Cost accounting systems on a partial cost basis include those cost accounting methods in which not all costs are allocated to the activity units. The renunciation of the allocation of the entire costs is the decisive characteristic of these cost accounting systems (Haberstock, 2008).
The partial cost accounting systems can be carried out on the basis of actual costs, normal costs or planned costs. The splitting of costs into fixed and variable parts plays a central role here. Furthermore, cost accounting (especially cost center accounting) must divide and present the splits of fixed and variable cost portions in a targeted manner (Haberstock, 2008).
Cost accounting systems based on full costs have two main shortcomings in particular:
- Proportionalisation of fixed costs
- Allocation, apportionment and distribution of overhead costs
Partial costing systems were developed to avoid, among other things, these disadvantages of cost accounting methods. In general, the following tasks can be attributed to the direct costing systems: (Haberstock, 2008).
- Improvement of the performance analysis
- Improvement of the success planning
- Improving marketing decisions
- Improving cost control
- Improving the breakdown of direct (variable) costs
- Improving the breakdown of business fixed costs
- Improvement of the price calculation
- Improving the determination of the price floor (Haberstock, 2008).
Table of Contents
Table of Contents
List of Figures
List of tables
1 Introduction and basic presentation of direct costing
2 Applications of the contribution margin accounting
2.1 Single-level contribution margin accounting
2.1.1 Prerequisite and content of the single-level DB
2.1.2 DB applications
2.2 Multi-level contribution margin accounting
2.3 Contribution margin accounting with relative direct costs
3 Practical cases of contribution margin accounting
3.1 Case 1: Carpentry business
3.2 Case 2: Kiosk
4 Conclusion and outlook
Bibliography
List of Figures
Figure 1: Cost center distribution for multi-level DB accounting
Figure 2: Object-related reference value hierarchy
List of tables
Table 1: Operating income statement (=cost unit time statement)
Table 2: Simple calculation of a commodity
Table 3: Short-term cost-oriented price floor
Table 4: Long-term cost-oriented price floor
Table 5: Medium-term cost-oriented price floor
Table 6: Profit and loss account if no additional order is received
Table 7: Profit and loss account with inclusion of an additional order
Table 8: Cost Object Time Accounting (Total) on the Basis of Multilevel DB Accounting
Table 9: Cost Object Time Accounting (KT Allocation) on the Basis of Multilevel DB Accounting
Table 10: Retrograde cost object unit accounting based on multilevel DB accounting
Table 11: Progressive cost object unit accounting based on multi-level DB accounting
Table 12: Basic structure of the operating income statement for the presentation of the DB statement with direct costs
Table 13: Retrograde unit costing based on DB calculation with relative direct costs
1. Introduction and basic presentation of direct costing
Cost accounting systems on a partial cost basis include those cost accounting methods in which not all costs are allocated to the activity units. The renunciation of the allocation of the entire costs is the decisive characteristic of these cost accounting systems (Haberstock, 2008).
The partial cost accounting systems can be carried out on the basis of actual costs, normal costs or planned costs. The splitting of costs into fixed and variable parts plays a central role here. Furthermore, cost accounting (especially cost center accounting) must divide and present the splits of fixed and variable cost portions in a targeted manner (Haberstock, 2008).
Cost accounting systems based on full costs have two main shortcomings in particular:
- Proportionalisation of fixed costs
- Allocation, apportionment and distribution of overhead costs
Partial costing systems were developed to avoid, among other things, these disadvantages of cost accounting methods. In general, the following tasks can be attributed to the direct costing systems: (Haberstock, 2008).
- Improvement of the performance analysis
- Improvement of the success planning
- Improving marketing decisions
- Improving cost control
- Improving the breakdown of direct (variable) costs
- Improving the breakdown of business fixed costs
- Improvement of the price calculation
- Improving the determination of the price floor (Haberstock, 2008).
The cost accounting systems used today on a partial cost basis are:
- Single-level contribution margin accounting
- Multi-level contribution margin accounting
- Contribution margin accounting with relative direct costs (Equal, 2020).
The general basic formula of contribution margin accounting is: (Equals, 2020).
Revenue - costs = residual costs + profit
2 Applications of the contribution margin accounting
Partial costing systems have built on four application systems and can be represented as follows: (Equal, 2020).
- Single-level contribution margin accounting (=Direct Costing)
- Multi-level contribution margin accounting (= fixed cost recovery accounting)
- Contribution margin accounting with relative direct costs
Accordingly, the following chapters are divided according to these application systems - here, the cost accounting prerequisites are explained in each case and the respective applications are presented (Gleich, 2020).
2.1 Single-level contribution margin accounting
This section deals with contribution margin accounting with the unconditional prerequisites and contents in order to be able to perform DB accounting. Before the cost splits can be carried out, the cost accounting system must be adapted to the cost distribution and cost allocation system (Gleich, 2020).
