fixed cost - Decision-relevant Management Accounting

Contribution Margin or Full Cost

Full cost accounting leads managers to take wrong decisions because fixed costs are allocated to the costs per unit. Here is the proof.

Contribution Margin or Full Cost? What is decision-relevant?

Thanks to good negotiating of the CEO of Pekka Heating Systems Ltd., his company was able to acquire and realize a large installation order for a university building and a smaller conversion order for the heating system in a house with 6 apartments in the last period. Now the question is what kind of orders should be increasingly won in the future. A consultant was commissioned to calculate whether it would be more likely to win conversion orders or large installations of new systems. The consultant explained that, using the method he knew from school, he had first distributed the full manufacturing costs over the orders according to the number of hours worked. The costs of sales and administration were then allocated to the orders in proportion to the full manufacturing costs.

He presented the following calculation:

Contribution Margin or Full Cost — Full cost accounting

The verdict is clear: it is not advisable to accept large orders.

The project manager of the large installation project was, on the one hand, proud that Pekka Heating Systems Ltd. was able to successfully implement this large order and, on the other hand, frustrated by the massive loss of the order. Therefore he asked a friend if the consultants’ calculation was correct. The friend presented the following table:

Without order 1 the company would be bankrupt

With the following example, the friend showed him that the application of different cost allocation bases (allocation keys) leads to different order results every time, despite the same initial situation. None of the results can be correct because costs are distributed that are incurred for the whole organization.

Different fixed cost allocation keys lead to different order profits

The conclusion remains that full cost accounting is not suitable for management control, because managers need to compare both in planning and in the concrete case of application the additional net proceeds of an additional order to the direct costs incurred with this order.

Precisely because various accounting standards and tax laws require the preparation of full cost accounting, management accounting requires the courage to not allocate fixed costs from one to other cost centers, orders, and products because otherwise managers will make wrong decisions.

Contribution Margins to Cover Structure Costs

Contribution margin accounting is applicable in all industries. The procedure is described using various examples. In addition, the path from the contribution margin of a single item to the EBIT of the company is shown.

After completing the planning for proportional product costs and net revenues (see the post From Planned Sales to Net Revenue), the data to calculate the contribution margins to cover structure costs is available.

Contribution Margins to Cover Structure Costs

The proportional cost of goods manufactured includes those planned costs that are directly caused by the product (valued bills of material and work plans). All product costs are first booked as entries in the warehouse (semi-finished or finished products) at planned proportional costs (standard costs) and are withdrawn from there at the moment of delivery to the customer. The planned fixed costs remain in the cost centers.

The example of item 101060 shows how contribution margin I is created in the plan:

CMI 101060 — Contribution margin of article/item 101060

Salespeople should not get a commission based on sales or net revenue as a component of their income. Doing so often leads to rebates of all kinds being granted in order to achieve the sales targets or to increase capacity utilization. Therefore, in the example company a contribution-based commission of 2% of the achieved CM I volume is credited.

The contribution margin I (CM I) is internationally defined as the difference between net revenue and proportional product costs (see Glossary). It is easy to see that the sum of all CM I must be sufficient to cover all fixed costs and earnings before interest and taxes (EBIT) if the result is to be in line with the objective. CM I is thus the contribution to structural cost coverage. The following illustration shows its creation:

Contribution Margins to Cover Structure Costs — The interaction between production levels, warehouse positions and Contribution margins

The following planned EBIT can be shown in the example company:

This illustration is not particularly informative. In the post “Multi-Level and Multi-Dimensional CM Accounting”, more detailed insights for the management are provided.

Cross-Industry Applicability

Before that, we consider the cross-industry applicability of this profitability analysis structure. So far, the example has been developed for a manufacturing company.

