Management Accounting Research , 1997, 8, 261 – 276
Cost accounting in Germany
Thomas Schildbach*
While English cost accounting ideas enter into international academic discussion
automatically, cost accounting literature written in German is only known to a
relatively small number of scientists. The following paper presents some basic ideas
of German cost accounting in English language in order to make it easier, especially
for English speaking scientists, to have a first impression of German cost accounting
and to find literature of special personal interest. Cost accounting in Germany was
founded by Eugen Schmalenbach. Thus his ideas about accrual accounting and
valuation must be presented first. After the Second World War flexible standard
costing became the most important concept of cost accounting in theory and
business practice. The basic ideas, the use of marginal and full cost versions for
decision and control and the inter-relation with activity-based costing are discussed.
The Plant Models of Gert Laßmann are described as an example for consequent
cost accounting according to the principle of cause and effect. Finally pros and cons
of the current discussion about cost accounting as a basis for long-term decisions are
presented.
÷ 1997 Academic Press Limited
Key words: activity-based costing; cost accounting; direct costs; full costs.
1. The problem: there is no perfect cost accounting but there are many
interesting ideas
If you examine cost accounting in Germany you will find a huge number of concepts
in theory and business practice. There are several reasons for this variety.
Business enterprises are formed for a long period of time. Business decisions
therefore have consequences in several instants of time and there are many factors
which influence these consequences. Cost accounting, in essence, is a simple model
of what is going on in a business enterprise. The factors causing consequences have
to be reduced and all consequences have to be projected into one instant of time
based on the idea of consumption and arising of economic resources (accruals
principle). Of course there are different ways of reducing the factors and of drawing
a simple picture. We should expect that different ways of simplification are adequate
in different real situations but our knowledge about this is limited.
German cost accounting is a product of both theoretical concepts and practical
experience. One main root of cost accounting literature in Germany is a series of
articles in a scientific journal (Zeitschrift fu
¨ r Handelswissenschaftliche Forschung ,
1 – 10, 1906 / 07 – 1915 / 16) which describe practical methods of cost accounting in
diverse lines of business. But even the theoretical concepts do not only search for
* Lehrstuhl fu¨ r Betriebswirtschaftslehre mit Schwerpunkt Revision und Unternehmensrechnung, Universita¨t Passau, Postfach, 94030 Passau, Germany.
Received 3 August 1996; accepted 31 December 1996.
1044 – 5005 / 97 / 030261 1 16 $25.00 / 0 / mg960047
÷ 1997 Academic Press Limited
262
T. Schildbach
theoretically correct solutions but also look for a way of cost accounting that is
practically feasible (Kilger, 1993, p. 313).
There are several purposes of cost accounting—for instance decision support or
control—and cost accounting must be different according to the purpose it has to
serve. Moreover, these purposes may be regarded from the perspective of a
centralized firm as in traditional cost accounting or from the perspective of a
decentralized firm with several profit centres. The second perspective causes
additional problems for cost accounting and the need of new ideas for their solution.
According to the immense number of concepts and compromises in German cost
accounting it is impossible to describe all these concepts in one article. Since the
concept of Relative Direct Costing (‘relative Einzelkostenrechnung’) by Paul Riebel
(Riebel, 1994) is presented in another article of this journal it will not be discussed
in this article though it may help to understand the complex relations of cause and
effect in cost accounting and produces an interesting classification of costs. The
purpose of this article has to be limited. It can only describe some basic ideas of cost
accounting in Germany which should help to understand the German literature.
The basic ideas may also show similarities and differences to cost accounting
discussions in other countries so that German cost accounting ideas can perhaps be
integrated into an international exchange of opinions.
2. Schmalenbach’s ideas about profit and valuation—the roots of German
cost accounting
Profit and the reasons for the separation between financial and cost accounting
In Schmalenbach’s opinion the main purpose of accounting in a business enterprise
is to support decisions (Schmalenbach, 1919, p. 7 ff.; Schmalenbach, 1934, p. 7
ff.). Since modern techniques of planning were more or less unknown in the years
when Schmalenbach influenced both financial accounting and cost accounting in
Germany, and since the cash surplus of a single period is a bad indicator of
economic efficiency, he looked for a solution on the basis of accrual accounting
methods. His main goal was to find the rules that allow him to calculate the negative
and positive elements of economic benefits during a period. Matching appropriate
costs against revenues was in his eyes the best way to judge the economic welfare of
a business enterprise. He saw it as a basis to extend prosperous production, to
reduce detrimental production and to cut down wastage. The ultimate goal behind
this was common welfare and the optimal allocation of resources (Schmalenbach,
1926, p. 93 ff., this is the main issue of Schmalenbachs ‘gemeinwirtschaftliche
Wirtschaftlichkeit’) within the economy, but not private profit which was regarded
as evil at that time.