Furthermore, in this section the most useful applications with the contribution margin accounting will be presented and practically brought closer.
2.1.1 Prerequisite and content of the single-level DB
Single-step contribution margin accounting is a cost accounting system that is often referred to as direct costing (Gleich, 2020).
Direct Costing separates the fixed and variable costs - because only the variable costs are the direct costs of the product / service / etc.. Here it is assumed that the direct (i.e. the variable) costs, are the actual costs of the product, because this includes, for example, the cost of goods used (purchasing costs) - the manufacturing costs, etc. (Anon, 2020).
The variable costs must now be calculated directly on the so-called cost objects - thus, in financial accounting, postings must be made immediately to the cost objects (Gleich, 2020).
The fixed costs / overhead costs must be allocated / distributed to the cost centers where they actually occur - i.e. where they were also caused. Therefore, the allocation of costs to the cost centers must be omitted, because otherwise a mixing of the fixed costs is caused. After these allocations to the cost centers, no one can make an exact statement of the causes or background of the fixed costs in order to be able to carry out an appropriate analysis of the fixed costs with regard to their reduction or change (Gleich, 2020).
The cost breakdown must already take place in Cost Element Accounting - these are then posted and displayed on the cost centers in Cost Center Accounting:
- Reversal after variable direct costs
- Breakdown by variable Overhead costs (which must be allocated directly to the cost objects and are generally fixed costs, but have a variable effect after allocation (overhead/fixed costs that increase depending on the product quantity) and must therefore be allocated to the cost objects.
- Breakdown by fixed costs, which are distributed to the cost centers in the block or within the company according to cause (Gleich, 2020).
As a result, the cost object is only charged with the variable and direct costs - thus, no overhead/fixed costs should be allocated or even charged to the cost objects in direct costing (Gleich, 2020).
Cost centers should only be charged with fixed / common costs to be incurred - thus, real costs are on the cost centers and can be regrouped and broken down in other applications to reflect certain fixed cost representations and perform targeted analyses (Gleich, 2020).
Variable costs can be grouped as a prerequisite for single-level DB:
- Production material of a product
- Direct production wage of a product
- Machine costs / depreciation
- Etc. (Anon, 2020).
Fixed costs can be grouped as a prerequisite for single-level DB:
- Administrative salaries
- Building and machinery repair costs
- Office supplies
- Taxes, insurances, duties
- General administrative expenses
- Etc. (Anon, 2020).
2.1.2 DB applications
The following possible applications are based on the previously described single-level DB and are presented separately according to variable and fixed costs (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
2.1.2.1 Operating result calculation (=cost unit time calculation)
This income statement can be presented as an annual income statement or also as a short-term income statement - the application is based on the single-level DB system and can look like the following graduated form - but can also be done differently - the basic system, as presented, remains - the question always arises here: (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
- Which products are eligible in terms of profits? - which products / services have how much variable costs and can make what contribution margin to cover the residual fixed costs for a given sales volume.
In these circumstances, the further question arises: how many product or service units must be produced and sold to cover these fixed costs (identified by cost center accounting)? (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
Profitability Analysis based on the system of single-level DB accounting:
Table 1: Operating income statement (=cost unit time statement)1
Abbildung in dieser Leseprobe nicht enthalten
This profitability analysis can now be set up for different products - in line 9. (gross contribution margin) - it can now be determined which product has generated the highest contribution margin. From this it can now be analyzed which product, which services or which product segments can be sold how many times and how much profit (after production) can be generated in each case. (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
According to this, there are two ways of analysis:
- Which products generate the highest contribution margin and should be promoted accordingly?
- How much quantity must be produced to increase DB and also to secure it?
Furthermore, considerations can also be made as to which products should perhaps no longer be so promoted (or should also be removed from the sales programme) or accordingly need to be pushed somewhat so that they once again generate a positive DB (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
2.1.2.2 Cost Object Controlling
The contribution margins are the amounts that are available in the company through the sale of the products after deduction of the variable costs, in order to cover / exceed the fixed company costs to generate profit.
Thus, the unit calculation must be planned precisely - here the following possible solutions are available: (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
- Specification of target contribution margins, which contain the estimated fixed costs as well as a profit share.
- Application of the cost-bearing capacity principle, according to which contribution margins are no longer allocated or planned to products according to cause, but according to the given market conditions.
The calculation for the single-stage DB calculation is similar to that of the trade :
Table 2: Simple calculation of a commodity2
Abbildung in dieser Leseprobe nicht enthalten
The amount of the overhead, which is calculated on the variable costs, depends on the previous contribution margins of the product. Influencing factors can be:
- The amount of fixed costs to be allocated
- The amount of the planned dealer profit
- The amount of the planned production and sales volume
Costing with absolute gross cover charges corresponds to division costing considering a calculated profit: (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
Mathematically this calculation is done: P = (Kv + DB) : X
(P=Supply price €/piece / Kv=Variable costs of the period / DB=Contribution margin of the period / X=Sales quantity/production quantity of the period)
(Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
Practical example: The variable costs of product A are 170,000€ per period and the gross contribution margin is 28,000€ per period. The manufactured and sold quantity is 100 pieces.
