Prof. Dr. Olga Popova, OVGU Prof. Dr. Jörg Jablinski, OWL Lecture „Industrial Costing“ SS 2016/2017 Prof. Dr. Olga Popova, OVGU Prof. Dr. Jörg Jablinski, OWL

„Cost type accounting“ (Part 1) Chapter 2 „Cost type accounting“ (Part 1)

Flow Variables Content Flow Variables Inpayment Outpayment Revenues Inflows of cash or cash equivalents (Cash and demand deposits for example Transfers and cheques) Outpayment outs of cash or cash equivalents (cash and demand deposits) Revenues An increase of financial assets. A receipt is defined as the value of all sold goods and services over one (given) period of time Expenditures A decrease of financial assets. An expenditure is defined as the value of all goods and services received over one (given) period of time Proceeds Value of all goods and services produced over one (given) period of time Expenses Value of all goods and services consumed over one (given) period of time Performances Value of all goods and services produced over one (given) period of time according to the type of operating activity Costs Value of all goods and services consumed over one (given) period of time to produce a product

Actual Cost Accounting Normal Cost Accounting Standard Cost Accounting Time-based cost accounting systems Actual Cost Accounting Actual costs of a past period Analysis of the past operation activities (post calculation) past Normal Cost Accounting Average cost over several periods which is adjusted for “outliers” Analysis of the past operation activities Data base for the future decisions Standard Cost Accounting Planning with expected future costs Basis for decisions Planned targets for target-actual comparison future

Tasks of Cost Accounting Cumulating all costs Data Processing Cost Control Cost Budgeting Material Costs • Determination of the consumption - access method - stocks method - update method - retrograde method • Evaluation of the consumption - Fixed price method - Collective valuation method Staff Costs External Service Costs with Taxes and Fees Imputed Costs • Imputed amortization • Imputed interest • imputed employer's salary • Imputed risks • Imputed rent Income Controlling → Tasks→ Decisions

Cost Center Accounting Integration of cost type accounting in the cost and performance accounting Cost Type Accounting Question: What costs have been incurred? overheads Cost Center Accounting Question: Where costs have been incurred ? direct costs allocation/distribution Cost Unit Accounting Question: For what costs have been incurred?

Principles of cost type accounting Unambiguity Direct costs must be assigned to specific expenses without a doubt. Too extensive plan as well as the breakdown by several properties complicates the review of individual elements of cost. It must be avoided Completeness All costs incurred by the company should be considered. Through a complete listing of all costs mistakes can be avoided. Flexibility The cost element plan should be flexible so it can be adjusted to reflect the new realities Economic efficiency The cost type accounting should be based on economic grounds. Expenses for accounting should be minimal.

External Service Costs, Public Fees and Taxes The main cost types Cost types Material Costs Staff Costs External Service Costs, Public Fees and Taxes Imputed Costs

Methods for calculating the material consumption Stock Inflow Stock Outflow Access method Stock method Update method Retrograde method

Material Consumption = Sum of all Inflows According to the Delivery How does Access Method work Material Consumption = Sum of all Inflows According to the Delivery

How does stock method work initial stocks according to stocks at the beginning of a period + Inflows according to the delivery during the period - final stocks at the end of a period Consumption during the period Example: Calculating the material consumption initial stocks = final stocks according to inventory 2015 + Inflow on January 2016 + Inflow on February 2016 + … + Inflow on December 2016 - final stocks according to stocks 2016 Consumption 2016

How does update method work Material Consumption = Sum of all Outflows According to the material requisition card Calculating of the extraordinary consumption Actual initial inventory (according to inventory) + Actual Inflows (according to delivery notes) - Actual Outflows (consumption detected by material requisition card) = Standard final inventory (according to inventory accounting) - Actual final inventory (according to inventory) = extraordinary consumption

How does retrograde method work calculating the material consumption Consumption Volume = (expected consumption per product unit) * (produced quantity) On the following slides you will find examples of calculating the material consumption

Needed quantity for each product Stocks of July: Process Datum Amount Initial stocks 01.07. 4.000 units Inflow 07.07. 2.000 units Outflow 08.07. 2.400 units 13.07. 16.07. 3.000 units 21.07. 2.500 units 25.07. 27.07. 2.200 units Final stocks 31.07. 1.400 units In July the following products were produced: Product Amount Needed quantity for each product A 600 products 6 units per product B 800 products 4 units per product C 400 products 8 units per product Determine the quantitative consumption according to the different methods:

Consumption = All Inflows= 8.000 Units access method Consumption = All Inflows= 8.000 Units b) stock method Consumption = Initial Stocks + Inflows - Final Stocks initial stocks 4.000 Units + Inflow on 07.07. 2.000 Units + Inflow on 13.07. 2.000 Units + Inflow on 25.07. 4.000 Units - final stocks on 31.07. 1.400 Units Consumption 10.600 Units c) update method Consumption = Sum of all Outflows According to the material requisition card Outflow on 08.07. 2.400 Units + Outflow on 16.07. 3.000 Units + Outflow on 21.07. 2.500 Units + Outflow on 27.07. 2.200 Units Consumption 10.100 Units

d) retrograde method Consumption = Sum of all Outflows According to the material requisition card Consumption = expected consumption per unit of product A * produced quantity + expected consumption per unit of product B * produced quantity + expected consumption per unit of product C * produced quantity = 6 Units * 600 + 4 Units * 800 + 8 Units * 400 Consumption = 10.000 St.

