Management and Cost Accounting
Tools and Concepts in a Central European Context

Management and cost accounting has been the basic toolbox in business administration for decades. Today it is an integral part of all curricula in business education and no student can afford not to be familiar with its basic concepts and instruments. At the same time, business in general, and management accounting in particular, is becoming more and more international. English clearly has evolved as the "lingua franca" of international business. Academics, students as well as practitioners exchange their views and ideas, discuss concepts and communicate with each other in English. This is certainly also true for cost accounting and management accounting.
Management Accounting is becoming increasingly international. "Management and Cost Accounting" is a new English language textbook covering concepts and instruments of cost and management accounting at an introductory level (Bachelor, but also suited for MBA courses due to strong focus on practical applications and cases). This textbook covers all topics that are relevant in management accounting in business organizations and that are typically covered in German and Central European Bachelor classes on cost accounting and management accounting.
After an introduction to the topic, including major differences between the German approach and the purely Anglo-Saxon approach of management accounting, the book describes different cost terms and concepts applied in German cost accounting, The book is much more specific here compared to US-American standard textbooks. Based on different cost concepts, the topic of cost behavior is discussed, including the determination of cost functions. The heart of the book guides the reader through the general structure of a fully developed cost accounting system following the German and Central European standard: It starts with cost type accounting, moves on to cost center accounting and finally deals with cost unit accounting, assigning cost to goods and services offered in the market.
The remaining parts of the book deal with decision making and how management and cost accounting data can support managers in this task. A comparison of absorption costing and variable costing introduces the reader to management decisions such as product portfolio and outsourcing decisions. Additionally, cost-volume-profit analysis (break-even-analysis) is covered. The book closes with a comprehensive treatment of cost planning and variance analysis.

