GERMAN COST ACCOUNTING VS. ACTIVITY-BASED COSTING
Shirley A Polejewski, PhD
Professor of Accounting
University of St. Thomas
2115 Summit Avenue
Saint Paul, Minnesota 55105
INTRODUCTION
It appears that Activity-Based Costing is widely used in cost/managerial accounting as a cost
measurement, yet accounting practices can differ widely between countries. To be able to
recognize difference and similarities in seemingly identical practices between countries provides
an opportunity for improvement and allows managers to draw managerial implications in light of
the increasing internationalization of companies. This paper compares the USA Activity-based
Costing (ABC) and the German (GPK) Activity-based costing. The paper establishes differences
based on purpose, cost, concepts construction and cost allocation, and quantity and quality of
cost information.
From this research it appears that many of the enterprises in the USA as well as those in other
countries 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
and in referencing the German Cost Accounting system.
HISTORY OF PRODUCT COSTING
There are significant compromises in a key part of the system, the costing out of products, which
misrepresent the true behavior of the business. Overhead, specifically, has been allocated in
such a simplistic manger usually on labor hours consumed. Initiatives taken in plants to regain
competitiveness have not been captures and supported in the accounting records. Managers
could be mislead, develop inappropriate strategies, and make bad decisions. For example, a
small specialty order requiring more design, scheduling and attention, i.e., increased overhead
because of the runtime and low direct labor. The small order would inaccurately appear to be
better than larger orders; the plant would be pushed in the wrong direction. With the
development of activity-based costing (ABC) this would then provide an opportunity for
management to bring these overhead allocations into line with the way the plant actually
operates. The activities, which cause the costs, are identified so that the products, which cause
the activity, can pay for them. ABC is not a radical change but a fine-tuning of applying
overhead to products. ABC has the potential to significantly improve the usefulness of
accounting as a decision support system for manager’s strategic moves in rebuilding
competitiveness.
The full cost of a product includes direct labor, material, variable overhead and fixed costs.
Direct labor and materials are observed and measured by industrial engineers and maintained as
“standards.” The overhead costs are captured and reported by responsibility centers, departments
or plants. The difficulty is what to do about tying overhead costs to products. Those who
advocate variable costing state that overhead costs are sunk or fixed and will not change with
most management decisions; therefore overhead costs should be expensed monthly as a general
cost of doing business. Advocates of full costing believe that the cost of the product must show
the full costs of the product, which means more costs are capitalized and put into inventory with
the product rather than expensed when costs occur. Full absorption costing is most common for
external reporting but from a management decision-making, this costing has important
implications.
ACTIVITY-BASED COSTING
Activity based costing has been the new approach to solve some of the problems and provide
management with better information. Activity-based costing (ABC) developed by Harvard’s
Robert Kaplan and Robbin Cooper allocates staff and overhead costs to products on the basis of
how the product actually consumes or causes these activities. The process is similar to the one
used by engineers and estimators in developing a bid or estimate of the cost of a project. They
search for systematic, cause and effect linkages between the product and costs, before resorting
to gross across-the board allocations. ABC calls these linkages “cost driver.” Companies use
things such as labor hours machine hours, floor space used, number of set-ups, order,
movements, size and weight, complexity, and sales costs as “drivers.” Costs are first
accumulated and then allocated to the product by the appropriate driver, i.e., cause. For
example, a product using 30% of the space might get 30% of the space costs; this then gives a
more accurate result and often a very different picture of costs and profitability of products and
product lines.
Pat Romano, editor of Management Accounting and director of NAA Research summarized
developments in ABC by saying, “Activity Accounting is a technique for understanding costs.” 1
It is very difficult to estimate the potential costs from running a business with inaccurate
information and ABC is an opportunity to improve the accuracy of accounting reports in
modeling the company.
One should note that, where a company produces a narrow range of similar products, ABC may
offer limited benefits but for firms that produce a diverse range of high-volume and low-volume
products, and ABC system is likely to be justified. 2
ABC is not a fad or a panacea for all that ails many industries; it is a progression of information
system of industry.
