Competing Cost Accounting Approaches and Explores Best

¶ … competing cost accounting approaches and explores best practices implemented in different countries. The essay examines traditional cost accounting (CA), activity-based costing (ABC), Grenzplankostenrechnung (GPK), throughput accounting (TA) and resource consumption accounting (RCA).

Tradeoffs Between Cost Accounting Systems

Comparing traditional costs systems and ABC shows that there are tradeoffs between cost and usability. The traditional cost system is typically both easy and inexpensive to implement; however, the information obtained from the system may be too raw to be analytically useful. ABC provides useful information, but by comparison is expensive and time-consuming to implement (Abdallah & Li, 2008).

The use of a given accounting system involves tradeoffs which may make it better suited for some companies than others. Companies using a Six Sigma/theory of constraints (TOC) may benefit more from the throughput accounting (TA) approach. TA emphasizes variable costs, with the objective of increasing throughput while simultaneously decreasing inventories and operating expenses. TA thereby leads to optimal decision making. Using a (TOC) framework, TA measurements can be more effectively used for various optimization decisions than cost-based systems that treat all areas of production as equally important (Aghili, 2011).

TA metrics provide advantages over traditional CA and ABC systems which do not address Voice of Customer issues as required by Six Sigma. ABC and traditional accounting tend to encourage inventory production over and above what is needed for customers' orders. TA, on the other hand, is more likely to be compatible with cutting-edge operation improvement methodologies. TA does better at helping an organization to align its financial systems with its throughput capacity. One drawback of TA, however, is that its reporting does not comply with generally accepted accounting principles (GAAP) (Aghili, 2011).

There are additional tradeoffs in comparing TOC and ABC as well, especially as shown by profitability analysis of environmental costs. ABC works well for understanding how environmental spending affects product cost, but does not facilitate product mix decisions aimed at profit maximization. ABC, when used to prioritize production, is valuable for its ability to trace the costs of activities to products. However TOC is a better method under several conditions, particularly for companies looking to invest in environmentally sound resources while at the same time maximizing their profits (Lockhart & Taylor, 2007).

The use of each accounting system involves tradeoffs which determine a company's choice of costing methods. A survey of German companies revealed that ABC was popular with food and textile industries, along with wholesale/retail trade and the financial industries. GPK was more popular with chemicals/paper/printing, wholesale/retail trade, and construction/mining industries. GPK adoption was also more likely to be found among companies with higher levels of information systems integration and quality, higher proportional costs, low-cost competitive strategy, an emphasis on management accounting, and strong use of budgeting systems, profitability analysis, and transfer pricing (Krumwiede & Suessmair, 2008).

Research also showed that combined costing systems such as resource consumption accounting (RCA) can yield better results than "simple" systems. GPK and ABC produced the best overall cost management system and business unit performance results for manufacturing firms. Among nonmanufacturing firms, GPK without ABC was rated highest on budgeting and planning and gross margin; ABC was rated highest on business unit return on investment (Krumwiede & Suessmair, 2008).

Why Cost Accounting Approaches Differ Among Nations

Researchers found significant differences between the U.S. And Germany in their approaches to cost accounting, based on culture and workforce and management education. According to Portz and Lere (2010), four categories exist in differences in cost center practices. First, German GPK cost centers tend to be smaller, but greater in number, because of more restrictive definitions of a cost center. Output and activity measurement differ as well. The two countries also differ in the classification of costs in a cost center. In Germany, costs are classified as proportional or fixed, while in the U.S. costs are divided into variable and fixed classifications. GPK emphasizes the role of the cost center manager in ensuring that costs adjust in response to changes in cost center output.

Differences in culture also influence the assignment of responsibilities for cost center managers. GPK with its emphasis on narrowly defined costs centers is consistent with an uncertainty avoidance culture found in Germany. U.S. managers, on the other hand, who prefer less structure and more flexibility, may feel confined by having to work within GPK constraints. German managers supervise a workforce that is more specialized and formally trained, while U.S. managers tend to have a broader range of responsibilities, including motivating their workforce. These differences should be taken into account when considering a GPK implementation in the U.S. Portz and Lere conclude that "Culture may be the main factor behind cost center practice differences directly and also indirectly through differences in the workforce and management education" (2010).

Challenges of Developing Cost Accounting Systems

America Latina Logistica (ALL) faced multiple challenges that required an upgrade to its cost measurement system. Following a period of growth and acquisitions, ALL struggled with the inability of the company's old system to provide good quality information to facilitate accurate, timely and well-informed business decisions. The company's SAP implementation, which initially provided extensive operating detail but no cost detail, required significant enhancements to perform the needed changes to make its cost accounting system more effective (De Modesti & Eriksen, 2008).

Indirect fixed cost allocation was being misreported and spread across all divisions, and ALL needed to develop a cost allocation basis that accounted for variances in business unit volume. Moreover, once the needed changes were implemented in their SAP system, they found that report generation was inadequate, requiring them to implement a business intelligence system. Redesigning their cost accounting system required significant time and effort, but resulted in improved capabilities that allowed their managers to increase profitability, better manage underperforming routes, renegotiate tariffs and enhance their financial reporting capability as well (De Modesti & Eriksen, 2008).