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Sharman, P. A. 2003. Bring on German cost accounting. Strategic Finance (December): 30-38.

Summary by Jae Johnson
Master of Accountancy Program
University of South Florida, Fall 2004

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Due to the wide dissatisfaction of U.S. CFOs with their organizational measurement and management, the author's purpose is to suggest incorporating practices from around the world, particularly German cost accounting. He goes on to explain the seemingly successful cost accounting practices the Germans have used for more than thirty years

Developed by H.G. Plaut, Grenzplankostenrechnung (GPK) can be translated to Flexible Analytic Cost Planning and Accounting which is also sometimes referred to as flexible standard costing. This methodology has become the standard for cost accounting in Germany (p. 31). Recently, Activity-based Costing (ABC) called Prozesskostenrechnung (PK) in Germany, has also been incorporated to further sophisticate GPK.

GPK has some major differences from U.S. standard costing. Where U.S. organizations using standard costing allocate overhead with the intention of fully recovering all costs, German GPK does not. GPK is more like marginal costing with characteristics of ABC. GPK includes cost-centers with a similar level of detail as ABC activity centers. However, GPK’s cost pools have a resource-centric view (p. 32). This system works best in companies with repetitive routines. Cost-centers need to be well defined and abundant in order to establish clear cause-and-effect relationships between resources used and their appropriate cost drivers. Defining a cost-center is a key aspect of GPK:

Costs must be separable and specific to the output.

Output must be repetitive.

The responsible manager per cost-center.

Size of the center should be manageable.

Work must be routine.

Cost drivers must be quantifiable and able to be planned.

The center should be classified as primary or support. (Support for a primary does work directly contributing to manufacturing or performance of a service.)

Typically, cost-centers are centered around a single “activity” with only one cost driver. This creates activity/cost-center entities within the cost accounting/management system and also in the budgeting and reporting systems. Cost-center managers can then use the previous year’s actual results to calculate the new budget taking into consideration any changes that may affect costs. ABC, in contrast, typically will have one cost-center with multiple activities (p. 32)

Another important concept is how fixed and variable costs are determined. Variable costs are defined in relation to the units of output of the cost-center activity as opposed to the total quantity of products. Variable costs are then re-allocated to primary departments according to units used. Fixed costs are allocated based on the percentage of budgeted units of output needed per primary cost center. Then each month budgeted variable costs are adjusted to show costs of actual units produced. These actual variable costs are called target or authorized costs. Spending should be equal to the sum of target costs plus budgeted fixed costs (p. 33).

The same techniques used in cost centers are applied to production-order or work-order costing. Variance calculations are also performed on the order, and differences are passed into contribution margins for the product. These variance analyses promote more accountability and efficiency because they are more operations oriented than traditional U.S. cost-allocation systems (p. 33).

Allocation of equipment cost is different in the GPK system. U.S. systems tend to divide total equipment cost by a variable amount of activity, typically budgeted labor hours or machine hours. Whereas, GPK equipment cost is divided by a “normalized capacity” that is the same every year. If production is less than full capacity then the “unused cost” isn’t allocated to the products (p. 34).

Another critical concept of GPK is analysis. Profitability is analyzed by groups and “layers” on profit-and-loss statements for each product, product group and the entire organization (p. 34) (See the adaptation of Table 6 below). The objective here is to provide managers with an understanding of the effective cost of operations, not for financial reporting purposes. Therefore, it is common to have the cost of depreciation based on replacement value rather than book value (p. 35).

GPK Profit and Loss (Adapted from Table 6, p. 35)
Layer Description Product Group 1 Product Group 2  
Product 1 Product 2 Product 3 Other cost Group Total Product 1 Product 2 Product 3 Other cost Group
Total
Total
Revenue 100 200 300 600 400 500 600 1,500 2,100
Direct Material 20 47 55 122 75 100 130 305 427
Direct Labor 10 22 40 72 35 51 67 153 225
Variable Indirect Cost 8 15 25 48 43 60 80 183 231
1a Marginal Contribution 62 116 180 358 247 289 323 859 1,217
Cost of Equipment 5 11 14 20 50 22 27 33 112 194 244
Imputed Interest on Capital - 1 1 5 7 2 3 3 10 18 25
1b Product Contribution 57 104 165 -25 301 223 259 287 -122 647 948
Distribution/
Logistics
60 60 125 125 185
Selling Expenses 75 75 125 125 200
2 Customer Contribution -135 166 -250 397 563
Fixed Costs 40 40 60 60 100
Marketing Expense 10 10 37 37 47
R & D 100 100 50 50 150
3 Operating Contribution -150 16 -147 250 266
Other Costs 10 10 15 15 25
4 Net Contribution -160 6 -162 235 241

Recently ABC has been incorporated to analyze indirect costs in order to improve cost/profitability analysis (also known as PK as mentioned earlier). Together GPK and PK are an integrated decision-support, budgeting, planning, and control system. In contrast, ABC is a top-down cost allocation system used to develop information about historical periods (p. 37).

Perhaps there are a number of reasons that GPK has been around for so long:

Disciplined design and methodology further refined by academics,

A clear distinction between management and financial accounting,

Proactive use of pull logic in the design of cost-center and output relationships, and

IT systems have evolved to support it (p. 37-38).

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Related summaries:

Clinton, B. D. and D. E. Keys. Not dated. Resource consumption accounting: The next generation of cost management systems. Focus Magazine (5): 1-6. (Summary).

Gaiser, B. 1997. German cost management systems. Journal of Cost Management (September/October): 35-41. (Summary).

Gaiser, B. 1997. German cost management systems (part 2). Journal of Cost Management (November/December): 41-45. (Summary).

Keys, D. E. and R. J. Lefevre. 1995. Departmental activity-based management. Management Accounting (January): 27-30. (Summary).

Keys, D. E. and A. van der Merwe. 1999. German vs. U.S. cost management. Management Accounting Quarterly (Fall): 19-26. (Summary).

Keys, D. E. and A. van der Merwe. 2002. Gaining effective organizational control with RCA. Strategic Finance (May): 41-47. (Summary).

Van der Merwe, A. and D. E. Keys. 2002. The case for resource consumption accounting. Strategic Finance (April): 31-36. (Summary).