“Imputed depreciation is the cost equivalent of the value depletion of long-term usable operating resources (Wolfgang Kilger, Flexible Plankostenrechnung und Deckungsbeitragsrechnung, 9th improved edition, Wiesbaden, Germany, 1988, p. 398)”.
Imputed depreciation should lead to corresponding amounts of money for replacement investments being “bunkered” in financial assets in the operating profit and loss account in order to be able to procure replacement equipment if necessary and thus continue to fulfill the purpose of the business. The depreciation equivalents mentioned by W. Kilger must be calculated on the basis of the replacement values of the investments from the point of view of value preservation.
The result is that imputed depreciation should not be calculated o from the basis of the historical acquisition value of equipment that can be used in the long term, but on the basis of the amount that would have to be paid at the end of the year for equipment with the same performance. In our view, the profit potential of a company is only maintained when equally efficient resources can be bought again. Only when the existing elements of the fixed assets can be procured again at current purchase prices is the substance preserved. Only the profit after deducting depreciation that preserves substance can be distributed to the owners / shareholders with a clear conscience.
The valuation at replacement value and the derivation of imputed depreciation from this requires that it be clarified before the annual financial statements what changes in purchase prices are to be expected for the various parts of the fixed assets. There are many reasons for impending cost price increases or expenditure for updates:
Inflation in the procurement markets
New technical or legal regulations to be complied with
Changes in safety regulations for the operation of systems (and buildings)
Adaptation of computer programs, program extensions and release changes
Change to another machine supplier because the previous one no longer exists.
On the other hand, systems to be replaced can become cheaper to purchase because physical system parts are replaced by electronics or metal by plastic.
Both with expected rising and falling purchase prices of assets and intangible assets, imputed depreciation must be recalculated for the year to plan and taken into account in the planned cost calculations. This is because in management accounting, like other costs, depreciation is one of the factors determining the level of profit.
Imputed depreciation should not only be calculated for long-term assets such as buildings, equipment, machinery and vehicles. Operating resources also increasingly include rights and potential benefits of a non-physical nature such as ERP and CRM systems, rights of use and usage and sale, purchased customer addresses and time-limited usage licenses. If such potential benefits lose their value over time and new investments are required to maintain them, the corresponding estimated amounts must be included in the replacement value, which in turn leads to higher imputed depreciation.
Sustainably successful corporate management requires the inclusion of imputed depreciation in the internal income statement. This prevents money from being distributed to the owners that will be needed to maintain the company’s potential for success and thus its continued existence.
Activity Based Costing allocates fixed costs of production, sales and administration to individual products. How relevant is this for decision-making?
Activity Based Costing (ABC)
ABC was published for the first time 1971 by Professor George Staubus under the title “Activity Costing and Input Output Accounting”. CIMA, the Chartered Institute of Management Accounting, designated ABC in 1988 as a cost accounting method, which assigns the costs of resources consumed to the final products. This allocation is to be achieved with the help of consumption estimates and cost drivers:
Resources -> cost drivers -> cost objects.
The purpose of these allocations is to estimate or determine the full costs of products, services and performed work. Thus, ABC is a further attempt to assign, if possible, all costs of an enterprise properly to the individual unit sold. Activity Based Costing was, in 1999, so up-to-date that Horngren/Bhimani/Foster/Datar dedicated a whole chapter to the topic in their book “Management and Cost Accounting” (pp. 344-370). This development was taken up also in the German speaking countries. Peter Horváth extended ABC to Process Cost Calculation (P. Horváth, Controlling, 7th edition, 1998, p. 532 ff.,). “The Process Cost Calculation is to be understood as a method to allocate overhead costs to products according to the German account system for external reporting (ibid. p. 533, translated by L. Rieder)”.
In ABC as well as in Process Cost Calculation the fixed costs of manufacturing, selling and administration are allocated to other cost centers and from there to the different product units (see ibid., p. 542). The intention is to be able to better assess the profitability of a product or service and to enable “fact-based pricing”.
