Specialized Master's in Logistics and Transport

1erayear – Semester 2

LOGISTICS MANAGEMENT CONTROL

CHAPTER 2:

Cost calculation and analysis

Rachid DAANOUNE
Professor
Management Department
Research and Studies Laboratory in Finance and Management (LAREFAG)
11
ENCG - Tangier
 The Management Information System consists of:

general accounting
management accounting and cost analysis
budget management
reporting and dashboards

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 General accounting Cost accounting
Mandatory Facultative

Global accounting Detail accounting

Turns towards the past Turns towards the future and the present

use basic documents Use basic documents

external and internal (purchase invoices essentially internal (bulletins of
and sales, pay slips) salaries, work vouchers, vouchers of
exit...)
Analyze the charges by nature Analyze the expenses by destination

Financial, tax objectives Economic objectives

["Uses rigid and normative rules","Uses flexible and evolving rules"]

Concerning the General Directorate Concerning all the managers

Give precise information, Give quick information,

certified, formal and monetary pertinent, approached, physical and
monetary

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 Objectives of management accounting

She performs the calculation and analysis of the costs that are necessary for
forecasting, measuring, and controlling results

She provides results by product, by order, by

activity...

She provides leaders and managers with useful information for

their decisions.

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MAIN METHODS OF COST CALCULATION AND ANALYSIS

•Full cost method or homogeneous sections (Centers

of analysis)

Method of rational allocation of fixed costs

Direct costing method or variable cost

Direct cost method

Marginal cost method

Standard cost method

ABC Method (Activity Based Costing): Activity-based costs

Target costing method (target cost or objective cost)

Methods of calculating the costs of non-quality and costs

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hidden.
CLASSICAL ANALYTICAL ACCOUNTING
Classical methods
cost calculation and analysis

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 FULL COST METHOD
or Method of homogeneous sections or Method of analysis centers

Direct and indirect charges

Direct costs
These are the expenses that can be included.
immediately into a cost (Example: materials
consumed, direct labor, advertising expenses for a
product….)

Indirect costs
These are the common charges that cannot be
incorporated into the costs following calculations
intermediate calculations relate to
analysis centers (office, workshop, store...)
we then use 'distribution keys'.

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Direct charges

Affectation

Imputation
Products
Main sections

Charges
Distribution

Indirect Primary
Distribution

Secondary

Auxiliary sections

Distribution

Primary

Reciprocal services

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 FULL COST METHOD
or Method of homogeneous sections or Method of analysis centers

Distribution of Indirect Costs

Treatment of indirect costs presented in a table,

called the allocation table for indirect costs:

Primary allocation: indirect costs are

distributed among all the analysis centers;

Secondary distribution: the benefits of certain

analysis centers to other centers are evaluated and
registered.
Calculation of the unit cost of a work by center for the allocation of
charges.

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 FULL COST METHOD
or Method of homogeneous sections or Method of analysis centers
The classification of analysis centers

The operational centers: their costs are related to volume

business activity; their unit of work is physical
(worker hours, machine hours, kg purchased...). Among these centers
we distinguish:
the main centers whose costs are attributable to
purchase, production, and distribution costs: These are the
supply, production, and distribution centers;
the auxiliary centers whose activity represents
services provided to other centers (Example:
maintenance, heating...

The structure centers

These are analysis centers for which no unit
The work cannot be defined in order to measure their activity.
(Example: administration).

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 FULL COST METHOD
or Method of homogeneous sections or Method of analysis centers

The calculation of the cost of workload units of the main centers

for allocation in costs.

Cost of the unit of work = Costs of the main center / number

units of work

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 FULL COST METHOD
or Method of homogeneous sections or Method of analytical centers

Calculation of Analytical Results

by product, by function or by activities

Analytical result = Sales - cost of goods sold

Reconciliation of the overall result of accounting

analysis of the result of general accounting:

The overall result of the analytical accounting, which is the

sum of analytical results, is corrected for
accounting treatment differences, and must be equal to the
result of the general accounting.

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METHOD OF RATIONAL ALLOCATION OF FIXED COSTS

Variable charges, fixed charges

The dead loads (or fixed loads): These are the loads
who are stable regardless of the level of activity of
the company

Operating (or variable) costs: These are the

charges that vary with the volume of activity of
the company.

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METHOD OF RATIONAL ALLOCATION OF FIXED COSTS

the method of rational allocation of fixed costs has

to neutralize the effect of variations in activity
on the cost and measuring the cost of under-activity or the
gain from overactivity.

Calculation of the rational allocation coefficient of charges

fixes.

Imputation ratio coefficient = actual activity /

normal activity

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 VARIABLE COST METHOD
(or Direct costing)

Variable cost is a partial cost.

