B Y PAU L A . S H A R M A N , AC M A , AND KURT VIKAS
his is the third article in a series that began in frustration on the part of CFOs and business managers
October 2003 with “The Case for Management with their lack of cost and management accounting infor-
Accounting” and continued in December 2003 mation. The effect is that businesses are so overwhelmed
with “Bring on German Cost Accounting.” Here we delve by the requirements of outside parties that even most
further into German cost accounting to see how it has accountants fail to understand that the real “business of
evolved over the years and to show how its latest form, business” is represented by the management accounting
when combined with the “made in America” activity- personnel who work inside the organization.
based costing (ABC), creates a much more capable man- Organizations that are successful are either lucky or
agement information and decision-support capability have superior information with which to make decisions.
ILLUSTRATION: J.W. STEWART/WWW.JWSTEWART.NET
than has previously been experienced in the United Those that have strong and disciplined preparation, inter-
States, Germany, or anywhere else in the world. pretation, and application of decision-support informa-
Management accounting and controllership practices tion have a greater opportunity to respond to threats and
are more highly developed in German-speaking countries opportunities and to manage costs than those that don’t.
(Germany, Austria, and Switzerland) than in the rest of We believe that some U.S.-led management accounting
the world, partly because of the recognition that good initiatives, particularly activity-based costing, haven’t sur-
management accounting practices are critical to the suc- vived in most organizations for two reasons. The first is a
cessful performance of the enterprise. Contrast this to the lack of emphasis on building a strong, professional man-
U.S. where there’s a dominant emphasis on financial agement accounting community with clearly articulated
accounting and regulatory reporting and a high degree of and practiced standards. The second is a lack of attention
28 S T R AT E G I C F I N A N C E I December 2004
by academics to fundamental management accounting After World War II, Grenzplankostenrechnung (GPK)
principles. In contrast, German companies and academics became the most widely deployed management account-
have demonstrated disciplined attention to management ing methodology in Germany. It is most associated with
accounting (or what the Germans call “controlling”) to Hans George Plaut, an automotive engineer who became
the degree that the majority of organizations recognize involved with management accounting in the late 1940s.
these capabilities as being the most important activities H.G. Plaut is important because he identified and deliv-
performed by the “inside” finance function. Financial ered a long-term, sustained methodology that was
reporting is respected but is considered less important to designed to correct cost accounting information—to cor-
the successful performance of the organization. rect the arbitrary allocation of cost practiced in the
U.S.—and that became the underpinning of the modern,
A LITTLE BACKGROUND strong “controlling” culture in German corporations. In
Throughout the 20th century, German academics were 1946, he founded an independent consulting business in
engaged in deep and thoughtful debate about accounting Hanover, which later grew to employ more than 2,000
systems. The list of participants is long, and their contri- consultants, and he was appointed Honorable Dr. by the
butions to the evolution of accountancy as we know it are University of Saarbruecken in 1985, a few years before he
profound. Also during the last century, American acade- died in 1992.
mics, regulatory agencies, and practitioners evolved theo- While Plaut provided the practical elements of GPK,
ries and practices, but they seemed to differ from what Wolfgang Kilger, an academic, provided discipline and
was practiced in the rest of the world. Management thorough documentation in the form of one of the most
accounting is a good example of such divergence. Empha- important cost accounting textbooks used by universities
sis on financial reporting, which represents perhaps no in German-speaking countries, Flexible Plankostenrech-
more than 5% of the work of accountants inside organi- nung und Deckungsbeitragsrechnung. (The 12th edition
zations, has been used to influence public perception that will be published in spring 2005. Sadly, there is no Eng-
the CPA (Certified Public Accountant) is the only lish-language version of Kilger’s book.)
accountancy certification of merit and that young After Plaut made the transition from engineering to
prospective accountants should pursue it rather than the cost accounting, he questioned the same things that still
CMA (Certified Management Accountant). This has cre- bother U.S. academics and business executives. He would
ated the situation where the number of practicing man- always remind students and clients that the main purpos-
agement accountants in the U.S. is one-tenth the number es of management accounting are to control costs, man-
in the U.K., Canada, and Germany. This means the capa- age profits, and provide information to managers that
bility of U.S. companies and their staffs to apply good would enable them to make informed decisions. Indeed,
management accounting techniques is deeply impaired, these were the very issues that were documented so elo-
which creates a significant risk of organization failure due quently in 1987 by Robert S. Kaplan and H. Thomas
to poor decision support, planning, and control over Johnson in Relevance Lost. Plaut’s vision had been articu-
value-adding operations. Another example is the develop- lated in a 1953 magazine article titled “Die Grenz-
ment of rules-based GAAP in the U.S. vs. principles- plankostenrechnung,” in Zeitschrift fur Betriebswirtschaft,
based GAAP elsewhere. and it motivated a widespread and sustained response.
