Hardly any other cost accounting method is as versatile and universally applicable as contribution margin accounting. From simple production program decisions to transport optimization or high-bay warehouse planning, there are numerous possible applications.
The counterpart to direct costing is absorption costing - absorption costing is suitable for small and medium-sized companies, for companies with a small or no cost accounting system. In general, both cost accounting systems should have a smaller cost center accounting - because the full cost accounting allocates the entire costs (as the name already indicates: full costs) - to the cost objects (= products / = services) - for this you need the cost centers to allocate / allocate the entire costs of the company to the cost objects. That is, the cost objects are the bearers of the costs, because the costs are raised for them, because they are the end products that the company offers to the market / end consumer and therefore these end products / cost objects must also recover these full costs / total costs through the sales price to the end consumer (including a profit margin) (Coenenberg et al., 2016).
Table of Contents
List of Figures
1. E ntroduction
2. Basic definitions
2.1 The cost elements of direct costing
2.2 Cost progressions in DB accounting
2.3 Subareas of marginal costing
3. Definition of the contribution margin
3.1 Single-level contribution margin accounting
3.2 Multi-level contribution margin accounting
3.2.1 Product-oriented contribution margin accounting
3.2.2 Customer-specific contribution margin accounting
3.2.3 The process-based contribution margin accounting
3.2.4 The fixed cost contribution margin calculation
4. Contribution margin and break even
4.1 The break-even point for series or type production
4.2 The contribution margin for make-to-order production
4.3 Full and unit cost analysis
4.4 Strategic Break Even Analysis
4.5 Quantity, profit and sales price
4.6 The problem of cost remanence
5. Assortment planning with contribution margins
5.1 An introductory example
5.2 Planning procedure with relative contribution margins
6. Further applications of contribution margin accounting
7. Summary
Bibliography
List of Figures
Figure 1: Development of costs in relation to output volume
Figure 2: Fixed and overhead costs behave degressively
Figure 3: General representation of the contribution margin (formula)
Figure 4: Turnover in relation to sales price
Figure 5: Total contribution margin
Figure 6: Contribution margin
Figure 7: Fixed cost recovery calculation
Figure 8: Break-even point for series/variety production
Figure 9: Cost trend with loss and profit zone.
Figure 10: DB for make-to-order production
Figure 11: DB for make-to-order production
Figure 12: Break-even with full and unit cost representation
Figure 13: Break-even point in relation to profit and loss zone
Figure 14: Break-even point at the intersection of the sales and unit cost curves
Figure 15: Break-even point at the intersection of the sales and unit cost curves (showing the profit/loss zone)
Figure 16: DB in relation to sales price and variable costs
Figure 17: DB and unit cost consideration
Figure 18: DB/unit cost view showing the profit zone
Figure 19: Relation of profit to variable cost change
Figure 20: Profit diagram - related to quantity and sales price
Figure 21: Cost remanence in the event of a decline in employment
Figure 22: Example of assortment planning with DB
Figure 23: Area C deleted and its proportionate fixed costs allocated to product areas A and B
Figure 24: One-dimensional bottleneck calculation (example)
Figure 25: Bottleneck calculation (follow-up example)
1. Introduction
Hardly any other cost accounting method is as versatile and universally applicable as contribution margin accounting. From simple production program decisions to transport optimization or high-bay warehouse planning, there are numerous possible applications.
The counterpart to direct costing is absorption costing - absorption costing is suitable for small and medium-sized companies, for companies with a small or no cost accounting system. In general, both cost accounting systems should have a smaller cost center accounting - because the full cost accounting allocates the entire costs (as the name already indicates: full costs) - to the cost objects (= products / = services) - for this you need the cost centers to allocate / allocate the entire costs of the company to the cost objects. That is, the cost objects are the bearers of the costs, because the costs are raised for them, because they are the end products that the company offers to the market / end consumer and therefore these end products / cost objects must also recover these full costs / total costs through the sales price to the end consumer (including a profit margin) (Coenenberg et al., 2016).
Total costs (=full costs) in this cost accounting system means the following: e.g. for a product to be produced
- Entry and inclusion of material costs (direct cost object costs)
- Recording and inclusion of production costs (direct cost object costs)
- Recording and inclusion of production personnel costs (direct cost object costs)
- Recording and inclusion of administrative costs (indirect / overhead costs)
- Recording and inclusion of distribution costs (indirect / overhead costs)
- Recording and including the residual costs of the company proportionally (indirect / overhead costs) (Coenenberg et al., 2016).
If one considers these contents of the full costs, then it can be determined that apart from the direct costs, which make up the production of the product, also the indirect costs, which the enterprise causes and has to answer for. Through this, on the one hand, all costs are distributed proportionally to the products, but they are also made more expensive with costs that they do not have to cause.
Proponents of full cost accounting, meanwhile, say that business costs must be captured because they are what make it possible to produce the product in the first place (Coenenberg et al., 2016).