The variable cost method involves attributing costs only to

that the only variable costs in order to determine
very useful margins for analysis and decision-making in control
of management.

This method specifically allows for calculating the threshold of

profitability.

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 Direct Costing Simple

Product 1 Product 2 Product 3 TOTAL

Sales (Revenue) CA1 CA2 CA3 CA1+CA2+CA3

Variable charges (VC) CV1 CV2 CV3 CV1+CV2+CV3

Margin on variable cost M1 M2 M3 M1+M2+M3

Fixed charges (FC) -CF (in full)

Result (in the method of

Overall result
variable costs

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The break-even point

The variable cost method allows for the determination of

break-even point (or critical turnover) which is
a sales amount (revenue) for which the result is
null.

Calculation of the break-even point (BEP):

SR = (CF) / (%m/cv)
CF: Fixed charges
Margin on variable cost: m/cv
Variable cost margin rate: %m/cv

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 Evolved Direct Costing

Charges retained by product:

variable costs and fixed costs
(whether direct or indirect)

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 Evolved Direct Costing
Product 1 Product 2 Product 3 TOTAL

Amount of sales (Revenue) CA1 CA2 CA3 CA1+CA2+CA3

Variable charges (VC) CV1 CV2 CV3 CV1 + CV2 + CV3

Contribution margin M1 M2 M3 M1+M2+M3

Charges
Specific fixed charges (SFCs) CFs1 CFs2 CFs3
specific fixes

Ms1+Ms2+Ms3
Margin on specific cost Ms1 Ms2 Ms3
Global margin on
fixed costs

Fixed charges
Fixed municipal charges
communes

Result (in the method of

Overall result
variable costs

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 DIRECT COST METHOD

This method allows for calculating margins by product.

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 Direct Cost Method

Product 1 Product 2 Product 3 TOTAL

Sales amount (revenue) CA1 CA2 CA3 CA1+CA2+CA3

Direct charges (DC) CD1 CD2 CD3 CD1+CD2+CD3

Margin on direct cost M1 M2 M3 M1+M2+M3

Indirect charges (IC) CI (in full)

Global Result Result

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 MARGINAL COST METHOD

The marginal cost (or differential cost) is "the difference between the total
current charges necessary for a given production and the whole
of those that are necessary for this same increased or decreased production
of a unit.
This unit can be a manufactured item, a batch of products, a service
of service, ...
The marginal cost is:
the cost of the last unit produced,
the increase in cost due to an increase in production.
Utility of marginal cost:
It allows for answering certain questions:
Is it profitable?
to increase production?
to accept an additional order?
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- to decrease the level of activity of the company?
 PRE-SET COST METHOD

The predetermined cost method allows for the setting of

objective or standard costs;

It allows, by the difference between actual costs and the

established costs, to define variances, which are
decomposed in order to analyze their causes.

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 STOCK VALUATION METHODS

There are several methods to value inventory outputs including

two are recommended by the general accounting plan:
the method of the weighted average cost per unit of the period (WACPU),
and the First In First Out (FIFO) method or method of
the depletion of stocks.
Other methods exist:
CUMP after each entry;
· DEPS (Last In First Out) or LIFO (Last In First Out);
Replacement cost.

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CONTRIBUTIONS AND LIMITS OF THE METHODS
CLASSIC CALCULATIONS
AND COST ANALYSIS
FOR MANAGEMENT CONTROL

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The main contributions of the method of analysis centers
for Management Control:
It allows to calculate the full cost, that is to say the cost of
comes back, what is essential to calculate the results.
analytical, but also very useful for preparing quotes or stopping
the selling prices
It allows for the analysis of costs by responsibility center.
analysis essential for Management Control;
It adapts very well to divisional structures, which are
still common in organizations, which often allows for
implement Analytical Accounting without reorganization
deeply the company.

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 The shortcomings of the analysis center method:
This method is often criticized for the arbitrariness of its procedures.
allocation of indirect costs and their allocation. Indeed, it is
difficult to convince of the validity of the chosen distribution keys;

The method of homogeneous sections does not take into account the variations.
of activity, which can result in a variation of the cost price due to
unlike the absorption of structural costs.

It's a relatively complex method in its implementation.

since it is a matter of adapting the cost calculation network to the organization of
the company.

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 The main contributions of the imputation method
rational in Management Control:
It highlights the cost of the sub-activity or the benefit of
overactivity.

It stabilizes the complete unit costs under management conditions.

unchanged;

It makes the value of the stock independent of the level of activity. At this
In this regard, rational allocation is recommended by the accounting plan.
notably during periods of underactivity;

It eliminates the risk of error from sales managers for

the establishment of quotes, particularly in cases of underactivity due to the
mévente.

