Notes from litterature (reading material)
Indholdsfortegnelse
Notes from lectures (reading material).......................................................................................................... 1
Lecture 1 – Introduction and Data structure + IT ......................................................................................... 1
Shamshin (E/R diagrams) ............................................................................................................................. 1
Database Normalization ................................................................................................................................ 3
Worre 1994 .................................................................................................................................................... 4
Näsi & Rohde 2007 ....................................................................................................................................... 6
Lecture 2 – Variability accounting (Aarhus School) and CPH School ....................................................... 9
Israelsen 1996 ............................................................................................................................................... 9
Israelsen & Rohde 2005 .............................................................................................................................. 10
Israelsen 1993 Kap 1-4 ............................................................................................................................... 13
Appendix A – VAMA case – Variability Accounting ..................................................................................... 15
Lecture 3 – Variability accounting cont. + manipulation of cost data – E.g. activity based costing .... 17
Cooper og Kaplan 1998 Chapter 6+7 – ABC + resource capacity ............................................................. 17
Israelsen og Kristensen 2015 - Characteristics and evaluation of Time-Driven Activity Based Costing
based on ABC’s Development..................................................................................................................... 19
Lecture 1 – Introduction and Data structure + IT
Shamshin (E/R diagrams)
This document is a tutorial on Entity Relationship Diagrams (ERDs), covering their history,
uses, components, and various notations. Let's summarize the key takeaways:
What is an ERD?
An Entity Relationship Diagram (ERD) is a visual representation of how "entities" (people,
objects, concepts) relate to each other within a system. They're primarily used for
designing relational databases but find applications in various fields like software
engineering, business systems analysis, and research. ERD components map to
grammatical structure (entities as nouns, relationships as verbs). The tutorial also
mentions the relationship of ERDs to Data Structure Diagrams (DSDs) and Data Flow
Diagrams (DFDs), but doesn't elaborate on their differences.
History of ERDs
Peter Chen is credited with developing ERDs in 1976, building on earlier work by Charles
Bachman and A.P.G. Brown. The tutorial briefly notes that the conceptualization of
interconnectedness dates back to ancient Greece. James Martin also contributed to the
development of ERDs and their relationship to Unified Modeling Language (UML).
Uses of ERDs
ERDs are valuable tools for:
 Database Design: Modeling and designing relational databases, considering both
logical (business rules) and physical (technology-specific) aspects.
 Database Troubleshooting: Analyzing existing databases to identify and fix logical
or deployment problems.
 Business Information Systems: Designing and analyzing relational databases for
business processes.
 Business Process Re-engineering (BPR): Analyzing and modeling new database
structures.
 Education: Designing educational databases.
 Research: Creating databases for analysis of structured data.
Components of an ERD
ERDs consist of:
 Entities: Represented as rectangles; they represent categories of things (e.g.,
students, courses, professors). An entity instance is a specific example of an entity
(e.g., John Smith).
 Relationships: Shown as diamonds or labels on connecting lines; they illustrate
the actions or associations between entities (e.g., "enrolls in").
 Attributes: Represented as ovals; they are properties or characteristics of entities
or relationships (e.g., student name, course title, date completed). Attributes can be
simple, composite (made up of sub-attributes), derived (calculated from other
attributes), single-valued, or multi-valued. The tutorial shows examples of
composite and multi-valued attributes (Figure 13 and 14).
 Cardinality: Defines the numerical relationship between entities (e.g., one-to-one,
one-to-many, many-to-many) and is visually represented in various ways,
depending on the notation style (Figure 15 shows examples). The concept of
obligated or participation constraint (mandatory vs. optional participation in a
relationship) is also introduced.
Special Entity Types
 Weak Entities: Dependent on another entity and lack a unique identifier; usually
represented with double lines. They can be avoided by adding a surrogate identifier
(Figure 16 shows an example with a surrogate identifier).
 Associative Entities: Combine attributes and relationships; they behave like
regular entities but serve to link other entities (Figure 16 shows an example).
ERD Notation Styles
The tutorial details several ERD notation styles (Chen, Crow's Foot, Martin, Bachman,
IDEF1X, Barker, Min-Max/ISO), showing how they represent entities, relationships,
attributes, and cardinality using different symbols and conventions (Figures 28-34 provide
visual comparisons of several notation styles).
Creating ERDs
The tutorial outlines steps for creating ERDs (Figure 20 walks through steps to create an
ERD for a university course registration system) and explains how to create ERDs from
existing databases, emphasizing the importance of proper planning, clarity, and
consistency (Figure 21 shows the use of a program to automatically generate an ERD
from existing database data).
Key Types in DBMS
The document covers different key types in database management systems (DBMS),
including: super key, candidate key, primary key, alternate key, foreign key, partial key,
composite key, unique key, surrogate key, and secondary key. These are described in
detail (Figures 23-27 illustrate the relationships between the various key types).
The tutorial provides a comprehensive guide to understanding and creating ERDs,
highlighting different notations and best practices. Remember to consult the original
document for visual representations (diagrams) and specific details.