Though calculation of profit is also the main goal of financial accounting
according to Schmalenbach’s theory of ‘Dynamische Bilanz’ he found several
reasons which make it difficult to reach this goal by use of official books. In financial
accounting the sum of all the profits on an accrual basis must be equal to total profit
(‘Kongruenz’, ‘clean surplus’) (Schmalenbach, 1926, p. 96 ff.). If, therefore, the
expected life of an asset was estimated as being too short, the wrong depreciation
during the first years causes wrong depreciation during the last years: depreciation
has to be too small in the end if it was too high in the beginning (Schmalenbach,
1926, p. 97 ff.). This is especially bad for the comparability of profits. Financial
Cost Accounting in Germany
263
accounting figures also have serious effects. They are important for the evaluation of
management by the market, for the salaries and bonuses of management, for tax
payments and, in Germany, for dividend payments. In order to restrict the
possibilities of ‘Window dressing’, financial accounting has to be based on verifiable
valuation methods as well as verifiable asset and liability definitions (Schmalenbach,
1934, p. 114 f.). Of course objectivity seems to diminish the informational content
of accounting figures. If for example the results of research and development are not
regarded as an asset since the value of these results cannot be measured reliably
there is a danger of misinformation. Especially the profits which result in years of
high and low efforts in research and development can hardly be compared.
Furthermore financial accounting results are distorted by chance and bad luck—for
instance if a customer goes bankrupt—or by non-operating income and nonoperating expenses.
Schmalenbach accepted the need for completeness, verifiability, reliability and
even conservatism in financial accounting probably because bias and ‘window
dressing’ seemed to be more dangerous to him. (This judgement, of course, is one
of the main reasons for some fundamental differences between German and
Anglo-American financial accounting.) On the other hand as far as cost accounting
is concerned bias and window dressing were not important in his eyes. Therefore
voluntary cost accounting had to be dedicated consequently to the idea of profit as a
measure of economic welfare of an enterprise in the main area of its business. Thus
Schmalenbach thought that it was very important to seperate costs and benefits
(‘Leistungen’) as elements of cost accounting from expenses and revenues as
elements of financial accounting.
All costs are the result of the consumption of economic resources on the one hand
and the valuation of this consumption on the other hand. Concerning the
consumption of goods, accruals in cost accounting are already different from those
in financial accounting. Non-operating expenses which are extraneous to the main
area of business activity are not costs (Schmalenbach, 1934, p. 115). Extraordinary
expenses and expenses that accrued in a former period with closed books differ from
costs. The long-term average amount of these expenses is cost (‘Wagnisse’), the
special amount is not (Schmalenbach, 1934, p. 115). Expenses according to
accounting policy or—via the connection between commercial and tax accounts
(‘Maßgeblichkeit’) (Schildbach, 1995, p. 128 – 150)—according to tax policy also
need to be adjusted to become costs. They are costs only to the extent they have
accrued in the period. Investments in future benefits that cannot be measured
reliably (research and development, advertising, creation of brand names) are also
not costs. On the other hand all economic resources that are used up in the main
area of business of an enterprise lead to costs—imputed costs (Schmalenbach, 1934,
p. 116). This is true for the depreciation of an asset that has already been written
off completely, for the interest on owners equity and for the fictious remuneration of
the owner of an enterprise.
Valuation based on marginal costs and marginal utility
Even more important are Schmalenbach’s revolutionary ideas about valuation. The
traditional production theory of those years—the Law of Diminishing Returns—is
the basis. In this theory constant factors cause non-linear marginal costs with
sub-proportional (‘degressiv’) and supra-proportional (‘progressiv’) average costs if
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T. Schildbach
the output is increased. It is difficult to work with non-linear cost functions.
Schmalenbach therefore looked for approximations. The whole range of possible
outputs is divided into several intervals resulting from shifts of work for example.
The proportional cost for each of these intervals or shifts of work is calculated by
dividing the additional costs of the shift by the number of additional products
received (Schmalenbach, 1934, p. 47). According to the Law of Diminishing
Returns proportional costs and fixed costs—defined as the difference between total
costs and proportional costs—are different for each interval or shift of work
(Schmalenbach, 1934, p. 29 ff.). Beyond the production volume with minimum
average costs, fixed costs become negative (‘Betriebsrente’) (Schmalenbach, 1934,
p. 41, 48) in this system. Proportional costs which are regarded as relevant for
decisions decrease at first and then become bigger and bigger as output is increased.
This development of proportional costs can be approximated by a valuation which is
based partly on marginal costs and partly on marginal utility. Thus variable factors
are valued with their constant purchase prices or with their marginal prices if these
prices are not the same for all units. Of course, actual prices are relevant, not
historic prices (Schmalenbach, 1947, p. 30 f.). Constant factors mainly caused by
long-term investment decisions and ‘variable’ factors with restrictions (the quantity
of materials purchasable is restricted or the purchase commitment concerning
materials is too big) are valued with their marginal utility. This marginal utility is
zero if the factor is not scarce—the marginal units cannot be used to earn any
income. The marginal utility is equal to the additional profit over costs arising from
other factors if the factor is a bottleneck. Especially in this case Schmalenbach’s
marginal utility proves to be a special kind of Opportunity Costs. Of course it is
difficult to find the exact marginal utilities in the case of several possible bottlenecks.
Therefore Schmalenbach is content with a good estimation. And he is ready to use
very special estimation techniques. Confronted with the problems of a top manager
in a big department store who had to distribute scarce shopwindows among the
departments before Christmas he gave the advice to increase the transfer prices of
the shopwindows until supply equals demand (Schmalenbach, 1947, p. 68 f.).
