Cost Controlling

Syllabus

Thematic definition of lectures: 1. Controlling. Cost Controlling. Costs - Meaning and Classification. Methods of Calculating Fixed Costs. Student will learn the theoretical definition of controlling and its development, tasks and functions, dimensions of controlling: strategic and operational controlling. Breakdown of operational controlling: financial, investment (project) and internal. Internal controlling: cost controlling and performance controlling. Internal controlling in the narrower and broader sense. Criteria for determining cost elements from the controlling point of view. Partial parts of cost controlling. Costs - value expression of production factors consumption. Nature and origin of costs. Cost classification. Breakdown of costs according to cost types, responsibilities for their origin, calculation formula, relation to the production (transformation) process, purpose of costs, dependence of costs on changes in production volume. Student will learn to construct a linear cost model. Methods of fixed costs calculation (mathematical and statistical, arithmetic method, method of two periods). Basic indicators for evaluating the cost level (differential and ratio indicators). 2. Calculation System. Types of Cost Calculations. Topics that form the basis of calculations and calculation system implementation: basic attributes of cost calculations, characteristics of cost calculations, calculation system, creation of calculation system, related documentation, basis of allocation and the process of cost allocation. We will explain the types of cost calculations (in terms of time and functions in the management process, method of compilation, cost structure, production capacity utilization, etc.). Costing deals with the calculation of costs in relation to cost drivers. The most frequently used forms of calculations are calculations focused on finding or determining the costs of a specific output. The object of calculation is a calculation unit that must be precisely defined. The rules and procedures for determining costs in relation to specific output are determined by the method of calculation. Understanding the basic classification of costs using the calculation sheet. Student will learn the difference between general and specific cost categories. 3. Calculation Methods: Differential, Joint Production, Surcharche (Mark-Up) The purpose of this lecture is to make the student aware of the importance of the proper functioning of the calculation system in company. The calculation system has to be based on specific production, technological and organizational conditions in companies and meet the ideas and needs of the company's top management and employees at lower levels. The created calculation system must also have links to other management subsystems (controlling, accounting, budgeting, operational records, statistics) and thus form a comprehensive system enabling the quality management. Student will learn to recognize different calculation techniques and understand the conditions under which they are being used. Methods: differential calculation, mark-up (additional charge) calculation. Student will also learn how to choose a proper allocation basis. 4. Budgets and Budgeting. Types and Forms of Budgets. This lecture is focused on defining the concept of budgeting and identifying relevant budgeting processes. We will define the concept of budget and its links to business processes. We will introduce the tasks of budgeting and types of budgets. Student will understand the connections between the budget and the calculation system. He will gain an overview of all the relevant aspects of budgeting. He will also learn to adapt budgeting procedures to specific business conditions. 5. Budgeting Methods. Annual Budgets. This lecture interprets the importance of the budget creation schedule and presents the content of its stages. It explains a set of organized methods and procedures that aim to determine short-term economic tasks of the company. It will also explain the links in the system of annual budgets, focusing on the master budget and its components: the budgeted balance sheet, budget income statemen, and the cash budget. Student will gain an overview of possible sources of information and materials for creating a budget. He will understand the process and steps of its preparation, including its limitations. 6. Internal Budgets. Budgetary Control. The lecture points out the importance of internal budgets in managing departments or partial activities of the company. We will discuss the importance of controlling the implementation of budgets and approaches to its application. Student will learn the principles of budgeting. Specific attention is being paid to the methods of budgeting overheads, esp. setting overhead standards, budgeting overheads based on their past development, limiting overheads, and recalculating budgets according to a reasoned estimate of their future development. 7. Marginal Costing. Comparison of full cost calculation and marginal costing according to the designation of calculation, cost object, content of the calculation, range of cost items used, and the cost structure (calculation sheet). Student will learn to recognize the simple marginal costing calculation and the multi-level (two or more levels) calculation of variable costs. He will also learn to properly choose which method to use. The role of marginal costing in supporting qualified managerial decisions. Economic calculations using the contribution margin, its nature and significance. Advantages, disadvantages, uses and limitations of marginal costing. Student will learn different calculation procedures using the contribution margin (Cost-Volume-Profit analysis, Break-Even-Point, ets.). 8. Differential Methods. Standard Costs and Variances. This lecture explains the importance of differential methods of cost calculation. It presents the main principles of differential methods application. Student will gain knowledge about the standard method of cost calculation. We will deal with issues related to standard costs and deviations from the standards. Students will learn procedures how to use the standard method from long-term and short-term perspective, and how to estimate the value of work in progress. They will understand the calculation of standard costs and variances. 