ManAcc S02 Slides

Management Accounting
for IBA
Season 2
Two Roles of Management Accounting
Responsibilities & Performance Measures
Cost Accounting Concepts
Cost Behavior
Cost-Volume-Profit-Analysis
© by C. Hörner
Introduction to Management Accountin g
What Are the Two Central Roles

of MA?
© by C. Hörner
Roles of Management Accounting 4
Two Roles of
Management
Accounting
Decision- Decision-
Facilitating Influencing
What is considered a good accounting decision, can

depend on the situation-specific importance of these roles!
© by C. Hörner
Decision-Facilitating (Example): Start-ups 5
• 36% of businesses fail within the first • Management accountants can play a vital
two years of operation. role to bridge gap between strategy and
• Among most common reasons: financial control.
• Poorly thought-out business plan • Scenario planning, strategic options, and
• Running out of cash evidence-based decision-making are
• Pricing or cost issues among the areas where management
accountants can provide expertise.
© by C. Hörner
Decision-Influencing (Example): P-A relationships

• Controlling and coordinating actions: How to
motivate (incentivize) employees to provide effort
and make decisions in the interest of the principal?
Principal: I pay you to generate profits for me! • Salaries dependent on company success or target
achievements
• Checks, monitoring, and punishment
• Promotion and firing decisions
• Coordination between departments
Agent: I have my own interests!

• Selection: How to attract the employees that are
most likely that they act in the interest of the
principal?
• Screening and referrals
• (Personality) Tests
• Contracts with certain features (high variable parts)
© by C. Hörner
Season 2
Cost Behavior
© by C. Hörner
Where Do I Need to Measure

Performance?
© by C. Hörner
Decentralization 9
• Organizational structure to achieve more decentralization: responsibility centers

• Decentralized decisions important
• Localized information, specialized skills
• Decentralized decisions need to be aligned with headquarters’ interests
• Need to evaluate (performance of) decentralized units
• Tools to manage decentralized units
• Targets and budgets
• Targets should be challenging but attainable
• Budget provides specific targets (↔ ‘do your best’ goals)
• Role of fairness
• Analysis of variances
• Transfer prices https://commons.wikimedia.org/wiki/File:Decentralization.jpg
• E.g. in profit centers with internal customers
© by C. Hörner
Responsibility Accounting 10
• Evaluating the performance of managers based on activities under their

supervision
Cost Center Responsible only for costs
Revenue Center Responsible only for revenues
Responsibility
Centers
Responsible for revenues,
Profit Center
costs, and profits

Investment Center
cost, profits, and investments
© by C. Hörner
Feedback Function of Responsibility Centers 11
• Budgets coupled with responsibility centers provide valuable feedback

• Variances can suggest questions and direct attention
• Variances can be analyzed and used:
• Early warning
• Performance evaluation
• Strategy evaluation
• Communication of the goals of the organization
• Feedback can be used to make necessary adjustments
© by C. Hörner
12
How Can I Measure

Performance?
© by C. Hörner
Pursuing a Strategy 13
• Possible tool: Balanced Score Card (Kaplan & Norton 1996)

• Identify, measure and incentivize appropriate performance measures
© by C. Hörner
Balanced Scorecard: Southwest Airlines 14
Learning
(Employee
Training)
Internal
(On-time)
Customer
(Customer
Satisfaction)
Financial
(Revenue/
Profit)
© by C. Hörner
Performance Measures 15
• Criteria of performance measures:

• Goal congruence/alignment: Compensate so that your employees share your goals
• Controllability: Only hold employees accountable for what they can influence
• Quantitative – Qualitative Measure the past

Sales margin vs. customer satisfaction
Benchmark: Actual vs. budgeted
Analyze: Source of variances
• Internal – External
ROA vs stock price Design the future
Employees training vs market share
Motivate: Budget targets
Allocate: Distribute rewards
• Financial – Nonfinancial Plan: Forecast
Inventory turnover vs store automation
© by C. Hörner
Goal Congruence 16
High Sales growth: 15%

