Comparing U.S. and German Cost Accounting Methods
Krumwiede, Kip, Suessmair, Augustin, Management Accounting Quarterly
THIS ARTICLE EXPANDS ON THE AUTHORS' ARTICLE, "GETTING DOWN TO SPECIFICS ON RCA," WHICH APPEARED IN THE JUNE 2007 ISSUE OF STRATEGIC FINANCE. BOTH ARTICLES WERE MADE POSSIBLE BY A FAR GRANT.
EXECUTIVE SUMMARY During our in-depth study of German and U.S. costing systems, we found that German companies emphasize management accounting more, and U.S. companies place their accounting emphasis on financial reporting. In addition, more German companies than U.S. companies are satisfied with their costing systems.
We recently completed an in-depth study of German and U.S. costing systems, which included site visits to several firms in both countries and a detailed survey asking many of the same questions to make head-to-head comparisons. We came away from our German site visits quite impressed with not only the amount of detail but also the level of commitment these firms place on management accounting (i.e., "controlling") information. This large emphasis placed on management accounting is rarely seen in U.S. firms, which tend to place their accounting emphasis on financial reporting. Any proposed management accounting initiative has to overcome strict cost-versus-benefit hurdles to be approved.
We will provide details of our survey results and site visits (see Table 1 for a summary of the respondents by industry). The results are based on 148 surveys from German companies and 130 from U.S. companies in a cross section of industries during January through June 2006. The German response rate was 36% of the companies contacted, and the U.S. response rate was 27%. Overall, the U.S. respondent firms were somewhat larger than the German firms in terms of sales revenue ($201 million-$250 million versus $151 million-$200 million, respectively). The two countries also varied somewhat in terms of industries represented with more U.S. responders than German responders (72% versus 58%, respectively) from manufacturing firms. We also report industry differences when applicable.
We found that the Germans focus more on certain advanced costing practices often associated with what has become known as resource consumption accounting (RCA). Firms in the United States tend to focus on different practices. Many of these differences are driven by culture and more advanced implementations of enterprise resource planning (ERP) systems. We will discuss the differences-and similarities-in order to help non-German companies determine whether advanced costing practices such as RCA will add strategic value for their firms.
The culture in most U.S. firms is that costing practices are just not important enough to invest heavy resources in more detailed methods. Convincing upper management to invest in more advanced methods usually requires a strong quantification of the expected benefits of those methods. Because those benefits are usually hard to quantify, the investments rarely get made. Even when firms spend millions on a new ERP system, much effort is made to minimize the expense and just try to get the new system to do essentially what the old system did. As one director of worldwide manufacturing finance responded about the possibility of implementing RCA, "It could work if operations management would agree to adopt. Cultural change is the biggest issue, and it would be a major effort to change the metrics being used today."
The Germans take a very different approach. Table 2 illustrates the strong emphasis Germans tend to place on management accounting, which is known as controlling. Their answers show consistently stronger topmanagement support for managerial accounting, pursuit of advanced cost accounting methods, and importance placed on internal decision support, planning, and control. On average, more than 40% of their accounting employees perform controlling functions compared to about 35% in the United States.
German and Japanese companies are also known for having a longer-term planning horizon than U. …