9. Process Costing and Job-Order Costing. This lecture explains the essence of costing methods in different types of production, esp. Unit Costing, Process Costing and Job-Order Costing, similarities and differences between Process Costing and Job-Order Costing, cost flows in Process Costing (processing departments, the flow of materials, labor, and overhead costs), operations costing, work in progress costs and final product costs. Students will learn that the specific process of product creation highly affects the costing process. For this reason, special calculation sheets and procedures are being presented and applied. Students will also learn when and how to apply the Job-Order Costing, incl. measuring direct materials and direct labor cost, preparing job cost sheet, computing and using predetermined overhead rate, and computing unit cost. 10. Activity Based Costing Students will learn reasons for the origin and development of the ABC method, the essence of the ABC method and its basic characteristics. Cost calculation using Activity Based Costing method. Student will also learn the classification of costs, which is applied in the ABC method. Students will learn to distinguish the hierarchy of processes and activities, and interrelations between activities. Students will receive information on how the cost allocation process takes place (simple model). They will learn the importance of a procedural approach to calculations, comparison of the traditional calculation procedure and ABC method. We will explain the methodical procedure of ABC, the form and content of the calculation sheet, the comparison towards a traditional approach. Students will learn the relationship between Activity Based Budgeting (ABB) and Activity Based Costing (ABC). 11. Costs and Time Flow. Target Costing. Product-Life-Cycle Costing. Structuring Costs in Different Stages of Life-Cycle. Primary aim of this lecture is to explain the philosophy and the calculation of target costs and life cycle costs. Students will learn the essential principles of Target Costing. They will learn the process of setting target costs, benefits and limitations of this method, and possibilities of using it to reduce future costs. Students will also gain knowledge about the Product-Life-Cycle Costing, and factors affecting product’s life cycle costs. For this purpose, students will also learn to deal with the time value of money, the cost of capital and the present value of future value stream. Student will also get familiar with predicting the future level of life cycle costs of a new product, using forecasting models. At the same time, students will learn how to optimize the structure of the company's costs according the current and future stage of company’s lifecycle. 12. Performance Measurement in Decentralized Organizations Student will learn the concept, principles, advantages and disadvantages of a decentralized organization and responsibility centers: Cost center, Profit center and Investment center. Student will also learn how to evaluate Investment Center performance using esp. Return on Investment (ROI) and its disaggregation, Residual Income, Economic Value Added (EVA), and will learn the possibilities of application, advantages and disadvantages of these methods. At the same time, student will learn different methods of measuring operational performance, esp. the Delivery Cycle Time, Throughput (Manufacturing Cycle) Time, and Manufacturing Cycle Efficiency (MCE). Student will learn to divide the delivery and manufacturing cycle time into value-added and non-value-added time. Furthermore, student will get familiar with the Balance Scorecard method, the possibilities of its use in the context of measuring the performance of decentralized organizations and its links to corporate strategy. 13. Valuation of Company’s Output from the Costing Perspective. Internal Pricing. Relations Between Cost Controlling Tools. This lecture identifies the basis for valuing business output from costing perspective. It clarifies the importance of internal pricing in the context of the open cycle of economic resources used within departments. It defines and characterizes internal pricing as a tool that allows to close this cycle of resources and to determine the result of its management. Student will gain knowledge about types and forms of internal prices and the principles of their quantification. Student will learn to identify and characterize the links between various tools of cost controlling, esp. budgets, accounting, provisional and final calculations, and the financial plan. Thematic definition of exercises: 1. Introduction, conditions for passing the course. Cost controlling. Business costs. Basic cost indicators and cost calculations. The introductory exercise is focused on getting students familiar with the conditions for completing the course, information about the required literature - textbook, the obligation to attend seminars. Students will be presented the conditions and process of attending and passing the midterm exam. Exercise: a) knowledge of theoretical concepts (content and meaning) related to the topic of the current exercise, b) economic calculations and their interpretation (using the exercise book as a workbook with pre-printed assignments and tables to calculate the results), c) discussing results, d) the most common errors and biases, e) practical application of calculations, the compilation of budgets and calculations, f) case study and other activities in accordance to the content of the exercise. Students usually work together in teams. Students present their knowledge of the theoretical basis of controlling, company costs, basic cost indicators and their interpretation. Practical application of computing and interpreting indicators. 2. Nature and the classification of costs. Fixed costs. Methods of calculating fixed costs. Break-Even-Point. Students present their knowledge of business cost theory. They are able to determine the difference between different kinds of company's costs and use the appropriate classification of costs to prepare the cost calculation and budget. They know how to define fixed costs, and are able to apply different methods of fixed costs calculation. They are also able to critically assess the pros and cons of each method. They know the concept of Breal-Even-Point and, based on its calculation, are able to make qualified decisions on price, variable costs, profit and production volume. They understand the consequences of the costs degression and the payment of fixed costs. 3. Calculation system, calculation methods. Calculation by simple division and division by ratios. Cost calculation in joint production. To complete this exercise, students must know the calculation system, calculation methods and conditions for its use and choosing calculation method depending on the nature of the product and the conditions under which this product is being created. The above is important for the correct choice of calculation method. Students, in the practical part of the exercise, start with the simplest method of division and continue with the method of division by ratios. During the exercise, they get acquainted with variants of the method of adding costs by dividing by ratios. Students will explain the essence of the calculation method in joint production, they can explain the concept of joint production and also know the variants of this method. This is followed by calculations using the method of cost calculation in joint production. Comparison of calculation results when choosing different factors (price, volume, internal price) for costing. 