In the following it is examined how far ABC can lead to more decision-relevant cost information and which internal inventory evaluations are decision-relevant.
Cost Elements in Activity Based Costing
In the cited book “Management and Cost Accounting” (p. 345 ff.), three guidelines for determining activity costs are defined:
Account for all costs either as direct costs of a product or a cost center. If direct allocation to a cost center is not possible, the cost items are to be charged to a higher aggregated cost center. In the cost cube (see below), these are the direct costs of the respective cost center under consideration (Traceability).
Refine the cost center structure so that each cost element can be assigned to one and only one cost center. While this leads to a massive increase in the number of cost centers to be planned and tracked, it also leads to clear responsibilities for the cost center managers.
Define a cost key for each cost center that represents a direct cause-and-effect relationship between a cost center’s activity and its costs. This requirement leads to the allocation of fixed costs from one cost center to another and from there to the products. It thus contradicts the requirements for cause-related cost splitting between proportional and fixed.
From a management perspective the guidelines 1 an 2 can be agreed upon. However, guideline 3 contradicts the rules of flexible budget costing, as it leads to fixed costs also being allocated to manufactured items and services.
The cost cube (compare the post “Management-relevant cost terms”) shows that the proportional costs are caused directly by the quantity of a product or service produced (direct cause-and-effect relationship). The fixed costs, on the other hand, are the result of decisions by the cost center manager and his superiors.
The most important parts of these fixed costs are the personnel costs for the management of the cost center and the costs for the calendar-dependent depreciation of the plant. They are created so that the cost center is ready to perform, even if production is not taking place. All fixed costs are period-dependent, not piece-dependent and can therefore not be attributed to a manufactured unit in accordance with the cause.
Cost cube
If the total cost center costs of a period were divided by the cost center services provided by that period, a different full cost rate would result for each month. This would be useless for the management of a cost center as well as for the inventory valuation of semi-finished and finished products and would cause variances for which no one is responsible.
ABC is thus also to be understood as full cost calculation. For each cost center an activity unit, called a cost driver, is specified, which measures the demand of the resources. All costs of a cost center are then divided by the number of performed activity units. The resulting cost rate thus consists of proportional and fixed cost portions. This is indicated in the following example for the food wholesaler Netto AS (translated from “Management and Cost Accounting, pp. 350 – 352).
Activity Based Costing at Netto AS
Since Netto AS is a trading company, which itself does not change the products it purchases, the difference between net revenue and proportional purchase costs of the sold products results is contribution margin I.
For the allocation of the cost center costs to the product areas of Netto AS, however, the conventional full cost method was used. For this purpose, the total costs of a cost center including allocations from supplying cost centers (e.g., energy, personnel administration or corporate management) were divided by the presumed characteristic activity quantity of the cost center. For example, the cost center “Customer Support” recorded total costs of 10,240 in 1999 and processed 51,200 order items with them. This results in a fixed cost rate of 0.20 EUR per order item, again including all allocations from other cost centers. This rate is multiplied by the number of order position of a product range, which results in the amount of 7,360 for fresh products.
Activity Based Costing
Taking all these cost allocations into account, the result is that Fresh Produce contributed “only” 420 to EBIT in 1999. One could conclude from this that the sale of fresh products could be abandoned and the time gained in the cost centers could be used for the more profitable product areas or the personnel could be reduced to a corresponding extent.
A look at the contribution margin line reveals that this would probably be short-sighted. This is because fresh product sales generate 20,020 contribution margin I, i.e., more than half of the total CM I of 36,400. The lost 20,020 CM I would have to be saved in fixed costs, which would primarily mean personnel layoffs. The risk is great that in this case there would also be a lack of qualified personnel to carry out the sales and delivery activities for the other product ranges. In addition, the storage areas would become too large and the installations no longer in use, including computers and software, would still have to be depreciated. The fixed costs of the central functions of Netto AS, e.g., management, IT or personnel administration are already included in the sales processes in the numerical example (numbers 1-4). These would not be reduced by discontinuing the Fresh Produce range, as they are necessary for Netto AS to be able to perform. As a consequence, the other product areas would have to bear higher allocations, which in turn would reduce their profitability.