Database Normalization
This document is a practical guide to database normalization. Here's a summary of the key
points and takeaways:
What is Database Normalization?
Database normalization is a process for organizing data within a database to reduce
redundancy and improve data integrity. It aims to eliminate data anomalies (insertion,
deletion, and update anomalies) that can occur during data modification.
Goals and Benefits of Normalization
The primary goals of normalization are to:
 Eliminate redundant data
 Ensure data dependencies are logical
 Protect against anomalies
 Improve data integrity
 Simplify queries
Key benefits include more efficient data storage, reduced disk space usage, improved data
integrity and consistency, simpler data models, and easier data modification.
Normalization Levels (Normal Forms)
The guide explains three main normal forms:
 First Normal Form (1NF): Eliminates repeating groups of data, uses atomic values
(indivisible data elements), and defines a primary key for each table.
 Second Normal Form (2NF): Meets all 1NF requirements and eliminates partial
dependencies. Partial dependencies occur when a non-key attribute depends on
only part of a composite primary key.
 Third Normal Form (3NF): Meets all 2NF requirements and eliminates transitive
dependencies. Transitive dependencies exist when a non-key attribute depends on
another non-key attribute, which in turn depends on the primary key.
The guide mentions that higher normal forms exist (like Boyce-Codd Normal Form), but
most databases only normalize to 3NF.
Anomalies and Examples
The document illustrates how unnormalized databases are prone to anomalies (insertion,
deletion, update) using an example of a table storing book and author data. The example
demonstrates how normalization transforms an unorganized database design into a wellstructured one that eliminates redundancy and avoids anomalies (Figures shown in the
text illustrate this).
When to Denormalize
Denormalization (intentionally reducing normalization) can sometimes be beneficial
despite increasing redundancy and anomaly risks. It can improve read performance (by
avoiding joins) but should only be used when performance gains outweigh the increased
risks to data integrity.
Tools and Technologies for Normalization
Various tools (ER modeling tools, DBMS features) and technologies help in the
normalization process. ER modeling tools provide a visual representation of database
structure, while modern DBMSs have built-in functions to enforce normalization rules.
Automated tools can also aid in identifying functional dependencies and suggesting table
partitions.
Challenges and Common Mistakes
Common challenges and mistakes in normalization include:
 Over-normalization: Creating excessively complex database structures.
 Under-normalization: Failing to adequately apply normalization principles.
 Ignoring Application Needs: Designing a database that doesn't align with
application requirements.
 Ignoring the Evolving Nature of Data: Not adapting the database design to
changes in data and business requirements.
Impact of Modern Databases
The guide acknowledges the impact of modern database systems, including NoSQL
databases, on the application of normalization principles. NoSQL databases frequently
employ denormalization techniques to optimize read performance, often prioritizing
scalability and flexible schema design over strict adherence to traditional relational
normalization.
Conclusion
Database normalization remains crucial for efficient and scalable data management. The
guide emphasizes the need for careful planning, a thorough understanding of data
characteristics, and continuous monitoring to ensure database designs remain robust and
adaptable.
This summary provides a comprehensive overview. Always refer to the original document
for detailed information and illustrations. Note that the diagrams mentioned were not
directly provided in this text.
Worre 1994
This article traces the evolution of management accounting in Denmark from the 1930s to
1994, highlighting the shift from imitative cost accounting to a more nuanced,
management-oriented approach.
Early Influences and the German Model (1930s-1940s)
Early Danish management accounting was heavily influenced by German practices,
focusing on detailed cost allocation to products using cost centers and a dualistic
accounting system (separating internal and external accounting). The work of Palle
Hansen, particularly his Den industrielle Kontoplan (The Industrial Chart of Accounts) from
1940, is cited as a key development, introducing the concepts of cost centers, detailed
periodization, and internal cost calculations (depreciation, interest) to improve product cost
accuracy and control. However, this approach is considered an "idealized endeavor of true
product costing" and somewhat inflexible.
The Rise of Variability Accounting (1950s-1960s)
Vagn Madsen is credited with introducing variability accounting, emphasizing the need for
unbiased cost data applicable to various management purposes. This approach classifies
costs based on their variability (how they change with activity levels) and reversibility (how
easily they can be adjusted). Madsen's work stresses the importance of understanding the
interplay between cost behavior and management decisions. Figure 1 illustrates the
hierarchical recording of cost data by departments and cost objects.
Contribution Accounting and a More Business-Oriented Approach (1950s-1970s)
Palle Hansen's later work champions contribution accounting, advocating a more
pragmatic approach focusing on understanding the relationship between costs and
profitability rather than striving for perfectly accurate product costing. He emphasizes the
separation of variable costs (directly related to production volume) from capacity costs
(less directly related to activity), advocating for budget control and segmented profitability
analyses.