Get people to
Individual KPI on
use the Internet
Sales growth
more. (2016) Profit growth below expectations
Dilbert comics by Scott Adams
© by C. Hörner
Goal Congruence 17
Selling and maintaining

MRI and CT machines
Sales Incentive: Sales agents can offer

What will Sales do?
Department Bonus per $ Revenue discounts/ warranties
Service Maximize: What will Service

Department RevenueService - CostsService think about that?
What will GE
think about that?
© by C. Hörner
Challenges of Incentivized Measures

• Incentives matter!
• Good measures→ right direction; bad measures→ wrong direction and this very fast
• Bloomfield’s Law of Measurement
“Measure management arises when incentivized measures capture performance

constructs with error, the people being evaluated know the details of how performance
is measured, and people have discretion to distort either operations or reporting.”
• Historical examples of “gaming” the performance measurement system: snakes, rats
Dilbert comics by Scott Adams
© by C. Hörner
19
What Is the Principle of

Controllability?
© by C. Hörner
Principle of Controllability 20
Subject of a responsibility center (e.g. Performance measurement:

cost, profit) should be controllable by the Exclude all uncontrollable costs from
manager for a given time period a manager’s performance report
© by C. Hörner
Responsibility Accounting 21
• Evaluating the performance of managers based on activities under their

supervision
Cost Center Responsible only for costs
Revenue Center Responsible only for revenues
Responsibility
Centers
Profit Center
costs, and profits

Investment Center
cost, profits, and investments
© by C. Hörner
Principle of Controllability 22
Subject of a responsibility center (e.g. Performance measurement:

cost, profit) should be controllable by the Exclude all uncontrollable costs from
manager for a given time period a manager’s performance report
• However…
• Decision-facilitating vs. decision-influencing role: compromises might be necessary to force
the managers to make certain actions
• Controllability vs. information/knowledge of a certain subject: managers of certain
responsibility centers can explain variances the best (even though they cannot control
them).
• Focus and bigger-picture-thinking: production manager with profit instead of cost despite
lack of control over revenue: broader focus might facilitate bigger-picture-thinking
© by C. Hörner
Season 2
Cost Behavior
© by C. Hörner
24
What Are Costs and What

Costs Are There?
© by C. Hörner
What Are Costs? 25
• Cost
• “Resource sacrificed or foregone to achieve a given objective”
• Usually expressed in monetary terms ($, €, £, etc.)
• Goal: Find out the “true” costs (e.g. of producing a car)
Examples:
- Management
- Support staff
- Rent and Energy
© by C. Hörner
Example: Product in Financial Industry 26
Overhead
Profit
Revenue
Costs
Costs
© by C. Hörner
Opportunity Costs 27
• Cost
• “Resource sacrificed or foregone to achieve a given objective”
• Not all relevant, economic costs are recorded and based on factual transactions
• Opportunity Costs
• “Loss of potential gain from (the best of) the other alternatives when one alternative is
chosen.”
• Examples for opportunity costs
• Should you buy or rent a house (alternative: invest in stocks)?
• Should you invest $1m in Project A or Project B?
• Should you accept an extra order (Product X) if this means reducing your regular output of
Product A because both products use the same machine?
• Should you accept an extra order (Product X) if the machine needed for this is idle?
• Should you work extra hours in a bar?
• Should you stop to pick up $1 from the road?
© by C. Hörner
What is an Cost Object? 28
• Cost Object = “thing” for which cost information is needed

• Examples
Product or Product Lines
Departments and Business Units
Projects and Programs
Service
Activity/Process
Customers
• Depends on individual situation or interest
© by C. Hörner
Direct vs. Indirect Costs 29
Cost
Assignment
Direct
Costs
Cost Tracing • Related to particular object
Accumulated Costs
to Cost Object • Tracing economically feasible/not too costly
or
• Related to particular object
Indirect
Costs
Cost Allocation
to Cost Object • Tracing economically not feasible/too costly
• Allocation based on (arbitrary?) criteria
determined by the company.
Direct costs more accurate: preferred for making decisions.

