Chapter zero in perspective: although the management accounting profession has undergone major transformations in the last 20 years, many practitioners and academics say Germany is far ahead of the united states in developing standard practices. What are the next steps the profession needs to take to have worldwide cohesiveness?

Management Accounting Quarterly, Wntr, 2004 by Anton van Der Merwe

This article provides an overview of Chapter Zero, the introductory chapter to the latest edition of the preeminent cost accounting textbook on German Standard Costing, Flexible Plankostenrechnung und Deckungsbeitragsrechnung, (1) and looks at some developments that have had an impact on U.S. management accounting. Chapter Zero also describes how German management accounting should move forward. Aspects of this proposal that would work for U.S. management accounting also will be examined.

Although the textbook discusses the development of standard costing in Germany over the years, its primary focus is the most advanced form, which goes under various names: standard costing, flexible standard costing, marginal costing, contribution margin accounting, the latter two terms combined, and Grenzplankostenrechnung (generally abbreviated in U.S. literature as GPK). Each of these names highlights a certain aspect of a broad, sophisticated approach.

Flexible Plankostenrechnung und Deckungsbeitragsrechnung literally translates into "Flexible Plan Cost Accounting and Contribution Margin Accounting." In this article, I will use the term marginal costing, which is a literal translation of the predominant term used in the German text. Do not, however, read too much into the use of the term "marginal." Although a sophisticated approach is used to determine marginal costs for every cost object, German standard costing is not a direct (variable) costing system. A good one-paragraph description of marginal costing is given at the outset in Chapter Zero (see Section 0.1).

THE RELEVANCE OF CHAPTER ZERO TO U.S. MANAGEMENT ACCOUNTING

Why consider what is written in a German textbook? For the simple reason that a path well trodden is one easier traveled. As will be evident from Chapter Zero, management accounting in Germany is facing transformation pressures but seems positioned to come out stronger on the other side. U.S. management accounting can learn from the German experience in a number of areas:

* Gain more insight into what transpired over the last two decades and why,

* Understand the current state of U.S. management accounting,

* Gain insight into a path forward, and

* Leverage established approaches.

Moreover, there is a distinct lack of critical debate and discussion in the U.S. management accounting profession from both academia and practitioners, which hinders progress and is unhealthy. Take, for example, the virtual absence of material on the weaknesses/ pitfalls of activity-based costing (ABC). (2) Chapter Zero sheds significant light on the issues related to the developments over the last two decades, which marginal costing brought to the fore in Germany yet traditional standard costing (or its proponents) in the United States failed to highlight. (3) Chapter Zero, then, is relevant not only from the perspective of providing insight into the past and a glimpse into the future but also in identifying concrete levers that can be used to launch U.S. management accounting's own restoration process.

BACKDROP TO CHAPTER ZERO

The last one-and-a-half decades of the 20th Century were marked by developments that challenged conventional management accounting theories and thinking. The authors added Chapter Zero to the 11th edition of the marginal costing textbook to address these developments from a German management accounting perspective. The developments can be divided into two broad categories:

* Economic and industrial structural changes (refer to Section 0.2), such as the decline in manufacturing significance and the rise in outsourcing, and

* Innovative ideas in management systems and tools from new thinkers (refer to Section 0.3.4), such as ABC and the balanced scorecard.

Although the United States served as the primary breeding ground for the new thinkers, their ideas spread quickly. Germany faces similar transformation pressures and recognizes the need to change (Section 0.3.3). In contrast to what happened in the United States, developments in Germany unfolded along different lines.

Early on, ABC took two aspects of the U.S. establishment to task: the "peanut butter" spreading of bulging indirect costs and the relevance of the management information provided. The latter almost inexorably--because of the lack of an independent and robust management accounting discipline in the United States--led to battle lines being drawn between ABC and financial accounting (GAAP).

In Germany, on the other hand, with its well-entrenched management accounting discipline, the new thinkers faced something wholly different--marginal costing. This made their endeavors both less risky and more challenging. Less risky because financial rule makers, the might of the capital markets, and capital market regulators did not have to be confronted on the relevance issue.

On the other hand, their task was more challenging due to the entrenched nature of marginal costing. As it turned out, marginal costing was a totally different kettle of fish, and transplanting the arguments from the United States into Germany would prove less successful when measured against initial U.S. "victories" for ABC. For various reasons, such as a high level of sophistication and the decision relevance of the management information provided, marginal costing proved difficult to ridicule compared to traditional standard costing. The main thrust for change in Germany ended up arguing for simplification and questioning the benefits of a perceived overkill in precision (Section 0.3.2).