The Integrated Danish Model (1970s-1994)
Zakken Worre synthesizes these earlier approaches, arguing for a flexible management
accounting model that integrates cost and budget data, emphasizing the importance of
understanding both ex-ante (planning) and ex-post (analysis) aspects of the accounting
system. He promotes the use of "inspiration analyses," non-periodic analyses connecting
contribution margins to capacity costs for strategic decision-making. The model also uses
a "capacity network" (Figure 2) to visualize the relationships between different capacities
(e.g., accommodation, material, staff) and their costs, illustrating both horizontal
(specialization of functions) and vertical (management layers) aspects of the organization.
The model also considers the degree of variability and reversibility of different costs,
emphasizing the need for direct attribution and flexible reporting, avoiding arbitrary
allocations. Figures 3 and 4 illustrate the cost classification criteria and the basic cost
accounting model for capacity cost tracking. Figure 5 depicts the SOR model of marketing
communications and a cost accounting model to reflect its internal and external
dimensions. Finally, Figure 6 provides an example of how to use attributes of pure cost
and sales administration for classifying marketing costs, with Figure 7 giving an example of
an attributation matrix for this.
Key Takeaways
The Danish management accounting model emphasizes:
 Flexibility: Adapting cost accounting to fit specific organizational needs and
management goals.




Simplicity and Clarity: Avoiding complex, inflexible systems in favor of usable
information.
Integration of Planning and Control: Connecting budgeting and accounting for
better management decision-making.
Understanding Cost Behavior: Classifying costs according to their variability and
reversibility to explain their dynamics.
Emphasis on Qualitative Understanding: Using quantitative data to support
qualitative managerial insights.
The article highlights a gradual shift from a purely imitative, rules-based approach to a
more flexible and insightful management accounting model tailored to the specific
characteristics of Danish businesses. It's emphasized that this model is not a rigid system
but rather a framework that should be adapted to individual circumstances. The model is
also distinguished by its extensive use of action research, linking theory to real-world
practices.
Näsi & Rohde 2007
Here's a summary of the provided text, structured by relevant headlines and written in
fluent English. Note that some Danish terms are retained where direct translation would
be unclear or inaccurate.
**Development of Cost and Management Accounting Ideas in the Nordic Countries**
This chapter examines the historical development of cost and management accounting
theories and practices in Denmark, Finland, Norway, and Sweden during the 20th century.
The focus is on dominant themes and uniquely Nordic innovations, recognizing that most
ideas originated in larger industrial nations (Germany, UK, USA) but also traveled between
Nordic countries.
**Introduction**
The study specifically focuses on Denmark, Finland, Norway, and Sweden, highlighting
their shared history and cultural connections, including linguistic proximity, which facilitated
the cross-border exchange of accounting ideas. The authors' initial plan for a
comprehensive overview of the entire history was abandoned due to its scope; instead, the
focus shifted to key topics and influential figures.
**Theory—'Travels of Ideas'—Imitations and Local Translations**
The authors utilize the "Travels of Ideas" framework to analyze the spread of management
accounting concepts. They argue that ideas aren't simply copied but are adapted and
translated to fit local contexts, using metaphors of "travel" and "imitation." Key actors in
this dissemination include academics, consultants, and publications.
**The 'Travel' of the German Business School (Handelshochschule) Concept to the Nordic
Countries**
The establishment of business schools in the Nordic countries (starting with Stockholm in
1909, then Helsinki, Copenhagen, and Bergen) significantly influenced the development of
accounting. These schools initially adopted the German model, evident in the recruitment
of German professors and the adoption of German terminology and principles. Key figures
like Eugen Schmalenbach, Ernst Walb, Oscar Sillén, and Albert ter Vehn played crucial
roles in this transmission. Finland followed Sweden's lead in establishing similar
institutions. The strong German influence extended beyond terminology, shaping practices
and influencing education.
**Translations of Unified Costing Principles and Standard Chart of Accounts**
The adoption of unified costing principles and standard charts of accounts in the Nordic
countries was heavily influenced by Germany, particularly Schmalenbach's work. Sweden
saw early efforts at standardization through the Swedish Institute of Standards (SIS),
which involved a significant debate on the merits of different approaches. Albert ter Vehn's
intervention was crucial in Sweden, influencing the final proposals. Norway and Finland
also saw attempts at standardization, though they faced unique challenges and
interactions with other models, including those from the USA.
**The Translation of 'The Marginalist Idea' in the Nordic Countries**
The mid-20th century saw a shift toward marginal costing and contribution margin analysis
in the Nordic countries. The discussion of full costing versus variable costing was
vigorous, influenced by the work of academics from the UK and USA and by the practical
experiences of industry leaders. In Sweden, for instance, the adoption of the
Mekanförbundet chart allowed for the application of both full and variable costing. In
Finland, Martti Saario's priority order of costs theory provided an independent but
complementary perspective. Denmark saw influential contributions by Palle Hansen, who
championed the direct costing (contribution margin) principle. Norway also experienced a
transition toward variable costing, though not as definitively as some other countries.
