ACC 403

Cost Accounting

Tutorials with solutions

Prof. Dr. Jannis Bischof

University of Mannheim

FSS 2023

The tutorial questions are partly based on:

- Bhimani, A., C.T. Horngren, S.M. Datar and M.V. Rajan (2018): Management and Cost Accounting,
7th edition, Harlow / UK: Pearson Education.
- Datar, S. M., Rajan, M. (2021): Horngren’s Cost Accounting: A Managerial Emphasis. 17th edition
(global edition), Harlow / UK: Pearson Education.

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 1

 Session 1

Question 1

The bike producer RaceBike produces its high-end bicycle seats in-house. For the production of 98 bicycle
seats, the following costs occurred:

- Foam material: 100 kg at 1 €/kg

- Leather: 5 rolls at 250 €/roll
- Special aluminium: 200 kg at 2,000 €/ton
- Screw kits: 100 pieces at 0.80 €/piece
- Salary costs: 10,000 €
- Machine depreciation: 300 €
- Other fixed costs: 800 €

Please calculate the total costs and the costs per unit for the production of the bicycle seats (round to the
second decimal place).

Solution:

Total costs:

Foam material (€) 100

Leather (€) 1,250
Special aluminium (€) 400
Screw kits (€) 80
Salary costs (€) 10,000
Machine depreciation (€) 300
Other fixed costs (€) 800
Total costs 12,930 €

Costs per unit: 12,930 € / 98 seats = 131.94 €/seat

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 2

Question 2
Bill Clinton is a well-known politician. Ericsson wants Clinton to be the speaker at their upcoming confer-
ence. Clinton’s agent offers three possible fee arrangements:

- 700,000 € fee
- 500 € per person and a 50,000 € fixed fee
- 1,000 € per person

Each attendee will be charged a 900 € fee for attending the conference.

a) What is the fixed cost and variable cost for hiring Bill Clinton under each alternative scenario?

b) Which option would you choose to minimize total costs if a) 500 people attend, b) 1,000 people attend,
and c) 2,000 people attend? Please calculate the total costs and unit costs per seminar attendee for
each scenario.

Solution:

a)

Fixed costs Variable costs

Scenario 1 700,000 € -
Scenario 2 50,000 € 500 € per person
Scenario 3 - 1,000 € per person

b)

500 people 1,000 people 2,000 people

Scenario 1
Total Costs 700,000 € 700,000 € 700,000 €
Unit costs 1,400 €/attendee 700 €/attendee 350 €/attendee
Scenario 2
Total costs 300,000 € 550,000 € 1,050,000 €
Unit costs 600 €/attendee 550 €/attendee 525 €/attendee
Scenario 3
Total costs 500,000 € 1,000,000 € 2,000,000 €
Unit costs 1,000 €/attendee 1,000 €/attendee 1,000 €/attendee

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 3

Question 3

The measure operating leverage summarizes the risk-return tradeoff across alternative cost structures. It
describes the effects that fixed costs have on changes in operating profit as changes occur in units sold
and hence in the contribution margin.
Firms with a relatively large share of fixed costs have high operating leverage and firms with a relatively
low share of fixed costs have low operating leverage.

a) Each firm sells 40 units. Please calculate the degree of operating leverage for the following three
firms.

Firm A Firm B Firm C

Sales price per unit (€) 100 100 100
Variable costs per unit (€) 20 50 70
Total fixed costs (€) 2,000 800 0

b) Assume that variable costs follow a linear cost function with units sold being the cost driver.
Please compute the absolute and relative changes in the total contribution margin and in the total
operating profit for (i) a sales increase of 50% and (ii) a sales decrease of 25% (compared to task
a).
c) Regarding the results of b), please elaborate on the risk-return-implication of cost structures.

Solution:

a)
Firm A Firm B Firm C
Number of units sold 40 40 40
Contribution margin per unit (€) 100-20 = 80 100-50 = 50 100-70 = 30
Total contribution margin (€) 80 * 40 = 3,200 50 * 40 = 2,000 30 * 40 = 1,200
Total operating profit (€) 3,200-2,000 = 2,000-800 = 1,200 – 0 =
1,200 1,200 1,200
Degree of operating leverage 3,200/ 1,200 = 2,000/ 1,200 = 1,200/ 1,200 =
2.67 1.67 1.00

 Firm A has the highest degree of operating leverage and hence, the highest share of fixed costs.
 Firm C has the lowest degree of operating leverage and hence, the lowest share of fixed costs.

b) i) Sales (number of units sold) increase by 50%  40 * 1.5 = 60

Firm A Firm B Firm C

Number of units sold 60 60 60
Contribution margin per unit (€) 100-20 = 80 100-50 = 50 100-70 = 30
Total contribution margin (€) 80*60 = 50*60= 30*60=
4,800 3,000 1,800
Absolute change 4,800-3,200 = 3,000-2,000 = 1,800-1,200 =
1,600 1,000 600

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 4

 Relative change 1,600/3,200 = 0.5 1,000/2,000 = 600/1,200 = 0.5
 + 50% 0.5  + 50%  + 50%
Total operating profit 4,800-2,000 = 3,000-800= 1,800-0= 1,800
2,800 2,200
Absolute change 2,800-1,200= 2,200-1,200= 1,800-1,200=
1,600 1,000 600
Relative change 1,600/1,200 = 1,000/1,200 = 600/1,200 =
133.33% 83.33% 50%

o Contribution margin increases by 50% for each firm.

o Operating profit increases for firm A by 133.33% to €2,800, for firm B by 83.33% to
€2,200, and for firm C by 50% to €1,800.