These considerations show that activity-based costing can be used to calculate the estimated full costs of an activity. But these full costs cannot be relevant for decision-making if fixed costs are allocated to product or customer groups by means of an allocation key. In Flexible Standard Costing, proportional costs are allocated to product units according to their source. The fixed cost center costs are transferred however as blocks into the contribution margin calculation.
The ABC idea is consistent with GPK (Grenzplankostenrechung) and RCA (Resource Consumption Accounting), to the extent it assigns proportional costs to products. But it also allocates fixed costs without appropriate cause-and-effect allocation keys (or cost drivers). This application of other allocation keys does not reduce the fixed costs and can lead to erroneous decision making based on misleading costing information. As with any costing method, care must be taken when using ABC costing data to ensure the information used is appropriate for the decision being made.
Show purchase price variances in financial accounting per period and in management accounting per product.
As a result of the Corona pandemic and supply chain challenges, increasing inflation rates can be observed worldwide. As a result, the questions of how quickly and comprehensively rising costs can be passed on to customers and what consequences can be expected for the company’s own results are coming to the fore.
To determine the extent to which price variances in purchasing could be passed on to customers and whether price increases are leading to increased spending variances in the cost centers, it is necessary to record purchase price variances in management accounting for short-term planning and control.
Row 7 of the table shows the monthly purchase price variances based on the standard price of EUR 120.- per ton.
These variances should be recorded as part of the monthly cost of materials in financial accounting, since the purchase price variance arose in this period.
In management accounting, however, the planned standard purchase price should be used throughout the whole year, since otherwise production would have to create a new standard cost calculation every month, which would be too late for sales, since new price increases have already occurred in the meantime.
The purchasing manager should include the expected average inflation when setting the standard purchase price for the plan year. Since he is not a prophet, he can only estimate the price. This estimate goes into the planned product costing and consequently is also applied in the planned contribution margin calculation. The advantage of this is that the standard cost estimate remains the yardstick and the monthly variances can be calculated automatically.
Stock receipts of semi-finished and finished products are also consistently valued in Management Accounting at proportional standard manufacturing costs, which in turn facilitates the preparation of contribution margin accounting.
This approach also makes sense because raw materials from deliveries with different real purchase prices can be consumed in the same production order. The table highlights consumption and costs:
Purchase prices are topical again
Order 1 (row 8) consumes in January the 100 tons of sectional steel purchased in December of the previous year at a price of 100.00/ton, plus 20 tons from the January delivery at a price of 117.30 (row 3 in the price development table).
Due to its volume of 320 tons the production of order 4 (row 11) has to be distributed over the months March to May. Because 100 tons are purchased each month and charged by the supplier at the applicable price, 3 different purchase prices would also have to be used for the calculation.
If the smaller order 5 (row 12) were processed before order 4 in early March, it could still benefit from the more favorable purchase price in February of 134.20 per ton at the expense of order 4, but this would increase the cost of order 4.
This complexity of evaluating order-specific consumption cannot be expected of neither the production managers nor the salespeople. In addition, as can be seen from rows 16 – 18, the valuation rule to be applied would still have to be determined:
All purchases are valued at the standard purchase price throughout the year (row 16).
The real withdrawals from the warehouse are valued at the current purchase price of the month of purchase (Last-In-First-Out, row 17).
The real purchases are valued at the weighted average purchase price of the current inventory (weighted average purchase price, row 18).
It can be seen that price variances in purchasing are period costs. They can only be clearly allocated to a product if the material was purchased directly for a specific production order.
As a result, especially in inflationary times, order and product costing should be carried out using standard purchase prices. Otherwise, those responsible for production will lose their orientation with the use of rapidly changing prices. In addition, they are held responsible for variances for which they are not responsible.
As mentioned, purchase price variances are period costs. In stepwise contribution accounting they can usually not be clearly assigned to a specific sale. Consequently, they are to be reported where unambiguity is given, e.g. per product or customer group or, as in the example, the assortments (cf. Management Control with Integrated Planning, p. 231).