**The Advent and Translations of Budgeting in the Nordic Countries**
The post-WWII era saw the rise of budgeting in Nordic management accounting, strongly
influenced by US practices. This involved a shift from cost control towards strategic
planning and the integration of budgeting into management systems. Henrik Virkkunen's
work in Finland emphasized budgeting as a management tool. Palle Hansen played a
crucial role in introducing budgeting to Denmark. Sweden saw strong initial influence from
US models, but with a later focus on its integration with management systems. Finland
and Norway showed a mix of approaches, with some research focusing on the behavioral
aspects of budgeting. The overall trend was toward greater integration of budgeting into
broader organizational strategy.
**Management Accounting Trends in the Nordic Countries Today—International Trends
with Some Specific Nordic Features**
Globalization led to a convergence of management accounting practices in the Nordic
countries. The use of standardized information systems, participation in international
conferences, and the influence of international consulting firms contributed to this
homogenization. However, unique Nordic features remain, such as a strong emphasis on
behavioral aspects in research and a commitment to action research. Public sector
management accounting has been a distinct focus, with pioneering work conducted by
Nordic researchers. The authors identify unique contributions in management accounting
change research and emphasize the continued relevance of both theoretical and practical
perspectives.
Lecture 2 – Variability accounting (Aarhus School) and
CPH School
Israelsen 1996
Here's a summary of the provided text, focusing on key points and main takeaways,
formatted for easy understanding and study:
Management Accounting in Denmark: A Historical Overview
The industrial revolution arrived late in Denmark, impacting the development of cost and
management accounting. Initial development in the 1930s focused on standardizing
recording systems and calculation principles. The 1930s also saw the establishment of the
Nordisk Tidsskrift for Teknisk Økonomi (Nordic Journal of Technical Economics), which
played a significant role in the debate surrounding cost accounting. The 1940s were
marked by a period of price controls and scarcity, which influenced accounting practices.
The easing of price controls in the 1950s marked a turning point.
Key Figures and Their Contributions
 Ivar Jantzen: His 1924 doctoral thesis, incorporating the work of Clark (1923),
established a theoretical agreement on the irrelevance of fixed costs in price
determination.
 Vagn Madsen: His 1951 doctoral thesis, influenced by his time in the United States,
introduced "variability accounting," emphasizing a pure cost database without
arbitrary allocation. This system uses three dimensions for recording costs: type of
production factor, department, and objective for resource use. It stresses the
separation of data recording and data manipulation tasks. A key aspect is the use of
"variability factors" (V-factors) to classify costs. (See Figure 2.1 for a visual
representation of Madsen's model.)
 Palle Hansen: Initially advocating a full absorption principle, Hansen later became
a proponent of the contribution margin principle, incorporating the 'du Pont' format.
His work led to the dominance of the direct costing principle in Danish financial
accounting until the 1981 Financial Statements Act. Hansen's contributions included
the founding of Lederskab og Lønsomhed (Leadership and Profitability) journal and
a handbook on budgeting.
 Zakken Worre: Worre introduced the concepts of absolute and relative divisibility of
costs, arguing that the distinction between variable and capacity costs depends on
the defined sales activity. He emphasized a management-oriented accounting
system with four dimensions: production factor, process, information entrance, and
objective. Worre's work highlights the use of non-monetary measurements in ex
post recordings. Figure 2.1 also visually displays the Danish model for recording
cost accounting data incorporating Worre’s ideas.
Characteristics of Present Danish Management Accounting
Current Danish cost and management accounting emphasizes:
1. The use of ex post recordings for inspiration analyses and improved future decisionmaking.
2. Cost accounts serving as a database for measured resource consumption without
data manipulation.
3. Safeguarding access to non-arbitrary data through recording only measured direct
consumption.
4. Viewing the firm as a system (input-process-output model) applicable to any
activity/action.
5. Recording absolute divisibility of input factors and the reversibility of capacity costs.
6. Recording actual capacity use for capacity utilization assessment.
7. Recording output units and the receiving department/process.
8. Reflecting the total activity/capacity network. (See Figure 2.1 for a visual of this
model)
Empirical Studies on Danish Cost Management Practices
Two surveys, one on product costing and the other on the diffusion of modern cost
management techniques, provide insights into current practices:
 Product Costing Survey: This found that Danish firms are largely market-oriented
in price determination, but a surprising number still use full-cost accounting for
product costing, although the number is decreasing. Despite this, most firms
perform profitability analyses using stepped contribution margin hierarchies. Many
firms expressed a need for changes in their cost calculation methods driven mainly
by increased competition.
 Diffusion of Modern Cost Management Techniques Survey: This survey
focused on progressive firms and highlighted the prevalent use of non-financial
performance measures (like on-time deliveries), target costing, and, to a lesser
extent, benchmarking and strategic cost analysis. Activity-based costing (ABC)
appears to be less common.
Conclusion
Danish management accounting practices are largely market-oriented, emphasizing multilevel contribution margin analyses. While traditional methods are still used, the adoption of
newer techniques is gradually increasing, though there's still some resistance. The use of
ABC is limited so far.