- In a pure trading company, the goods purchased are usually the goods sold. The company makes no changes to the product, that is, the bills of material and the work plans remain the same, so the purchase price corresponds to the proportional cost of goods manufactured. Small adjustments can happen if purchased goods are repackaged. All other costs are fixed costs since they are the result of the organizational and capacity structure of the trading company.
- In service companies, clear product definition is a prerequisite for the installation of an integrated planning and control system. Only the structured recording of the scope of services makes it possible to record the use of purchased services or products (bill of materials) and to describe the activities to be performed in the cost centers for a product in a measurable way (work plan). In an automotive workshop, the bill of material is of relatively great importance (spare parts, additional parts, externally commissioned paint shops). In a law office it is mainly the type of case to be processed (products) and the processing times required for this in the various departments (work plan) that are decisive, rather than the use of purchased parts or services.
- Public administration companies and, to a large extent, hospitals also know the consumption of purchased goods (parts list) and the work performed by their internal departments (work plans) for the planning and control of their cases.
- In banking institutions, the market interest rates of borrowed money define the proportional cost of the money lent in a mortgage while the work steps in the process of granting the mortgage loan correspond to the work plan and thus to the proportional manufacturing costs. The trading function comes to the fore when foreign currencies or gold (coins) are involved.

With the presentation of the planning of costs, services, and revenues as well as contribution margins for a manufacturing company, a more complex case was deliberately chosen. However, as the above references are intended to show, the presented system can be applied to almost all companies.

Proportional and Fixed Costs

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.

If the planned activity level, the planned cost amounts per cost type and the consumption per RFU are known for each cost center, cost splitting can be completely automated. Proof of this is provided in the simulation model of the book Management Control with Integrated Planning – Models and Implementation for Sustainable Coordination.

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.

Management-Relevant Cost Terms

In order to make correct cost decisions, the management accounting system must be able to present all costs in three dimensions. Because these dimensions interpenetrate each other, they can be represented with the cost cube.

Why management-relevant cost terms?

Enabling management control requires decision-relevant cost and revenue terms. Every manager is dependent on being able to identify which variables he can directly influence and therefore should also be responsible for in his area. He must be able to recognize in which time period he can change what cost and revenue parameters. Finally, he wants to be sure that only those cost items are charged to his area that can be unambiguously assigned.

This requires viewing costs in three dimensions according to their intended use and mapping them in the management accounting system:

Management-Relevant Cost Terms in the cost cube

These three dimensions interpenetrate each other, which is why they should be represented in a cube (see the cost cube in the Controller Dictionary, p. 146):

What does this mean for the design of Management Accounting systems?

Costs are to be planned by the unit whose manager is also directly responsible for them. Personnel costs and most third-party costs arise in the cost centers (except material). The same applies to depreciation. Material costs and product-related external services are incurred for the products. They are represented in bill of materials items and are therefore included in the costing of the products. The production managers are responsible for this. These costs are therefore to be planned and accounted for by cost center managers and product-responsible managers.

For all managers, it is important to know in which period of time their costs (and the procurement prices behind them) can be changed. In the case of personnel costs (they always arise in cost centers), hiring, notice periods, negotiated wages and rates for social benefit costs determine the period in which the costs can be changed. In the area of material and external service costs, order quantities and the agreed contract and delivery conditions determine the costs.

From the point of view of traceability, in Management Accounting, both planned and actual costs (or expenditures) must be assigned to the area that is directly responsible for them. The costs of the unit’s own employees are direct costs for a production cost center since each employee is permanently assigned to that cost center. For the orders processed by the cost center, they are indirect costs because an employee usually works on different orders in a given time period. The same applies to the consumption of operating supplies, external maintenance work, or depreciation. Direct costs of products are the raw materials and semi-finished products consumed (ex warehouse) and of externally procured external services. These items can be clearly assigned to a production order. The key to recording purchases and consumption in a management-oriented manner is therefore the account assignment of the documents (supplier invoices, payroll accounting, material procurement from stock).