Projects cause investments and costs. These are to be included in management accounting in order to present the complete result. The necessary data is presented here.
Project cost planning
To release a project order its financial effects should be determined as well. Project cost planning requires a similar procedure as for product costing. As projects also generate costs and investments they also have to be represented in the management accounting system.
In the assembly cost center of the example company the material positioning (envelope and mechanism) should be automated with the help of a loading robot and at the same time enable an accurate positioning of the parts. Manager of this project is the head of the Assembly cost center. His employees will help set up the equipment and test it. An external company will be commissioned to handle the project, the in-house maintenance and repair center will ensure the availability of compressed air and electricity, and the in-house IT department will program and test the interfaces for the transmission of production order data.
The same procedure as for the manufacture of a product should therefore be provided for:
Material consumption for testing
Internal services of the cost centers Maintenance and Repairs and IT
The time needed in the Assembly department to put the installation into operation (internal tasks)
The external expenditures for the system (including installation) for testing (third-party invoices, cash out).
The internal services provided are already included in the post “Planning the Internal Services Provided”. These services, the investment, and the material consumption will be posted to the balance sheet as assets under construction. This is recommended from a management perspective, because the costs of the investment will not appear as (imputed) depreciation in the assembly cost center until the following periods. The points to be considered when determining depreciation in Management Accounting are discussed in another post.
Because projects will soon be omnipresent in companies, the working time requirements for internal tasks and for internal services provided in particular must be planned in detail. These hours have an increasing impact on personnel requirements planning.
Proportional standard production costs are the planned costs that are directly caused through the product or service to be manufactured. They are the value-based consequence of fixing the objectives and must therefore be applied in calculation as well as in the valuation of inventories.
Creating the standard cost calculation for an article requires the following data: bill of material and work plan, lot size, planned purchase prices for raw material, planned proportional cost rates of the cost centers.
The base plate for the locking mechanism of a 4-ring binder is calculated as follows:
Basic data and proportional planned cost of itemnr. 11
From production planning it is known that the annual production of item number 11 should be 816,200 pieces. 11 equal lots of 74,200 units should be produced.
The bill of materials shows that sheet metal for 50 units will be used for setup and that 200 of the manufactured units will have to be disposed as scrap. For one base plate 0.024 m2 of sheet metal are required.
Together with the requirement for setup and scrap the requirement for steel amounts to (74,200 + 50+ 200) x 0.024 m2 = 1,786.8 m2.
The planned purchase price per m2 is 2.00 EUR. This results in direct material costs of the lot of 3,573.60 EUR
The work plan states that 0.25 machining minutes are required to produce one qualitatively good base plate (stockable). Added to this are 120 minutes for setup. The power requirement per batch is therefore (74,200 pieces at 0.25 min + 120 min setup = 18,670 min.
These are multiplied by the proportional planned proportional cost rate of the stamping shop of 0.8938, which results in the proportional planned production costs of 16,686.37.
In total, the proportional planned costs of this lot are EUR 20,259.97 or, for 74,200 good units, EUR 0.2730 per unit of inventory entry.
Valued at EUR 0.2730 / unit, the semi-finished product base plate 4-ring (itemnr. 11) is posted as a stock receipt. In the management-oriented system, this valuation approach for inventory movements applies to both planned and effective transactions. The reason for also using the planned proportional standard rates for real movements is that cost variances occur at the time of production and that the production managers are responsible for this variance. The orders that withdraw the semi-finished products for the next manufacturing level are not responsible for the variances that occurred previously and should therefore receive the products at standard cost rates.
For the same reason, the actual withdrawals of raw materials from inventory are always valued at planned purchase price. This is because if purchases are made at a higher or lower price than planned, a purchase price variance occurs in procurement. This variance can be observed by the purchasing manager and is shown in the overall result of a period. Often it is not possible to pass on purchase price variances to the production orders according to their cause, because it would then be necessary to decide which orders receive the same material at the lower and which at the higher price.