Traditional fixed costs like depreciation intended only to distribute former investment payments over the useful life of an asset are not relevant for decisions.
Influence on todays cost accounting
Though his valuation theory was not easy to understand and controversial,
Schmalenbach exercised strong influence on cost accounting in Germany in the
years before the First World War until the first years after the Second World War.
Until recently (Ziegler, 1994, pp. 175 – 188) there is practically no doubt that,
according to Schmalenbachs ideas, cost accounting has to be seperated from
financial accounting. With his ideas about the purposes of cost accounting he even
paved the way for modern decision-minded business economics. Cost accounting
for control, cost estimation and short-term operational profit determination in the
sense of Schmalenbach are only means to improve short-term decisions in a
business enterprise concerning the efficiency of production, the optimal volume of
production and the optimal product mix.
Of course his theoretical basis of cost accounting was poor and his confidence in
accrual accounting methods was too optimistic. The Law of Diminishing Returns is
a doubtful basis for cost accounting because it is too global for a business
Cost Accounting in Germany
265
enterprise. Compared with modern planning techniques accrual accounting is only
an approximation. It is impossible to calculate exact costs or profits and even
comparable costs or profits. And Schmalenbach’s idea of solving the problems of
cost accounting by using marginal costs and marginal utilities is not free from
difficulties. In many cases marginal utilities cannot be derived from cost
accounting—they are needed as input into cost accounting—and compared with the
difficulties of estimating the marginal utilities of bottlenecks the processing of this
data by cost accounting is a minor problem.
3. Flexible standard costing
Theoretical basis
Flexible standard costing—also designed to support short-term decisions and
therefore interested in finding the exact factors that cause costs—does not continue
the ideas of Schmalenbach, except the separation of cost and financial accounting.
Flexible standard costing has a different theoretical basis (Kilger, 1993, pp.
133 – 195, the book was first published in 1961) and different ideas about valuation.
Flexible standard costing which in the beginning was strongly influenced by
American Standard Costing and Direct Costing is based on the experience that it is
important to differentiate between fixed costs and variable costs since only variable
costs are relevant for most short-term decisions. Furthermore, planning of variable
costs has to be based on solid cause and effect relationships. The Law of
Diminishing Returns is not regarded as such a solid basis because sub-proportional
costs (‘degressive’ Kosten) and supra-proportional costs (‘progressive’ Kosten) are
rather unusual. In Germany flexible standard costing finally found a better
theoretical basis in the production theory of Erich Gutenberg and his scholars,
especially Wolfgang Kilger. The production theory of Gutenberg was developed to
study the input – output relations of a business enterprise in great detail (Gutenberg,
1983, the book was first published in 1951). The main characteristic of this theory
is that there are two different input – output relations in a firm—direct relations
between output and input of direct materials and direct labour, and indirect
relations. In cases of indirect relations the input depends on the number of
elementary work units of cost centres wanted, the intensity or speed of production
and the technical features of the assets used. Thus flexible standard costing has a
theoretical basis for direct and indirect costs which, by referring to work units, is
similar to activity-based costing.
Valuation in flexible standard costing refers only to actual market prices of
resources or to historical market prices if they are similar. Opportunity costs caused
by scarce resources or capacities are not included in values. Since in cases of more
than one bottleneck exact opportunity costs are only known after the optimal
solution has been found, and since they may be valid only in a very small range
around the optimum, flexible standard costing prefers to regard scarce resources
and capacities explicitly by means of constraints.
Planning of direct costs
Since direct materials and direct labour depend directly on the number of products
manufactured it is easy to plan the resulting costs mainly based on the bill of
materials, a list of direct labour necessary and a fixed Standard-price close to actual
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T. Schildbach
market price (Kilger, 1993, p. 231 ff.). Of course planning also implies assumptions
about material mix, about the relation between machine time and set up time or
between the number of operating personnel and the number of machines and about
the wastefulness of production (Kilger, 1993, p. 299).
Planning of overheads based on one cost driver per cost centre
Indirect input – output relations have to be planned seperately for every productive
asset – labour combination or cost centre. Even if the valuation problem is solved by
using a fixed standard price for every kind of resources needed many factors remain
that influence costs (cost drivers, ‘Bezugsgro¨ ßen’). Some of these factors—technical
features of assets, know how and legal form of an enterprise for instance—are
constant from the perspective of short-term cost accounting. Others like the
maximum number of working hours per week or the outside temperature cannot be
influenced by the firm. Of course the rest—cost drivers that can be influenced by the
firm on a short-term basis—is big enough to cause severe problems (Kilger, 1993, p.
313). In this situation ‘exact’ cost accounting based on all relevant short-term cost
drivers may be a challenging goal. But exact cost accounting, if possible, will be very
expensive and the marginal benefits of perfection will hardly outweigh related
marginal costs. Cost centres will have to be divided into single asset – labour
combinations which increases the number of planning units drastically. Furthermore cost components have to be divided according to the cost drivers into several
parts. Energy costs for instance depend partly on calendar time (fixed costs), partly
on outside temperature, set up time, product mix, production time and production
intensity. If costs are a joint function of several of these cost drivers the problems
become even more complicated. A fully flexible cost accounting system trying to pay
due regard to all of these factors will be very complicated, non-linear and
impracticable in most cases.