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The shortcomings of the rational imputation method:

The method of rational imputation is not strictly speaking

a full-fledged Analytical Accounting method. This is a
special treatment reserved for fixed charges.
In this regard, all criticisms directed at full cost methods,
notably in the method of homogeneous sections, can also be
held here, except for that relating to the variability of the cost price
because of the activity.

The method suffers from the difficulty of objectively determining a

normal activity, particularly for service provider centers.

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 The main contributions of the direct costing method
for Management Control:
The direct costing method is considered more objective and better.
tailored to the needs of Management Control in companies with a
structure by product or product line.
It is particularly used in performance assessment of
product managers and product profitability.

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Contributions of the direct costing method for Control
of Management:

Easier prediction of the outcome: As long as one can

make a forecast of the activity, the variable costs in
derive, and therefore the margins and the results. The calculations of
simulations are also easier to carry out;

- Calculation of the current and projected break-even point. One can

determine the breakeven point.

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Also, thanks to the margins on specific costs, the method allows
also to determine the specific breakeven point for each product;

The method avoids the arbitrary allocation of indirect costs;

The method also helps to maximize the company's results by

pushing the products with the highest margins and abandoning
possibly those who have negative margins on variable costs.

It is also a very effective short-term management tool.

allowing to play with the selling price according to the opportunities and
market constraints.

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The shortcomings of the direct costing method:

The main criticism that can be made of the direct costing method
whether it is a partial cost calculation method, not allowing to
determine the cost price. Therefore, one cannot refer to this
method to determine the selling price, or prepare a quote.

Moreover, the use of this method generally results in a

underestimation of stocks. It is moreover not recognized by the
legislator for the evaluation of inventories in the tax declaration of
the company.

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 EVOLUTION OF ACCOUNTING
ANALYTICAL AND MANAGEMENT

NEW METHODS OF MASTERY OF

COSTS AND PERFORMANCE MANAGEMENT
ABC/ABM Method
Activity Based Costing/Activity Based Management
Activity-based costs

Target Costing Method or Target Cost

or Objective cost
Methods of calculating non-costs
quality and hidden costs.
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Management Accounting
Accounting
based on activities
(ABC Method)

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ABC Method (Activity Based Costing) or Activity Based Costs
NEW CONTEXT: NEW METHODS OF COST ANALYSIS

Evolution of production methods, inventory management, of the

technology, market conditions, and the multiplication of
products;
Evolution of business organization methods
↓

Modification of the cost structure

Increase in indirect costs: computerization, actions
marketing, product and quality control, after-sales service,...
Reduction of direct costs: Direct labor,...)
↓
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New tools and methods for business management
 Modification of the cost structure
↓
New tools and methods for business management
ABC: New method of calculating and analyzing costs

CHARACTERISTICS OF THE ABC METHOD

The ABC method is centered on the cost of activities;

The ABC method is based on a cross-sectional analysis (and not
functional/ costs by functions) of the different processes of
The company is seen as a network of processes
transverse
The ABC method helps to understand the origin of costs.
causes of costs.
The ABC method distinguishes three levels of analysis:
The elementary level of the task;
The intermediate level of the activity; 37
The upper level of the process
 The task is the first level in the description of the work.
It does not lead to a cost calculation.
Unloading a truck
Write a letter
["Planing","Routing","Drilling"]

Sort accounting documents

The activity is a set of ordered and interconnected tasks.
for a given purpose.
EXAMPLE:
-The activity of receiving deliveries includes all the
next tasks (four tasks): Unloading the truck, the
comparison between the delivery note and the purchase order, the
control of the quantity and quality of received materials, the
Arrangement of materials in the store. 38
The machining activity includes all of the following tasks
(trois tâches) : Le fraisage, le rabotage et le perçage.
The accounting activity includes all tasks
following (five tasks): Collecting accounting documents, sorting them,
the transfer of entries, the consultation of accounts, the editing of
balances.
The process
The series of activities aimed at a common goal form a
process involving several divisions, workshops, and services.
Cross-cutting vision of the company (The company is seen as a
transversal process network
Example: Order execution process

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Task 1 Task 2 Task 1 Task 2 Task 1 Tâche 2 Tâche 3
Unload Ranger Compare Control of Cutting Rounding Assembling

the goods quantity-quality

Handling activity Control activity Machining activity

Order execution process

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 MAIN OBJECTIVES OF THE ABC METHOD:
Identify for each product the activities it consumes.
Calculate the cost of activities, the cost of processes, the cost of
products to improve decision making.
Measure the consequences of a decision related to a product (the
subcontracting, for example, on the company's activities.
Determine more relevant costs of goods for the products (than
those calculated by classical methods) thanks to a more in-depth analysis
deepened the origins or causes of the costs.
Explain the consumption of resources (indirect costs).
The analysis of indirect costs is more detailed than in the methods
classics of full cost.
Improve decision-making and business performance.
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 COST CALCULATION BY THE ABC METHOD:
The calculation of the cost price of products using the ABC method is
organized as follows:
The charges are consumed by The activities are consumed by The products
(resources)