In our post “From the Sales Plan to Production and Purchase Planning” the multi-level bill of materials of item 101060 was presented. These steps from the raw materials to the various semi-finished products and to the finished product are shown in the standard cost calculation for the finished product 101060 below.
Standard Cost Calculation of product 101060
The proportional costs of every unit are always transferred to the next production level as standard values. Costs for setup and scrap are always included in the proportional standard costs. Although the warehouse receipts and issues are not shown, they are also always valued at these standard costs.
The allocation of internal services to other cost centers or products using full cost rates provokes wrong decisions. Only if these services are ordered by the recipient, their proportional costs are to be charged to the receivers.
Charging Internal Services
In many companies and in literature it is strongly believed that all costs of internal service areas should be charged to end products. This is done in order to be able to see how much a certain item did cost in total until it was received in the finished goods warehouse. The subject of this post is to show to what extent this approach can be implemented in a way that is appropriate for management and thus for decision-making.
Our starting point is the plan of cost center 330 Maintenance and Repairs in the example company. Cost center manager Temmel is responsible for internal repair and maintenance work in the entire Ringbook Ltd. This also includes the operation of the energy center. Up to now, the manager was able to carry out this work alone. For larger orders, external service companies were commissioned. Their costs are planned in the receiving cost centers in the cost type “external maintenance/repairs”.
Based on the planning of the internal services provided the planned activity level of cost center 330 is 1,650 hours for the plan year. The question as to whether Mr. Temmel’s planned presence time of 1,700 hours will also be sufficient for his internal tasks was left open for the time being. If there will be some overtime it will be paid and shown as a cost center variance.
Charging Internal Services: 330 Repair center
Together with his controller and his boss, Mr. Temmel prepared his cost planning on the basis of the planned activities. His own salary including social benefits amounts to 64,496. The consumption he has planned for his cost center is listed in cost types 5 – 13. Based on the equipment installed in his cost center, the controller has calculated the imputed depreciation of 7,625. From the previous measurements it can be deduced that the cost center will consume about 400 kWh of electrical energy per year. This corresponds to 80.00 at an internal rate of 0.20 / kWh.
The splitting of the costs into their proportional and fixed parts works automatically, as shown in our previous blog “Splitting Planned Costs into Proportional and Fixed”, when the plan data has been completely entered:
His personnel costs are 64,496 for 1,700 hours presence time. Per hour this amounts to 37.94.
He assumed that he will need 0.56 auxiliary and operating materials per hour of repair and maintenance work in his cost center. This amount is consumed with every hour worked for other cost centers and can therefore be integrated into the proportional cost rate. The remaining 156 of this cost type are incurred for the operational readiness of his repair center and can thus not be charged to the recipients.
He proceeded accordingly when planning the other cost types.
This results in proportional planned costs of 64,266. Divided by the planned employment (1,650 hours), the proportional planned cost rate of 38.95 results.
The cost center manager is responsible for the planned fixed costs of 11,445. The installations and capacities of his workshop are there because they are planned by him and approved by his bosses in the budget. If he can dismantle them, for example by reducing the fixed maintenance of his own processing machines, the total costs of the job will be lower. However, the proportional cost rate for the service hour performed remains 38.95.
If any share of fixed costs for the workshop building, for the use of the canteen, for IT connection and personnel administration were allocated to the workshop cost center, the full cost rate of the workshop would explode but the proportional cost rate would remain the same. If the full cost rate were to rise to 100 EUR/hour as a result of these fixed cost allocations, the internal service receivers would get the idea of procuring the repair and maintenance activities externally, because they would be available there for 70-80 EUR per hour. This would not only result in more money flowing outwards. The fixed costs of the workshop would rise massively because less internal service would be provided, but the employee and the equipment would still be there. This would result in a reduction in profits for the company as a whole.
To avoid such undesirable developments, we recommend to only charge the proportional costs of internal services provided at planned cost rates. It is the management, not the receiver of the service, that decides on the amount of structural costs.