Of course, it’s typical for good ideas and proven capabil- His vision was:
ities to move across oceans. For example, target costing was ◆ To correct errors made by allocation of fixed cost to
perfected in Japan as was the concept of “building quality products, and
in” rather than “inspecting” it in. Clearly, German manage- ◆ To provide clear and reliable cost information to help
ment accounting also has been influenced by the work of managers make better decisions.
American academics. An example is how a form of ABC Plaut and his associates went on to implement GPK in
was grafted onto the strong roots of a proven German cost hundreds of organizations, many of which are still using
accounting system to produce what now, arguably, repre- it decades after they first implemented it. As reported in
sents the state of the art in management accounting. “Bring on German Cost Accounting,” when we asked
December 2004 I S T R AT E G I C F I N A N C E 29
controllers at companies we visited what would happen if ◆ Be an integral component of budgeting and opera-
their organization abandoned GPK tomorrow, we were tional planning.
told “nothing for a year, and then we would lose control.” ◆ Be done for every cost center.
Contrast this with the response we would receive from ◆ Reflect demand under effective, efficient, and economic
many U.S. corporations to “What would happen if your conditions (realistic expectations vs. “last year plus ?%).
organization abandoned activity-based costing tomor- Correct allocation of internal services cost should:
row?” The answer would be “Nothing. We already did!” ◆ Reflect true supply-and-demand conditions.
It isn’t our intent to disparage ABC but rather to ◆ Apply “pull” logic (see Figure 1, which demonstrates
explain how two initiatives, 30 to 40 years apart, should the flow of resources toward output or Cost Objects as
have such different results. One, GPK, was deployed with products “pull” cost to them).
great care and discipline. Essential elements or standards ◆ Ensure that the categorization of costs as proportional
were established for it, its methodology has evolved, and and fixed is sustained as costs cascade through the
its application has been sustained for more than 60 years system.
in many companies. Indeed, every management account- Use of standards should:
ing student in German-speaking countries learns about ◆ Be stable throughout the planning period.
GPK. The other initiative, ABC, was deployed toward the ◆ Be the basis of and provide for comprehension of
end of the 1980s with much marketing hoopla but with- variances (price, usage).
out any professional body establishing standards for it.
Hence its introduction and implementation became an GPK’S ROOTS
undisciplined, money-oriented, feeding frenzy for consul- GPK began in the manufacturing arena and later
tants and software companies alike. The outcome has branched out to service organizations. Initial applications
been a serious disappointment and, for most implemen- focused on direct product costs only, creating the impres-
tations, abandonment. sion that it was simply a marginal costing methodology.
Later manufacturing adopters such as Steyr Daimler Puch
A GOOD COSTING SYSTEM (now Magna Steyr), BMW, Porsche, Daimler Benz, Stihl,
Plaut described what he considered to be the essential and others allocated fixed as well as direct costs in their
elements of a good costing system in the 1953 article to GPK systems. Here are some critical aspects of the manu-
which we referred earlier. facturing application:
Cost Centers should: ◆ More emphasis was placed on analyzing direct costs or
◆ Be the clearly defined responsibility of a manager. costs that vary in proportion to the output of the activ-
◆ Represent homogeneous purpose and costs. ity (what the Germans describe as “proportional”).
◆ Be economic in design (not too complex). ◆ Cost control at the cost-center level was critical (as output
◆ Represent the cost of resources employed, where a volumes varied, cost-center mangers were held account-
resource equals machines, people, buildings, etc. able to adjust resource consumption accordingly).
Fixed and Proportional cost splitting should: ◆ Manual calculations were extensive as there was little
◆ Be done for each cost center by account/activity. use of computers in early applications.
