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This is the third article in a series that began in October 2003 with "The case for Management Accounting" and continued in December 2003 with "Bring on German Cost Accounting." Here we delve further into German cost accounting to see how it has evolved over the years and to show how its latest form, when combined with the "made in America" activitybased costing (ABC), creates a much more capable management information and decision-support capability than has previously been experienced in the United States, Germany, or anywhere else in the world.
Management accounting and controllership practices are more highly developed in German-speaking countries (Germany, Austria, and Switzerland) than in the rest of the world, partly because of the recognition that good management accounting practices are critical to the successful performance of the enterprise. Contrast this to the U.S. where there's a dominant emphasis on financial accounting and regulatory reporting and a high degree of frustration on the part of CFOs and business managers with their lack of cost and management accounting information. The effect is that businesses are so overwhelmed by the requirements of outside parties that even most accountants fail to understand that the real "business of business" is represented by the management accounting personnel who work inside the organization.
Organizations that are successful are either lucky or have superior information with which to make decisions. Those that have strong and disciplined preparation, interpretation, and application of decision-support information have a greater opportunity to respond to threats and opportunities and to manage costs than those that don't. We believe that some U.S.-led management accounting initiatives, particularly activity-based costing, haven't survived in most organizations for two reasons. The first is a lack of emphasis on building a strong, professional management accounting community with clearly articulated and practiced standards. The second is a lack of attention by academics to fundamental management accounting I principles. In contrast, German companies and academics have demonstrated disciplined attention to management accounting (or what the Germans call "controlling") to the degree that the majority of organizations recognize these capabilities as being the most important activities performed by the "inside" finance function. Financial reporting is respected but is considered less important to the successful performance of the organization.
A LITTLE BACKGROUND
Throughout the...