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Keys, D. E. and A. van der Merwe. 1999. German vs. U.S. cost management. Management Accounting Quarterly (Fall): 19-26.

Summary by Jennifer Jenkins
Master of Accountancy Program
University of South Florida, Fall 2004

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The purpose of this paper is to advocate the use of German cost management systems (CMS), compare U.S. CMS to German systems, and acknowledge hesitations that U.S. companies may have when implementing German CMS. The authors break the advantages of German CMS into seven areas. German CMS provide:

A more comprehensive approach.
A different approach to cost drivers.
A more detailed approach to cost control.
A greater willingness to make estimates.
A more accurate assignment of costs to the right year.
A better use of different costs for different purposes.
A clear conceptual separation between financial accounting and management accounting.

A More Comprehensive Approach

German CMS are more comprehensive according to the authors because they foster many levels of organizational planning and control. Strategic, tactical, and operational processes are all encompassed within the system in order to provide managers with the information needed to make both short term and long term decisions (p. 2). This type of organizational planning and control is only found in a few U.S. companies. Although these processes are in place, they are not assimilated. The German systems are extensively planned and tested to make sure that cost rates are meeting organizational goals and the system is functioning properly. Assigning selling and administration costs to German products and services is another aspect that allows the German systems to be more comprehensive than U.S. CMS systems.

A Different Approach to Cost Drivers

German CMS are different from the U.S. systems in that they use cost drivers differently. Resource cost drivers are a functional tool for resource and capacity management. Resource management allows managers to make decisions to outsource resources, determine other means of acquiring and using resources, and measuring the cost of excess/idle capacity (p. 3). These cost drivers quantify capacity based upon fixed resource costs. The German definition treats fixed costs as costs that will not oscillate over time, e.g., straight-line depreciation. Keys and Van der Merwe note that the resource cost drivers “…have more of a linear relationship with total cost than U.S. cost drivers” because of accurate capacity measurement (p. 3). In order to control these resources, internal users are charged for the resources consumed. This encourages the divisions to efficiently use resources.

A More Detailed Approach to Cost Control

Using cost centers as a means for overhead control is another element that German CMS have over the U.S. systems. German subunits must meet very detailed criteria to fulfill their definition of a cost center. Once the subunits are qualified cost centers, overhead costs are managed using responsibility accounting where managers are accountable for what cost can be controlled in their cost centers (p. 5). Planning and evaluating is a continuous part of German systems. Calculating variances by product gives managers a comparison between actual and budgeted costs in order to improve and control costs in a detailed manner.

A Greater Willingness to Make Estimates

In order to compare the costs discussed above, German CMS are more willing to use estimates to plan for costs. Estimates allow for more accurate and timely profit margins.

A More Accurate Assignment of Costs to the Right Year

U.S. companies have not been able to evolve from historical costing. German CMS use replacement cost as a valuation method. By using replacement cost instead of historical costing, German CMS do not need to be influenced by external reporting requirements to make internal decisions, thus, lending to a more accurate assignment of costs (p. 7). Transactions that result from their systems are less likely to provide a basis for net income manipulations. For example, the authors note how U.S. companies treat research and development costs as period cost versus how German companies amortize R&D so that costs are matched over a period of time (p.7).

A Better Use of Different Costs for Different Purposes

Additionally, the costs are more precise because of their ability to identify different costs for different purposes. Separate costs aid in planning and making decisions about different segments so that both long and short term analysis can be made for each segment, thus, better predictability of profit per segment.

A Clear Conceptual Separation Between Financial Accounting & Management Accounting

On a broader note, German CMS are more advantageous over U.S. systems because they place the same emphasis on information for internal use and financial reporting. Through the use of high-tech software, CMS are able to integrate cost management information and financial reporting information without having two separate systems (p. 8). The software minimizes redundancy with a single point of entry for both financial and managerial information; and information for external reporting supplies the information for managerial accounting for online, real-time analysis (pp. 5 & 8).

Disadvantages of German CMS

Due to the multifaceted and inclusive nature of German CMS, U.S. companies may feel deterred from implementing such systems. Establishing a new system may cost more than the benefits obtained. Moreover, companies would need a lot of expertise, both technological and managerial, to handle the mass of information that results from this type of system. For U.S. companies that are interested in and capable of implementing a German CMS, Keys and Van Der Merwe recommend that the system be introduced gradually or by segment, not company wide (p. 8). Furthermore, U.S. companies could adopt parts of German CMS, instead of employing the whole German cost structure.

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Related summaries:

Gaiser, B. 1997. German cost management systems. Journal of Cost Management (September/October): 35-41. (Summary).

Gaiser, B. 1997. German cost management systems (part 2). Journal of Cost Management (November/December): 41-45. (Summary).

Keys, D. E. 1994. Tracing costs in the three stages of activity-based management. Journal of Cost Management (Winter): 30-37. (Summary).

Keys, D. E. and R. J. Lefevre. 1995. Departmental activity-based management. Management Accounting (January): 27-30. (Summary).

Keys, D. E. and A. van der Merwe. 2002. Gaining effective organizational control with RCA. Strategic Finance (May): 41-47. (Summary).

Sharman, P. A. 2003. Bring on German cost accounting. Strategic Finance (December): 30-38. (Summary).

Van der Merwe, A. and D. E. Keys. 2002. The case for resource consumption accounting. Strategic Finance (April): 31-36. (Summary).