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Cost accounting: Introduction

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Department C

CControlling, Accounting

andOrganisation

C 1

Corporate Controlling and Strategic Planning

C 2

FinancialAccounting

C 3

Organisation

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Corporate Controlling and Strategic Planning

C 10

„Standard“(Personl assessment)Operational Statistics

C 11

Cost Accounting,Profitability Analysis,

Budgeting and Budget Monitoring

C 12

Strategic Planning

C 13

Functional Assistance for and Coordination of

ESCB/ES related issues

Central OfficeFrankfurt

Division C 1

Regional OfficeHamburg

Service centre„Cost accounting data provision“

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Section C 11: Elaboration of principles on cost type- and cost centre accountingExecution of Standard costing/BudgetingData analysis, production of non-regluar reports for managementRegular Reporting to top and middle level management9 employees

Service centre „Cost accounting data provision“Established in June 2003, Preparation and provision of cost accounting data, especially withrespect to standard costing and budget monitoring13 employees

Section C 11 and Service centre„Cost accounting data provision“

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Agenda

„What ist our unterstanding of Cost accounting?“How do we define the scope of Cost accounting and how do we distinguish between Cost accounting an Financial accounting?

What is the purpose and what are the objectives of Cost accounting?

„Why do we practice Cost accounting ?“What were the impulses for implementing Cost accounting at Deutsche Bundesbank?

What is the history of Cost accounting at Deutsche Bundesbank?

Is there a legal basis for Cost accounting?

Cost accounting at Deutsche BundesbankWhat is the definition of Cost accounting at Deutsche Bundesbank?

How are the different parts of Cost accounting designed and what is “the output” of the different subsystems of Cost accounting?

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Project controlling

Corperate Controlling and Strategic planning

Cost centreaccounting

Cost type accounting

Cost unit accounting

Budgeting(Standard costing)

Budget monitoring

Revenue controlling

Examination of specific

procurementsand investments

Job evaluation

Automated staffingassessment procedure

Coordination of organisational issues; In-house Consulting

All Departments:

Responsibility for cost-effectiveness, security, orderliness;organisational autonomy

Operational statistics

Risk management(Methodology + bankwideCoordination)

Functions of Bundesbank´s Department „Controlling, Accounting and Organisation“

Office for Risk Control

IT- Controlling Organisation surveys (eg analysis of staffing requirements)

Financial Accounting

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Schaubild 1

Accounting system

Financialaccounting

Costaccounting

Operationalstatistics

Budgetaryaccounting

Financial reporting (Financial accounting system)External addressees; “Products”: balance sheet and profit & loss account

Main concept in profit & loss account are the expenses

Management accounting (Cost accounting system)Internal addressees; Main output is management information – cost accounting information

Main concept in cost accounting are the costs

Basic understanding of Accounting system

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financial

Financial accounting system (= external)

Non-operating expenses Operating expenses

- Unrelated to core business or not relevant for cost accounting

- Unrelated to accounting period Basic costs Other costs Additional costs- Extraordinary

Cost accounting system (= internal)

Non-operating expenses : - Interest charges

„Basic costs“ :

- Wages and salaries - Expenditure on IT, premises, training - Banknote printing expenditures

„Other costs“ : - Depreciation

„Additional costs“ : - Cost of capital employed

Expenses and costs - a theoretical approach

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… - just a theoretical approach ?

cost centresfunctionsproducts

Profit &Loss Acc.

structureharmonizedaccording toGuidelines

ECB/2002/10

Staff costs

Other operating costs

Depreciation

Costs of capital employed

Cost types

Operating income

FinancialAccounting

CostAccounting

Adjustments

Traceablebridge

“Framework for reconciling the data in the financial accounting and cost accounting”(by COMCO)

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The task of cost accounting is to classify, record, distribute and allocate costs incurred in the provision of an institution‘s output

„Historical approach“- Accountablity- Oversight

= Current cost accounting

„Future approach“- Planning and Budgeting- Internal control

= Budgetary accounting

Budgetary accounting deals with planned outputand estimated costs (target costs).

Costs are kept under constant review(Continuous comparison of target and effective costs)

Provision of cost accounting data for management information

Current cost accounting comprises all thecosts actually incurred (effective costs).

Purpose of cost accounting

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To sharpen cost consciousness“I never imagined that this investment/service would cost so much.”

To create or boost (cost) transparencyWhat are the actual cost drivers?

To provide managment information forthe decision-making-process

- The fee charged by the Bank for service X does not cover the costs- Can a service be obtained more cheaply from an external source?

Objectives of cost accounting (I)

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To identify potential savings- Do we really need service X?

To allow feasability studies- Do the same services really always cost the same (in different officesin different branches)?

Objectives of cost accounting (II)

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Cost types Cost centres Cost units

What costs will beincurred by …/ havebeen incurred ?

