The Development Of Managerial Accounting In Germany : A .
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BEBRSTX)FACULTY WORKINGPAPER NO. 90-16263516COPY 2The Development of ManagerialAccounting in GermanyA.G. CoenenbergH.M.W.The LibraryM&R 2 4oithe1990Unlvarsitv o? MlofNrtanfrChampaKinCommerce and Business AdministrationBureau of Economic and Business ResearchUniversity of Illinois Urbana-ChampaignCollege ofSchoenfeld
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BEBRFACULTY WORKING PAPER NO. 90-1626College of Commerce and Business AdministrationUniversity of Illinois at Urbana- ChampaignFebruary 1990The Development of Managerial Accounting in GermanyA Historical AnalysisA.G. CoenenbergUniversity of Augsburg/GermanyH.M.W. SchoenfeldUniversity of Illinois/USA
The Development Of Managerial Accounting in GermanyA Historical AnalysisbyUniversityA.G. Coenenberg,of Augsburg/GermanyandH.M.W. Schoenfeld, University of Illinois/USADuring the second half of the 19th century managerial accountingdeveloped in Germany based largely on micro-economic theory. Inthefirst3decades ofthe 20th century the emphasis shiftedtowards costing techniques and laterthe1930s'and 40s')(intowards determination of "true cost", by-and-large for governmentcontracts. The outcome was a highly developed systematic approachwhich had a majorimpact on cost accounting in most continentalEuropean countries. The major difference to US developments wasthe separationof cost(viewed as accounting for consumption orutilization of physicalresources)from traditional accountingexpenses, allowing easier inflation adjustments and concentrationon reproduction or replacement costing.After WWII the emphasis shifted to cost theory,resulting in theadoption oflimitationalrather than substitutional productionfunctions as the basis of analysis and search for (minimal) costcombinations. Gutenberg examined various adaptation patterns as aresponse to output changes and demonstrated limits ofthe breakeven-analysis. By creating a more sophisticated theory based onan indirect rather than a direct relationship betweenoutput andcost managements'options forinfluencing cost are highlighted.This provides a theoreticalfoundation forutilization oftheactivity costing - which was adopted earlier by German companiesthan their US competitors. These theoriesrepresent little knowndevelopments which might stimulate theory research in the US.
2Managerial accounting as a major tool of management decision makingdevelopment of accountingtied to thein general. In analyzingnecessary to refer to financial accounting occasionally.German managerialaccounting development,itwillitsTo showcloselyisdevelopmentitwillbedistinctive steps inbroken down into several periods:these are (1) the time before 1900, (2) the period of early academic analysis until the1930s' (coinciding with the early stages of business administration as anmidsubject), (3) the period ofthe period afterWWIIgovernment standardization and controlleading up to today's decision orientedacademicuntil 1945,managementand(4)accounting.«Management AccountingI.1.Cost Behavior Analysis.As longasmerchants have kept records, they have attempted to relate expensesto specific activities in order totransaction. Initially thisonitwas alsoSchneider(1613),before 1900.1determine how much profit accrued with eachwas regardedrealized, that expensesas a secretprocedure and carefully guarded. Earlymight decline with growing quantities. Aspoints out, these ideas can already be found in the writings of Antonio SerraAdamSmith, and others. In theGerman"disproportionate" overhead (disproportionirte Unkosten) and Leuchsacquisition related expenses into sales relatedOnMayaccounting literature32mentionsdistinguishedand independent (presumablefixed) cost.the other hand, economists concerned with agriculture such as Turgot (1727Thuenen and-1781),others pointed out that increasing efforts will not necessarily yieldincreasing returns, thus laying the foundation for another type of cost behavior (increasing marginal cost).It is,therefore, save togroups of cost has been usedmuchassumeearlier thanthat the distinctionbetweendifferentmost 19th century authors claim.