© by C. Hörner
Factors Affecting Classification: Direct vs. Indirect 30
Economic materiality of the

cost
Available information
gathering technology
(“easiness” to trace)
Design of operations (e.g.

exclusive or joint use)
The direct/indirect classification can depend on the cost object.
© by C. Hörner
Cost Driver 31
• Cost driver = factor, such as the level of activity or the quantity, that causally affects total
costs over a given time span.
• Change in in the level of cost driver → change in total costs of cost object
• Other terms: cost determinant, cost generator
• Examples:
R&D: # of labor hours on a project, price of test materials
Design: # of parts, # of engineering hours
Production: # of units, # of machine reconfiguration
Marketing: # of ads, # of sales personnel
Distribution: # and weight of packages, distance to customers
Customers: # of service calls, # of customer service employees
© by C. Hörner
Cause-and-Effect Criterion 32
• Physical (operational/ technology-based) relationship (e.g. quantity → material costs)

• Contractual arrangement (e.g. costs of phone provider based on number of calls)
• Logic and knowledge of operations (e.g. number of parts in product design)
Careful: spurious correlations vs. “true” cause-and-effect relationships
Example
Where do babies come from?
- Old tales suggest storks (theory)
- In fact: statistically significant positive correlation
Birth Rate
- Convinced?
- But:
- Urbanization affects both
- If you include urbanization as control, the
correlation above is not significant any more
Storks
© by C. Hörner
Variable vs. Fixed Costs 33
• Do costs vary proportionally with quantity or are they independent of the quantity?
Total Total Total
Costs Costs Costs
Quantity Quantity Quantity

Variable Costs Fixed Costs Mixed Costs
• Examples:
• Phone provider contracts
• Rent of a car production hall and steel to produce cars
• Permanent and temporary employee
• Truck fleet and individual delivery orders
© by C. Hörner
Variable vs. Fixed Costs 34
• However, classification can depend on the time horizon

• Costs can be classified as fixed in the short run, but variable in the long run
• Termination of rent contracts
• Decrease of work force
• Selling of trucks
• Relevance of range:
• Costs can be variable in a certain range, but require additional fix costs when range is
exceeded
• Example: At a certain capacity, you need to buy a second machine (step-cost function)
Total
Costs
Quantity
© by C. Hörner
Unit/Average Costs 35
𝐓𝐎𝐓𝐀𝐋 𝐂𝐎𝐒𝐓𝐒 ($)

• Unit (or: average) costs =
𝐐𝐔𝐀𝐍𝐓𝐈𝐓𝐘 (units)
Unit Unit
Costs Costs
Quantity Quantity
Variable Costs Fix Costs
• Intuitive and convenient (particularly ex post evaluation)

• Careful: differentiating between fix vs. variable allows better decision-making
© by C. Hörner
Direct vs. Indirect / Variable vs. Fixed 36
Do costs vary proportionally with quantity

or are they independent of the quantity?
Cost Object
Cost Driver
Direct/indirect vs. variable/fixed are different approaches.
© by C. Hörner
Product Cost vs. Period Costs 37
Tracing or Allocation No Allocation

Can be inventoried P&L expenses
© by C. Hörner
Budgeted Cost vs. Actual Costs 38
Budget 2018 (expected) Actual 2018 Deviations
Direct Direct
Cost Cost
$500K $550K Direct: +$50K Implications
vs. = Indirect: -$100K for liquidity,
Indirect Indirect Net: -$50K goals, bonus?
Cost Cost
Overhead Overhead
$800K $700K
Costs forecast Costs incurred
© by C. Hörner
Sunk Costs 39
• Sunk costs: costs incurred/investments made and not recoverable

• Should (economic perspective) be irrelevant for future decisions
• Example: Rammstein concert
• Band is hired; stage constructed; sound system installed
• Many tickets left 1h before concerts starts
• Give them away cheaper than original price (ignore reputation)?
• As long as price > variable costs, fixed costs are partly recovered
• Costs considered sunk at one point (hence: irrelevant) can be very relevant when
planning projects (not yet sunk)
• Sunk cost fallacy:
• It can be psychologically hard to ignore sunk costs
• “I have given up too much now to quit…”
© by C. Hörner
Sunk Costs 40
• All-You-Can-Eat-Pizza – Example (Just und Wansink 2008):