◆ Apply resource drivers to distribute costs. ◆ Marginal costing was used to decide which products
◆ Employ capacity limitations/utilization. to eliminate and which products to place marketing
◆ Consider how costs behave under changing output and sales efforts on.
levels. ◆ Contribution margin was calculated for products and
Activities and Drivers should: customers and was used to influence the efforts of
◆ Be applied so that each cost center has at least one sales staff.
representative output measure, such as machine ◆ Lack of standard software created a dependency on IT
hours. departments for data processing, which brought with
◆ Ensure that the relationship between the output mea- it the associated problems of long development cycles.
sure and the proportional cost pool is linear. As computing capabilities evolved, Plaut and his con-
◆ Ensure that the relationship between the output mea- sulting associates worked with each individual client to
sure and the object (product) is linear. produce their own customized, stand-alone software to
Analytical Cost Planning should: facilitate data capture and to calculate results. The process
30 S T R AT E G I C F I N A N C E I December 2004
Figure 1: Linear Cost Flow Relationships
(WHAT WE SPEND)
MAINTENANCE REPAIR OPERATING OPERATING
LABOR SUPPLIES UTILITIES DEPRECIATION FLOOR SPACE
DRIVER – REPAIR HOURS SUPPORT
CONTROL MACHINE ACTIVITIES
DRIVER – RUN HOURS ACTIVITY
MACHINE RUN MACHINE SET-UP MACHINE IDLE
ACTIVITY ACTIVITY ACTIVITY
(WHAT PEOPLE AND MACHINES DO)
COST OBJECTS 2 3 BUSINESS
(WHAT WE PRODUCE) PRODUCT 1 SUSTAINING
Source: Focused Management Inc.
A critical aspect of GPK is to establish a clear “diagram” or tracing of the flow of the cost of resources to the activities of
processes and then to the receivers of output (Objects) of activities or processes. Relationships depicted in such a fash-
ion define the nature of quantitative relationships. For example, the machine running hours (number of hours the
machine will run) will determine the quantity of electricity and supplies to be consumed, which, in turn, determines cost
for the same.
was inefficient, cumbersome, and repetitive. After a while, SAP employed Plaut consultants and some of the
companies began to talk with each other, creating user brightest academics available in Europe to design the
groups to establish best practices. This, in turn, led to operations of their integrated cost accounting systems in
companies sharing software, which created many prob- which they applied Plaut’s essential elements. Over the
lems because of a lack of disciplined product introduc- next 20 years, SAP deployed the new, integrated cost sys-
tion practices and inconsistent applications. Such tem to hundreds of companies around the world. The
problems eventually prompted Plaut to develop a stan- methodology was incorporated into the “Controlling”
dard, stand-alone management accounting system. module, which drew operational data from other mod-
But being in the software business created a set of busi- ules such as billing or production management and
ness problems that Plaut wasn’t willing to sustain. Having financial data from the financial information module.
to keep pace with changing software technology and The new system provided integration and standardiza-
wanting to take advantage of data made available by inte- tion, thus eliminating problems associated with stand-
grated solutions prompted him to approach the world- alone systems.
leading German integrated systems supplier, SAP, in the At a Harvard colloquium in 1989, representatives of SAP
mid-1980s to have them build his solution into their sys- discussed German cost accounting methods and applica-
tems. SAP did so, and Plaut exited the software business, tions, comparing them to activity-based costing as it was
yet he worked with SAP clients to help them implement beginning to emerge in the U.S. ABC software was in its
GPK properly. infancy in the U.S., and, as in Germany, stand-alone sys-
December 2004 I S T R AT E G I C F I N A N C E 31
tems and custom-built solutions were being developed by Lesson 2: The essential elements that Plaut identified
organizations that were struggling to sell or implement in the early application of GPK were equally applicable to
ABC. Consequently, most American organizations that had service organizations.
invested millions of dollars in SAP software failed to take Lesson 3: Proportional costs should increase or
advantage of the full capability of the SAP Controlling decrease in response to changes in product volume that
module (CO). The decision by these organizations not to were facilitated by the existence of flexible human
use SAP CO seems odd given the amount of money they resource practices (temporary staff employed in peak
had spent to acquire and implement SAP software. Possibly times, etc.).
it’s because the SAP approach was different from ABC as it GPK then spread to service organizations in almost
was becoming popular in the U.S., and practitioners, acad- every conceivable sector, including financial services—
emics, and consultants didn’t understand it. Fortunately, Deutsche Bank, Post Bank; transportation services—
SAP has continued to evolve their system to incorporate Deutsche Bahn (German Railway), Lufthansa;
good ABC practices and standards. utilities—Ruhr Gas; healthcare services—Universitatsklinik
Heidelberg, Stuttgart Krankenhauser; and many others.
