Cost-Type Accounting PDF

Module 2. Cost-type accounting Module 2. Cost-type accounting Introduction to cost-type accounting Tasks of cost-type accounting, linkage to financial accounting, and important cost types Tasks of cost-type accounting Cost-type accounting Cost-center accounting Product and service costing W...

Module 2. Cost-type accounting Module 2. Cost-type accounting Introduction to cost-type accounting Tasks of cost-type accounting, linkage to financial accounting, and important cost types Tasks of cost-type accounting Cost-type accounting Cost-center accounting Product and service costing Which costs have been incurred? Where have costs been incurred? For which products have the costs been incurred? 32 Cost-type accounting and financial accounting Cost accounting Provides information to make decisions Financial accounting Cost-type accounting Determines the profit for a period 33 Classification of cost types Classification criterion Examples Nature of the input goods Material costs, personnel costs, machine costs (depreciation, interest), costs for external services Attributability of costs Direct costs, indirect costs Dependence on output variation Variable costs, fixed costs Position in value chain Research and development costs, procurement costs, manufacturing costs, selling and shipping costs, administrative costs Origin of the input goods Primary costs, secondary costs 34 Important cost types Important cost types Material costs Personnel costs Machine costs Other cost types 35 Module 2. Cost-type accounting Material costs Introduction to material costs Important types of materials Material type Example Attributability Raw materials Wood, water Direct costs Auxiliary materials Paints, adhesives Artificial indirect costs Operating materials Oils, greases Indirect costs 37 Methods for recording and valuing material consumption Material costs = quantity ∙ price First In First Out (FIFO) Inventory method Methods for recording material consumption Carrying-on method Retroactive accounting method Methods for valuing material consumption Last In First Out (LIFO) Ex-post average prices Moving average prices 38 Module 2. Cost-type accounting Material costs Recording material consumption Introductory example Situation Cable ducts are needed to produce wind turbines Task Determine the consumption of cable ducts for one month https://www.siemensgamesa.com/en-int/products-and-services 40 Methods for recording material consumption Material costs = quantity ∙ price Inventory method Methods for recording material consumption 1 Carrying-on method 2 Retroactive accounting method First In First Out (FIFO) 3 Methods for valuing material consumption Last In First Out (LIFO) Ex-post average prices Moving average prices 41 1 Inventory method Consumption = beginning inventory + acquisitions – ending inventory Example: Beginning inventory (1.5.): Ending inventory (31.5.): Acquisitions (May): Example based on fictitious values. 500 units 760 units 1,500 units - + Consumption (May): 1,240 units 42 2 Carrying-on method Consumption Directly recorded (consumption slip) Example: Consumption slip project 1 (4.5.): Consumption slip project 2 (17.5.): Consumption slip project 3 (24.5.): Example based on fictitious values. 400 units 600 units 200 units + Consumption (May): 1,200 units 43 3 Retroactive accounting method Consumption Calculated based on the bills of materials for each product Example: Bill of material for one wind turbine: 1 tower, 3 rotor blades 10 wind turbines Example based on fictitious values. Consumption (May): 10 towers 30 rotor blades 44 Module 2. Cost-type accounting Material costs Valuing material consumption Introductory example Copper price in Euro Situation Copper is an important material in the production of wind turbines Task Determine the value of copper consumption during an accounting period https://www.finanzen.net/rohstoffe/kupferpreis 46 Methods for recording and valuing material consumption Material costs = quantity ∙ price Inventory method Methods for recording material consumption Carrying-on method Retroactive accounting method Methods for valuing material consumption First In First Out (FIFO) 1 Last In First Out (LIFO) 2 Ex-post average prices 3 Moving average prices 4 47 FIFO and LIFO 1 FIFO method assumes that material delivered first is consumed first IN 2 1 OUT 2 LIFO method assumes that material delivered last is consumed first IN 2 1 OUT 48 FIFO and LIFO Example: Copper consumption  Inventory: 500 kg valued at €7.50 per kg  Copper price is fluctuating Date 01.10. 06.10. 20.10. 28.10. 10.11. 27.11. 15.12. 22.12. Event Quantity [kg] Price [€/kg] inflow 1,000 6.00 outflow 800 outflow 500 inflow 1,800 4.50 outflow 900 outflow 700 inflow 1,200 3.00 outflow 500 FIFO-method [€] Beginning inventory inflow 01.10. inflow 28.10. inflow 15.12. 3,750 outflow 06.10. 6,000 outflow 20.10. 8,100 outflow 10.11. 3,600 outflow 27.11. outflow 22.12. Ending inventory 21,450 5,550 3,000 4,350 3,150 2,100 3,300 21,450 LIFO-method [€] Beginning inventory inflow 01.10. inflow 28.10. inflow 15.12. 3,750 outflow 06.10. 6,000 outflow 20.10. 8,100 outflow 10.11. 