Israelsen & Rohde 2005
This document compares two Danish management accounting frameworks—Variability
Accounting (VA) and Capacity Cost Accounting (CCA)—with Activity-Based Costing (ABC).
Here are the key points and takeaways:
Danish Management Accounting Frameworks: A Historical Context
Danish management accounting frameworks developed significantly, drawing inspiration
from German scholars like Schmalenbach and Schneider, and integrating managerial
economics and behavioral theory. The frameworks emphasize flexible data retrieval for
various analyses across organizational levels and market segments. Two prominent
frameworks emerged: Variability Accounting (VA), developed by Vagn Madsen, and
Capacity Cost Accounting (CCA), primarily shaped by Palle Hansen and Zakken Worre. A
key area of contention among Danish scholars and a source of criticism against ABC
focused on how capacity costs are handled and allocated, particularly in relation to the fullcost principle.
Analyzing the Frameworks: The Bjørnenak & Olson Model
The authors use Bjørnenak & Olson's (1999) framework for analyzing management
accounting innovations (Figure 1) to compare VA, CCA, and ABC. This framework
considers:
 Scope: Descriptive objects (resources, departments, processes, cost objects, and
data types), causal variability factors (influences on variations), and time
(accounting period and ex ante/ex post data).
 System: Number and lifetime of systems, and user aspects (design involvement
and information asymmetry).
Variability Accounting (VA)
VA, developed by Madsen, is a consumption-based cost accounting system. It avoids
arbitrary allocations by using three dimensions:
1. Factor Type: Types of resources consumed.
2. Cost Center: Where resources are used.
3. Objective: The purpose for which resources are used (including products, services,
maintenance, marketing, R&D, etc.).
VA uses hierarchies in cost centers and objectives to avoid arbitrary allocation, recording
consumption in quantities and time at standard rates. It includes "variability factors" (Vfactors) to quantify activity levels and tracks absolute divisibility and reversibility of
resources. VA distinguishes between data recording (using relational databases) and data
analysis. It uses both ex ante (budgets) and ex post (actual consumption) data. (See
Figure 2 for a visual representation of VA’s transaction table). Appendix 1 provides an
example of VA records.
Capacity Cost Accounting (CCA)
CCA, developed by Worre, focuses on capacity costs and data. It uses four dimensions:
1. Factor Type: Types of resources.
2. Information Entrance: Organizational areas of responsibility.
3. Process: Types of tasks performed.
4. Objective: Recipient of the performance output.
CCA emphasizes direct recording and avoids arbitrary allocation. It uses capacity
utilization units and load units as causal variability factors and classifies costs by variability
and reversibility. Like VA, it uses both ex ante and ex post data, but its focus is on flexible
data extraction for various analyses. (See Figure 3 for a visual representation of CCA).
Comparing VA and CCA
While both frameworks aim to avoid arbitrary allocations, they differ in the number of
dimensions, the use of hierarchies, and how they handle capacity costs. VA allows for
allocation within its hierarchical structure, while CCA strictly uses direct recording. Figure 4
summarizes the key similarities and differences between VA and CCA.
SWOT Analysis of Danish Basic Accounts
 Strengths: Detailed descriptions, avoidance of arbitrary allocations, flexible data
storage and retrieval, integration of managerial economics and behavioral theory.
 Weaknesses: Complex concepts, mixed terminology, primarily conceptual and
normative descriptions, limited international dissemination, lack of direct links to IT.
 Opportunities: Integration with ERP systems for more efficient data management
and analysis.
 Threats: Rapid changes in the business environment, requiring constant system
maintenance and updates.
Comparing Danish Frameworks with ABC
While seemingly different, both Danish frameworks and ABC share similarities: use of
drivers, hierarchies, and attention to variability and reversibility. However, ABC's initial
focus was on product costing, while the Danish frameworks emphasize broader, flexible
data management. ABC has evolved to include more purposes. Figure 5 summarizes the
comparison.
Conclusion
Danish BRFs and ABC aim to provide flexible and useful management accounting
information. While ABC focuses on specific projects and gradually integrates into the
accounting system, the Danish BRFs aim for a comprehensive, integrated system from the
outset. The authors suggest that a combination of the two approaches may be optimal,
leveraging the strengths of both
Israelsen 1993 Kap 1-4 – Activity vs. variability management
accounting
This document compares and contrasts Variability Accounting (VA) and Activity-Based
Costing (ABC), focusing on their evolution and applications in management accounting.
Here's a summary highlighting key points, takeaways, and examples:
1. Variability Accounting (VA): Fundamental Features
VA, developed by Vagn Madsen, aims to be a multi-purpose cost accounting system,
distinguishing between data recording and data manipulation. It uses three dimensions for
recording costs at the moment of consumption:
 Type of Production Factor: The specific resource used (e.g., specific type of labor,
material).
 Department: The location of consumption.
 Objective: The immediate purpose of resource use (e.g., specific product,
maintenance).
 Example: A record might show: "Direct Labor (skilled machinist) - Machining
Department - Production of Widget X - 2 hours - $50." (Figure 2 illustrates the basic
structure of such a record.)