In the third dimension, a distinction is made as to whether costs are caused directly by the units manufactured or sold (products or services) or by decisions that determine the capabilities of the organization (capacities of all types, size of the organization, training and further education or management services). The former are referred to as proportional costs, while the capability/capacity costs are mainly called fixed costs or structural costs.

Proportional costs are determined by sales and production, while fixed costs are determined exclusively by management decisions. To staff the anteroom of a member of the management board is a management decision just as much as the approval of a sales promotion campaign, the decision to convert existing production facilities, the purchase of vehicles for delivery or the introduction of an ERP system. Proportional costs are determined by production quantities, bills of material (where the planned consumption quantities are recorded), work plans (containing the planned times for the individual production steps in the cost centers) and planned purchase prices for raw materials and order-related external services. In a purely trading company, the purchase price for the product sold corresponds to the proportional costs, since nothing is changed in the product. All other costs of trading operations are structural costs.

To avoid confusion: We have replaced the term variable costs with proportional costs (see Controller Dictionary, p. 200), because in practice and science proportionality is often confused with controllability. If the activity of an employee in a production cost center is causally necessary for product creation (can be seen in the work plan), these are proportional costs. They are added with every unit produced. If the same employee has nothing to do due to a lack of orders, his wage is still paid, but becomes a fixed cost (reserved or unused capacity). How long the wage will continue to be paid despite underemployment (controllability) is a question of notice periods and the management’s decision what to do with this employee. From this it can also be concluded that everything that is not proportional becomes fixed costs.

To distinguish clearly between proportional and fixed costs is extremely important for the design of the management control system. For both operational and strategic decisions to be made, it must be known which costs are directly caused by the products and their sales and which will be the result of decisions on capacities and structures of the organization.

Capacity Requirements for Internal Tasks

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.

10 Principles for Decision Relevance

Management accounting has decision relevance when it can quantify objectives in plans, compare the results achieved with the plans, document the differences that arised and offer leverage points for improvement. In addition, it should provide support for the assessment of forecasts.

10 Principles for Decision Relevance

Implementing this uncompromising management orientation in the design of the management accounting system requires application of the following principles:

1 Work with standards:

Management means goal-oriented proceeding. This requires that all objectives be transformed into a measurable format. As far as management accounting is concerned this requirement can be met with a standard costing system. It can be applied to prices, services, cost and revenues. Standards and the standard cost system are not new. They are often described in literature and installed in practice (see Horngren, et al., 1999, p. 575 ff.).

New is the importance these methods gain in a management-oriented design of a planning and control system. A planned purchase price for a raw material determines for the plan year the expected average purchase price to be paid for raw material or supplies. For the responsible purchaser, this value is the yardstick against which he can measure the achievement of his price objectives. By displaying purchase price variances, procurement can see how well it succeeded in realizing the target prices.

For the users of an item (for example, production), the internal standard purchase price remains unchanged during the whole year. This equally applies for merchandise in the sales organization.

2 Plan and record direct costs:

A manager will rightly insist that his area of responsibility only be charged for services, consumption and revenues that he or his employees can influence directly and thus for which he should be held responsible. That includes withdrawals from inventory (raw material, semi-finished and finished goods), external purchases directly for one’s own cost center (area of responsibility), services from other cost centers (if the consumption can be determined directly by the receiver, i.e., real internal activity charging), as well as costs that can be clearly assigned to an item/product.

3 Distinguish consistently between proportional and fixed costs:

Proportional costs are those costs caused directly by the production of units, as opposed to fixed or structural costs which result from decisions by management concerning capacities or the structure of the organization. Decisions regarding fixed costs are always made by managers. Proportional costs can be clearly compared with the units produced and the sales achieved. Proportional costs are driven by quantity and product structure. Fixed costs are the result of management decisions and are the responsibility of the deciding manager.

4 Plan and record sales deductions according to source:

Bonuses and reimbursements are usually granted retrospectively based on sales achieved in a given period. Whether cash discounts were taken can only be determined after receipt of payment. All sales deduction items should be subtracted monthly from the monthly billings. This has the advantage of not overstating a company’s profits during the year. As the actual amounts of many sales deductions are not yet known at the reporting date, standard rates should be applied and deducted from sales. These standard rates should thus be used in preparing the monthly reports.