Same treatment of direct costs as that of the method

classical (Method of analytical centers); on the other hand, the processing of
Indirect charges differ in several points.
Before their allocation to the cost of products, indirect costs are
distributed at three levels:
-by work center;
-per activity;
By gathering center: Center that groups activities having
the same cost driver (factor explaining the variation of the cost of42
(activity) Calculation of the cost of the drivers.
Examples:
ACTIVITIES INDUCTORS
Order management Number of orders
Research Number of models

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REUNIFICATION CENTER
Les activités de facturation, livraison, mise en service, peuvent avoir
as a common inducer, the number of customer orders. We
group together in the same center.

STAGES:

Divide the company into work centers;

-Break down each work center into activities and allocate them
indirect charges to activities;
Search for the inducer for each activity (measurement means of
the activity or factor explaining the cause of the variation in cost of
the activity;
Gather activities in regrouping centers
same inductor;
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Calculate the unit cost for each grouping center.45de
the inductor
Unit cost of the inducer = Costs allocated to the regrouping center
Inductor volume

Assign the cost of products, or any cost object, the cost of 46

inductors they consume.
 METHOD
ACTIVITY BASED MANAGEMENT (ABM)
MANAGEMENT BY ACTIVITIES

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From ABC to ABM

Reminder: The ABC method consists of four steps:

The identification of the company's activities;

The allocation of resources (costs) to activities;
The definition of cost drivers of groups
of activities;
The allocation of activity costs to products by
through the intermediaries of the inductors.

Activity-based management (or activity management) or

ABM refers to the use of information for management.
produced by the first three steps of the ABC method.

ABM considers the company as a network of activities

organized into processes.
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PERFORMANCE AS VALUE-COST COUPLE

The purpose of processes is to produce goods and services.

that satisfy customers. The processes create
the value for customers. Value is defined here as the
price that customers are willing to pay to acquire the
goods and services produced.

But the activities that make up the processes have a cost.

who is measured by the ABC method.

The action on processes and activities aims to increase the

value/cost ratio as well through value
that by the limitation of cost.

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50
TYPES OF ACTIVITIES
Value-added activities: Activities that customers
perceive as increasing the usefulness of products.
clients are willing to pay a higher price for the
buy. High but controlled costs can be accepted
for these preferred activities.
Most production activities add value
to the products.

Non-value-added activities: Activities that do not

does not contribute to the perceived value by the customer. The reduction or
the "elimination" of these activities would reduce the
costs without diminishing the market value or the quality of
products.
Since these activities are of no added value, they must be
reduce as much as possible by acting on their
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causes.
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ABM METHOD APPROACH
Performance management within the framework of the method
ABM aims to continuously improve the management of activities and
processes by reducing costs and creating
value.
The degree of performance depends on both the cost of
activities and their contribution to value creation of the
product or service appreciated in relation to the
customer satisfaction.
We distinguish several stages:
Activity analysis:
-Identify/Identify value-creating activities and those
non-creating value;
Eliminate non-value-creating activities after having
identify the causes of their existence;
Modify the organization accordingly; 53
Manage value-creating activities:

Seek to reduce the costs of creative activities

value by studying their interaction while improving the
customer satisfaction level and the advantage
competitive.

Evaluate the performance of activities and processes:

Measuring the contribution of each activity to the achievement

set objectives.
The performance of activities and processes as well as the
the relevance of strategic choices can be measured by
the help of tools such as dashboards and reporting

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ABM TOOLS

Re-engineering (or reconfiguration of processes):

The aim of re-engineering is to improve processes.

créateurs de valeur en visant la simplification, la réduction
of costs and deadlines, the improvement of quality and the
better customer satisfaction and reduce activities
without added value.

Benchmarking:

Benchmarking involves studying, comparing, and evolving the

business processes with those of companies from
references considered as the best.

Benchmarking can also be internal by comparing the 55

practices in different sites of the company.
 Target costing method or Target cost
The 'Target Costing' method involves determining for a product
any 'objective cost' not to be exceeded due to the imposed price by
the market and the profit margin expected and defined by the company.
It rests on the following relationship:
Target cost = Selling price - Profit margin
This method was developed in Japan in the 1980s in the industry.
automobile.
When the estimated cost beforehand or predetermined cost is higher than the "target cost",
the consequences can be considered:
· either a modification of the product or its composition (modification of an order
technique)
either changes in the supply conditions and
manufacturing (cost reduction)

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