• Expected price when sitting down: $10
• Unexpected discount: $5
• As soon as you start eating you have to pay
• Should the amount you have paid affect the amount of pizza you eat?
© by C. Hörner
The Role of the Sector 41
• Manufacturing & Merchandising

• Tangibles
• Direct material and overheads
• Unit cost
• Stock of finished goods, work-in-progress
• Service (e.g. consulting, law firms)

• Intangibles
• High labor costs (>70%)
• Unit cost ???
• No stock of finished goods
Different requirements and challenges for Cost Accounting Systems
© by C. Hörner
Some Key Take-Aways 42
Classifications can often depend on the

situational circumstances and context
Different tasks/companies require

different cost system approaches
Usually, humans make decisions:

potentially subjective, arbitrary
Usually, there does not exist one “true”

cost number!
© by C. Hörner
Season 2
Cost Behavior
© by C. Hörner
Cost Behavior
44
How Can I Learn

About My Costs?
© by C. Hörner
Cost Behavior
Cost Estimation Approaches 45
• Industrial-engineering or work-measurement method

• Step by step monitoring and measuring of inputs
• Time-consuming and often not feasible
• Conference method
• Use estimates on the basis of analysis and opinions of experts from different areas
• Quick, but highly dependent on experts’ inputs
• Account analysis method
• Classification in variable, fixed, mixed cost drivers
• Theory driven (e.g. contracts as source), but can be subjective
• Widely used in practice
• Quantitative analysis (e.g. High-Low or regression based)
• Data-driven classification
• Independent variable (IV): cost driver
• Dependent variable (DV): cost of an cost object
© by C. Hörner
Cost Behavior
Example: Quantitative Analysis
Costs (in €) # of meals sold

March 50’000 2’000
Running a restaurant. A famous jury of established April 70’000 3’000
chefs follow people in a television show on May 55’000 1’500
surviving in the hard business of running a June 65’000 3’500
restaurant. All restaurants opened their doors, and July 55’000 1’000
are running for 10 months. One of the chefs ask for August 65’000 2’000
an overview of the cost structure (the volume driver September 45’000 1’500
= meals sold). One of the contestants presented October 80’000 4’000
following data for his restaurant. November 55’000 2’500
December 60’000 2’500
What are your fixed costs? What are your variable costs?
© by C. Hörner
Cost Behavior
Low – High Method: Analytically 47

March 50’000 2’000
April 70’000 3’000
That’s where you are heading
May 55’000 1’500
Total Y = a + b*Q
June 65’000 3’500
Lowest value: Costs
July 55’000 1’000
August 65’000 2’000 cost driver (IV)
September 45’000 1’500
Highest value:
October 80’000 4’000
cost driver (IV) a
November 55’000 2’500
December 60’000 2’500 Quantity (Q)
Cost Driver
b = Slope of the line = variable costs a = Intercept = approximation for fixed costs
(€80’000 – €55’000) / (4’000 – 1’000) = €8.3 p. meal €80’000 – €8.3 p. meal * 4’000 = €46’700
Y = 46’700 + 8.3 * Q
Careful: The line tries to explain the data in the relevant range of observations.
Theoretically, intercept equals fixed cost only when relevant range includes 0.
© by C. Hörner
Cost Behavior
Low – High Method: Graphically 48
90.000 Relevant range

80.000
70.000
60.000
Costs (in €)
50.000
40.000
30.000
20.000
10.000
-
- 1.000 2.000 3.000 4.000 5.000
Cost Driver: # of meals
© by C. Hörner
Cost Behavior
Low – High Method 49
• High-Low method useful for quick planning decisions

• Depends on only two points (maybe “strange” compared to average behavior)
• Relevant range:
• Costs are relevant within a range. E.g. If meals sold would increase up to – e.g. – 8’000
meals we might have to build extra space (changes everything)
• Time span: A cost can be fixed within periods, but variable in the long run (e.g. staff costs)
• Cost driver:
• All costs depend on one cost driver.
• Economic sense: most crucial driver, relevance for the business
• Multiple cost drivers are often needed for detailed analysis
• Regression method more accurate and powerful than Low-High method
© by C. Hörner
Cost Behavior
Regression Method 50

