The relationship between manufacturing personnel who produce product and accountants who generate a product cost is often strained. The reason is simple. Accountants normally create product cost by the rules of generally accepted accounting principles; manufacturing personnel look at the nature of the resources consumed. A huge gap exists in the rules for external financial statement costing and the principles needed to reflect the realities on the factory floor in money. Has any part of the world developed a more satisfactory solution for costing manufacturing operations?
Research by the Institute of Management Accountants (IMA) has shown that Germany has the highest satisfaction with its costing practices. What is different about German management accounting, which is known as grenzplankostenrechnung (GPK), meaning marginal cost planning and accounting? First, it isn’t used for external financial reporting. The primary customers of GPK information are managers inside the organization. It was developed as a strategic, operational and tactical planning and control tool to support efficient operations and effective operational and investment decisions. Second, GPK clearly reflects resource quantities (as well as cost), capacity, and the nature of the quantity and cost relationships as fixed or proportional. This enables marginal and incremental analysis and decisions at all levels of the organization. Third, GPK does not allocate. It assigns costs based on strong cause and effect relationships; costs with weak or no causal relationships to products are assigned to levels of the organization that are responsible for and can manage those costs. This eliminates distortion from cost information and clarifies responsibility. The profession that works with GPK goes by the term “controlling” (not accounting) in Germany, and is a separate academic and professional discipline from accounting.
The reason German costing is so different from costing in the U.S. is because Germany developed capital markets much more slowly than the U.S. did. Germany relied on private investor and bank financing, which was much more aggressive and intrusive about ensuring that their financing was going to generate a profit and be repaid. Because of the relatively tighter access to capital, business owners in Germany pushed their controllers to develop methods to maximize the use of existing resources to avoid seeking additional financing. This required a high level of causality—the ability to rapidly and clearly identify the operational cause of a financial outcome, and the ability to accurately project the financial impact and outcome of an operational change.
It is surprising that very little is known of German controlling/costing methods outside of German-speaking countries. Germany has a rich academic culture that educates controllers, many widely used textbooks, and two prominent associations of controllers. Software company SAP has its developmental roots in computerizing the GPK approach to costing. IMA research and the German controlling associations confirm that GPK is used by more than 3,000 companies—manufacturing and others—in Germany.
The only other costing approach that has directly incorporated GPK is Resource Consumption Accounting (RCA). IMA’s Conceptual Framework for Managerial Costing also draws extensively from GPK for its principles and concepts that define the elements needed to create cost information for internal decision support. RCA has sought to improve on GPK by incorporating activity measurements that support continuous process improvement, by defining capacity measurement based on theoretical capacity, and defining other conventions to present a clearer picture of cause and effect resource, process and cost relationships. Manufacturers who suffer with insufficient or distorted cost data need not be victims. There are solutions, but they may not be ones your accountants and financial staff have been exposed to in most accounting or business education.
>>Larry White, CMA, CFM, CPA, CGFM, [email protected], is executive director of the Resource Consumption Accounting Institute (www.rcainstitute.org), which trains and advocates for improved cost information connecting operations to business performance.