THE NEXT LEVEL OF GPK Here are some of the differences between these implemen-
Plaut’s work with SAP clients led to the next level of evo- tations and the German Post Office implementation:
lution of GPK. An early change was assigning fixed cost ◆ Workflow and processes were not analyzed and not
on the same basis as proportional cost. This came some documented, and activities had to be identified.
10 years after the initial applications, which had focused ◆ Work time standards had to be established for activities.
on proportional cost and marginal contribution. Even at ◆ Actual activity information was captured every
this stage marginal contribution was still considered to be month.
the most reliable cost information for price determina- ◆ Complexities arose from the existence of nonroutine
tion and decision-support purposes. activities and the variability of routine activities.
Before 1985, applications of GPK to service organiza- ◆ Each industry has unique characteristics with respect
tions were rare, but a major breakthrough was achieved to cost categories, factors of production, and objects.
when the German Post Office (Bundes Post) undertook These applications of GPK yielded additional lessons.
an implementation. (The implementation was described The most important were:
in detail in a white paper by Wolfgang Kilger, which he Lesson 1: Each application had to reflect the unique
presented to the Minister for Bundes Post in 1985, and in characteristics of the industry (which meant that, for
a 1988 book by Kurt Vikas titled Controlling im Dien- example, after the first hospital implementation had been
stleistungsbereich mit Grenzplankostenrechnung.) The completed, further hospital applications should be rela-
implementation effort involved using methods that hadn’t tively more straightforward).
previously been necessary for manufacturing organiza- Lesson 2: Lack of workflow and process information
tions, but, fortunately they already existed at Bundes Post caused the implementations to take much longer than
when the work began, making implementation feasible. expected. Data processing products like ARIS from IDS-
These included: Scheer were helpful because of their analytic capability
◆ Workflow and processes were already analyzed and and because they provided direction on what information
documented, and activities had been identified. should be gathered and how it should be analyzed.
◆ Work time standards had been established for In addition, service organizations derived many bene-
activities. fits. Deutsche Bank, for example, gained a meaningful
◆ Actual activity performance information was captured analysis of the cost of processing stock transactions
every month. because GPK provided a previously unavailable level of
The application of GPK to Bundes Post provided a cost transparency and acceptance of rational transfer
wealth of new information for specialists and academics. pricing for internal services. Also, the bank identified
Here are some of the lessons from the implementation: and realized significant cost improvement opportunities
Lesson 1: GPK functions the same way in service orga- as a result of combining cost and workflow/process
nizations as in manufacturing companies where there are reengineering. Managers received reliable, applicable
direct product activities and where there are many repeti- information and were able to focus on important
tive processes. opportunities to reduce costs and improve profits.
32 S T R AT E G I C F I N A N C E I December 2004
enrechning” or process-based costing (PK). PK has been
A Note from Paul Sharman incorporated into a recent application of GPK on a very
A number of people who know me and my past involve- large scale at German Telecom (Deutsche Telekom, DT).
ment with activity-based costing and the management DT had been a division of the German Post Office
accounting profession have asked why I am so interested until 1989, when it was spun off, so it had participated in
in German cost accounting. The answer is because I am the Post Office’s implementation of GPK and marginal
frustrated with what I see as being excessive emphasis costing with its cost-center-level flexible cost planning
placed on financial reporting and auditing in the U.S. Our system. DT recognized that its existing costing system
corporations are able to produce value and satisfy soci- didn’t go far enough in assigning support department
ety’s expectations only if the financial professionals inside costs, and it wanted to change that. The new system is
are doing a good job. The Germans have managed to get
known as Integrated Cost and Accounting System (IKE).