Preface xi

CHAPTER 1 Introduction to Management Accounting and Cost Accounting 1

The Purpose of Accounting 2

Information Needs in Business 2

Different Sources of Information for Businesses 4

A Definition of Accounting 5

The Job of an Accounting System 5

The “Accounting Family” 6

Financial Accounting 7

Cost and Management Accounting  9

Is Accounting a Universal Language? 10

Differences in Financial Accounting 11

Differences in Cost and Management Accounting 13

National Differences in Management Accounting – Problem or Strength? 15

German “Controllers” versus “Management Accountants” 16

The Role of a Controller in a Business Organization 17

Ethical Aspects of Accounting 19

CHAPTER 2 Cost Terms and Cost Concepts 23

The Meaning of “Cost” in Business 24

Comparing Cost with Other Accounting Measures 26

Company Goals as Starting Point of Accounting Measures 26

Different Accounting Measures for Different Purposes 26

Receipts and Payments: Changes in a Company’s Cash Position 26

Proceeds and Expenditures: Changes in a Company’s Monetary Assets 27

Income and Expenses: Changes in a Company’s Total Assets 28

Revenues and Costs: Changes in a Company’s Required Assets 29

Comparing Different Value Concepts in Business Operations 30

Cost Revisited: An Overview of Different Cost Concepts 39

Overview 39

Cost Concepts for Predicting Cost Behavior 39

Cost Concepts for Comparing Cost 43

Cost Concepts for Differentiating Time Reference 44

Cost Concepts for Decision making 46

Cost Concepts for Assigning Cost to Different Objects 48

Cost Concepts for Analyzing Cash Relevance 50

Cost Concepts for Preparing Financial Statements 52

Relevance of Cost Categories for Business Management 53

CHAPTER 3 Cost Behavior and Cost Estimation 61

Things to Know About Cost Behavior 62

No Costs without Cost Drivers! 63

Typical Shapes of Cost Functions 64

Cost Stickiness and Cost Elasticity 67

Mathematical Models of Cost Behavior: Cost Functions 69

Methods for Estimating Cost 72

Heuristics 72

Conference Method 73

Account Analysis Method 73

Scatterplots and Visual Fit Method 74

High-low Method 75

Regression Analysis 76

Engineering Method (Physical Measurement) 78

Comparison of Methods and Examples 79

CHAPTER 4 The Basic Structure of a Cost Accounting System 89

Cost Accounting as Information Source in Business 90

Defining the Conceptual Framework for a Cost Accounting System 92

Defining Relevant Cost Objects 93

The Minimum Set-Up 93

The Advanced Set-Up 95

Defining Principles for Recording and Allocating Cost 96

Comparing Cost Allocation Principles 101

Comparison 105

Defining Time Reference and Cost Accounting Periods 106

General Cost Accounting Principles 109

The Basic Layout of a Cost Accounting System 111

IT as an Enabler of Cost Accounting Systems 113

CHAPTER 5 Cost Type Accounting 117

Purpose and Nature of Cost Type Accounting 118

Cost Categorizations Used in Cost Type Accounting 119

Cost Categorization Chart and Chart of Accounts 119

How to Value Resource Consumption 122

Main Cost Types in Detail 123

Cost of Material  124

Cost of Labor 128

Asset-related Cost 129

Cost of Financing / Cost of Capital 130

Third Party Cost 130

Taxes and Public Fees 131

Imputed Cost 132

Imputed Depreciation 133

Imputed Interest 138

Imputed Risk Charges 142

Imputed Management Salaries 144

Imputed Rent 145

CHAPTER 6 Cost Center Accounting 151

Purpose and Nature of Cost Center Accounting 152

Splitting the Organization into Cost Centers 154

Number of Cost Centers in Practice 155

Primary Cost Allocation 157

The Cost Allocation Chart 159

Overview Cost Allocation Chart for Comparing Multiple Cost Centers 160

Detailed Cost Allocation Chart for Managing Sub-unit Cost 160

Determining the Allocation Base for Overhead Costs 161

Determining Overhead Allocation Rates 165

Internal Support Department Cost Allocation 165

Cost Allocation Problems in Internal Support Departments 166

Combining Support Cost Allocation Principles – An Example 168

Allocating Costs of Multiple Support Departments 171

Direct Method 175

Step-Down Method 177

Reciprocal Method 180

Iterative Method 182

Does Support Department Cost Allocation Really Matter? 184

CHAPTER 7 Cost Unit Accounting (Product Costing) 191

Purpose of Product Costing 192

Overview of Product Costing Methods 194

Process Costing 195

Single-Stage Process Costing 196

Two-Stage Process Costing 196

Multi-Stage Process Costing 197

Equivalence Coefficient Costing 199

Multi-Stage Equivalence Coefficient Costing 202

Job Order Costing 203

Simple Job Order Costing 204

Extended Job Order Costing 206

Department-based Costing 209

Machine Hour-Based Costing 212

Joint Product Costing 214

CHAPTER 8 Absorption Costing versus Variable Costing 221

Accounting for Profits 222

Absorption Costing 223

Absorption Costing Example 224

Strengths of Absorption Costing  226

Weaknesses of Absorption Costing  227

Variable Costing  229

Multi-Step Variable Costing 231

Variable Costing Example 233

Decision making with Variable Costing 235

Product Portfolio Decisions 235

Product Mix Decisions 237

Product Mix Decisions under Capacity Constraints 238

Special Orders 240

Outsourcing Decisions  242

Outsourcing Decisions and Opportunity Costs 245

Qualitative Factors Influencing Outsourcing Decisions 248

Cost-Volume-Profit Decisions  249

Break-Even Analysis 249

Graph Method for Break-Even Analysis 252

Target Operating Income 253

Sensitivity Analysis for Cost-Volume-Profit Decisions  254

Assumptions in Cost-Volume-Profit Analysis 256

Strengths of Variable Costing 257

Weaknesses of Variable Costing 257

CHAPTER 9 Cost Planning, Standard Costing and Variance Analysis 263

The Importance of Cost Planning 264

Conceptual Approaches to Cost Planning 265

Static Cost Planning 266

Flexible Cost Planning 268

Flexible Cost Planning Based on Full Absorption Cost 269

Flexible Cost Planning Based on Variable Cost 273

Standard Costs as Basis for Cost Planning and Cost Management 274

Variance Analysis for Cost Management 275

Types of Cost Variances 277

The Problem of Overlapping Sub-variances 279

Approaches to Dealing With Overlapping Cost Variances 282

Alternative Method 285

Proportional Method 286

Cumulative Method 288

Differential-Cumulative Method 292

Bibliography 297

Index 301

Both authors hold a chair and teach at ESB Business School, Reutlingen University. They have been researching and teaching in the field of management and accounting and management control for many years.
Andreas Taschner holds a diploma and a doctoral degree from Wirtschaftsuniversitat Wien (Vienna University of Economics and Business). He has more than 10 years of industry experience. He was appointed professor of management accounting at ESB Business School at Reutlingen University in 2011. His teaching and research interests include comparative management accounting, management reporting, investment appraisal techniques, and supply chain accounting.
Michel Charifzadeh holds a diploma in business administration from Ludwig-Maximilians University Munich and received his doctoral degree from EBS Universitat fur Wirtschaft und Recht, Oestrich-Winkel. He has worked for several years as a project manager in mergers & acquisitions at Siemens AG. As a professor of finance and accounting he was employed at the International University of Bad Honnef-Bonn before he was appointed in 2011 to ESB Business School at Reutlingen University. His teaching and research interests include value based management, performance measurement, company valuation and International Financial Reporting Standards (IFRS).