dynamic costing Troels Troelsen

Troels Troelsen
Dynamic Costing
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2

Troels Troelsen
Dynamic Costing
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3

Dynamic Costing
1
st
edition
© 2006 Troels Troelsen &
bookboon.com
ISBN 87-7681-151-4
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Dynamic Costing
4
Contents
Contents
Dynamic Costing 6
Preface 7
1 Introduction to Costs 9
1.1 Introduction 9
1.2 Dierent Cost Denitions 14
1.3 Fixed Costs vs. Variable Costs 18
1.4 Separation of Fixed and Variable Costs 22

1.5 Other Costs Distinctions Relevant for Decision-Making 27
1.7 e Management Job 40
1.8 Assignments for Chapter 1 43
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Dynamic Costing
5
Contents
2 Cost Functions 47
2.1 Cost Functions in the Short-Term 48
2.1 e North Sealand Raspberry Plantation 52
2.2 Easymap 56
2.3 e Printing House 58
2.2 Assignments for Chapter 2 62
3 Dierent Cost Types as a Function of Dierent Decision-Making Situations 66

3.1 Introduction 66
3.2 Examining Dierent Cost Types 67
4 Calculations 74
4.1 Introduction 74
4.2 Dierent Calculation Models 86
4.3 Activity Based costing 90
4.4 Assignments for Chapter 4 102
5 Guiding Solutions 104
5.1 Guiding solutions for chapter 1 104
5.2 Guiding solutions for chapter 2 110
5.4 Guiding solutions for chapter 4 118
Notes 124
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Dynamic Costing
6
Dynamic Costing
Dynamic Costing
1
Costs dened in a dynamic perspective with decision making as objective
“You cannot formulate one universal cost term, you have to establish dierent
cost terms and measures for dierent purposes”
John Maurice Clark 1923
2
“Producing a good requires an eort of resources that usually has a price. is
consumption of resources is called costs. To produce a specic good with the

lowest possible cost is a decisive factor for the long-term success of a business.
erefore, it is important to be able to establish costs in order to obtain the
relevant management information necessary to achieve the lowest possible
production costs.
Achieving the lowest possible costs is a holistic job, involving management,
business culture, optimal technology, optimal internationalization, optimal size
of production, etc. And costs vary with the relevant decision occasion. is is the
dynamic perspective.”
Troels Troelsen 2003
“By denition, a cost is considered to be relevant if it is aected by a management
decision. Any cost not aected by a decision is considered irrelevant.”
Paul G. Keat and Philip K.Y. Young 2000
3
Author of the book is Troels Troelsen, Course Coordinator Department of Operations Management
Copenhagen Business School, 2003
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Dynamic Costing
7
Preface
Preface
e objective of operations management is to organize the production and sales/marketing eorts in
the most appropriate way for the business.
e purpose of a business is to produce a series of goods or services (from this point on, these terms
are considered the same and are referred to as goods). It is a deciding factor that this process is achieved
as cheaply as possible.
• Private business products: A Harboe non alcoholic beer, a box of Legos, a newspaper, a
car repair.
• Public business products: A full year’s work for a pupil in 7
th
grade, a hip operation,

administration of nes.
e challenge and problem of costs can be described as:
1. Production of a good requires an eort or consumption of resources that in most cases have
a price, i.e. a minimal consumption of resources, at the lowest possible price, is essential.
2. is consumption of resources is called costs
3. Producing a specic good at the lowest possible cost is oen decisive for the long-term
success of a business.
4. erefore it is important to be able to establish costs in order to obtain the necessary
management information, required for achieving lowest possible production costs.
5. Achieving as low costs as possible is a very holistic job, involving management, business culture,
the right technology, the right internationalisation, the optimal size of production etc.
6. e cost of producing a good vary in terms of the relevant decision-making occasion, which
is the content of a dynamic perspective.
A business can, among other things, be described as a string of contracts (nexus, nodes), which combined
comprise the fundamental base, the production, and the liquidity access (sales or grants/appropriations).
Such contracts (to buy, sell, establish a production facility, hire sta etc.) are commonly agreed upon with
contracting entities outside the group of owners and decision makers. It is therefore essential to understand
a number of models which place the rm in the context of its environment.