it right. In the U.S., regulators and auditors, for whatever
Inconsistencies in the way that the old costing system was
reason, seem to like the disproved concept that quality
applied by various departments led to different interpre-
can be inspected in. The problem is that it is overdone to
tations of results, so the company decided to extend and
the extent that management accounting capabilities inside
organizations are deteriorating badly. Good governance
redesign its existing system to accomplish the following
comes from strong processes and properly trained profes- objectives:
sionals inside an organization. Good audit results come 1. To integrate stand-alone solutions with the SAP R/3
from the existence of well-designed and properly operating system:
processes, not more checking. The primary way to regain a. Cost Center Accounting
confidence in the accountancy profession is for the profes- b. Activity-Based Costing
sionals inside organizations to design and deliver such c. Product Costing
processes. It seems that few in government, academia, or d. Profit and Loss Accounting
senior financial organizations in the U.S. know this or are 2. To associate a detailed understanding of processes and
willing to acknowledge it. But without these well-designed activities with operating quantitative and financial
and properly operating processes, corporations fail.
information to facilitate reporting, planning, and con-
If there were a theme for IMA this year, it might be
trolling of costs and profits at all managerial levels in
“Building Quality In.” The association is making the point
an integrated fashion.
that good governance and solid audit results occur only
3. To harmonize internal management accounting/
because of the efforts and good practices of those
controlling information with externally reported
finance function staff who work inside each organization.
The same is true for superior financial performance. Com- financial information as much as possible to provide
pare this to the role of auditing, which is really intended to data for business unit reporting.
inspect the work of the inside financial professionals. 4. To satisfy government reporting requirements.
5. To provide quick turnaround of product cost informa-
tion and customer profit information.
Finally, budgeting and planning of head count became a 6. To have a fast monthly, quarterly, and annual financial
relatively straightforward process in the context of a close.
properly designed process and costing system. The bank 7. To provide a common and user-friendly interface for
realized these benefits because of the newly available all staff.
fact-based measurements rather than what had previ- The IKE system took approximately 27 months to
ously been the subject of highly emotional and subjec- develop and implement and was completed in early 2004.
tive negotiations. Half the time was spent making sure that the system
would satisfy requirements of the telecommunications
STATE-OF-THE-ART APPLICATION authority that supervises telephone companies. The
During the past 10 years, German academics and practi- authority demands a high level of transparency, so new
tioners have monitored the progress of management features are evolved and implemented every three
accounting, particularly ABC, in the U.S. and the rest of months. Developed within the SAP CO module, IKE cap-
the world. The lack of standards in ABC was noted by tures cost information about the efforts of approximately
German Prof. Peter Horváth, who worked to create a 120,000 people working in 40,000 cost centers. Cost-
more disciplined version of ABC known as “Prozesskost- center information is organized and captured in approxi-
December 2004 I S T R AT E G I C F I N A N C E 33
Figure 2: Deutsche Telekom Integrated Design (provided by Deutsche Telekom):
Resource, Activity, Process, and Cost Object Cost Structures Linked
PROCESS COST PRODUCT COST
PROFITABILITY PROVISION OF BASIC RATE
DIGITAL ACCESS FOR DIGITAL CITY CALL
LINE CONNECTION ACCESS LINE
COST PROVISIONING OF ALLOCATION CONNECTING
OBJECTS DIGITAL ACCESS OF ACCESS ACTIVITY
LINE IN P&S
PROCESSES SALES PROD./SERVICE
SALES SALES PROD. SERVICE
ASSET ASSET ASSET ASSET
SALES PROD. SERVICE TYPE TYPE TYPE TYPE
PERSONNEL COST CENTER ASSET COST CENTER
With permission of Deutsche Telekom T-COM
mately 200 profit centers. DT developed this large, com- BENEFITS OF THE NEW SYSTEM
plex application with the help of consultants from a The new system, illustrated in Figure 2, provides many
number of firms, including Plaut Consulting and Booz benefits:
Allen Hamilton, and a number of respected and experi- 1. It provides consistent representation of profit-and-loss
enced academics. reporting by customer/product/region profitability
The system was implemented for the DT terrestrial along with multidimensional reporting of critical
telephone system, which covers all of Germany and serves information using online analytical processing (OLAP)
40 million customers. The application of operational technology. The new system replaced a number of dis-
modeling for all departments and cost centers involved parate systems that had previously been the source of
disciplined quantitative analysis and business modeling. conflicting information and much disagreement
Models were based on mathematical functions (defini- among managers.
