Relevance Added: Combining ABC with German Cost Accounting: Activity-Based Costing Is Better for Long-Term Decision Making While a Leading German Cost Accounting Method Supports Short-Term Decisions More Effectively

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Are you familiar with Grenzplankostenrechnung?

Translated from German, it roughly means "flexible margin costing." Flexible margin costing, or GPK, is a time-tested cost accounting system used by many companies in German-speaking countries. GPK is about marginal costing instead of full costing, short-term decision support instead of long-term, and cost centers instead of activities and processes. And by combining activity-based costing ABC) with GPK, you can add relevance to your cost accounting system.

Management accounting has long been more important to companies in German-speaking countries, such as Germany, Austria, and Switzerland, than to companies in the United States. This perhaps can be attributed to the external accounting rules in German-speaking countries, which put the interests of creditors before those of shareowners. In contrast, financial accounting provides little guidance for management decision making. Thus the need for a sophisticated cost accounting system--explicitly for management decision making--is paramount.

Meanwhile, in the U.S., the cost accounting system that has attracted the most attention since the mid-1980s has been ABC.

In this article, we're going to describe the principles of both GPK and ABC and analyze the differences between the two. First, let's delve into the details of GPK.


GPK was developed in the 1950s and 1960s by Hans-Georg Plaut, a practitioner, and Wolfgang Kilger, a cost accounting researcher. Both Plaut and Kilger were focused on developing cost accounting methods to support decision making. After its development, GPK became arguably the most important cost accounting system for industrial firms in German-speaking countries. In the past 20 years, its success can be at least partly attributed to the advent of SAP's enterprise resource planning (ERP) software because SAP offers the conceptual framework of GPK for cost accounting as part of its management accounting module.

Similar to direct costing, the most important idea behind GPK is that fixed costs aren't charged to products. If they were, managers would be induced to make incorrect short-term decisions, such as for pricing and make-or-buy decisions. In practice, however, GPK can be combined with a multilevel allocation of fixed costs.

The fundamental structure of GPK, shown in Figure 1, follows the structure of basic cost accounting systems taught in the business schools of universities in German-speaking countries. GPK consists of four important elements: cost-type accounting, cost center accounting, product cost accounting, and contribution margin accounting for profitability analysis.


Cost-type accounting, seen in Table 1, separates different cost types, such as labor, material, and depreciation. In contrast to most U.S. cost accounting systems, GPK and other German systems also include interest as a cost type. Each cost type is decomposed into variable and fixed costs along with the assignment of costs to cost centers. As linear cost functions are assumed, variable unit costs are constant with respect to output. Obviously, this decomposition can't be done for each cost type, but it has to be made for each accounting transaction.

Cost-type accounting leads us to one of the most important elements of GPK: cost center accounting. A cost center is a relatively small entity with a robust and quantifiable relationship between its costs and a single activity, and it is typically composed of around 10 workers or less. Firms usually have multiple cost centers for such areas as manufacturing, material, administration, sales, and R&D. Cost centers usually have one or a few cost drivers, and they determine the relationship between variable costs and the output of the cost center. This simplicity allows for detailed cost planning of each cost center, with cost functions that describe the relationship between costs and output. …