March 50’000 2’000 That’s where you are heading
April 70’000 3’000 Total Y = a + b*Q
May 55’000 1’500 Costs
June 65’000 3’500
July 55’000 1’000
August 65’000 2’000
September 45’000 1’500
a
October 80’000 4’000
Quantity (Q)
November 55’000 2’500 Cost Driver
December 60’000 2’500
Intercept = 39’500, slope = 8.7

Regression estimates instead of Low-High method: Y = 39’500 + 8.7 * Q
© by C. Hörner
Cost Behavior
Regression Method: Graphic 51
90.000 Relevant range

80.000
70.000
60.000
Costs (in €)
Graphical 50.000
Depiction 40.000
30.000
20.000
10.000
-
- 1.000 2.000 3.000 4.000 5.000
Cost Driver: # of meals
Statistically The line (red) with the least distances to the observations is estimated and described as: Y = a + b*Q
This estimate is better as it relies less on the two extreme observations (blue line from Low-High)
Careful again with the interpretation of the intercept.
© by C. Hörner
Season 2
Cost Behavior
© by C. Hörner
Cost-Volume-Prof it-Analysis
53
What Is a CVP Analysis and

What Do I Need It For?
© by C. Hörner
Cost-Volume-Profit-Analysis 54
“Quick analysis to explore many business opportunities”
© by C. Hörner
Examples 55
• What-If questions
• Examples:
How many tickets do you need to sell if you want to organize a profitable festival?
How many tickets does Lufthansa need to sell for flights from FRA to NY if they want to
break even?
If DHL lowers price by 10%, how much express parcels should they handle to earn an
operating profit of 100’000?
How is Nintendo’s profit affected if they are able to reduce variable costs by 10%?
© by C. Hörner
CVP-Analysis 56
• We have seen cost structure of firms, CVP-analysis assumes:

• Fixed part + variable part
• Fixed Costs + Variable Costs per unit * the quantity of the cost driver (Q)
• In a similar way, CVP-analysis assumes a revenue function:
• Revenue driver = a variable that drives revenues
• Revenue = Unit Selling Price * the quantity of the revenue driver (Q)
• Driver Q often output (quantity): e.g., # of tickets sold, # of parcels delivered
Operating Profit = Revenue – Variable Costs – Fixed Costs

= (USP * Q) – (UVC * Q) – FC
OP = operating profit, USP = unit selling price, UVC= unit variable costs,
Q = Quantity (cost/revenue driver), FC = fixed costs
© by C. Hörner
CVP-Analysis: Assumptions 57
• Assumptions
• Revenues/costs change due to the same driver (= quantity of output)
• Linear behavior of cost and revenue functions
• Unit variable cost, fixed cost and selling prices are known and are assumed to be constant
• No inventory-levels assumed, all cost and revenues are added without taking into account
time value for money
• Simple planning, first analyses, what-if scenarios…

• Based on
• historical costs or revenues to make predictions
• on managerial estimates
© by C. Hörner
CVP-Analysis: Break-even Point

LG wants to launch a 32 inch LCD television at a price of 200 (to be
targeted at price-sensitive shopper). The fixed cost that LG incurs for this
product are 1’000’000. Expected variable cost per unit are 100
Q: How many screens should be sold in order to break even?
Break-even point = output level for zero profit

Method 1: Equation method Method 2: Contribution method
Revenue – All Cost = 0 OP = USP * Q – UVC * Q – FC
USP * Q – UVC * Q – FC = 0 OP = (USP – UVC) * Q – FC
Q = (FC+OP) / (USP – UVC)
200 * Q – 100 * Q – 1’000’000 = 0 In Break Even: OP = 0