The idea of outsourcing internal services to a separate company within the corporation must also be carefully considered from an overall perspective. After all, the spun-off company must also build up and pay for all kinds of capacities. Investments must be written off, taxes and profit transfers to the parent company are due. This often led to the total costs of a spin-off getting higher than previous internal costs. This has then led to a higher internal price for the service than before.
The splitting of cost center costs into their activity-dependent proportional and their fixed portion is part of the annual cost center planning. This is done for each planned in the affected cost centers. Once the basic data is available, the process can be automated.
Proportional and Fixed Costs
Applying the cost cube from the previous post means that for decision support all costs have to be split into their proportional and fixed portion, since proportional is the consequence of units produced and sold, fixed is the consequence of management decisions. The point is to correctly represent the principle of cause and effect in cost center planning. This splitting is done in the planning process.
An employee in a production center can work on production orders (setup, production, monitor quality, pack finished parts into transport containers). These are tasks that are causally necessary for the creation of a defined product. Without them, the product cannot be created. They are incurred proportionally to the quantity produced. The same employee can organize, take part in further training, attend meetings, clean up the workplace or, hopefully in rare cases, wait for work. The latter activities are determined by the organization of the cost center. They are incurred independently of the quantity produced and are therefore part of the cost center’s fixed costs.
The consumption of electrical energy in a production cost center is mainly determined by the type of product to be manufactured and the quantity produced. Electricity is also consumed for lighting, air conditioning, and the operation of auxiliary equipment such as computers. The consumption for production is causally necessary for the creation of the product and must therefore be planned proportionally. The rest of the electricity consumption is again the part of the capability to perform.
Maintenance work on the machines installed in the cost center can be caused by the operation of the equipment, e.g. after 200 hours of operation the rollers have to be replaced because they are no longer flat. Other maintenance work (technical inspections, functional checks) is due after a predetermined period of time, for example, annually, regardless of the quantities produced, to ensure operational readiness.
The examples show that different cost elements in a cost center must be planned with a proportional and a fixed portion. The following section shows how the necessary cost splitting can be largely automated. The example of the Stamping cost center is reused for this purpose.
Proportional and Fixed Costs in 220 Stamping
In comparison to the initial situation in the post “Planning Cost Centers”, the columns proportional, fixed and value consumption per RFU have been added.
The procedure for automated cost splitting using the example of personnel costs: The annual budget for personnel costs is 337,560. This amount divided by the normal capacity of the employees (408,000 Pmin) results in the average presence time rate per minute of 0.82735. This is the average cost per minute “been there” of any employee in this cost center. The 0.82735 are multiplied by the planned activity level of 338,855 Pmin. The planned proportional personnel costs are thus 280,353. The fixed costs are the difference to the planned amount (57,207).
For the other cost types the cost center manager considers for each of these what portion of the planned amount depends on the cost center’s activity. In the example, these are the consumption of auxiliary and operating materials, external maintenance, other expense, and energy. The manager derives this proportional share from his planning documents (maintenance contracts, consumption tables for energy, material costs that only arise from productive work). By dividing the amount by the planned activity he receives the consumption per reference factor unit (RFU, entry in last column). Since the RFU in the stamping shop is the minute, this naturally results in very low rates. The calculation method is then analogous to the splitting of the personnel costs.
Tip for practical implementation: Do not use percentages when splitting the proportional from the fixed amount. Always use the proportional rate per RFU. If the planned activity level has to be adjusted due to a changed production plan, the proportional plan cost rate of the cost center would change when using percentages. This is unrealistic because it is still the same product with the same work plan.
Cost splitting is a prerequisite for the calculation of proportional planned product costs. In order to be able to process if-then questions, the manager must know which costs are directly caused by the product (proportional planned production costs) and which cost blocks are the result of structural and capacity decisions (fixed costs). The latter change as shown in the cost cube through management decisions while the proportional product costs per unit remain the same as long as the product unit has the same bill of materials and work plan.
Cost splitting is not necessary in structure cost centers since these areas work for the products and not on the products. Consequently, only fixed costs can be planned in these cost centers.