5 Always valuate stock receipts and issues with proportional standard costs:

Similar to the valuation of raw material issued to production at the planned purchase price, standard rates (based on proportional costs) should also be applied to the valuation of receipts to and issues from the semi-finished or finished goods warehouse as well as to the valuation of goods in production, WIP. This means that all production activities performed on production orders are always valued at proportional standard cost (proportional planned cost rate of the respective performing cost center). Additions to the semi-finished goods warehouse are valued at the planned proportional product cost, as are withdrawals of finished products for sale.

This principle results from the management orientation. If in a cost center the actual costs deviate from plan, the cost center manager is charged with taking corrective action so that the variances disappear in future reporting periods. He must ensure that these deviations are rectified by means of corrective measures. Recipients of his services, be they a person responsible for production orders or a cost center manager who receives internal services, cannot directly influence these variances. From a management point of view, it is appropriate that variances are always reported at the point of origin and not passed on to the purchasing or consuming units. They are only to be presented in the overall result of the operating unit. In any case, the allocation of variances to subsequent cost centers or to products is inappropriate as there is no direct causal link between the cause of the deviation and the actions of the recipients.

6 Present contribution margins after deducting proportional standard product costs:

The planned and the realized revenues (gross and net) should always be compared to the proportional standard cost of goods sold. Production managers and their cost center managers are responsible for variances on the manufacturing side; sales is responsible for the realized net revenues.

7 Revalue year-end inventories:

The application of the standard system for the calculation of proportional standard costs requires that, in the transition from the old to the new year, all inventories must be valued with the planned proportional unit cost for the new year. If, for example, an item becomes more expensive in the new year due to price increases in purchasing or due to higher proportional cost rates (e.g., higher wages), the inventories available at the end of the year are to be revalued with the new standard rates. This prevents “comparing apples to oranges” in the planned year.

This revaluation at year end is to be implemented without affecting net income. The assessment of net income for the current year is based on the standard rates for the current year, while the assessment for the following year is based on the new rate.

8 Value fixed assets at replacement value and use imputed depreciation:

It is advisable to value fixed assets at replacement value. This gives the responsible managers a more realistic feeling about the investment needed to produce and sell their products. Replacement value is estimated with the question: “How much would have to be paid today if the asset in question were bought and installed newly and what is the planned useful life of this new asset? From these specifications, one can calculate imputed depreciation for each asset and therefore also for each cost center.

Imputed depreciation is a fair guess of the cost of use of the currently invested assets and should be deducted whenpresenting the internal EBIT to management. The total of all replacement values minus the cumulated imputed depreciation roughly shows management the necessary net investment in fixed assets to run the business.

9 Do not allocate fixed costs:

Fixed cost should neither be passed on from one cost center to another nor allocated to manufactured or sold items. The amount of fixed costs is determined by the decisions of the respective cost center manager and his superiors. They are therefore responsible for these amounts.

Since there is no direct “cause-effect-relationship” between fixed cost and units produced and sold, any allocation of fixed cost to other cost centers and from there to product units is not appropriate.

The so-called “as realistic as possible causal relationship” does not actually exist. It can only be constructed with an arbitrary allocation basis. Because of this, neither full manufacturing costs nor cost-prices per unit should be calculated in accounting for management. Fixed costs are passed on as cost blocks in the step-by-step contribution margin accounting.

10 Include in reports only revenue and cost figures that can be directly influenced by a manager:

A manager should only be held responsible for what he can directly influence himself. All plans and reports about revenues and cost should be presented in a performance-related way so that the addressee recognizes the connection immediately. Items that cannot be influenced (e.g., allocations) are not to be shown. Input services from other areas should always be valued at proportional standard rates, as the influence is exerted through the service provider. Additionally, the receiver of the report should be able to derive the time-period in which he can change individual items from the report.