Since flexible standard costing is intended to be a practicable system of
accounting the number of relevant variable cost drivers is normally reduced to one
cost driver per cost centre though flexible standard costing is also capable of
accommodating more than one cost driver per cost centre (Kilger, 1993, p. 317).
The variable cost driver used—for example, production volume, production time or
production weight—is called ‘Bescha¨ ftigung’. All other factors like prices, material
mix, production conditions, the relation between set up and production time and
the relation between the numbers of assets and personnel handling them are
regarded as constant. Concerning production intensity or speed it is indeed efficient
to use either the optimal intensity or the higher intensity necessary and to adjust the
production time in order to minimize costs. This also leads to linear cost functions
which make planning easy.
For every kind of resource consumed and for every cost centre linear cost
functions are planned (Kilger, 1993, p. 298). Planning in detail is based on both a
target volume of production (‘Planbescha¨ ftigung’) (Kilger, 1993, p. 335 ff.) and a
fictitious zero volume of production which means that the ability of future
production is maintained though there is no actual output in the cost centre.
Planned costs at zero volume of production of course are fixed costs and planned
costs based on a target volume of production contain additional variable costs over
these fixed costs.
Cost Accounting in Germany
267
Indirect cost centres
Not every activity in a business enterprise is related directly to the final products
sold to the customers. Therefore activities in ‘direct’ cost centres (Kilger, 1993, p.
493 ff.) have to be seperated from activities in ‘indirect’ cost centres (Kilger, 1993,
p. 437 ff.) which are only indirectly related to the final products (power supply,
administration of the buildings, gate keeper, social facilities, e.g.). Of course
indirect relations should only be assumed if direct relations cannot be found. But
inevitably the costs of some activities or cost centres have to be planned on the basis
of cost drivers with no direct relation to final products. In flexible standard costing
costs of both direct and indirect cost centres are planned. Costs of indirect cost
centres are not directly charged to products but charged to the cost centres which
received the services. This indirect way of charging overheads of indirect cost
centres to products via other cost centres is problematic but these problems cannot
be solved by attempts to charge overheads of indirect cost centres directly to
products. The direct way has to follow the same path if indirect overheads are not
charged in a lump sum and it increases the danger that indirect overheads are
generally interpreted as variable to production.
Marginal costing for decisions
Flexible standard costing is a solid basis both for full cost information and for
marginal (direct) cost information (Kilger, 1993, p. 679 f.).
There is no doubt in theory that short-term decisions have to be based on
marginal cost information (Kilger, 1973, 1993; Ewert and Wagenhofer, 1995;
Schweitzer and Ku¨ pper, 1995). Since the overheads in all the cost centres are
carefully divided into proportional and fixed components marginal costs can easily
be derived from flexible standard costing by concentrating on direct materials,
direct labour (with doubts because according to German ‘Ku¨ ndigungsschutz’ even
direct labour has partly the character of fixed costs) and proportional overheads
charged to the products on the basis of the one cost driver normally selected for
every cost centre. Since in a world of linear cost functions marginal costs equal
variable costs and since in German cost accounting literature selling prices are
usually assumed to be independent from production volume the short-term benefits
of products can easily be measured by their specific difference between net revenue
and marginal costs, their contribution margin.
In the case of no bottleneck all products with positive contribution margin should
be produced. In the case of one bottleneck relative contribution margins of all
products are needed which result from dividing the (absolute) contribution margin
of a product by the number of units necessary for the product on the bottleneck
capacity. The capacity is of course dedicated to the products with the biggest
relative contribution margins. In the case of more than one possible bottleneck the
best production mix and volume alternative can only be found by means of linear
programming based on (absolute) contribution margins and the units of bottleneck
capacities both available and needed for every product. The choice of short-term
production procedure (‘Verfahrenswahl’) is based either on the comparison of the
direct costs of these procedures or solved by linear programming. The short-term
make or buy decision is only a special case of the short-term production procedure
decision. If products do not compete for a scarce bottleneck capacity the short-term
minimum price necessary for a firm to produce a product is marginal costs. In case
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T. Schildbach
of one bottleneck capacity the minimum price is the sum of marginal cost and the
contribution margin which would be ousted if the product was produced. In cases of
more than one bottleneck linear programming is needed again to find the minimum
price of an additional product.
Full costs as a proxy for decisions
In German practice marginal costing is regarded with scepticism (Ewert and
Wagenhofer, 1995, p. 285). In most cases full costing is wanted at least for
additional information (Kilger, 1980, p. 50). This wish can easily be fulfilled by
flexible standard costing, if fixed overhead costs are also charged to products. For
this purpose the fixed overhead costs in every cost centre are divided by the target
volume of production in this cost centre measured by the cost driver selected. The
resulting fixed costs per unit of the cost driver are charged to the products according
to the units of cost drivers necessary to produce the products.
Of course full costs per product are a problematic basis for short-term decisions.
