Bring on German Cost Accounting: U.S. Companies Should Take a Look at the Ways Their International Counterparts Successfully Measure and Manage Organization Performance in Order to Resolve Limitations in North American Practices
Sharman, Paul A., Strategic Finance
In "The Case for Management Accounting" (October 2003), I issued a clear call for action. Financial accounting priorities are dominating business measurement and management to the detriment of good management accounting practices. Management accountants help drive effective and efficient business performance, while regulators, financial analysts, and auditors are like checkers who check the checkers who check the scorekeepers at a bridge game. So intricate is the scoring process that some players become distracted and concentrate on keeping score rather than playing the game (Enron, WorldCom). In those instances, the analysts (unintentionally perhaps) create business performance criteria based on scorekeeping intricacies rather than actual playing ability. As one CFO commented after reading the article: "You are right! It is time to push the pendulum back."
I also noted that sincere efforts by operational and financial managers to improve organization measurement and management over the past 15 years have often missed the mark. Unsatisfactory applications of activity-based costing (ABC), performance measurement, and other strategic cost and management initiatives have left CFOs dissatisfied. Disappointed executives are reluctant to make potentially more unfulfilled promises to their fellow executives about how great new measurement and management methods will revolutionize the way they plan and control operations.
This isn't the time to be folding our tents and capitulating to the overwhelming power of financial reporting requirements. It's time for management accountants to drive meaningful, dynamic, and disciplined changes in their role of providing information to managers to facilitate responsible, excellent business performance. This will involve learning from U.S. management accounting experiences and combining the successful aspects with positive practices from elsewhere in the world.
Of particular interest is German cost accounting, which satisfies the need to measure and manage organization performance. These successful systems represent a thoughtful and long-term evolution of management concepts that originated in both Europe and North America. In some cases, companies have been using these methods for more than 30 years.
GERMAN COST ACCOUNTING
German cost accounting was designed with the explicit objective of supporting management decision making about which products or services to offer, how to price them, and how to plan and control operations. In fact, in many organizations in Germany and German-speaking countries, there's a clear organizational distinction between the department responsible for financial accounting and the one responsible for "controlling."
German cost accounting systems developed in response to a financial accounting system that was highly defined by government reporting requirements but wasn't especially helpful to managers in supplying information needed to manage the business. Shortly after World War II, H.G. Plaut developed a new form of cost accounting called Grenzplankostenrechnung (GPK in English), which may be translated as Flexible Analytic Cost Planning and Accounting, sometimes referred to as flexible standard costing. Plaut and his consulting company deployed the technique to many manufacturing companies in Germany and German-speaking countries as well as to a number of significant service organizations including banks and the postal system. Prof. Dr.Wolfgang Kilger was influential in developing the theory of GPK, and Prof. Dr. Paul Riebel created a highly sophisticated contribution margin accounting method called Einzelkosten und Deckungsbeitragsrechnung as a competing model.
Both models are integrated in modern German cost accounting systems. Indeed, the resulting GPK methodology has become the standard for cost accounting in Germany. The primary German cost accounting textbook, which features GPK, was published by Gabler in 1961. …