3,600 outflow 27.11. outflow 22.12. Ending inventory 21,450 4,800 3,450 4,050 3,150 1,500 4,500 21,450 49 Ex-post and moving average price method 3 Ex-post average price method uses average purchase price for all the consumed material at the end of an accounting period 1 2 3 Ø price 4 4 Moving average price method uses the average price after each material consumption based on total inventory at that time 1 Ø price 2 Ø price 3 Ø price 4 Ø price 50 Module 2. Cost-type accounting Personnel costs Personnel costs Personnel costs Salaries Time wages Types of personnel costs Piece-rate wages Premium wages Fringe benefits 52 Module 2. Cost-type accounting Machine costs Types of machine costs Types of machine costs Depreciation Interest costs Types of machine costs Leasing or rental payments Acquisition-related costs Maintenance costs 54 Module 2. Cost-type accounting Machine costs Depreciation Introductory example Situation For the transport of individual components of the wind turbines a heavy duty transporter is needed Problem statement Determine the depreciation of a heavy duty transporter https://www.maz-online.de/Lokales/Potsdam-Mittelmark/Niemegk/Windpark-in-Niederwerbig-Alle-Infos-zum-Baubeginn 56 Depreciation: Task and methods Depreciation spreads the purchase price over the years of use of the asset Depreciation methods Time dependent Output dependent Straight-line depreciation 1 Declining balance depreciation 2 Arithmetic-degressive depreciation 3 Units of production depreciation 4 57 1 Straight-line depreciation  Most important time-dependent method  Constant amount of periodic depreciation Amount of periodic depreciation (𝑎): Example: Depreciation of a truck  Purchase price: €80,000  Residual value: €20,000  Usage over 4 years (𝐼 − 𝐿) 𝑎= 𝑇 with: I acquisition value L residual value T useful life 58 2 Declining balance depreciation  Time-dependent method  Depreciation amounts decrease gradually over time Depreciation percentage rate (p): Example: Depreciation of a truck  Purchase price: €80,000  Residual value: €20,000  Usage over 4 years 𝑝=1− 𝑇 𝑝 =1− 𝐿 𝐼 4 €20,000 €80,000 = 0.293 with: I acquisition value L residual value T useful life 59 3 Arithmetic-degressive depreciation  Time-dependent method  Depreciation amounts decrease each year by a constant value Depreciation percentage rate (𝑑): Example: Depreciation of a truck  Purchase price: €80,000  Residual value: €20,000  Usage over 4 years 2 (𝐼 − 𝐿) 𝐼 − 𝐿 or 𝑑 = 𝑑= 𝑇 (𝑇 + 1) 1 + 2 + …+ 𝑇 with: I acquisition value L residual value T useful life 60 4 Units of production depreciation  Output dependent  Based on the utilization of the asset Depreciation amount per unit: (I − L) Total units of production Example: Depreciation of a truck Purchase price: €80,000 Residual value: €20,000 Usage over 4 years Running performace: 30k km (2020), 35k km (2021), 40k km (2022), 45k km (2023) Depreciation amount per kilometer driven: (€80,000 - €20,000) / 150,000 km = €0.4 per km     with: I acquisition value L residual value 61 Module 2. Cost-type accounting Machine costs Interest costs Interest costs Interest costs capital required for operations ∙ interest rate 1. Determine the assets necessary for operations Four steps of determining interest costs 2. Value the assets necessary for operations 3. Determine the capital required for operations 4. Determine the interest rate 63 Step 1: Determine the assets necessary for operations Example: Interest costs for a wind turbine producer Check the operational necessity for each position on the active side Assets Liabilities FY Industrial property rights Property with factory hall Undeveloped property Machinery Investments in other companies Inventories Accounts receivable Cash and cash equivalents Total 40 1,100 400 900 500 Previous year 10 1,150 430 780 580 4,500 7,000 4,200 6,400 500 700 14,940 14,250 FY Common stock Additional paid in capital Retained earnings Current year´s earnings Provisions 2,000 450 1,900 2,690 3,400 Previous year 2,000 450 1,100 2,170 3,900 Loans Revenues received in advance Accounts payable 1,500 0 30 1,200 3,000 3,400 14,940 14,250 Total 64 Step 2: Value the assets necessary for operations Example: Interest costs for a wind turbine producer Decision: Valuation based on replacement costs or acquisition and production costs Estimate average values of assets over the accounting year Assets FY Industrial property rights Property with factory hall Undeveloped property Machinery Investments in other companies Inventories Accounts receivable Cash and cash equivalents Operating assets Previous Year 40 10 1,100 1,150 Not relevant for operations 900 780 Not relevant for operations 4,500 7,000 500 4,200 6,400 700 Average 25 1,125 840 4,350 6,700 600 13,640 65 Step 3: Determine the capital required for operations Example: Interest costs for a wind turbine producer Deduct non-interest-bearing-liabilities (NIBL) from the operating assets Valuation based on average values FY Previous year Operating assets - Provisions - Revenues received in advanced - Accounts payable Capital required for operations Average 13,640 3,400 3,900 3,650 0 1,200 600 3,000 3,400 3,200 6,190 66 Step 4: Determine the interest rate Example: Interest costs for a wind turbine producer 𝐸 𝐷 Weighted Average Cost of Capital (WACC): 𝑊𝐴𝐶𝐶 = 𝑟𝐸 + 𝑟𝐷 (1 − 𝑡) 𝐸+𝐷 𝐸+𝐷 with: E Equity D Debt rE Cost of equity rD t Cost of debt Tax rate Capital Asset Pricing Model (CAPM): with: rf rm – rf β 𝑟𝐸 = 𝑟𝑓 + 𝛽(𝑟𝑚 − 𝑟𝑓 ) Risk-free interest rate Market-risk premium Beta-Factor; company risk faktor 67 Interest costs Example: Interest costs for a wind turbine producer Book value of the equity Interest-bearing liabilities Interest rate Cost of equity €7.04 million €1.5 million 6% 𝑟𝐸 = 0.05 + 1.2 ⋅ 0.05 = 0.11  The tax rate is 35%, resulting in a weighted average cost of capital of 7,040 1,500 𝑊𝐴𝐶𝐶 = 0.11 ⋅ + 0.06 ⋅ ⋅ (1 − 0.35) = 0.098 8,540 8,540  Interest costs: 9.8% * €6.19 million = € 607 thousand 68