But there is evidence that full costs can be an interesting orientation for decisions in
a world of imperfect information (Schildbach, 1993). If there are only risky
expectations about the prices of alternative products and the quantities that can be
sold full costs can be interpreted to combine variable costs with simplified
opportunity costs. The assumption behind these opportunity costs is that actual
products compete against alternative products with revenues which make the net
present values of the investments exactly equal to zero. The capacities of the
investments which cause the fixed costs therefore are assumed to be scarce at
precisely the level necessary so that the relative contribution margins of the marginal
products fully compensate for all expenditures and interests. The full cost
checkpoint has to be modified of course according to the expectations about the
markets for the firm’s products. If the demand for the products of a firm is expected
to be lower than assumed in full costs, actual costs are anywhere between full costs
and marginal costs. Actual costs are of course close to full costs if demand for the
products of a firm is expected to be only a little lower than assumed in full cost and
they are close to marginal costs if demand for the products of a firm is expected to
be so low that customers will hardly pay more than marginal costs. If on the
contrary demand is expected to be higher than assumed in full costs actual costs are
somewhere above full costs. In any case costs resulting from past investments with
limited capacities depend on the contribution margins that the market is willing to
pay for the products which need these capacities. Therefore the costs for capacities
do not depend on the historical expenditures.
Besides support for centralized short-term decisions, full costing is also discussed
as an instrument which is expected to reduce typical problems in firms with many
different decision-making units. Considerations known from articles by Zimmerman
(1979), Demski (1976) or Baiman and Noel (1985), for instance, that the use of full
costs instead of marginal costs will reduce agency and coordination problems in a
divisionalized firm are discussed and supported in Germany (Pfaff, 1993). The
discussion about transfer prices in Germany is an example of this recent development. Theory of course was and is primarily interested in perfect solutions for the
problems of transfer pricing under different circumstances (Ewert and Wagenhofer,
1995, p. 509 ff.). Since these perfect solutions are very hard to find and very
dependent on the individual conditions proxy solutions become attractive. More
Cost Accounting in Germany
269
and more full costs are regarded as an acceptable proxy solution even in theory
though full costs have serious shortcomings especially for short-term decisions
(Ewert and Wagenhofer, 1995, p. 561 f.).
Flexible standard costing for control
Cost control is traditionally an important purpose of cost accounting. Actual costs
are compared with specifically planned costs or cost budgets and the entire cost
variance between both is divided into several partial variances. Cost variances are
calculated and analysed for several reasons (Ewert and Wagenhofer, 1995, p. 314
ff.). Cost control can lead to the reduction of wastage or abnormal use of resources
and—if these can be eliminated—help to cut down future costs. Information about
cost variances is expected to be helpful for future decision-making by illuminating
relations of cause and effect and by improving the ability to predict the consequences of possible action. Cost control also exercises influence on the behaviour
of the individuals being controlled. Since cost variances can result in sanctions
people under control will try to act as scheduled and will try to avoid any variances.
Flexible standard costing supports cost control with cost budgets. The differences
between budgets and actual values especially of direct material costs can be divided
into a price variance, variances resulting from changes in the construction of
products, material characteristics or material mix and a variance resulting from
wastage (Kilger, 1993, p. 239). Every kind of overhead costs in every cost centre
can be compared with a planned counterpart and the resulting entire variances are
often divided into partial variances according to price differences, volume of
production differences and consumption per piece difference resulting mainly from
wastage.
In flexible standard costing overheads can be controlled both on a marginal and a
full cost basis. Planned marginal costs can only be compared with actual costs after
fixed costs have been eliminated from actual costs. The advantage of cost control on
a marginal basis is that differences resulting from production volume do not
necessarily arise. They do arise if control of overheads is based on full costs.
Though there is dissent about the definition the production volume variance is
normally interpreted as the difference between the sum of all fixed costs charged to
products in full costing and the fixed costs that have accrued (Kilger, 1993, p. 652).
The difference arises because fixed costs per unit are calculated on a target volume
of production basis but the volume of fixed costs charged to products depends on
the actual volume of production.
There is of course intensive discussion about many details of cost control.
Concerning the character of cost planning that leads to a maximum of information,
planned costs without any wastage as complete measure of economy (‘Standardkosten’) are confronted with costs that try to anticipate future results including
expected wastage (‘Prognosekosten’) (Ewert and Wagenhofer, 1995, p. 319). Since
all costs are the result of several factors and cost control is based on both planned
and actual versions of these factors cost analysis becomes ambiguous (Ewert and
Wagenhofer, 1995, p. 321 ff.). It is not clear whether a partial difference resulting
from one factor—the difference between actual and planned prices for example—
should be calculated on the basis of the actual or planned versions of the remaining
factors (actual or planned production volume for example). Furthermore there is
dissent whether all partial differences must be calculated on the same basis of the
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T. Schildbach
remaining factors, whether the sum of all partial differences must add to the entire
difference and how to accomplish both goals because they are inconsistent.
If cost accounting for control is established in a firm information about partial
variances between planned and actual overheads in cost centres is routine. But
information about variances is only the first step. Since the second step—verification
and analysis of the cost variance in order to find the reasons that have caused it—is
expensive there is a discussion about the criteria useful for the decision whether to
analyse a variance or not (Ewert and Wagenhofer, 1995, p. 358 ff.).