VA employs hierarchies for departments and objectives to avoid arbitrary cost allocations.
Costs are recorded as far down the hierarchy as direct measurement allows. It uses
"variability factors" (V-factors), which are quantitative measures of output (e.g., units
produced) that correlate approximately with the costs of a given objective. The system
uses actual consumption at standard prices, and the choice of price depends on the
analysis purpose. It avoids the fixed/variable cost dichotomy, as the classification of costs
depends on the objective. Depreciation and interest are handled outside the VA system.
2. Interpretations and Changes in VA Principles
The document clarifies and updates several aspects of VA:
 Cross-referencing: While Madsen's original VA didn't fully cross-reference all three
dimensions due to technological limitations, modern relational databases now allow
for complete cross-referencing.
 Cost Types: The document clarifies that "cost types" in VA refer to categories of
production factors, not tasks or objectives.
 Variability Factors: Variability factors are defined as output measures. However,
the text also suggests interpreting it as a measure of production factor services
used that vary proportionately with the output. This implies approximately linear
production functions and constant price functions.
 Direct/Indirect Costs: The concept of indirect costs is invalidated in VA; all costs
are direct by being linked to specific objectives and departments as far down the
hierarchy as direct measurement allows.
 Unique/Multifunctional Costs: A production factor's unique/multifunctional nature
(used in multiple objectives/departments) is evident from the cross-referencing of


the dimensions. The economic implications of multifunctionality, which depend on
price and efficiency, are addressed outside the VA system.
Absolute Divisibility and Reversibility: This relates to the quantum nature of
resources (minimum purchase quantity, capacity units) and how easily they can be
discharged or reduced. This is recorded separately to provide information for
capacity management.
Example (Supplement 1): Madsen's example of a detailed account structure
demonstrating the hierarchical nature of departments and objectives.
3. Activity-Based Costing (ABC): Fundamental Features
The original ABC aimed at improving product cost calculation by using cost drivers
(volume-related and non-volume-related) to allocate indirect costs more accurately. It
allocated costs from resources to activities and then to cost objects.
4. New Developments: From ABC to Activity-Based Profitability Analysis (ABPA)
Cooper and Kaplan shifted ABC's focus from product costing to profitability analysis. ABPA
uses a tiered contribution margin approach, calculating margins at different levels (unit,
batch, product, product-line, plant). Costs are subtracted at the level where they vary with
decisions at that level. It uses a causality criterion for cost allocation (physical resource
consumption) but does not necessarily adhere to the finality principle. This makes ABPA
more of an inspiration analysis for identifying high-profit/low-profit areas than a tool for
direct decision-making.
 Examples: Figures 15, 16, and 17 illustrate the ABPA framework and calculations,
highlighting the different levels and drivers involved. They show how costs are
assigned at different levels based on variability and causality, focusing on a drive
shaft example.
5. Comparing VA and ABC
The document explores the similarities and differences between VA and ABC, noting that
ABPA incorporates many of the principles found in VA (drivers, hierarchies, variability).
However, VA prioritizes a comprehensive, flexible database, while ABC (and ABPA) are
more focused on specific analyses.
6. Natural versus Problem-Determined Hierarchies
The document contrasts natural hierarchies (found in VA, determined by the inherent
relationships between costs and activities) with problem-determined hierarchies (in ABC
and ABPA, determined by the analysis's purpose). The authors emphasize that a lack of
distinction between cost objectives and their attributes can lead to information loss when
using problem-determined hierarchies.
 Example: Figure 18 shows a chart of accounts with multiple adjacent objective
hierarchies (material movements, product development, promotion, etc.). Figures
19, 20, and 21 illustrate how different problem-determined hierarchies can be
constructed based on the same data, leading to different conclusions. Figure 22
shows how the choice of hierarchy can affect the level of detail and information
available. Figure 23 provides a summary of information loss depending on the
hierarchy chosen.
Conclusion:
The document highlights the strengths and limitations of VA and ABC/ABPA. VA provides a
powerful and flexible data foundation but requires significant upfront implementation work.
ABC/ABPA offers more adaptable approaches for specific analyses, though it can involve
compromises on allocation precision, depending on the hierarchy chosen. The authors
suggest that integrating elements from both systems could create an improved
management accounting framework.
Appendix A – VAMA case – Variability Accounting
This document describes a variability accounting system using a fictitious company, VAMA
Inc., as an example. The key takeaways center around a three-dimensional cost coding
system and its application in cost management.
Understanding the Variability Accounting System
The core of the system is a three-dimensional cost code, illustrated in Figures A3, A4, and
A5. This code classifies costs based on:
1. Department: Identifies the organizational unit incurring the cost (Figure A3 shows a
hierarchical breakdown of departments within VAMA's production area).
2. Objective: Specifies the purpose for which the resources were used (Figure A4
illustrates how this is coded for different products and stages of production).
