial consequences of future events and actions have been assessed
• Decision making tasks


  Arising in different departments and at different hierarchical levels within the company
• Monitoring and feedbacking tasks


  Involving a comparison of goals and plans with what has actually been achieved
• Conceptual framework elements of a cost accounting system


  • Cost objects
  • Cost allocation principles
  • Cost accounting cycles and periods
• Conceptual framework of a cost accounting system

  • It must give answer at least to the following questions:
  • Which cost objects are relevant to our company?
  • Which rules do we want to follow when assigning and allocating costs to different cost objects?
  • Which time frame is relevant for the cost accounting process?
• Cost objects in the minimum set-up of a cost accounting system

  • Resources
  • Goods and services
  • Organization entities (departments)
• Minimum set-up of a cost accounting system

  • The smallest set of cost objects which a cost accounting system should be able to handle in order to be of use for company management
• Value creation process


  • Can be made more efficient if more valuable resources can be replaced by less valuable ones, or if the amount of resources can be reduced altogether
• Organizational entities


  • Specialize in a subset of all company tasks and activities. Cost accounting has the task to determine which amounts of resources are consumed in which accounting system
• Goods and services


  • Value is created only if the company's output is of use to third parties. Company management will try to ensure that the company's valuable resources are not wasted in producing output that the market is not valuing
• Cost accounting system dealing with multiple cost objects

  • Cost object 1
  • Cost object 2
  • Cost object 3
• Cost tracing


  Direct cost
• Cost allocation


  Indirect cost
• Additional entities in the advanced set-up of a cost accounting system


  • Customers
  • Distribution channels
  • Business divisions
• Customers


  • Are the ultimate key to success for every company. It is therefore only natural to determine the amount of resources required for serving a particular customer and match these with the sales revenues generated
• Distribution channels


  • Bridge the logical, temporal, and geographic gap between the company and its customers. Depending on the distribution channel, the costs involved in serving customers might change
• Business divisions


  • Companies with a broad range of products cluster their products in separate organization units. The cost accounting system must therefore be able to separate costs by business division
• Cost allocation principles


  • Cause-and-effect principle
  • Proportionality principle
• Cause-and-effect principle


  Stipulates that costs must be charged to those objects that cause them. This means that costs are allocated to those objects where a change in the object output or quantity causes a directly measurable change in costs
• Proportionality principle


  Assumes that there is a linear (proportional) relationship between the resource amount consumed and the cost driver quantity
• The cost accounting system should ensure that each cost object carries its "true" cost. For that, rules must be established that give clear guidance on how costs are distributed across different costs objects
• Uniform cost allocation


  • Distributes costs across cost objects uniformly. The cost amount is divided by the total number of cost objects and each cost object has to bear the same cost amount
• Prof. Dr. Andreas Taschner, ESB Business School, Hochschule Reutlingen, Alteburgstraße 150, 72762 Reutlingen, www.reutlingen-university.de, T. [phone], F. [phone]-903027, [e-mail]
• Proportionality principle


  Cost driver share
• Cost allocation


  • 30%
  • 10%
  • 60%
• Cost object


  • A
  • B
  • C
• Total costs


  • 10%
  • 60%
  • 30%
• Average principle


  Distributes costs across cost objects uniformly. The cost amount is divided by the total number of cost objects and each cost object has to bear the same cost amount.
• Ability-to-bear principle


  Advocates that cost allocation should be based on a cost object's ability to bear costs. A cost object that can bear higher costs should be allocated a higher share of indirect costs and vice versa.
• Cost allocation


  • 33%
  • 33%
  • 33%
• Cost allocation


  • 33.3%
  • 50%
  • 16.7%
• • Revenue: €€€
  • Revenue: €€
  • Total Revenue: €€€€€€
• Defining time reference


  • t1
  • t0
  • t2
  • Today
• Defining accounting periods


  The third major question that must be answered in order to define the conceptual framework for a company's cost accounting system is concerned with issues of time.
• Retrospective Accounting System


  Collects and processes actual costs. This system can explain what costs have been incurred and what the underlying resources are.
• Prospective Accounting System


  Works with future costs, which can be either predicted or standard costs. Forward looking cost accounting systems are the main work-horse for budgeting and planning tasks.