Kaplan and Cooper reiterate, “ABC is not designed to trigger automatic decisions but designed
to provide more accurate information about production and support activities so that
management can focus its attention on the products and processes with the most leverage for
increasing profits.
ABC appears to be less revolutionary than evolutionary as it is a matter of formally examining
processes and products to find out how they cause expenses and then seeing how they bear the
costs.
Companies that implement ABC do run the risk of spending too much time, effort and money on
gathering data that is collected. Too many details can prove frustrating for managers involved in
ABC, on the other hand, a lack of detail leads to insufficient data.
One should note that, where a company produces a narrow range of similar products, ABC may
offer limited benefits but for firms that produce a diverse range of high-volume and low-volume
1
2
Romano, Patrick L., “Trends in Management Accounting,” Management Accounting, August 1990, p53-56.
Drury, Colin, “Product Costing in the 1990s,” Accounting (UK), May 1990, p 126
products, and ABC system is likely to be justified.3 Another reason of limited benefits is that
maybe that the external accounting rules puts the interests of creditors before those interests of
shareowners.
GERMAN COST ACCOUNTING: (Grezplankostenrechnung or “GPK”)
Flexible margin costing, or GPK is a time-tested cost accounting 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 center instead of activities and processes.
Management accounting has been more important to companies in German-speaking countries,
such as Germany, Austria, and Switzerland, than to companies in the USA. Perhaps one of the
reasons why management accounting is important maybe that the external accounting rules puts
the interests of creditors before those interests of shareowners.4
Hans Georg Plaut, a practitioner, and Wolgang Kilger, a cost accounting researcher, developed
GPK in the 1950s and 1960s. Both men were focused on developing cost accounting methods to
support decision-making. 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 cost-type costs. 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 separate different costs types such as labor, materials and depreciation.
GPK also includes interest as a cost type. Each cost type is decomposed into variable and fixed
costs along with the assignment of costs to cost centers.
Cost type accounting leads to one of the most important elements of GPK; cost center
accounting. Cost centers usually have one or a few cost driver 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. Comparing planned and realized costs at the cost-center level
provides early and detailed information about emerging problems.
GPK uses two difference types of cost centers: primary and final cost centers. Primary cost
centers cover activities that are far away from the manufacturing process while the final cost
centers are closely connected to the manufacturing process. Only variable costs are charged to
final cost center and only variable costs of the final cost center are charged to cost object in
product costing.
Product cost accounting assigns to products the cost of direct labor, direct material as well as the
variable costs of the final cost centers. Only the variable costs of each product are shown in
3
Cooper, Robin, Kaplan, Robert S, “Profit Priorities from Activity-Based Costing,” Harvard Business Review,
May-June 1991, p130-135.
4
Gunmther, Friedl, Ulrich-Hans, Kupper; Burkhard, Pedell, “Relevance Addes: Combining ABC with German
Cost Accounting,” Strategic Finance; June 2005, Vol. 86 Issue 12, p56-61.
product cost accounting. Fixed costs can also be allocated to products in a parallel calculation
for mid-and long term proposes but this contradicts the basic principle of GPK. Fixed casts are
allocated by a surcharge as a percentage of variance costs.
The final element of GPK is contribution margin. The contribution margin of each product is
obtained by subtracting variable costs from product revenues. This then supports short-term
management decisions because the decisions are based on contribution margin rather than
product costs. By subtracting the relevant fixed costs from the contribution margin, different
contribution margins or different layers can be obtained. Example: If there are fixed Research
and Development or Advertising costs for a small product groups, these costs are subtracted
from the product group’s contribution margin. This type of layered contribution analysis
supports short-term decision-making and gives recommendations for long term decisions.
