Industrial production
The main trigger for the development of management accounting was industrial production. Their managers want to know the net revenue of a product or order and compare it with the costs directly caused by the product. The difference is the contribution margin I (CM I).
To achieve this, management accounting is to be set up that it can calculate the proportional production costs in planned and actual values, based on the quantity and activity structure of the manufactured product. The bills of materials and routings with consumption quantities and working times are used for this purpose (see the post “Pizza Dough and Management Accounting“).
Net revenue less proportional production costs results in the CM I per product unit, as described several times in this blog. Based on this, the contributions to the coverage of fixed costs and profit for product groups, customers, customer groups, regions or sales channels can be determined in planned and actual in various levels and dimensions (see the post “Multidimensional CM-Calculation“). After deducting all fixed costs, the top level of summarization is the EBIT achieved by the company as a whole.
Construction Companies
In construction companies the focus is on the contribution margin of a specific customer order. The person responsible for implementing the order (construction manager) is assessed according to how well he succeeded in realizing the planned contribution margin for the order. As in industrial operations it is important to adhere to the planned costs of the bills of materials and subcontracting, as well as to avoid higher actual time consumption by employees compared to the projected target times.
In both industrial and construction operations, the splitting of cost center costs into their proportional and fixed costs is necessary for cost planning and control (see the post “Cost splitting”). Even the best financial accounting software cannot fulfill this requirement because it can only record values, but not quantities and times per order.
Pure Trading Companies
A pure trading company sells its products as they are purchased. Customers usually receive the products directly from the warehouse or from the rack in the store. Packaging for shipping is determined by the size of the order, rarely by the individual item. This usually also applies to online retailers.
Because in trading companies the purchased product is not changed, no routings are required and bills of materials are only needed if the items to be sold consist of product bundles. Therefore, in the cost centers of a pure trading company, all cost center costs, from purchasing to warehousing, sales and administration, are fixed costs. There is no need to split costs into proportional and fixed costs in the cost centers because the proportional production costs correspond to the stock withdrawals for the sales executed.