Where will the costs be incurred / where havethe costs been incurred ?

For what service / what “product” will the costs be incurred / have the costs been incurred ?

Cost type 1

Cost type 2

Cost type 3

Cost centre 1

Cost centre 2

Cost centre 3

Cost unit 1

Cost unit 2

Cost unit 3

Total cost typesTotal costsIncurred by

all cost centres

Total costs ofall units

(direct costs/full costs)

Cost type, cost centre and cost unit accounting

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A central bank like Deutsche Bundesbank renders services, that are generally accepted (by the public)

Deutsche Bundesbank is an independent central bank anddoes not draft a government budget, that must introduced to and approved by the parliament

History of Cost accounting at Deutsche Bundesbank - starting position (I)

As a basic principle, business operations in a public authority likeDeutsche Bundesbank cannot be in the focus of cost planningand internal control

Result: Low (internal) sensitivity for theimplementation of a cost accouting system !

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Since the 1960‘s, Deutsche Bundesbank uses a sophisticated staffingassessment procedure, so that the most important cost driver is underpermanent monitoring (human ressources controlling)

In addition, specific procurements, specific investments and projectsare examined by the „controlling department“

Several specific and for Deutsche Bundesbank relevant legal acts, (e. g. legal act concerning procurement by public tender) assure,that large-value procurement decisions are made under considerationof the principle of cost-effectiveness

History of Cost accounting at Deutsche Bundesbank - starting position (II)

Result: Cost accounting and internal controlat Deutsche Bundesbank not necessary !

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Federal Court of Auditors (BRH) demands in the late 80‘s/theearly 90‘s the implementation of a standard cost account and aa budget monitoring procedure

An external study of management consultants in the early 90‘sproposes

• Implementation of a standard cost account in the central officeis convenient

• Implementation of cost centre accounting in the central office

• Set-up of an „allocation system“ for the costs of internal services

„Case Münzrolle“ in the early 1990‘s

History of Cost accounting at Deutsche Bundesbank - external impulses (I)

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1993: Introduction of a detailed cost centre-structure in thecentral office

1995: harmonised structure of cost centres for the branches

1994: Implementation of a costing procedure for price calculation(„Case Münzrolle“)

1994: Implementation of Standard costing in the central office

1996: Standard cost accounts in all regional offices (LZBen)

2002: First Budget Monitoring Report („analysis of budgeted figuresand actual costs and investments“) for the entire bank(aggregation of the standard cost accounts of central officeand the until 2002 independent regional offices/LZBen)

History of Cost accounting at Deutsche Bundesbank - development in the 1990‘s

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26 Annual accounts, cost accounting...

(4) To assist it in its management and administrative tasks, the Deutsche Bundesbank shall prepare a cost account.

Before the start of a financial year, the Deutsche Bundesbank shall draw up a standard cost account and an investment plan.

At the end of the financial year, it shall make a comparative analysis of thebudgeted figures and the actual costs and investments.

This analysis shall be reviewed separately by the auditors.

...

Legal basis of Cost accounting and Budgeting - Bundesbank Act (amendment 2002)

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26 Annual accounts, cost accounting

...

(5) The annual accounts, the standard cost account, the investment plan, theanalysis of the budgeted figures compared with actual costs and investments, and the auditors‘ report shall be forwarded to the Federal Ministry of Finance and the Federal Court of Auditors.

The annual accounts, the analysis of the budgeted figures compared withactual costs and investments and the auditors‘ report shall be presented to the Bundestag (the lower house of parliament)....

Legal basis of Cost accounting and Budgeting - Bundesbank Act (amendment 2002)

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The Federal Court of Auditors (BRH) checks under consideration of the legal basis from 2002, wether the conception of the cost accountingsystem is appropriate and in accordance with the law

The auditors are reviewing the cost accouting system on the basis ofclause 26 Bundesbank Act. In the focus of this review is both, the outputand the conception of the cost accouting system

History of Cost accounting at Deutsche Bundesbank - external impulses (II)

The results of the Commitee on Common Cost Methodology (COMCO)– „COMCO-approach“

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Further development of cost type accounting and cost centre accountingimplementing a standard ERP-software for the entire bank

Further development of cost unit accounting with the target toallow feasability studies

Introduction of a harmonised structure of cost centres for theentire bank

Adaption of the cost accounting system to the new harmonised frameworkin the Eurosystem („COMCO-approach“)

History of Cost accounting at Deutsche Bundesbank - development since 2002

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Cost accounting - a must?

Is the coexistence of financial accounting and costaccounting really necessary ?The profit of an institution is the most important information (for the ministry of finance) !

The amount, which must be paid for the personnel, can be inferred simply from the profit and loss account !

Cost accounting information is indispensably for themanagement ! Only with the product-view the contributions to the success of an institution can be analysed

For price decisions or outsourcing decisions, the managagementshould expect the provision of appropriate information