P = (172.000 + 28.000) : 100 = 2.000€ / piece for standard cost estimate
Thus, it can be planned with approx. 2,000€ per production unit - this can be assumed if the DB (the expected profit) must be expected in this range - furthermore, the sales volume should be within this range, because if this should decrease in real terms, then the offer price would have to increase and correspondingly with increased sales, it could decrease. (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
2.1.2.3 Break-even analysis
The division of total costs into fixed and variable costs enables a profit-oriented view of the company. The break-even analysis serves this purpose.
With their help, the relationships can be represented between:
- Sales
- Costs
- Profit
- Quantity (number of units produced)
Break-even analysis is often referred to as break-even analysis. With this analysis, the entrepreneur can plan the number of units to be produced in the period, given cost parameters (variable and fixed costs), from which the point is reached at which the total costs are equal to the revenues of the company, the threshold from the loss to the profit zone. When the break-even point is reached, the total costs are just covered by the total revenues. In this case, a certain number of units with given cost and revenue parameters is causal. To determine this number of units in this company situation is the purpose of this analysis (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
The break-even point is also often referred to as:
- Useful threshold
- Critical quantity
- Cover point
- Break-Even-Point
- Dead center
The break-even analysis is linked to several prerequisites - related to the period under consideration:
- Linear total cost trend
- Constant fixed costs
- Constant prices
- Constant performance program
- No storage
These parameters are mostly unrealistic in practice - but this analysis can yield good conclusions in planning (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
Practical example: A company produces one type of product - the variable costs per unit are 52.50€ - the fixed costs per quarter of the company are 312.000€ - the products are sold for 114,90€ per unit.
a. First the DB per piece must be calculated: DB=Revenue-Kv
DB = 114,90€ - 52,50€ = 62,40€ / piece
b. Subsequently, the fixed costs of the period have to be put in relation to the unit DB of the product in order to calculate the unit quantity to be planned, which is necessary to cover the total fixed costs - from this unit quantity onwards the break-even point is reached and from here onwards the profit zone begins to be reached.
X = 312.00 : 62,40 = 5.000 pieces / quarter
Control calculation: 5,000 units x 62.40€/unit-DB = 312,000€ fixed costs, which are covered by 5,000 units - from this quantity onwards the profit zone for the company begins and this unit quantity can now be used as planning information.
2.1.2.4 Price floors
The price floor indicates the offer price as a net sales price that a company must demand at least in order to be able to survive (reasonable profit). It is assumed here that the company puts the products it offers on the market to buyers at essentially the same price.
The cost-based price floor - most commonly used price floor calculation - can be determined within the framework of the DB calculation for a product. Full cost accounting is not suitable to serve as a basis for the determination of the cost-determined price floor - because in this full cost accounting cost elements are included which cannot be influenced in the short to medium term and have not been caused by the product and thus it is not identifiable which cost elements are to be taken into account in a price floor or not (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
It must be noted that DB accounting can also be considered appropriate only if the following principles are observed:
- The cost-based price floor determined by the DB calculation should only be regarded as information on where the "real sacrifices" for a company begin.
- The cost-oriented price floor can be overlaid by market-related requirements - for example in the context of a:
- Sales connection
- Introduction policy
- Bait and switch
- Displacement policy
The cost-oriented price floor may be overlaid by liquidity policy requirements - i.e. the company needs a certain DB for each unit sale, which then covers a share of the company's fixed costs.
The cost-based price floor determined by DB accounting should not lead to a common practice of slightly lenient pricing policies, but should only be practiced when it is unavoidable (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
The cost-oriented price floor results from taking into account the different maturities of the decisions,
The following maturities can be distinguished:
- Short-term cost-oriented price floor
- Long-term cost-oriented price floor
- Medium-term cost-oriented price floor
(Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
A. The short-term cost-oriented price floor, which is the variable cost caused by the product:
Table 3: Short-term cost-oriented price floor3
Abbildung in dieser Leseprobe nicht enthalten
Since the fixed costs cannot be considered to be depreciable in the short term and are therefore incurred in any event, it would be irrelevant whether production is carried out and sold at a price corresponding to the variable costs or whether no production takes place.
[...]
1 Own representation based on (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
2 Own representation - based on (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
3 Own representation - based on (Nguyen, 2014 / Olfert, 2013 / Schweitzer et al., 2016).
- Citar trabajo
- Dipl.-Betriebs- und Verwaltungswirt und PhD Maged Hassanien (Autor), 2021, Scientific essay in the field of accounting / controlling. Contribution margin in its (practical) application. Part 2, Múnich, GRIN Verlag, https://www.grin.com/document/1150521
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