3. Type of Production Factor: Categorizes the type of resource consumed (Figure
A5 shows how various costs are categorized, like materials, labor, and services).
Figure A2 provides a visual representation of the production flow within VAMA Inc.,
showing how raw materials are transformed into finished products (R and Q) through
various production units and processes. The '0' in the diagram indicates that further
processing happens in the specified unit.
Cost Coding and Application
The document emphasizes that costs are coded at the point of consumption rather than at
the point of production. This approach is illustrated by the example of Y2 parts (used in
both Z1 and Z2), where it is impossible to allocate these costs to Z1 and Z2 until
consumption data are available. The cost coding also considers whether further
processing is involved. For instance, the cost of raw material M251 used in producing Y3
in department "c" is coded as 60574121831222, linking this cost to its department,
objective (part of product Q), and type of production factor.
Supplement 1: General Account Code of Variability Accounting
Supplement 1 presents a general account code, a classification framework for costs,
organized by class (production factors), department, and objective. This provides a
standardized structure adaptable to different companies.
Supplement 2: Examples of Recording and Inspiration Analysis
Supplement 2 provides examples demonstrating the application of variability accounting.
 Figure A: Illustrates administration costs across various stages of production and
different departments, highlighting the interaction between administrative support
and production activities.
 Figure B: Shows how variability accounting records costs associated with
production batches, tracking them across different stages and product components.

Figure X: A stylized example showcasing a complex production process involving
multiple departments and product lines, further illustrating the system's applicability
to intricate production flows.
Key Takeaways
The document highlights a variability accounting system focused on a three-dimensional
cost code. This approach, unlike traditional activity-based costing, tracks costs based on
consumption and purpose, providing a detailed and adaptable system for cost
management. The examples and figures demonstrate its practical applicability in different
organizational structures and production processes, emphasizing the need to consider the
variability and reversibility of costs for effective management decisions.
Lecture 3 – Variability accounting cont. + manipulation
of cost data – E.g. activity based costing
Cooper og Kaplan 1998 Chapter 6+7 – ABC + resource capacity
Here's a summary of Chapters 6 and 7, focusing on key points and takeaways, explained
in a fluent text with understandable headlines. Models and figures will be referenced and
explained.
Chapter 6: Activity-Based Costing: Introduction
Limitations of Traditional Costing Systems
Traditional costing methods (Stage II), such as standard cost and flexible budgeting
systems, fail to provide detailed information on operational processes, products, and
customers. This leads to inaccurate cost allocation and hinders efforts to improve
operational efficiency.
The ABC Approach: A New Way of Thinking
Activity-Based Costing (ABC) offers a more comprehensive approach. Instead of simply
allocating costs based on traditional methods, ABC focuses on:
1. Identifying Activities: Determining the specific tasks (activities) performed by
organizational resources.
2. Costing Activities: Calculating the cost of performing each activity.
3. Understanding Activity Needs: Analyzing why the organization needs to perform
each activity.
4. Linking Activities to Outputs: Determining the relationship between activities and
the organization's products, services, and customers.
An ABC model serves as an economic map illustrating the organization's expenses and
profitability. It helps managers navigate complex operations by providing relevant insights
into cost drivers and performance.
The ABC Model: Mapping Costs (Exhibit 6-1, 6-2, 6-3)
Exhibit 6-1 illustrates how traditional costing systems distort costs by averaging across
different products (high/low volume, simple/complex). ABC systems aim to overcome this
by providing a more accurate picture.
Exhibit 6-2 showcases the typical structure of a traditional cost system, where overhead
costs are arbitrarily allocated to production cost centers and then to products. This often
leads to inaccuracies.
Exhibit 6-3 diagrams how ABC systems trace resource expenses through activities to cost
objects (products, services, customers). The process starts with resource expenses,
moves to activities, and finally to cost objects, providing a more direct link between
resources and outputs.
Building an ABC System (Four Steps)
The document outlines four steps to develop an ABC system:
1. Develop the Activity Dictionary: Create a comprehensive list of all activities
performed within the organization, detailing each activity.
2. Determine Activity Costs: Assign costs to each activity using resource cost drivers
(Exhibit 6-4).
3. Identify Products, Services, and Customers: Define all outputs the organization
produces and delivers.
4. Link Activity Costs to Cost Objects: Connect activity costs to products, services,
and customers using activity cost drivers.
Types of Activity Cost Drivers
The text explains three types of activity cost drivers:
 Transaction Drivers: Count the number of times an activity is performed (e.g.,
number of setups).
 Duration Drivers: Measure the time required to perform an activity (e.g., setup
hours).
 Intensity Drivers: Directly charge for resources used per activity (e.g., specific
skilled labor for certain setups).
Chapter 7: Measuring the Cost of Resource Capacity
Limitations of Historical Cost Data
Using historical data alone to calculate cost driver rates for ABC models has limitations:
1. Time Lag: Rates are calculated after the period ends, preventing real-time
decision-making.
2. Unused Capacity: Historical data might not reflect unused capacity, leading to
inaccurate cost estimates.
