Cost accounting got you down?You're not alone. As much as 80 percent of Amercan management accountants agree that their current methods just aren't good enough for current business.
With that disturbing thought, Dr. Kip R. Krumwiede, CMA, CPA, and assistant professor of accounting at Boise State University, went to Germany, Austria and Switzerland to examine a costing system called GPK, or Grenzplankostenrechnung, roughly translated as "flexible standard costing."
The system is quintessentially German: complex, comprehensive, detailed, integrated and finely tuned.
"I came away with the impression that these German-language countries are ahead of us in costing practices," Krumwiede said. "While most American controllers say they are dissatisfied with their cost accounting systems, most German controllers say they are highly satisfied. Based on my trip and the survey responses I've received so far, there seems to be no question that, on the whole, the German systems are more advanced in terms of detail, precision, accuracy and control."
If knowledge is power, GPK is king. Where a typical U.S. company might have one overhead measure per department, a GPK structure typically involves a half dozen or more measures per resource cost center. On top of that, fixed and proportional overhead costs are discriminated. The work center could be as singular and identifiable as a single computer work station with its own measure for charging its costs to an output. A given company may have as many as 20,000 cost centers, with most having 400 to 2,000 - far more than the handful at a typical American company.
The consequent flow of information is nothing less than Amazonian. A given manufacturing cost can be assessed for direct or indirect assignability, type (production, research, administration, etc.), decision relevance, cash-flow relevance, allocation level, production cost category, absorbability, and every production cost type, from process labor to general factory overhead.
It all adds up to better control and smarter decisions.
Multinational manufacturers can break down the cost of production in order to decide where best to manufacture or buy products. By analyzing fixed and proportional costs, they can identify where capacity can be eliminated. They can also compare target and actual costs for each cost center. Sales and production planning can be controlled more precisely.
"Cost control is the biggest benefit," Krumwiede said. "One controller told me that his company can account for every euro of cost. For every work center, they had a target for every fixed cost and every proportional cost. They can compare that to actual cost and identify, in minute detail, where any variance occurred. In the U.S., when a cost is higher, we can usually identify it within a department, but often can't take it down to the level of the individual work center."
To handle all this information, it's nice to have a powerful information system. The 11 companies that Krumwiede visited tended to use sophisticated SAP enterprise resource planning systems. SAP, which is headquartered in Germany, offers a GPK module that facilitates implementation.
Culture clash?
Still, designing, implementing, maintaining and feeding a GPK system takes a lot of time. It's expensive, and a lot of the harvested information may serve little or no purpose. Even though American management accountants are generally dissatisfied with their cost accounting systems, they have been reluctant to crank up GPK. Perhaps it's laziness, but it may also be a prudent keep-it-simple philosophy.
Krumwiede thinks it's largely a matter of culture.
"It's a general culture difference, not a cost accounting philosophy," Krumwiede said. "Germans are known for precision in engineering. They couldn't fathom a costing system that wasn't terribly detailed. That isn't an assumption that U.S. companies are making. They need to be convinced that they need more detail. It's ironic that most companies say their cost system is inadequate and not meeting their needs, yet when asked if major improvements to their costs systems are on the horizon, almost as many say no."
Krumwiede has noticed that American companies tend to put their management accountants to work on financial reporting, with cost accounting of secondary concern. He has also noticed companies in German-speaking countries shifting their accounting attention more toward financial reporting, but generally their emphasis is still on cost accounting.
"Even the simplest German cost system, among those I looked at, would be considered a pretty detailed and complex system in the U.S.," Krumwiede said. "I don't think they'll ever come together. I think Germany's going to get a little simpler, and hopefully the U.S. will get a littler more detailed."
The Institute of Management Accountants is backing the concept of GPK and has begun a program to expand its use in North America. The plan is to first involve academics - Krumwiede is one of them - so that standards, benchmarks and best practices can be established before companies start implementing an incompatible hodge-podge of systems. IMA chief executive officer Paul Sharman said that it was this kind of ad hoc disorganization that caused activity-based costing to rise into wide popularity, only to crash in confusion.
"We want to entice academics to look at something that works and then to make it American - design it, change it, make it work so we can create it in an American methodology," Sharman said.
Karl Angler, vice president of finance at Stihl Inc., had little choice in the matter. Stihl's founding company in Germany was already using GPK, and Stihl in the U.S., which manufactures several outdoor handheld power-tool products, already had an SAP system in operation. The shift to GPK in late 2004 was an obvious step, and not an especially difficult one.
"As part of our standard costing system, we had already broken down our costs into fixed and variable elements, so we had a pretty good foundation for implementing a GPK philosophy," Angler said.
Angler said that adoption of GPK not only facilitates the exchange of information with the founding company in Germany, but makes additional costing information available with greater transparency. He called it a helpful tool for assessing selling prices and making decisions. The company is using parallel concurrent GPK and standard costing systems.
Krumwiede confirmed that GPK provides a good link between transnational operations, but GPK on one side and standard costing systems on the other can cause inefficiencies.
"For this to work well for companies with headquarters in, say, Germany, and subsidiaries or operating units in other countries, they need to have a common framework for reporting all their information, so they can relate one location to another and combine information from all locations," Krumwiede said. "This can be a big challenge. These systems tend to be very detailed, and the type of detail at one entity doesn't necessarily translate well to the form at another entity, especially between Europe and the U.S."
Krumwiede said that many American companies have already implemented some of the GPK elements when they installed their ERP systems. To take their existing cost center information and translate it into cost information, they will need to work with the ERP provider.
Toronto's Hospital for Sick Children was one of the first organizations in North America to adopt a GPK system, albeit at the level of a pilot project. Financial operations director Brian Mackie said that they made the switch in late 2003, and have just completed their first fiscal year using GPK.
"In the past, we have attempted to do activity-based costing and found that for various reasons it did not work out as we had hoped," Mackie said. "It was typically a separate software that was separate from our general ledger, so basically we had to enter all information twice and keep both systems up to date. It ended up being way more work without much benefit coming out of it."
Mackie admitted that GPK was "a hell of a lot of work to set up," but was set up within the general ledger, making updates immediate. The new system, using a PeopleSoft ERP system, had five or six cost centers for each used in the previous system. The new reporting structure involved only part of the hospital, but the success of the first fiscal year will lead to expansion in other parts of the organization.