tions) and relationships among cost-center resources, 2. GPK and ABC (or PK) were integrated into a new,
processes, activities, and cost objects such as products and single system.
customers. The integration of standard cost per unit of 3. Contribution margin was determined in the new
output and disciplined “pull” ABC principles provides for system by combining cost information from account-
performance monitoring and comparison between actual ing records with quantitative data from operations
performance and planned cost and quantitative usage systems and data sources.
variances. “Pull” ABC calculates demands for activity- 4. The new system provides a single source of informa-
driver quantities and resources (per Figure 1) based on tion for all users at all levels in order to satisfy their
quantitative relationships. Contrast this to “push” ABC, business requirements. For example, a product manag-
which simply allocates down from accounts to activities er is able to obtain profitability analysis by product
and activities to cost objects. and by market from the same system. This has uni-
34 S T R AT E G I C F I N A N C E I December 2004
formly created a common language, understanding, ulations, processing transactions, or auditing. Working
confidence, and trust in a way that wasn’t possible inside organizations to provide fiduciary controls, proper
previously. governance, and business planning is the biggest and
5. Information produced by the system identifies oppor- most important job of all. With properly trained and
tunities to reduce costs and reengineer processes by affiliated managerial finance professionals to partner with
providing an analysis of activity and process costs by business managers at all levels to create value for share-
cost center to operations teams to eliminate those that holders and customers alike, we don’t need all the regula-
are high cost or nonvalue adding. tors, auditors, and investment analysts. The big job is
IKE dramatically reduced the need for individual inside. Somehow the U.S. has forgotten that. The Ger-
departments/profit centers to perform calculations, and mans have not. They have it right.
the company eliminated nine different systems. As a
result, DT reduced the number of people assigned to cost LESSONS FOR GERMANS
accounting activities and has been spending less on con- Although German CFOs and other executives are quite
sultants. All information is now provided by a single inte- satisfied with their management accounting systems
grated system. For their work and the IKE system, DT and the systems’ outputs, global regulators are empha-
was awarded first prize in the 2003 “Controlling World sizing governance and financial reporting, so there’s a
Awards” (author Kurt Vikas participated on the jury). In movement in Germany to adopt a more American-style
applying for the award, DT reported that the net present simplification. Germans should remember that there
value of the project was 15 million euros, with payback in are different objectives, one for management account-
four years. ing and one for financial reporting, and they should
move to protect the good work they have already
IMPLICATIONS FOR U.S. FIRMS accomplished. ■
Recent surveys report that U.S. CFOs continue to be dis-
satisfied with their cost accounting efforts even though Paul A. Sharman, ACMA, is interim executive director of
these efforts meet the need of regulatory reporting. This the Institute of Management Accountants (IMA). You can
dissatisfaction is premised on the failure of cost account- reach him at (201) 474-1579 or email@example.com.
ing to accomplish what H.G. Plaut established as the
essential elements of a good costing system. German Kurt Vikas is a lecturer and professor at the University of
organizations, however, have applied these essential ele- Graz (Austria). He has 40 years of consulting experience in
ments and have consequently achieved a high degree of German-speaking countries, mainly implementing manage-
satisfaction with their ability to manage costs and make ment accounting systems in numerous companies in the
meaningful decisions. Moreover, the underlying princi- industrial and service sectors. You can reach him at
ples have remained consistent throughout the years and firstname.lastname@example.org.
have been applied in a variety of industries with the effect
of evolving implementation practices and business
lessons. The most important lesson from DT is that
incorporating what is good from ABC with what is good
from Grenzplankostenrechnung in an integrated system
yields significant human and operational benefits by
combining correct direct (marginal cost) information
with properly assigned indirect and support activity costs,
thus giving managers relatively more correct profit data
for decision-support services.
In the U.S., we have yet to recognize and implement
the essentials of good management accounting practices.
Instead, we have focused on financial reporting. In so
doing, we have missed the most important role for
financial professionals, whether they be engaged in con-
trollership activities, financial reporting, establishing reg-
December 2004 I S T R AT E G I C F I N A N C E 35