Nevertheless, a major problem is that the cost unit costs are so inflated that at the end of the allocations it is not possible to define exactly where the cost floor might be in an emergency (sales problems of the product) and which costs could then be extracted in this situation in order to establish a lower final sales price on the market to make the product more attractively priced for the end consumer (Coenenberg et al., 2016).
As always, there are pros and cons to full cost accounting - but when looking at direct costing, it quickly becomes clear to the observer that this cost accounting system - which only takes into account a portion of costs (namely direct) - provides more benefits and a transparent overview of costs when recording and allocating costs to cost objects than the full cost accounting system (Coenenberg et al., 2016).
How should the partial cost accounting system be used in a meaningful and transparent way as well as functionally and controlling relevant - this will be the subject of this issue and also of the next issues from the series: Contribution Margin Accounting.
In this issue, the basic features of direct costing will be presented - accordingly, the prerequisites for such a system can be overviewed.
Subsequently, more in-depth findings and application examples of contribution margin accounting are presented - here the possibilities and transparency of this system become apparent and should help to a better understanding for the further editions in this series - because in the following editions the real applications of the system are to be worked out and presented, which can be implemented immediately - e.g. controlling / DB in a department - e.g. controlling / DB in a carpenter's business - e.g. controlling / DB in a kiosk - etc.
This means that applications are to be presented that can be implemented on site - the prerequisites, conditions and DB implementation and their effects are to be made transparent.
2. Basic definitions
2.1 The cost elements of direct costing
Direct costing is any cost accounting method that uses fixed and variable costs as its conceptual basis. Thus, the following definitional fundamentals underlie all procedures and methods of direct costing, are absolutely fundamental and are presented in this issue: (Bals, Hack, 2001).
- Variable costs (Kvar) are costs that depend on the output quantity or performance, i.e. quantity-induced costs,
- Fixed costs (Kfix) are costs that are independent of output quantity but are by no means invariant (Bals, Hack, 2001).
What is a fixed cost and what is not, therefore, often depends on the particular company under consideration: the telephone bill of an industrial company, for example, would generally be a fixed cost because it changes every month, but the telephone bill of a call centre may be a variable cost because it changes with the performance of the company. (total duration of calls) is related. Total costs (Kges) are the sum of fixed and variable costs (Bals, Hack, 2001).
The concepts of direct costing should not be confused with those of absorption costing: variable costs can be both direct costs and overheads; fixed costs are always only overheads. The often encountered identification "direct costs = variable costs" and "overhead costs = fixed costs" is if not always wrong, at least a drastic simplification that should be avoided (Bals, Hack, 2001).
2.2 Cost progressions in DB accounting
It is important to first clarify the basic cost trends. If we first look at the development of costs in relation to the volume of services, the following picture emerges:
Abbildung in dieser Leseprobe nicht enthalten
Figure 1: Development of costs in relation to output volume1
All cost types involved behave linearly. If, however, the costs are also related to a single unit of output, i.e. if you calculate in unit costs, then you must write "€/unit" on the vertical axis of the diagram. This leads to a considerable change in the graphical representation: fixed and total costs now behave degressively, i.e. they increase in absolute terms but decrease in relation to a unit of output; variable costs, on the other hand, remain constant per unit: (Burger, 1999).
Abbildung in dieser Leseprobe nicht enthalten
Figure 2: Fixed and overhead costs behave degressively2
2.3 Subareas of marginal costing
Unlike costing, direct costing is an extraordinarily heterogeneous field of cost accounting, comprising a variety of procedures and methods for different purposes. However, at the beginning are usually (Burger, 1999).
- the contribution margin accounting and
- the break even calculation
Subsequently, on the basis of these basics, the elementary ideas of partial cost accounting are taught.
3. Definition of the contribution margin
The contribution margin is the part of the sales revenue that exceeds the variable costs and thus contributes to the complete or partial coverage of the fixed costs and possibly to the generation of a profit. The contribution margin can be defined in terms of units, operations or companies, and is one of the most important business ratios of all. Generally, the contribution margin is defined as: (Däumler, Grabe, 1998).
Abbildung in dieser Leseprobe nicht enthalten
Figure 3: General representation of the contribution margin (formula)3
In order to show the contribution margin, one must therefore include the sales line (U) in the sketch, since the sketch is based on the produced and sold Number of units (X). The following applies to turnover: (Däumler, Grabe, 1998).
Abbildung in dieser Leseprobe nicht enthalten
Figure 4: Turnover in relation to sales price4
The contribution margin accrued for a certain output can therefore be represented per unit and in total and shown in the sketch at the respective considered The total contribution margin (shown in euros per accounting period) increases linearly from zero to the end of the accounting period. It can be seen that the total contribution margin (shown in euros per accounting period) increases linearly from zero: (Däumler, Grabe, 1998).
Abbildung in dieser Leseprobe nicht enthalten
Figure 5: Total contribution margin5
The unit contribution margin, on the other hand, remains constant because sales and variable costs per unit remain constant and only increase in absolute terms:
Abbildung in dieser Leseprobe nicht enthalten
Figure 6: Contribution margin6
This form of analysis can be performed in several specific ways:
(Däumler, Grabe, 1998).