Traditional cost control is useful only if production technology does not change
rapidly because otherwise planning and control information becomes obsolete after
a short time. Moreover traditional control is based on the perspective of a
coachman. The staff of a business firm is regarded only as an instrument necessary
to execute the plans of well informed top management in exactly the way
management wants and the purpose of control is to secure this behaviour. Since the
dynamic of production technology is growing and centralized organizations are
replaced by decentralized organizations which make better use of the skills and
information of the individuals employed, the importance of traditional cost control
is decreasing. New instruments are needed which stimulate individual motivation,
self control and conformity of individual decisions with other decisions in the
organization and the main objectives of the whole firm (Ewert and Wagenhofer,
1995, p. 379 ff.).
4. Plant Models
Plant Models by Gert Laßmann (Laßmann, 1973, 1993) and his scholars are based
on both input – output models and engineering production functions or process
models which are used especially in the steel industry to control the production
process. Consequently Plant Models concentrate on the consumption of economic
resources and the factors which cause the consumption. Valuation of the resources
consumed is deferred to the last step of the cost accounting procedure so Plant
Models describe mainly quantity relations.
The great number of factors that cause consumption of resources and costs is
divided into several categories of primary and secondary factors (Laßmann, 1973, p.
13). Primary factors are the quantities of the different products wanted (Production
Programme), Production Conditions like material mix, energy mix, batch sizes or
relations between the number of machines and the operating personnel, but also
outside temperature or hours of daylight and Period Characteristics like the number
of working days or the number of Saturdays and Sundays in the month planned.
Primary factors determine the consumption of variable resources and the occupation
of fixed resources. The quantities of some variable resources determined by primary
factors influence the occupation of fixed resources and the consumption of other
variable resources. Also the occupation of the fixed resources influences the
consumption of variable resources. Therefore the resources that influence consumption or occupation of other resources are regarded as secondary factors
(Laßmann, 1993, p. 171). The Plant Model then is a matrix of linear relations
between primary and secondary factors which cause the consumption or occupation
of resources and the different kinds of variable and fixed resources consumed or
occupied (Laßmann, 1993, p. 173 f.). It takes care of the fact that the quantities of
Cost Accounting in Germany
271
some of the resources consumed and the degrees of occupation concerning fixed
resources have influence on other resources consumed and that the degree of
occupation of fixed resources is limited. If relations between primary or secondary
factors on the one hand and the consumption or occupation of resources on the
other hand is non-linear, it can be approximated by several linear relations and
additional restrictions to confine the areas in which the linear relations are valid
(Laßmann, 1993, p. 170).
Plant Models deliver a solid basis for short-term decisions. Every kind of possible
short-term action is characterized by a specific combination of primary factors—a
production programme, a special kind of production condition (e.g. material mix,
energy mix, batch sizes, expected outside temperature) and period characteristics
(e.g. relation between working days and holidays). Plant Models show the
consequences of alternative kinds of short-term action concerning the consumption
of variable resources and the occupation of limited fixed resources which lead to
costs if consumed quantities are valued with an adequate price (Laßmann, 1993, p.
176). In Plant Models consequences cannot be calculated for the production of a
single product or for the choice of a special production process—consequently costs
per unit of a special product can only be calculated by comparing total costs
resulting from different quantities of production of this product—but they can be
calculated for the entire course of action as total costs and benefits resulting from all
parameters of action. Therefore and because of the complexity of the model, it is
impossible to find an optimal course of action by any kind of algorithm. Instead,
good solutions have to be worked out by comparing the consequences of different
courses of action and by searching for hypotheses indicating ways for improving
planned action. This does, of course, not mean that the computer which is
necessary to handle the complex multivariable Plant Models cannot be helpful in the
process of generating courses of action with better consequences.
5. Cost accounting and long-term decisions
Developments that make cost accounting for short -term decisions obsolete
In cost accounting all consequences of possible action are assumed to arise in one
instant of time. In a strict sense therefore cost accounting is only able to support
short-term decision problems. Consequently the theoretical basis of both flexible
standard costing and Plant Models are the relations between variable costs and the
short-term variable factors which influence these costs. Though the efforts to find
theoretically conclusive concepts of cost accounting as a basis of short-term
decisions were quite successful, the practical relevance of such short-term cost
accounting concepts is tragically melting away.
According to actual trends in production the importance of fixed costs in relation
to variable costs is growing steadily (Ewert and Wagenhofer, 1995, p. 255;
Backhaus and Funke, 1996). Any system of marginal or variable costing therefore
concentrates on the costs with diminishing importance, while the fixed costs which
are regarded as irrelevant become more and more important. Thus the future
success of a business enterprise depends increasingly on long-term decisions while
the relative influence of short-term decisions on this future success is vanishing.
Also costs which are only indirectly related to the final products or which can hardly
be associated to periods (general administration costs, research and development
272
T. Schildbach
costs, advertising costs, employee training costs or dismantling costs) play an
increasing role. Since these costs cause severe problems for any cost accounting
system their growth throws additional doubt on the value of cost accounting.
Moreover, costs turn out to be dependent on time (Coenenberg, 1993, pp.
172 – 190; Ewert and Wagenhofer, 1995, p. 40 ff.). According to Learning or
Progress Curves assembly costs, wages or even real unit costs decrease at a steady
rate every time the production volume is doubled. Cost accounting is unable to pay
regard to this effect, since costs as consequences of decisions are assumed to be
representative for a longer period and in this respect independent of time. Especially
average costs—the typical solution to problems like these in cost accounting—
cannot describe this effect.