100 Q = 1’000’000 Q = 1’000’000 / (200 – 100)
Q = 10’000 units Q = 10’000 units
Memory aid: Contribution of each unit to
reduction of fixed costs (Price – Variable Costs)
© by C. Hörner
CVP-Analysis: Break-even Point 59
Method 3: Graphical method
4500000
4000000 COST
REVENUE
3500000
3000000
2500000
2000000
1500000
1000000
500000
Q = 10’000 units
0
0 4000 8000 12000 16000 20000
Output
© by C. Hörner
CVP-Analysis: Target Profit 60
Output level to achieve a given operating profit objective (target: TOP)
Assume that LG wants to realize a Target Profit of 350’000: FC = 1’000’000, UVC = 100, USP = 200.
Q: How many units does it have to sell?
Contribution method:
Q = (FC+OP) / (USP – UVC)
Target = OP = 350’000
Q = (1’000’000 + 350’000) / (200 – 100)

Q = 13’500 units
© by C. Hörner
CVP-Analysis: Influence of Taxes 61
Assume a 30% tax-rate: Does the break-even point for the LG example changes?
o YES
NO: Taxes only relevant if OP > 0 (by definition not the case for break even point)
o NO
What happens with the number of units that LG needs to sell if it still wants to earn an profit of
350’000, but after taxes
o Units to be sold is still 13’500

o Units to be sold increases Taxes relevant as OP > 0
o Units to be sold drops Profit after Taxes = OP * (1 – Tax) →
TOP compensating for taxes = Target Profit after Taxes / (1 – Tax)
TOP = 350’000 / (1 – 0.30) = 500’000

Q = 1’000’000 + 500’000 / (200 – 100)
Q = 15’000 units (increases)
© by C. Hörner
CVP – Analyses: Other What-if Analyses 62
• Effect of price/unit cost changes etc…

• How much units do we need to sell for TOP of 350’000 if LG expects
• A sudden cost increase of 5% in UVC
• A drop in selling price of LG by 10%
• A fixed cost increase by 20%
Q = (FC + OP) / (USP – UVC)
• Often done in spreadsheets !

• Worst Case / Best Case scenarios, etc.
© by C. Hörner
CVP-Analysis & Subcontracting 63
Effect of alternative cost schemes in contracting:
OPTION 1: An outside subcontractor asks a fixed fee of 2’000’000 per period to meet
up the demand of LG (fully fixed fee structure)
OPTION 2: An outside subcontractor offers LG to produce the screens at a cost per

unit of 130 $ (fully variable cost structure)
What does this mean for the demand risk (volatility) of LG?
© by C. Hörner
CVP-Analysis and Uncertainty 64
Assume that LG has outside contracting options of a fully variable cost structure of 130 $ per unit
or fully fixed cost structure of 2’000’000$ and selling price for LG = 200 $ per unit.
Q: Which contractor should it choose knowing that market for low budget LED TV’s is
a) 9’000 units (30% probability) or b) 19’000 units (70% probability) ?
General approach = Expected Values (based on: probability * outcomes)
Fixed Cost structure: Variable Cost structure:

a) (200 * 9’000) – 2’000’000 = - 200’000 a) (200-130) * 9’000 = 630’000
b) (200 * 19’000) – 2’000’000 = 1’800’000 b) (200-130) * 19’000 = 1’330’000
E(OP) = 0,3 * (-200’000) + 0,7 * 1’800’000 E(OP) = 0,3 * 630’000 + 0,7 * 1’330’000
= 1’200’000 = 1’120’000
Given these expectations: fixed cost structure preferred.

© by C. Hörner
Break Even Point: Example 65
GM has gone from losing billions of dollars to making money, $7 billion so far this year. Thanks to
its reorganization and government bailout, North America’s largest car company is largely debt-
free. Granted, Europe is a problem. Apparently the company is not doing so well in South America
either, a big car market. And the stock price is not where it should be. But in distinction to life in
pre-bankruptcy days, GM’s new executive management team now has the luxury of actually
running the business (as opposed to lurching from crisis to crisis), Amman told The Wall Street
Journal Senior Editor Darren McDermott during a session at the recent MIT Sloan CFO Summit in
Boston.
What was GM’s strategy for lowering its risk profile? One big step was to dramatically reduce the
company’s break-even point, Ammann said. “We had a huge fixed-cost base, so we had to build a
certain number of vehicles to cover the fixed cost. We had a supply-push business model: You built
the vehicles and then figured out how to sell them.”
“Getting the break-even point down allowed us to have a business model where we are building to
demand, as opposed to building a particular level of volume to allow the business to break even,”
he added.
Outside contracting can be a way to reduce (inside) fixed costs.
© by C. Hörner
CVP-Analysis in Government/Non-Profit 66
• Governance agencies, hospitals, social institutions, etc. often receive a fixed budget to
run their operations
• They can have the goal to maximize the number of people profiting instead of company
profits
• Example 1:
The city Genève has a (lump sum) budget of 400’000 to treat drug addicts. This budget is given
to an agency to conduct a counseling program. Fixed cost of the agency are 150’000; the variable
costs per patient are 400.
Q: How many patients can receive a treatment?
Number of patients (Q)