Insofar as external reporting requirements, local tax law, or the determination of transfer prices require the disclosure of full manufacturing costs, these calculations should be performed outside the management accounting system. External financial statements should only be shown to those managers who bear (co-)responsibility for these so that the different valuation approaches do not create confusion within the company.

Overall, the decision- and responsibility-oriented design of the management accounting system should always be structured in a way that each manager can immediately recognize for his area which items he is directly responsible for and thus has to react to if actual results do not proceed according to plan and requires corrective measures.

While these 10 principles contradict in many ways those used in common accounting practice, they are essential for developing and implementing effective management control systems. Most ERP-systems can be rearranged to reflect this management orientation without requiring a change of software.

Full product costs are always wrong!

Fixed costs can only be charged to a product unit with the help of an arbitrarily chosen allocation key.

Full product costs are always wrong!

An engineer and board member wanted us to develop a costing system that shows the profit before deduction of interest and taxes (EBIT) by product (item number). This would require calculation of the full manufacturing cost and the cost price per item number (net revenue – cost price = EBIT).

We did not accept this engagement!

Scientifically and empirically it has been shown that full production costs or even cost prices cannot serve as reliable decision-making information. Nevertheless, the methodology of the “cost distribution sheet” is still being taught at many schools and is extensively used in practice. Even for a simple trading company that only sells one single product, the inadequacy of using total cost (EBIT) per unit for decision-making is clear. While the purchase price per unit is agreed with the supplier and can be clearly assigned to the sold unit, that is not the case with other costs:

- The procurement costs (packaging, freight, insurance) depend on the quantity ordered. They are caused by the purchase order (decision), not by the individual piece.
- The costs of the purchasing department (personnel and material costs) are determined by the size of the department (decision) and only indirectly by the quantity purchased.
- Advertising and sales promotion costs are also the result of decisions on selling activities. These costs are also decided before sales are made. These cannot be related in a direct cause-effect-relationship to the quantity of units planned or actually sold.
- This also applies to infrastructure and to the costs of managerial functions.

The following example shows how the full production cost and the cost of goods sold change when planned and actual quantities or other structural costs differ (method: simple fixed cost allocation):

Full product costs are always wrong! — Changing profits per unit due to fixed cost allocation

Although the costs directly incurred by the product sold are always the same, each situation presented gives rise to a different full manufacturing cost or cost price per unit. This is due to the fact that the structural costs (fixed costs) determined by management decisions were allocated to the product unit based on sales volume.

If the example is extended to a company offering several products and possibly also producing semi-finished products, additional cost allocation keys would have to be used. This is because the parts delivered to inventory would have to bear a proportionate share of the fixed costs of procurement and production readiness (full production costs). The fixed costs of sales and marketing, of the remaining internal functions, and of overall management would have to be allocated to the units sold in order to calculate the cost of goods sold per unit. Whatever allocation factors are used to achieve these allocations is therefore always wrong. This is because all fixed costs are a result of management decisions (budget) and are only indirectly dependent on the units produced or sold.

Only the costs caused by the actual production of a product unit can be clearly assigned to a product unit. Behind these costs are the consumption of raw materials, external services, semi-finished products, and own production activities. These are determined by bills of material, workplans, and recipes (technical cause-effect chains). These are the proportional (planned) manufacturing costs. There is never a direct causal relationship between the fixed costs of the support functions and the units manufactured or sold.

In other words:

There is no such thing as a doubt-free profit per unit before interest and taxes (EBIT), because it is calculated based on arbitrarily chosen allocation factors.

There is also no such thing as “as far as possible cause-based allocation” because, due to the lack of a direct cause-and-effect chain, an allocation factor must be used anyway.

This insight must be taken into account when designing decision-relevant management accounting systems. Managers correctly argue that they should only be responsible for cost elements they can directly influence themselves.