There is an ongoing debate in the United States about the performance of cost accounting systems. American managers tend to be dissatisfied with their own cost accounting methods, and there is widespread use of enterprise resource planning (ERP) IT systems based on German management accounting methods, so German cost accounting attracts a great deal of attention in the United States. (1) Some American managers believe that German companies provide best-practice examples because they are generally more satisfied with their systems. (2) (See Figure 1 for results from two surveys.) To provide a basis for comparison, we studied the cost accounting systems of a number of the largest German enterprises.
Starting with an overview of the differences between German and U.S. accounting practices, we first provide some insights into German management accounting practices. Then we report the results of a survey that sheds light on the cost accounting practices of large German companies. Finally, we consider factors that will impact the future of cost accounting in German companies. The results of this study indicate a surprisingly high level of satisfaction among German managers with the information they derive from their cost accounting methods. Another significant finding of our survey is that German cost accounting systems regularly distinguish between variable and fixed costs and are more detailed than their U.S. counterparts.
DIFFERENCES BETWEEN GERMAN AND AMERICAN COST ACCOUNTING PRACTICES
Cost accounting in the United States has regularly been criticized for not supporting managerial decision making and for inaccurate cost allocation resulting from widespread practice of allocating overhead costs based on direct labor. (3) Recent empirical studies of cost accounting practices in the United States have shown that direct labor costs are commonly used to establish the overhead rate base. (4) This result is surprising because activity-based costing (ABC) was designed to avoid this error. (5) U.S. firms, however, have been reluctant to implement ABC. Kip Krumwiede's 1998 study of the implementation stages of activity-based costing reported that only a quarter of responding enterprises applied it. (6) By 2005, Jeff Thomson and Jim Gurowka found that the system was already being described as "yesterday's hope." (7)
In Germany, however, several detailed management accounting systems were developed over the last century to overcome the flaws of external accounting.8 Because German financial accounting principles are designed to serve the purposes of creditors rather than investors, financial accounting cannot provide enough information for managerial decision making. Therefore, specific cost accounting systems have been designed for this purpose. The importance of cost accounting in Germany as a basic system for the supply, storage, and provision of corporate data led to the development of sophisticated cost accounting systems that combined the ability to effectively support managerial decision making and efficient IT support. With its strong theoretical foundation developed by Hans-Georg Plaut and Wolfgang Kilger, Germany's most important cost accounting system, Grenzplankostenrechnung (GPK), has reached great practical relevance--for instance, as embedded in software products like SAP, which supply data in consolidated or segmented form to corporate management as well as to decision makers on the plant floor.
The main features of GPK include cost-type accounting, cost center accounting, product cost accounting, and contribution margin accounting. One of the distinctive features is the separation of fixed and variable costs at the level of cost-type accounting. Because GPK follows the principles of direct costing, only variable costs are allocated to cost units. Fixed costs are used only in the profit-and-loss (P&L) statement because they contain no information for short-term decision making. In GPK, the profit-and-loss statement is intended to serve mainly internal purposes and is called contribution margin accounting. Three different forms exist. The simplest form subtracts all fixed costs as a single block from the product's contribution margins. In multistage contribution margin accounting, fixed costs are gradually subtracted from product types, product groups, or divisions by accountability. The most detailed form, called marketing segment accounting, allows a deep analysis of fixed costs according to different criteria such as sales regions, customer groups, or product groups.
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DESIGN OF THE SURVEY ON COST ACCOUNTING PRACTICES IN GERMANY
To assess cost accounting practices in Germany in more detail, we conducted a survey of the 250 largest German companies in terms of annual revenues. We mailed a comprehensive questionnaire to the head of controlling at each of these companies. The response rate of analyzable questionnaires was 19%, representing a total of 45 firms with an average of 20,024 employees. Of the respondents, 33% were …