German accounting

Custom Student Mr. Teacher ENG 1001-04 18 December 2016

German accounting

German accounting was developed for the objective of supporting management decision making regarding what to produce, how much to price, and how to plan and control operations. A new cost accounting called Grenzplankostenrechnung (GPK in English), which may be turned into Flexible Analytic Cost Planning and Accounting, also referred to as flexible standard costing. This was developed in Germany 40 years ago. GPK integrated the management system into an accounting system. GPK provides meaningful information to manage the business and conducts flexible budgeting of the capacity costs.

GPK focuses on operational costs and resource consumption. The “Controlling”department is separate from the Financial Accounting department in German organizations. The major characteristics of GPK are that cost centers resource consumption rates are either fixed or proportional relative to outputs and cost centers rates are calculated and charged to the departments at the budgeted rates. An activity based costing (ABC) is a powerful tool for managing performance that is used for identifying, describing, assigning and reporting on agency operations.

Activity based costing is used to identify opportunities to improve the process effectiveness and efficiency by identifying the exact cost of the product. Activity based costing defines processes, identifies cost drivers and determine the cost per unit. The major advantage of using activity based costing is that it reduces the distortions in product costing and allocation of indirect costs. ABC generates how the money is spent. Activity based costing is a management tool that provides better allocation of resources, is useful for forecasting financial baselines, aligns costs to output.

(Cokins, G. 2001). Theory of constraint (TOC) is used to accelerate process improvement in project and manufacturing operations. Theory of constraints helps companies to increase their performance far higher and quicker than any other approach. The factors needed to increase the performance of the companies include the need to develop innovative and new products quickly in the market. The companied have realized that they have to achieve more with the less.

Theory of constraint helps organizations to increase their performance of manufacturing to a great extent without increasing the labor and capital investments. Balanced scorecard (BSC) is the most widely used performance management system today. Balanced scorecard can measure performance across different perspectives like customer perspective, financial perspective, etc. The use of different perspectives shows a balanced view of the company’s performance. The major indicators can include customer satisfaction, new product development, etc.

Balance scorecard is accepted globally because this approach enables the organizations to align their staff with the single strategy. The benefits that organizations can achieve by implementing balanced scorecard includes translating the strategy into operational plans and goals, aligning organizations around a single, coherent strategy, making strategy everyone’s everyday job from top of the layer to the bottom and making the strategic improvement a continuous and throughout process. (Johnson, C. C. 2000 p. 1-13)

The Activity based costing (ABC) is very different from the other approaches because it helps the organizations to identify the most profitable and the least profitable customers, it more accurately predicts the costs, profits, the quantity of resources needed and the resource costs, its helps to better track the costs of activities and work processes, and provide front- line managers with cost intelligence for making improvements. ABC also helps to point out the root causes of the problems of poor financial performance. The system in an accounting base system that analyzes the organization and manage it.

Successful firms use activity based costing along with the balance scorecard to achieve company’s strategy and to gain competitive advantage. (Gunther, F. L. 2005) The balanced scorecard relies on preparing different strategic maps that has different strategic themes and each theme has a certain set of objectives. The benchmarking approach is used in the balances scorecard. The activities of budgeting, resource allocation, reporting and target setting are integrated together into an ongoing performance management and measurement system. The balanced scorecard set priorities for performance enhancements.

(Johnson, C. C. 2000 p. 1-13). Theory of constraints is an approach that focuses on the process of continuous improvement. TOC is implemented through three measures that include throughput, operating expenses and inventory. Throughput is the rate at which the system generates money from sales. To identify the throughput, the organizations need to remove the problems. This approach is different from other approach because it uses a continuous and ongoing process for improvement. Better capacity management is achieved by increasing the efficiency of each machine and maximizing the number of hours each machine work.

The main difference in this approach is that it focuses on identifying the bottlenecks and problems that help organizations to remove them and improve the performances. The theory of constraint uses five steps that differentiate it from other approaches. The five steps are that first of all it identifies the system constraints, decide how to exploit the constraints, subordinate everything to the above decision, elevate the system constraints and finally if the previous constraints are broken than go to step 1.

The difference between activity based costing and theory of constraints is that ABC is long term oriented whereas the TOC is short term. In the short run the activity based costing, the capacities of the activities are fixed. In the theory of constraints, the capacity of the plant is fixed in the short run. ABC and TOC have different assumptions about labor and overhead costs. Flexible margin costing, or GPK, is a time-tested cost accounting system. GPK is based on the marginal costing instead of full costing.

GPK focuses on short-term decision support where as activity based costing focuses of long-term orientation, and GPK emphasizes on cost centers instead of activities and processes. The GPK differentiate itself from other cost management by the factors such as cost center is to be defined, the cost needs to be separable, the output produced must be repetitive, the output must be the responsibility of the individual managers, cost center size must be manageable, cost assignment drivers must be quantifiable. The cost center defined must be across a single activity where each department has a single cost driver.

Activity based costing is designed to handle multiple activities in a single cost centre whereas GPK created a relatively large number of cost centers. The ABC information was kept outside the main financial accounting system whereas in GPK the activity management and financial management became the same thing. Conclusion Management accounting is a connected portion of the management process and evaluates by probing whether resources are used effectively by organizations in creating value for shareholders, customers, or other stakeholders.

Whereas the purpose of financial accounting involves maintaining official records, preparing reports, responding to questions defined by external bodies, and coordinating and responding to audits. Financial accounting also deals with preparing and managing financial transactions and valuations such as balance sheet valuation, cash flow and income statements. 80% of organizations still use traditional full-absorption standard costing even after negative impacts. This is because activity based costing systems are too complex, and they are standalone and not IT integrated.

Future plans for further reporting and capital / facility overhead dimensions will add to organizational decision making. Sources Sharman, P. A. (2003, December). German cost accounting. Strategic Finance, 30-38 Johnson, C. C. (2000) Introduction to Balanced Scorecard and Performance Measurement Systems. Chapter 1, 1-13 Gunther, F. L. (2005, June). Relevance added: Combining ABC with German Cost Accounting System. Strategic Finance, 56-61 Cokins, G. (2001). Activity Based Cost Management: An Executive’s Guide

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  • University/College: University of California

  • Type of paper: Thesis/Dissertation Chapter

  • Date: 18 December 2016

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