GPK is able to support many short-term management decisions such as optimal production plan,
make-or-buy decisions, pricing decisions, or internal transfer pricing. Costs are highly
transparent which helps influence the behavior of employees and identify potential weaknesses.
These then are a major reason for the use of GPK in large industrial firms in German-speaking
countries.
GPK AND ABC COMPARED
Since GPK applies the marginal costing principle and allocates only variable cost to products,
this costing method provides information for short-term decisions. ABC, on the other hand, aims
at allocating all the costs required to produce and market a product in the long run. It focuses on
long term decisions such as product design and production and involves allocation of fixed costs
that use assumptions about the proportion of costs that normally won’t be fulfilled which makes
ABC less suited for short-term decision making.
GPK allocates overhead costs on products via cost center and ABC does it via activities and
processes, the underlying formal structure of cost pools and cost drivers is similar. Some
companies use the cost center module of SAP for implementing ABC. This then shows that the
difference between GPK and ABC aren’t about the structure of the system but involve the types
and number of cost drivers and the allocation of fixed costs. Both systems use cost drivers in
production-related areas to measure the performance of cost centers and their activities, but ABC
employs nonoutput-related cost drivers such as product complexity and the number of product
variants, which is suppose to improve the manufacturing design and reduce the number of parts
used. ABC also uses cost driver to allocate total costs on products and GPK doesn’t because
charging fixed costs to products isn’t in line with its principles.
Both management accounting systems stress the issue of cost and profitability control through
variance analysis. An important difference between
GPK and ABC is the distinct focus of ABC on the process owner’s responsibility for their
processes across cost centers and departments. This implies a horizontal, process orientation
compared to GPK’s vertical functional one.
There are advantages in combining GPK and ABC especially as the importance of indirect costs
increases. A permanent ABC system that delivers detailed cost information of single activities
on a monthly basis like GPK would be very expensive in most instances. An alternative solution
for companies that are using GPK would be to define cost centers in indirect areas in order to
improve planning and control of the principal activities costs. Another widely practiced
alternative is to employ ABC on a case-by-case basis only, such as the development of new
products.
It is recognized that ABC compliments GPK in administrative and nondirect “cost centers.” It
can be further argues that the discipline required to establish a cost center is identical to that
required to establish an activity center in ABC. The important distinction source of long-term
sustainment is the incorporation of a disciplines methodology into organizational measurement
and management planning and control system. It is possible that incorporating the successful
aspect of GPK with those of ABC combined with disciplined methodology and competent
software will satisfy the needs of USA CFOs.
IS THERE A FUTURE OF GERMAN COST ACCOUNTING IN THE USA?
According to a survey, as many as eighty percent of American management accountants agree
that their current methods of costing just aren’t good enough for current businesses, yet nothing
is being done to overcome this deficiency.5
An American professor from Boise, Idaho visited many German-languages countries and came
away with the impression that these countries are way ahead of the US in costing practices.
While American controllers say they are dissatisfied with their cost accounting systems, most
German controllers say they are highly satisfied with their cost accounting systems. If German
systems are more advanced in terms of detail, precision, accuracy and control, why haven’t US
businesses and accounting educators looked more favorable into the German GPK system? Are
we prone to a “keep-it-simple” philosophy as the maintaining and feeding a GPK system takes a
lot of time, or is it a matter of culture?
Germans are known for precision engineering and they cannot fathom a costing system that isn’t
terribly detailed, this isn’t an assumption that US companies are making. Although we say we
have an inadequate costing system in the USA and the system is not meeting our needs, when
asked if major improvement to the cost system are on the horizon, business and educators say
“no.”
US firms must decide to place a higher emphasis on management accounting than generally
exists today. Long-term financial results will probably be improved by strong internal
information and cost analysis. Many US firms have invested millions in integrated systems such
as SAP R/3 yet don’t take full advantage of what these ERP systems can do for cost analysis,
why?
5
Cheney, Glenn, “German Cost Accounting: Will it Work in American?,” Assurance; p14, Vol 19, No. 9
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