4. Surcharge calculation. Theoretical knowledge of surcharge calculation, conditions for applying this method. Students are able to explain the principles for choosing an allocation base and are able to justify their decision. They know the difference between the summary method of calculating indirect costs and differentiated surcharge calculation. They correctly quantify the volume of the allocation base, the calculation surcharge and the calculation rate. They can identify, from the assignment, the origin of costs and the cost driver. They will compile the planned calculation and the resulting calculation in the correct way. The results will be compare and explain the probable causes of deviations. Students are able to check the correctness of their calculations. 5. Budgets and budgeting. Types and forms of budgets. Budgeting methods. Annual budgets. Students can explain the definition of budget and budgeting on a specific example. They will be able to justify the choice of the type and form of the budget with regard to specific company’s needs. They are able to identify the necessary documents that will become the basis for budgeting. They are able to apply different budgeting methods. They know the annual budget, they are able to describe its components and to compile the budget result, including its components. 6. Internal Budgets. Budgetary Control. Students know the problematic areas of creating internal budgets and can design procedures for their creation. They know how to use a variator both for the breakdown of costs into variable and fixed components and also for the compilation of the internal budget. They can design the structure of a flexible budget according to the needs of the company and the available data. They are able to compile a flexible budget and assess the impact of production capacity on the company’s profitability. They can use a flexible budget to control the budget and actual data captured in accounting and present conclusions to increase efficiency and effectiveness of company’s operations. 7. Marginal Costing. Characteristics of marginal costing. Students know the essential principles of this calculation method, they are able to identify variable and fixed costs in connection with internal departments (centers), products, product categories, customers, or sales channels. They also know how to identify the production capacity of a company (centers). Based on calculations, they know how to determine the contribution margin of different products, product categories and customers. They are able to determine critical production volumes, profitability, production capacity utilization and production program optimization. They are also able to use the classification of direct costs and overhead costs to calculate the above. 8. Differential Methods. Standard Costs and Variances. Students are able to identify advantages and limitations of differential calculation methods. They are able to characterize the concepts of basic calculations, operative calculations, final calculations, they do know the principle of these calculations, as well as the links between them. They are able to apply the standard costs and standard costing method to estimate the value of costs at the level of basic, operational and final calculation. For a selected cost item, they can use the standard costing method to calculate the cost per unit of output, the actual cost of production and the value of work in progress. They are able to use the knowledge of standard costing to identify differences between this method and other methods of costing. 9. Process Costing and Job-Order Costing. The theoretical knowledge about Process Costing and Job-Order-Costing gained during lectures is being practically applied using some exercises and case studies. Students prepare their own cost calculations, interpret, and present their results, discuss the factors affecting those results. Students are able to explain differences between these two methods and know exactly which method to apply. Using these methods, students are able to determine the cost of final production, but also to estimate the cost of the work in progress. They are able to carefully choose and use the allocation basis to allocate overhead costs to the cost unit. 10. Activity Based Costing. During exercises, students use and present their knowledge of ABC method. They know the specific terminology and conditions for its use. They are able to explain the differences in the calculation procedure when applying the ABC method, compared to other methods. They are able to identify and fully understand the nature of costs entering the production process. They are able to identify activities and sub-activities related to different costs, scope of activities, etc. Based on this knowledge and skills, they are able to apply calculation procedures. ABC case study is being presented and solved. 11. Target Costing and Life-Cycle Costing. Students know the difference between traditional calculation procedures and modern approaches to cost management (Target Costing and Life-Cycle Costing). They prepare calculations to determine the target costs level and explain the factors affecting these costs. Students are able to explain the course of costs during the product life cycle. They identify various stages of product’s life cycle and factors affecting costs at this stage. Students are able to take into account the time value of money, estimate the cost of capital and the present value of future value streams. Students are presented with a case study focused on forecasting the future level of costs, their present value, effects of changes in product price and costs level, and the impact of fixed costs and R&D costs. 12. Performance Measurement in Decentralized Organizations. Midterm exam. Students attend the midterm exam test. They are reminded of the conditions for passing this course, the dates for the final exam are being set. The second part of this seminar is devoted to solving tasks focused on the use of methods of measuring performance, esp. ROI and its disaggregation, Residual Income, Economic Value Added (EVA), Delivery Cycle Time, Manufacturing Cycle Time and Manufacturing Cycle Efficiency (MCE). 13. Valuation of Company’s Output from the Costing Perspective. Internal Pricing. Relations Between Cost Controlling Tools. Students are able to calculate the value of company’s output using cost-based approach. Students are presenting their knowledge of various forms of internal prices. They are able to calculate internal prices using available data. They are able to describe the links between various cost controlling tools that have occurred in previous exercises. They are able to examine the links between the preliminary and final calculation and to quantify the absolute and relative deviations, followed by an analysis of their impact.