Budget has to suffice for the fixed costs of the agency and the variable costs per patient
400’000 = 150’000 + 400 * Q → Q = 625
Revenue = Budget (fixed fee/revenue structure)

Costs = Fixed costs + variable costs * Q
Profit is 0: Budget fully spent
© by C. Hörner
CVP-Analysis in Government/Non-Profit 67
• Example 2:
Assume that the budget of the agency is reduced by 10%.
Q: How many patients can receive a treatment?
Number of patients (Q) when budget is reduced

360’000 = 150’000 + 400 * Q
→ Q = 525
• Example 3:
Assume that the budget of the agency is still reduced by 10%. However, the agency still wants to
treat the original amount of people (Example 1: 625).
Q: How much money can be at maximum spent per patient?
Maximum costs when budget is reduced
360’000 = 150’000 + VC * 625
→ VC = 210’000/625 = 336
or a reduction of variable costs of 16%
© by C. Hörner

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Management Accounting

Two Roles of Management Accounting

Responsibilities & Performance Measures

Cost Accounting Concepts

What Are the Two Central Roles

Roles of Management Accounting 4

What is considered a good accounting decision, can

Decision-Facilitating (Example): Start-ups 5

Decision-Influencing (Example): P-A relationships

Agent: I have my own interests!

Two Roles of Management Accounting

Responsibilities & Performance Measures

Cost Accounting Concepts

Where Do I Need to Measure

• Organizational structure to achieve more decentralization: responsibility centers

• E.g. in profit centers with internal customers

• Evaluating the performance of managers based on activities under their

Revenue Center Responsible only for revenues

Responsible for revenues,

Feedback Function of Responsibility Centers 11

• Budgets coupled with responsibility centers provide valuable feedback

How Can I Measure

• Possible tool: Balanced Score Card (Kaplan & Norton 1996)

Balanced Scorecard: Southwest Airlines 14

• Criteria of performance measures:

• Quantitative – Qualitative Measure the past

High Sales growth: 15%

Dilbert comics by Scott Adams

Selling and maintaining

Sales Incentive: Sales agents can offer

Service Maximize: What will Service

Challenges of Incentivized Measures

“Measure management arises when incentivized measures capture performance

Dilbert comics by Scott Adams

What Is the Principle of

Subject of a responsibility center (e.g. Performance measurement:

• Evaluating the performance of managers based on activities under their

Revenue Center Responsible only for revenues

Responsible for revenues,

Subject of a responsibility center (e.g. Performance measurement:

Two Roles of Management Accounting

Responsibilities & Performance Measures

Cost Accounting Concepts

What Are Costs and What

What Are Costs? 25

Example: Product in Financial Industry 26

What is an Cost Object? 28

• Cost Object = “thing” for which cost information is needed

Departments and Business Units

Projects and Programs

• Depends on individual situation or interest

Direct vs. Indirect Costs 29

to Cost Object • Tracing economically feasible/not too costly

• Related to particular object

Direct costs more accurate: preferred for making decisions.

Factors Affecting Classification: Direct vs. Indirect 30

Economic materiality of the

Design of operations (e.g.

The direct/indirect classification can depend on the cost object.

Design: # of parts, # of engineering hours

Production: # of units, # of machine reconfiguration

Marketing: # of ads, # of sales personnel

Distribution: # and weight of packages, distance to customers