ABC with Budgeted Expenses: Forecasting the Future
Using budgeted expenses instead of historical data in ABC models allows for proactive
planning and decision-making. Budgeted cost driver rates, based on anticipated expenses
and practical capacity, can be used for real-time pricing, order acceptance, and resource
allocation. Reconciling actual and budgeted costs helps identify spending and volume
variances.
Practical Capacity and the Fundamental Equation of Activity-Based Costing
Practical capacity represents the maximum amount of work that can be handled by
available resources. The fundamental equation highlights this concept:
Cost of Resources Supplied = Cost of Resources Used + Cost of Unused Capacity
This clarifies the difference between resources supplied and resources used, emphasizing
that unused capacity should be accounted for.
Addressing Common Misconceptions
The chapter addresses common misconceptions about ABC, such as the assumption that
ABC treats all costs as variable. It clarifies that while some costs are variable in the short
term, others (especially related to committed resources) are fixed in the short run and
become variable only over longer periods through managerial decisions.
Activity-Based Costing (ABC) and the Theory of Constraints (TOC)
The chapter compares ABC and TOC, emphasizing their complementary roles. TOC
focuses on short-term optimization within existing constraints, while ABC provides a
longer-term perspective on managing capacity and resource allocation, enabling more
informed decision-making.
This summary provides a comprehensive overview of Chapters 6 and 7. Refer to the
original document for detailed information. Remember that the figures referred to were not
available in the text, so visual aspects cannot be described.
Israelsen og Kristensen 2015 - Characteristics and evaluation of
Time-Driven Activity Based Costing based on ABC’s Development
This paper analyzes Time-Driven Activity-Based Costing (TDABC) by comparing it to the
evolution of Activity-Based Costing (ABC). It concludes that TDABC offers improvements
over ABC, particularly in handling diverse activities and complex cost structures, but that
certain aspects of ABC, like hierarchies, should be retained.
Evolution of Activity-Based Costing (ABC)
The paper traces the development of ABC through four variants (ABC1-ABC4),
highlighting key features and limitations at each stage:
 ABC1: Focused on improved long-term product costing, using transaction drivers to
allocate overhead costs. It's criticized for its arbitrary allocation of overhead costs
and for not adequately capturing the complexities of multi-product environments.
(Figure 1 illustrates this initial ABC model).
 ABC2: Introduced a hierarchical model (Figure 2 shows the hierarchy of activities),
aiming to improve the clarity and analytical capability of cost allocation. This
hierarchical approach is seen as a way to avoid misunderstandings from directly
allocating costs to individual product units, allowing for a more detailed profitability
analysis. However, it's also criticized for its arbitrary allocation of facility-sustaining
costs. (Figure 3 illustrates the hierarchical profitability analysis).
 ABC3: Distinguished between used and unused capacity (Figure 4 shows an
example of income accounting in ABC3), improving cost accuracy and providing
valuable insights into resource utilization. This was applied to all capacity
resources, but complexities arise with multifunctional resources.
 ABC4: Incorporated variability and reversibility of costs into the model,
acknowledging the varying degrees of responsiveness of costs to activity changes.
This aspect highlights the need to consider the time it takes for costs to adjust. It
also introduced a distinction between primary and secondary activities.
Time-Driven Activity-Based Costing (TDABC)
TDABC is presented as a significant departure from ABC, primarily in its avoidance of
explicit activity definition. The authors emphasize that TDABC does not eliminate activities
entirely, but rather integrates them into a simplified two-stage process:
1. Resource Cost Allocation to Departments: Costs are allocated to homogenous
departments (rather than individual activities) creating a standardized cost per unit
of time (e.g., cost per minute). The departments are defined by homogeneity of
service, not necessarily by the company's organizational structure.
2. Cost Calculation via Time Equations: Time equations, representing the total time
to perform specific tasks or processes, are used to calculate costs for individual
cost objects. These equations consider numerous factors that might influence time
requirements, allowing a precise calculation for each transaction, rather than relying
on average costs. (The Sanac case study is used to illustrate this, showing a
complex time equation for delivery processes using various factors and customer
types. Figure 6 shows Sanac's cost object hierarchy).
TDABC's time equations are noted as elegant and accurate but are less unique than
initially perceived, as they incorporate the (variable) standard cost accounting approach
common in manufacturing.
Comparing TDABC and ABC
The authors conclude that TDABC offers improvements over ABC, especially for
companies with heterogeneous activities. The TDABC approach simplifies cost allocation,
reduces subjectivity (avoiding the estimates inherent in ABC's activity-based allocation),
and increases analytical flexibility. They acknowledge, however, that the lack of explicit
activity definition in TDABC might mean discarding useful aspects of the ABC system,
particularly hierarchies. They recommend retaining elements such as the hierarchical
profitability analysis. The focus is shifted from assigning costs to activities to directly
calculating costs per transaction, reflecting the time spent on tasks which are considered
to be fairly homogeneous within defined departments. This simplifies the process
considerably, especially in large and complex organisations.