ii) Sales (number of units sold) decrease by 25%  40 * (1-0.25) = 30

Firm A Firm B Firm C

Number of units sold 30 30 30
Contribution margin per unit (€) 100-20 = 80 100-50 = 50 100-70 = 30
Total contribution margin (€) 80*30 = 50*30= 30*30=
2,400 1,500 900
Absolute change 2,400-3,200 = 1,500-2,000 = 900-1,200 =
-800 -500 -300
Relative change -800/3,200 = -0.25 -500/2,000 = -300/1,200 =
 -25% -0.25  -25% -0.25  - 25%
Total operating profit 2,400-2,000 = 400 1,500-800= 700 900-0=
900
Absolute change 400-1,200= -800 700-1,200= -500 900-1,200= -300
Relative change -800/1,200 = -500/1,200 = -300/1,200 =
-66.67% -41.67% -25%

o Contribution margin decreases by 25% for each firm.

o Operating profit decreases for firm A by 66.67% to €400, for firm B by 41.67% to €700,
and for firm C by 25% to €900.

c) Risk-return implications of cost structure:

As the example of firm A shows, a high operating leverage (i.e., high proportion of fixed costs)
means that sales increases lead to relatively high changes in operating profit (+133.33%) relative
to firm C (+50%) which has an operating leverage of 1, i.e., no fixed costs at all.
However, this upward potential implies a downside risk. Whereas firm C loses only 25% of oper-
ating profit in a scenario of decreasing sales, firm A’s operating profit is cut by 66.67%, almost
three times as much as firm C’s relative profit change.
Hence, high fixed costs may lead to high profits, but higher returns come with higher risks and
vice versa.

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 5

Question 4
Car Rent GmbH operates car rental agencies at over 30 airports. Customers can choose from one of the
three contract options to rent a car for one day or less:

- Contract 1: 50 € for the day

- Contract 2: 30 € for the day plus 0.20 € per km driven
- Contract 3: 1.00 € per km driven

a) Please present separate plots for each of the contracts, presenting the costs on the vertical axis and
the km driven on the horizontal axis. Distinguish between total costs and unit costs.

b) Describe each contract as a linear cost function of the form y = a + b*X.

c) Describe each contract as a variable, fixed, or mixed cost function.

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 6

Solution:

a)
Total costs

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 7

Unit costs

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 8

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 9
b)
Contract 1: y = 50 €
Contract 2: y = 30 € + 0.20 € x X
Contract 2: y = 1 € x X
Where X is the number of kilometers driven in the day

c)
Contract Cost function
1 Fixed
2 Mixed
3 Variable

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 10

Question 5
The Cost Accountant of the vineyard von Othegraven calculated the following costs for different produc-
tion quantities:

Production quantities
10,000 bottles 15,000 bottles 20,000 bottles
Variable production 44,400 66,600 88,800
costs (€)
Fixed production costs 120,000 120,000 120,000
(€)
Fixed sales and admin- 48,000 48,000 48,000
istration costs (€)
Total costs (€) 212,400 234,600 256,800

The Head of Marketing predicted the following prices for the quantities of bottles sold:
Quantities sold
10,000 bottles 15,000 bottles 20,000 bottles
Selling Price (€/bottle) 21.60 18.00 14.40

a) Please calculate the unit costs for the different production quantities. For which production quantity is
the cost per unit the lowest?

b) Please calculate the profit of the vineyard for the different production and sales quantities. Assume
production quantities equal sales quantities. For which production quantity is the profit the highest?

c) Why do the costs per unit decrease when the production quantity is increased? Why does the sales
price decrease when the sales quantity is increased?

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 11

Solution:

a)
Unit costs:

Total costs (€) Production quantity (bottles) Unit costs (€/bottle)

212,400 10,000 21.24
234,600 15,000 15.64
256,800 20,000 12.84

b)
Profit:

Production quantity/ Sales (€) Total costs (€) Profit (€)

Quantities sold (bottles)
10,000 216,000 212,400 3,600
15,000 270,000 234,600 35,400
20,000 288,000 256,800 31,200

c) The unit costs decrease with an increase in production quantity, because the fixed costs per unit de-
crease when production quantity increases.
A lower price is necessary to incentivize customers to purchase a larger quantity of wine.

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 12

Question 6

The Controller of FairPlay is interested in the behavior of various cost types. In particular, she wants to
analyze how FairPlay’s operating, material, and labor costs change in proportion to changes in sales. For
example, she estimated that proportional to a 1% increase (decrease) in sales operating costs, on aver-
age, rise (fall) by 0.401% (0.371%). For benchmarking purposes, the Controller also collected cost data
from public reports of two competitors, JackInOffice and Hire&Fire. The following information was com-
piled:

Sensitivity to one per-

FairPlay JackInOffice Hire&Fire
cent increase in sales
Operating costs 0.401 0.632 0.308
Material costs 0.557 0.798 0.457
Labor costs 0.366 0.424 0.056

Sensitivity to one per-

FairPlay JackInOffice Hire&Fire
cent decrease in sales
Operating costs 0.371 0.602 0.322
Material costs 0.513 0.769 0.430
Labor costs 0.366 0.196 0.075

a) Please determine for each firm and cost type whether cost behavior is symmetric or asymmetric. In
the case of asymmetric cost behavior, please indicate whether the costs are sticky or anti-sticky.

b) Please provide two general reasons for the occurrence of cost stickiness.

Solution:

a)

FairPlay JackInOffice Hire&Fire

Operating costs 0.030 0.030 -0.014
Material costs 0.044 0.029 0.027
Labor costs 0.000 0.228 -0.019

Symmetric; sticky; anti-sticky

b)

(1) Resource adjustment costs: e.g., severance payments to dismissed workers, search and training costs
for new employees, installation and disposal costs for capital equipment
(2) Managerial decisions: e.g., empire building incentives

Prof. Dr. Jannis Bischof – ACC 403 Cost Accounting 13