3.1 Single-level contribution margin accounting
The method presented above is known as single-stage contribution margin accounting. It shows the contribution that a particular sale makes to covering the of the fixed costs. However, contribution margin accounting becomes much more interesting when it is carried out on several levels and in relation to specific individual circumstances: (Däumler, Grabe, 1998).
3.2 Multi-level contribution margin accounting
In general, any stepwise or successive calculation of the contribution margin with the aim of making the cost structure more transparent and giving advice on the Optimization of the cost structure, can be considered as a multi-level contribution margin accounting. The basic idea of any multi-level contribution margin accounting is to further subdivide the fixed costs into different categories and to successively subtract them from the contribution margin until only the operating result remains. The structure of the fixed costs and the order of the subtractions depends on the object of investigation (Däumler, Grabe, 1998).
3.2.1 Product-oriented contribution margin accounting
This attempts to show the cost structure of the product more transparently. It therefore decomposes the fixed costs in the order in which they are close to the product, starting with the fixed costs that are product-related (and therefore mostly cost centre direct costs) and ending with company-fixed, completely non-product-related fixed costs: (Frommlet, et al., 2004).
The product-oriented multi-level contribution margin accounting:
1. revenues/sales
2. variable costs
3. = Contribution margin I
4 - Fixed product costs
5 = Contribution margin II
6 - Fixed product line costs
7 = Contribution margin III
8 - Fixed corporate costs
9 = Contribution margin IV
= Operating result
Multi-level contribution margin accounting is often an integral part of fixed cost management and thus an indirect tool of operational risk analysis because fixed costs are generally risky in nature, especially when they are cash equivalent (Frommlet, et al., 2004).
3.2.2 Customer-specific contribution margin accounting
This variant of contribution margin accounting attempts to break down the contribution margins attributable to a customer. In this way, customer-related statements can be made about the respective coverage of fixed costs (Frommlet, et al., 2004).
Customized contribution margin accounting:
1. gross sales
2 - Direct sales deductions
3. = Net sales I
4 - Indirect sales deductions
5 = Net sales II
6 - cost of sales (trade)
7. = Gross profit
8 - variable production costs (industry)
9. = Contribution margin I
10 - Proportionate costs directly attributable to the client
Costs (e.g. del credere, bill charges, etc.)
Etc.)
11. = Contribution margin II
12 - marketing budgets individually attributable to the customer
(e.g. promotional discounts)
13th = Contribution margin III
14 - selling costs individually attributable to the customer
(e.g. personal visits)
15 = Contribution margin IV
16 - logistics costs individually attributable to the customer
or service costs (e.g. freight forwarding,
shelf maintenance)
17. = Contribution margin V
18 - special services (e.g. for furnishings)
19. = Contribution margin VI ( (Frommlet, et al., 2004).
3.2.3 The process-based contribution margin accounting
On the basis of activity-based costing, a customer-specific contribution margin accounting could also be oriented towards the process of operational service production at service providers and then take on the following appearance: (Frommlet, et al., 2004).
Process-based custom contribution margin accounting:
1. customer gross revenue
2 - Sales deductions
3. = net sales to customers
4. - Individual costs of the order
5 = Customer contribution margin I
6. - Costs from goodwill, warranty, etc.
7 = Customer contribution margin II
8 - Process costs: customer acquisition, quotation preparation
9 = Customer residual contribution margin I
10 - Legal costs: customer care and similar,
Travel expenses
11 = Customer residual contribution margin II
12th - Technical engineering in the bidding phase
13 = Customer residual contribution margin III
14th - Technical customer support
15 = Customer residual contribution margin IV
16 - Other direct costs of litigation
(e.g. product individualization)
17. = total contribution margin (Frommlet, et al., 2004).
3.2.4 The fixed cost contribution margin calculation
If the contribution margin accounting is to allow a statement about the extent to which revenues allow a contribution to fixed cost coverage beyond the coverage of variable costs, and if it is carried out for all products at the same time, it is also referred to as a so-called fixed cost coverage accounting. The basic idea here is to carry out a multi-level contribution margin calculation for several product lines or variants in parallel. You then find out which product contributes how much to the coverage of the fixed costs, which are broken down again in each case, and can derive statements about the continuation or elimination of the individual products or product lines from this. Fixed cost recovery accounting is therefore of fundamental strategic relevance. This form of cost evaluation can look as follows have: (Graumann, 2007).
[...]
1 Own representation - based on Burger, 1999.
2 Own representation - based on Burger, 1999.
3 Own representation - based on (Däumler, Grabe, 1998).
4 Own representation - based on (Däumler, Grabe, 1998).
5 Own representation - based on Däumler, Grabe, 1998.
6 Own representation - based on Däumler, Grabe, 1998.
- Quote paper
- Dipl.-Betriebs- und Verwaltungswirt und PhD Maged Hassanien (Author), 2021, Basic features of contribution margin accounting. Procedure and application possibilities of the partial cost accounting. Part 1, Munich, GRIN Verlag, https://www.grin.com/document/1150516
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