As a consequence of all these developments one should expect that cost
accounting is replaced by multiperiod capital budgeting techniques or similar
models. Only models like capital budgeting which pay due regard to financial
consequences in different instances of time are able to support long-term decisions
on a theoretically sound basis. They have been developed to evaluate courses of
action which lead to fixed costs like the installation of machinery or the employment
of labour. They are able to account for Learning or Progress Curves and they are
the only rational basis to support research and development, employee training or
dismantling decisions.
New systems of cost accounting to support even long -term decisions
Curiously the described replacement cannot be observed. Firms have hardly
switched to capital budgeting or similar models. Instead they adhere to cost
accounting. But due to the diminishing importance of short-term decisions, new
systems of cost accounting have been developed which are expected to be useful also
as a basis of long-term ‘strategic’ decisions. Though these new systems of cost
accounting were mainly imported from abroad and though they have led to rather
controversial discussion in theory, they have found wide practical acceptance in
Germany. Special influence on cost accounting in Germany was exercised by:
activity-based costing (Prozeßkostenrechnung) (Coenenberg, 1993, pp. 193 – 216;
Ewert and Wagenhofer, 1995, pp. 270 – 286.), value analysis or overhead value
analysis ((Gemein-)Kosten-Wertanalyse) (VDI Zentrum Wertanalyse, 1995); and
target costing (Zielkostenmanagement) (Seidenschwarz, 1993; Ewert and Wagenhofer, 1995, pp. 286 – 292).
There are several reasons that have led to the practical acceptance of strategic cost
accounting systems instead of multiperiod capital budgeting models. Multiperiod
decision support models like capital budgeting need forecasts of multiperiod cash
flows for all possible courses of action. Long term forecasts for strategic decisions
are difficult and risky. Without divine help forecasts can only be made on the basis
of assumptions and these assumptions can easily turn out to be wrong in a dynamic
world. For the transformation of future cash flows into simple decision criteria like
net present values an interest rate is needed which is not easy to determine
especially if a risk adjusted interest rate is wanted.
Cost accounting on the other hand seems to be independent of long-term
prognostic information and complicated decision criteria. Nearly everybody thinks
that costs can easily be understood and that there are practically no problems to
compare them with benefits (Leistungen), revenue or other costs. The techniques
Cost Accounting in Germany
273
needed either to ascertain and draw together all the costs actually incurred or to
plan direct and overhead costs are thought to be quite simple.
Reasons in favour of the new systems of cost accounting
There are several similarities to cost accounting in the times of Schmalenbach. Cost
accounting is again regarded as a simplified and practically useful basis for business
decisions which now even include long-term or strategic decisions. Like in the early
years there is also a strong connection between theory and practice in cost
accounting. The fact that the new systems of cost accounting were strongly
influenced by successful firms and that they have found wide practical acceptance is
regarded as an important argument in favour of the actual developments (Horva´ th
and Mayer, 1991, p. 540). Compared with this wide practical acceptance
theoretical doubts and criticism seem to be of minor importance. Since most of the
theoretical criticism is based on the ideas of marginal costing and marginal costing
has lost much of its relevance, the theoretical discussion is regarded as useless,
dogmatic and stuffy (Horva´ th and Mayer, 1991, p. 540). It only shows that the
supporters of marginal costing are unable to realize the dramatic changes that have
taken place. The new systems of cost accounting on the other hand pay due regard
to actual changes in cost structures. Up to 80% of the later costs are determined by
long-term investment decisions. Thus modern systems of cost accounting—
especially target costing—are involved in early stages of the decision process in
order to be of practical relevance for decisions. Since more and more costs are
overheads and fixed costs arising in cost centres which are only indirectly related to
production and which in a great part do their work long before or after production
(research and development, procurement, marketing or servicing) mere distributions of these costs to products on a lump sum basis will destroy the information
content of cost accounting. In actual cost accounting therefore overheads are
assumed to originate from those activities in the firm which help to keep costs down
or to enhance the values of the products for the customers. These activities are
numerous and diverse.
Special care is dedicated to the treatment of overheads in order to avoid
presumptive distortions caused by traditional full costs. Cost drivers are not only
related to activities and overheads they are also related to products. Therefore
overheads are allocated to products according to the utilization of the activities by
particular products and utilization is measured by cost drivers. This technique of
full costing is expected to secure full costs in accordance with the principle of cause
and effect (Franz, 1991b , p. 537) which means that the costs attributed to a product
are caused by it. Full costs caused by a product and allocated according to strategic
cost drivers are expected to give good suppport for a diversity of decisions. Since
only a limited number of important cost drivers is considered, the impacts of factors
like the number of product variations, the number of different parts used in
production or the number of distribution channels on costs become apparent
(Horva´ th and Mayer, 1991, p. 540). At least in the long run this information is
regarded as useful for product differentiation, construction or marketing decisions
(Franz, 1991a , p. 185). But not only the cost information itself—like the cost of a
product in its whole life cycle, the costs of an additional product variation or the
costs of activities like product design, quality control or handling of materials—is
regarded as interesting and beneficial. Also the underlying analysis of activities
274
T. Schildbach
concerning the effects of these activities on the value of products to customers and
the necessary investigations into cost drivers and cost relationships are expected to
be helpful—mainly by revealing wastage (Franz, 1991a , p. 182).