Cost center planning begins with clarifying which production-dependent activities are to be performed in the plan period and which additional internal tasks are to be performed. This activity reference forms the basis for determining the planned costs per cost element.
Plan Cost Centers
Quantity, activity, and task-related annual planning as described in previous posts generate the orders for the cost center managers responsible for implementation. Like every manager, they are responsible in their area for QQDR: qualities, quantities, dates, and results (see the post “The management cycle determines the value types”). The performance requirements arise from:
the planned production quantities envisaged,
the necessary internal services provided, and
the planned internal tasks.
As a first step, cost center managers must therefore consider what services or results their area must deliver. From this, it can then be derived which staffing levels and which assets are required for this. The requirements are derived from the plans already drawn up:
From the planned production quantities, the planned activity levels of a production cost center can be derived with the help of the work plans. From this, the personnel requirements for the production-related work are determined.
From the internal tasks planned for the given cost center, the hourly requirements for work that is not directly production-related are derived. These are the working times for cost center management, training and education, inspection work, participation in projects, and attendance at meetings of all types.
The machines and installations installed in a cost center largely determine how much activity will have to be obtained from internal service providers (workshops, maintenance, internal transportation, energy, and so on).
The head of the Stamping cost center has the following planning basis concerning activities, employees, and machinery:
According to production planning, his cost center should be ready for an activity level of 338,855 personnel minutes (Pmin).
For the stamping work and for internal tasks, 4 full-time positions are required (including the manager), as each employee is planned with a net annual presence time (vacation public holidays and other absences already deducted) of 102,000 minutes (4 x 102,000 = 408,000 minutes).
The capacity of the installed machines is still sufficient at 435,840 minutes.
On this basis, he begins to plan the primary costs to be incurred for the planned activity. To do this, he receives a list of the plannable cost types from the controller. This is shorter than the list of the expense types in accounting as it is defined to plan the costs of this cost centers consumption:
To do this, the personnel costs including all social welfare costs are prepared in the personnel area and reported to the cost center manager as a total amount. Since the cost center manager cannot change the rates for additional wage-dependent costs (for example, insurance, vacation), one aggregate cost category for Personnel costs is sufficient. This makes planning and control easier.
The controller prepares the imputed depreciation amounts in Fixed Asset Accounting based on the assets installed in each cost center and reports this information to the cost center manager.
Primary costs are characterized by the fact that they come from outside the company and, with few exceptions, are always posted in Accounts Payable or Payroll Accounting. If such costs are to be provided in the cost center (office materials, supplies, etc.), the planner consults invoices from previous years, maintenance plans and other documents to determine the planned cost amount.
This procedure is directly linked to the process of management by objectives. Once the cost center manager has prepared his cost and activity planning, he agrees on the target cost center budget with his boss. For this reason, the cost center plan may only contain amounts and cost elements that the responsible person can influence directly.
Cost center planning does not yet contain the planned costs for internal services provided. These are called secondary costs as they stem from another cost center. In the table of planned internal activities in the post “internal services provided” it was shown that in the plan year 240 service-hours are to be obtained from the maintenance and repairs cost center (330). Its hourly rate is 38.95, which results in a debit of 9,348. The planned cost for energy consumption was calculated accordingly. A total of 536 is planned for this. The complete planned costs of the stamping shop are as follows:
Even in typical production plants, more than 50% of personnel costs today are attributable to internal tasks. These are tasks that are performed in order to be able to start production and sales at all. Consequently, internal tasks must also be planned and tracked.
Capacity Requirements for Internal Tasks
Internal tasks are the collective term for all work to be executed in an enterprise that is not directly caused by the units produced or by internal services provided. Internal tasks are only indirectly related to the products and services produced or sold. Examples include:
Management, planning and control work in all areas
Work of the entire sales-oriented areas
The entire production planning and control as well as the work preparation
The work of the personnel department, payroll accounting and the time spent on training and further education
Work of the functions purchasing, warehousing, forwarding
Tasks for the further development and operation of the entire information technology as far as it is not a matter of orders of individual areas and thus internal services provided.