Methods of Calculating the Consumption of Stocks the periodic average method Average price method the weighted average method evaluation methods with cost price as a base FIFO method LIFO method sequence of consumption method HIFO method LOFO method

Value of the Initial Stock + Value of all Deliveries of the Period Periodic Average Price = Amount of Initial Stock + Amount of all Deliveries of the Period

Example: Methods of calculating the stocks consumption Process Datum Amount Unit price Total value Initial Stock 01.10. 300 u. 10,- €/u. 3.000,- € Inflow 07.10. 200 u. 15,- €/u. Outflow 09.10. 250 u. 13.10. 4.500,- € 17.10. 500 u. 21.10. 50 u. 23.10. 400 u. 12,- €/u. 4.800,- € 28.10. 150 u. Final Stock 31.10.

a) According to the periodic average method Process Datum Amount Unit price Total value Initial Stock 01.10. 300 u. 10,€/u. 3.000,- € + Inflow 07.10. 200 u. 15,€/u. 13.10. 4.500,- € 23.10. 400 u. 12,€/u. 4.800,- € = Sum = 1.200 u. 12,75,€/u. = 15.300,00 € – Outflow – 950 u. – 12.112,50 € = Final Stock 31.10. =250 u. = 3.187,50 €

b) According to the weighted average cost method Process Datum Amount Unit price Total value Initial Stock 01.10. 300 u. 10,- €/u. 3.000,- € + Inflow 07.10. +200 u. 15,- €/u. +3.000,- € = Intermediate Stocks = 500 u. 12,00 €/u. = 6.000,- € – Outflow 09.10. –250 u. – 3.000,- € 13.10. +300 u. +4.500,- € = 550 u. 13,64 €/u. = 7.500,- € 17.10. –500 u. – 6.820,- € 21.10. –50 u. – 680,- € 23.10. +400 u. 12,-€/u. +4.800,- € = 400 u. = 4.800,- € 28.10. –150 u. – 1.800,- € = Final Stock 31.10. 250 u. = 3.000,- € Material Consumption 12.300,- € Evaluation of Material Consumption in October = 3.000,- € + 6.820,- € + 680,- € + 1.800,- € = 12.300,- €

Example: method of calculating the consumption of stocks Datum Consumption (950 Units) final stock (250 Units) FIFO method 01.10. 07.10. 13.10. 23.10. 300 St. x 10,- €/Unit + 200 St. x 15,- €/Unit + 300 St. x 15,-€/Unit + 150 St. x 12,-€/Unit = 12.300,- € 250 St. x 12,- €/Unit = 3.000,- € LIFO method (time-based) 400 St. x 12,- €/Unit. + 300 St. x 15,- €/Unit + 50 St. x 10,- €/Unit = 12.800,- € 250 St. x 10,- €/Unit = 2.500,- € LIFO method (permanent) 200 St. x 15,- €/Unit + 200 St. x 10,- €/Unit + 150 St. x 12,- €/Unit HIFO method + 400 St. x 12,- €/Unit LOFO method + 50 St. x 15,- €/Unit = 11.550,- € 250 St. x 15,- €/Unit = 3.750,- €

Assumption Valuation of the final stock of the consumption FIFO Available at the beginning of the period stocks or supplied materials are consumed the first with the prices of the latest received materials with the prices of the initial stock and the first received materials LIFO Last received materials are consumed the first with the prices of the initial stock and the prices of the first (material) Inflows during the period with the prices of the of the last (material) Inflows during the period HIFO The most expensive materials are consumed the first with the lowest prices with the highest prices LOFO Goods purchased at a low price are consumed the first

Sequence of consumption: Summary Material Costs = consumed amount x cost value Evaluation of material consumption Direct costs: raw materials, auxiliaries Overheads: (auxiliaries), operating materials Average cost method Periodic average price = Value of OB + value of all the delivery. (Period) Amount of OB + amount of all delivery. (Period) Sliding method: Evaluating of average after each inflow→ Also evaluating outflows Determination of material consumption Access Method: Material Consumption = Sum of all Inflows according to the Delivery Stocks Method: initial stocks according to stocks at the beginning of a period + Inflows according to the delivery during the period - final stocks at the end of a period = Consumption during the period Sequence of consumption: Time based: FIFO, LIFO method Price based: HIFO-, LOFO method Update Method: Actual initial inventory (according to inventory) + Actual Inflows (according to delivery notes) - Actual Outflows (consumption detected by material requisition card) = Standard final inventory (according to inventory accounting) - Actual final inventory (according to inventory) = extraordinary consumption Retrograde method : Consumption Volume = (expected consumption per product unit) * (produced quantity)