Scepticism in Germany concerning the new systems of cost accounting
According to German traditions, the new systems of cost accounting are regarded
with scepticism in theory .
Activity-based costing for example appears to be revolutionary if it is compared
with a simple mark up costing based on direct material or direct labour (Cooper,
1988, p. 45). For Germany this kind of comparison is problematic. Both in actual
full costing and in flexible standard costing direct material and direct labour play a
minor role as bases of allocating overheads. Instead overheads are allocated by use
of bases which are not dependent on values (machine hours or minutes, volume or
weight of product) and many bases are needed, not just one. Moreover a
comparison of cost drivers (Bezugsgro¨ ßen) in flexible standard costing and in
activity-based costing shows nearly no differences (Cooper, 1988, p. 48; Kilger,
1993, p. 327). Thus as far as techniques of cost allocation are concerned there is
hardly any progress. In fact flexible standard costing has shown that even in a single
cost centre costs are influenced by many factors and that it is impossible to pay due
regard to all of these factors. This is also true for activity-based costing.
Activity-based costing therefore is also forced to reduce the number of cost drivers
but it does not offer any help to do so. Thus it is extremely difficult to find a few
typical ‘strategic’ cost drivers which are also representative for many cost centres
and to build up a cost accounting system on this basis. As a result activity-based
costing is extremly arbitrary.
Furthermore, not every cost driver that causes costs in a cost centre is also a good
basis for cost allocation (Franz, 1991a , p. 184 f.). For example the number of
entries into the books is already a doubtful explanation for the origin of costs in the
book-keeping department (costs arise because people have been employed and
within certain limits costs are independent of the amount of actual work) but surely
it is a problematic basis for allocating costs to a product (Maier-Scheubeck, 1991,
p. 544).
This leads to the main problem. All new systems of cost accounting are full cost
systems and full costing is problematic. Only under very special conditions can
short-term decisions be supported by full cost information. This can easily be shown
on the basis of the example of two hypothetical plants for ball-point pens (Cooper
and Kaplan, 1988, p. 97). Plant I can only produce one type of pen in a great
number at low costs. Plant II is prepared to produce a variety of pens in different
colours according to the individual needs of the customers but it has higher costs. If
a firm which has chosen plant II and which is asked to produce a small number of
pens in a special colour uses activity-based costing to find out the costs per pen as a
basis for the calculation of the minimum sales price necessary it can easily make a
mistake. In activity-based full costing the cost per unit of small volume products will
be very high. If customers refuse to pay these high full costs the decision not to
produce small volume products is extremely problematic. Both the costs of the
special capacity of plant II—the ability to produce a variety of pens—and the cost of
an additional type of product—i.e. ordering and handling cost of special material—
are mostly fixed costs. Fixed costs remain even if small-volume products are not
Cost Accounting in Germany
275
produced. Thus not only the decision not to produce small-volume products will be
wrong in most cases, but the full cost per unit of the middle and high volume
products will increase as fixed costs have to be allocated to a smaller number of
products. As a result customers will refuse to pay the cost of an increasing number
of products and in mass production of pens plant II cannot compete with plant I.
Thus activity-based costing does not avoid misguided strategic signals but it
produces them.
Full costs are only useful in a very special case. If the customers for small-volume
products compete for the capacity of plant II, and due to lack of information, it is
necessary to assume the actual value of the capacities that enable product variety,
their full costs represent a special value of these capacities. In order to make full
costs relevant for short-term decisions it is necessary to assume that the market is
just willing to compensate all costs so that every offer to buy a small or medium
number of ball-point pens in a special colour competes with a full cost offer by the
market. In the long run this assumption also means that plant II has a fair price—an
investment in plant II will not result in an abnormal gain or loss. This full costing is
relevant for decision only if full costs are equal to marginal utility in the sense of
Schmalenbach and this is a very special case.
Scepticism cannot be reduced if full costing is used to support long-term
(‘strategic’) decisions. Without any doubt long-term decisions depend on the
multiperiod results that will be caused by the alternative courses of action. Decision
support models for long-term decisions therefore have to be based on forecasts of
these multiperiod results. It is an illusion to believe that cost accounting for
long-term decisions can be based on less and more simple information. If cost
accounting is expected to give the same quality of decision support it cannot be
easier to find the relevant costs than to forecast future cash flows. On the contrary,
since cost data is easier to handle it must contain additional information. If a series
of future results is represented by a single figure this figure has to contain both the
full series of future results and the factor to make them comparable, which is an
interest rate. Thus costs for long-term decisions have to be similar to annuity
information.
Of course, the new system of cost accounting may be regarded as a proxy
solution. The users of the new system accept a lower quality of decision support as
long as the cost accounting system is practically useful. The problem with this point
of view is that it is not specific. Both traditional systems of cost accounting and full
costs derived from flexible standard costing were regarded in a similar way. The
differences especially between full costs derived from flexible standard costing and
from activity-based costing have also turned out to be rather small. Thus there is
good reason to doubt that new systems of cost accounting are able to give better
proxy decision support than the old systems. The real progress in cost accounting
has taken place in the fields of terminology and marketing for cost accounting.
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