Provision of buildings, company premises, installations, and machines ready for operation
Administrative work to meet legal requirements.
What these Internal tasks have in common is that they are performed for the capability of the organization to perform at all. Managers decide how much work capacity is to be built up and made available in the form of employees or investment capacity as part of strategic and operational planning.
These capacities must always be included in the overall planning of an organization. This can be explained by the fact that nowadays in all industrial companies known to us, more than 50% of the total personnel costs are incurred for internal tasks.
The difficulty is to create a reliable capacity requirements planning for the areas of Internal tasks. One reason for this is the fact that people in these areas often perform a wide variety of tasks in parallel. On the other hand, only a few companies record time consumption for Internal tasks. This makes it difficult to plan the time requirements. In order to get a better grip on capacities and the cost pool for Internal tasks, we have therefore long recommended that work for Internal tasks should also be integrated into factory data capture. Although attendance time can be measured quite easily using time recording devices, many managers are not even required to carry out this recording for themselves. The work for which the time was spent cannot be evaluated from the presence time recording system.
Our experience showed that even the planning of task types in internal areas generates important insights for capacity planning. For this purpose, we divide the tasks into six groups, which occur in almost every cost center:
Capacity Requirements for Internal Tasks
Task 5 (subject tasks) can be subdivided by cost center. In a sales office cost center, for example, these could be tasks such as addressing potential customers, looking after existing customers, preparing quotations, negotiating contracts. In the personnel department it could be personnel recruitment and selection, wage and social insurances, personnel and illness care, documentation of management and specialist staff potential.
Capacity requirements planning is also an essential prerequisite for Activity Based Costing. For Internal tasks, the direct cause-effect relationship is missing, but capacity requirement estimates can be used to improve the planning quality of fixed costs.
Planning at the level of detail described above benefits the entire company. Since employees are usually reluctant to fill out the activity recording for the actual times incurred, a user-friendly and thus largely automated recording application should be set up.
Thanks to the Lean Production movement impressive improvements have already been achieved in the area of directly product-related services and production management, Now it is important to apply the findings to Lean Administration as well. This helps to improve the cost position towards competition.
We speak of Internal Services Provided if a service from another cost center is explicitly ordered by the receiving cost center or if the service is directly caused by the activity of this cost center. For Internal Tasks no order exists. This is why they cannot be charged according to the cause to other cost centers. But for Internal Services Provided the direct causation link exists. This why the latter can be charged to the receiving cost centers but not the internal tasks.
Plan Internal Services to be provided
Internal services are provided when a receiving cost center directly orders services (activities) from another cost center. Such an order can be placed explicitly or be the direct consequence of the activity level of the ordering cost center. The supplying area is therefore responsible for providing the service.
Examples:
A car of the sales department is damaged and repaired in the company’s own garage (the order could also have been placed externally).
Every 100 operating hours the repair department has to check the dimensional accuracy of the rolls in the Rolling and Punching cost center for four hours and replace the rolls if necessary.
The maintenance group receives an order to rebuild the entrance of the reception building according to the latest safety standards.
The energy supply division supplies all other divisions of the company with electricity, water, and compressed air. Consumption is directly dependent on the equipment installations and on the performance of the receiving cost centers. It can be measured using meters or calculated using consumption tables.
Every tenth production order must be checked in the internal laboratory for compliance with all quality regulations.
In these cases, the ordering cost center is the trigger for the production of the service, either through an explicit order or through an automatic relationship between the service provided in the ordering area and the service delivered by the service area (2,4,5 above). The originator of the service procurement is always the delivering party. The ordering party should plan (in cooperation with the internal supplier) the services for a year, so that the personnel and machine capacities required by the internal supplier can be determined from this information.
In the example company Ringbook Ltd., the genuine internal exchange of services is planned in the following table:
All planned internal services
The consumption estimates of the receiving cost centers are collected and converted to the personnel hours or kWh required. A distinction must be made between which consumption is dependent of the activities of the receiving cost centers and which is independent (mainly calendar-driven). Totaling the values in the last column gives the planned activity levels of the internal service providers.
