Lecture 12 - Marginal costing, GPK & PK

Question 1

(!) Describe grenzplankostenrechnung / marginal costing in general & assumptions?

Answer 1

General:
- Marginal costs = costs of additional units of output
- The next unit: Differ from unit level
- More stringent on VC: Direct costs
- Direct cost vary proportionately with product
- Usable for variance analysis
- Short term model
- Cost level within specific cost center at certain activity level
- Control & evaluate performance: Actual vs. planned cost
- Address problem on direct cost & controllability at ABC
- Less flexible than ABC: More details
- Assign cost differences to CD´s
- Support external reporting: Inventory valuation
- Require weak or absent inter-period dependencies: Else capital budgeting cannot be avoided
- Deckungsbereignung: Dækningsbidrag / Contribution margin

Assumptions:
- Output quantity variable: Only relevant cost driver
- Fixed input price: Exogenously given. Standard cost criteria
- Cost drivers only variable if proportionally to output level
- Only VC allocated to cost objects: Fixed reported separate
- All cost are deterministic: Transparent cost allocation. ”Unforeseen costs” cant occur

Problems addressed:
- Controllability: Primary vs. secondary costs
- Relevant info SH: Unlike ABC. Account for changes in activity level
- Allocate to cost type instead of activities
- MC adjust cap.: Excess cap.

Fra den anden:
Translated:
- Flexible standard costing
- Flexible analytic cost planning & accounting

General:
- Compete against contribution margin accounting method
- ABC is extension of GPK: PK
- Close related to marginal costing but with ABC characteristics
- Most effective in routinized & repetitive organizations
- Often many cost centres
- Application helped by ERP
- More succesful than ABC

Objectives:
- Correct errors on allocating FC
- Provide clear & reliable cost info for better decisions: Products/ services to offer, pricing & plan/control of operations
- Ensure constant balance of cost related to units of output

Question 2

(!) Describe the three principles for cost allocation

Answer 2

General:
- Decrease in preciseness

Principle of cause & effect:
- Assign costs to cost objects
- Focus in marginal costing
- Increased usage = Increased resource consumption
- Ref. Direct costs: Unit costs not VC
- Can be planning & predicted
- Most precise
- Require relation between use of cost object & cost increase
- Can also refer to the past
- Cost only there if we produce
- Eg. Mat. cost, labour cost & depreciation
- Ref. Zakken Worre?

Principle of demand:
- Focus for ABC
- Special case of cause & effect
- Observable that activity increase in cost object relate to increased resource consumption
- Different kind of cost behavior
- Increase in consumption dont always increase cost: Differ from principle 1
- Cost may occur before consumption
- Eg. machine usage

Principle of average:
- Focus for ABC
- Cost assigned to cost objects on average basis
- Based on cost pools
- Least precise
- Special case of other principles

Question 3

(!!!!!) Describe the different cost categories

Answer 3

Direct costs:
- Reversible
- None if activity stop
- Follow principle of cause & effect
- Vary with activity level

Indirect & fixed cost:
- FC always indirect
- Dont vary with activity level
- Some kind of capacity cost

Primary costs:
- CALC: Actual cost/unit * actual units used
- Resources bought from external supplier
- Manager accountable for price and amount
- Used to fix controllability problem
- Cost center account for actual price & amount of resources used
- Caused by consumption
- Isolate inefficiencies here
- Ensure accountability for only specific cost center cost of centre manager

Secondary costs:
- CALC: Standard cost/unit * actual units used
- Manager accountable for only amount
- Used to fix controllability problem
- Use of intermediate goods produced inside company
- In other cost centre than the currently evaluated
- Only amount received from prior cost center
- Ensure accountability for only specific cost center cost of centre manager

Question 4

Describe cost centres, their control & considerations

Answer 4

General:
- Important for MA
- Each activity has its own center
- Cost forced down to products
- (Analyze variances between budgeted & actual)
- (Denominator for capacity same for each year: Differ from traditional)

Requirements:
- Separable costs specific to output
- Repetitive output
- Only one manager
- Can have multiple cost centers
- Manageable size
- Similarity of costs, technology, resource type or work
- Quantifiable & plan-able CD´s
- Center primary or support: Not same as primary/secondary cost
- The measured must be out there

Considerations:
- Small centres if main part of costs vary with primary activity
- Know who to punish
- Consolidation of cost centres possible: VC & FC kept isolated which maintain economic logic (MC < MR)
- Cost & performance management system is basis for organization: Not opposite

Question 5

(?) Describe the steps of budgeting indirect costs

Answer 5

1. Assign direct costs to cost pools
2. Select cost drivers
3. Choose activity level for each cost pool
4. Estimate cost function
5. Determine primary indirect cost per pool for assumed activity level
6. Record fixed costs per cost pool
7. Allocate secondary indirect cost
8. Make cost budget per cost pool
9. Determine costing rate for calculating unit costs

Question 6

(!) Describe the difference between marginal costing & ABC

Answer 6

General:
- Both usable short & long run

Marginal costing:
- Follow cause & effect principle
- More short term than ABC
- Treat most indirect cost as fixed
- Only small variable proportion allocated to volume based cost drivers

ABC:
- Follow demand principle
- More long term than MC
- Assign more cost to product unit
- Prozesskostenrechnung / PK: Extension of GPK

Question 7

(!) Describe the model

Answer 7