32.Internal and External Accounting; Price Determination.Thebetweendistinctionand factory accounting records can also befinancialtraced in the literature to the end of the 14th centurymore frequently mentioned5(Klipstein,9Jung,The7).Atand "Handlungsbuchhaltung"how muchitdesriptive examples, however,earlierstillprevailed.system (Kalkulation)Theishadtoterms "Fabrickbuchhaltung"(financial accounting) are introduced.how much had beenspent on acomprehensive description of a price determinationattributed to Ballewski10isbe sold to reap appropriate benefits. Practicallevels.8whoalso deals with the issues of costThis was soon followed by arguments (Tolkmittpointing towards the central role of costing formanagement. Dornthis differentiationwere rare because the attitude of secrecy mentionedfirstbehavior at different outputforhowever,this time, thefactory accounting tasks consisted in determiningproduct and for;as the result of industrialization in the late 18th centuryand Fredersdorff(factory accounting)4classifies all theseall9)future oriented decisions as the basisattempts as a preliminary stage of costaccounting; most publications of this period contain substantial details, give technicalhowadviceattempt toII.1900-1.tohandle certain procedures, but neither systematize the material norcriticallyevaluate procedures found in various businesses.1930s.General Trend.Increasing industrialization jointly with the recognition of business as an academicsubject (foundation of business schools in Leipzigon theLeitnerissue of cost determination.,1in 1905.followed in 1907A,2.Thefirstand Colognein 1898)focused interestmajor systematic analysis was published bycomplete description of the system used by a well known companyThe AssociationofGerman Equipment Manufacturers (VDMA)
4surveyed the procedures usedin this industryand published thethese treatments of cost accounting issues concentratedoverhead among departments, and the redistribution ofdiscussed.It isAll.on procedural and technicalrecommended basesaspects. In addition, the causation principle,13results in 1908allfor allocation ofwerecost items to productsinteresting to note, that already at this time the viability of labor cost asan allocation basis was called into question.Duringthistime period internal and external accounting werestillviewed as acontinuous flow throughout the company and treated as an unified system.material publishedmoderndiscussed inSeparation of Expenses and Cost.Duringtionsstillof thetext books.2.tions ofnot very different from cost accounting proceduresisMuchthistime period the development was strongly influenced by the contribu-Schmalenbach, then a dominant figurewhichlaterinacademia,who madeseveral sugges-had a major impact on practical accounting. His major conceptualcontribution was thedemandHeexpenses, and (3) cost.to clearly distinguishobserved, that not onlybetweenis(1) cash expenditures, (2)there the wellknowndistinctionbetween cash flows and expenses (requiring period allocation of expenses accordingthe matching concept), but that cost represent a(rather thanmoney)summaryof resource input quantitiesinto the production or service generating process. This being so,traditional accounting-particularlyunder inflationary circumstancesrepresent a basis for pricing of products.If,-atan appropriate date(e.g. at theaccounting expenses and cost willshownin exhibit1.differ.isunable totrulyhowever, consumption of goods arerepresented in the internal accounting process, values (prices) for costducedtomay beintro-time of sale). Thus acquisition based financialTherelationship of his three categoriesis
5(insert exhibitHeclassifies the1here)major discrepancies between expenses and cost as caused by(1)temporal differences and (2) material differences. Temporal differences are caused bydifferent usage assumptions underlying depreciation (frequently linear in financialaccounting, but should be usage based in costing to reflect true consumption andthus be chargeable to other time periods); both will eventually result in theifmaysametotal,they are based on acquisition cost). Other temporal differences can be caused bydelayed repairs and overhauls;then costmay be understatedifnot recorded in the period in which they were caused,for a timeand overstated when these items leadtochargeable expenses (resulting in cost fluctuation in spite of the fact that resourceconsumption remained the same). Obviously, such ideasaccountants, because thereiswill raise objectionsfroma possibility for income smoothing. Nevertheless,assessed strictly in terms of real resourcesconsumedfor manufacturingUSifand regardedasa necessary part to determine prices, such items should be recorded in matching terms,thatis,inperiods in which they where caused.Even more important are material(a)expenses whichfrom expenses dueshallwilldifferences,which mayfallintotwo subgroupsnever become cost or vice versa, and (b) cost which are differentto different accounting (valuation) bases.be illustrated by some examples. There are businessThese material differencesactivitiesmanufacturing, such as speculation, financing and other non-minornot connected withactivities,which arenot part of the companies usual business activities. Although nobody would dispute theirnature as business expenses, such items do not represent purpose-oriented consumptionof resources-therefore they should neverbecomecost of a specific product; such itemsare expenses in Schmalenbachs' terminology and should be recovered from profits.These items are Schmalenbach's"(cost) neutral expenses". Conversely, thereisthe
6possibility of resource inputs( consumption)reflected in financial accounting expenses.-such as the use of equity capitalHe recommends,-notthat such items should berecorded as "imputed cost" and added to total cost in order to truly reflect resourcesand managementused. Other examples are self insurance "premiums"effortsowner(s) in private enterprises for which no salaries are paid; such items arealthough not normally recorded as expenses. Schmalenbachcost,on the needinsistsexpenses before these will represent actual input consumption reflecting cost3.by theto adjust14.Uniform systems of Accounts.It isagain Schmalenbach,whocontributed to the development of managerialaccounting in his efforts to develop uniform systems of accounts1S.Heviews managerialaccounting as representing internal transfers and transformations which are imbeddedan enterprise; consequently, these should be showninto the external transactions ofan integral part of the accounting system. Based onof accounts which at thedata.Such a system hassame time providesto integrate fullythisconcept, hefor internal controlrecommends aaschartand external reportingany adjustments needed to properly measuredexpenses and cost as defined above. This view has prevailed in the following period andbecame4.part of government imposed accounting requirements (details discussed below).OtherDuringIssues.thissame periodseveral other issues emerged, such as attempts toimprove the accuracy of the costing system by standardizing terminology, improving thedefinition of cost centersand breaking these down into(Platzkostenrechnung accounting for work stationsactivity costing).be traced toEven-their smallest unitsa concept particularly useful forearly developments of standard costing (Plankostenrechnung) canthis period.At the timeitemergedas "normal" or "optimal" costing,referring to the level of capacity usage for which costwhere measured.
7At the same time prevailing stronginflationarydevelopments triggered detailedsuggestions for "up-to-date valuation" of cost (easily accomplished, since original data aresimply regarded as quantity measurements, to which atenance of the physical substance can be attached).,8,newIt iswhich brings out these aspects (eventually resultingprice assuring the main-specifically thein thework of SchmidtDutch use of reproductionvalues initiated by his student Limperg). Schmalenbachs imputed cost proceduresfacilitates the integrationof such items into the regular accounting system.It isnoteworthy, though, that Schmalenbach himself never agreed to the use of reproductioncost in hisown system-he rather settled for indexing, because he regarded inflationarydevelopments as an abnormal rather than a normal development.III.19331.-1945.Accounting and Pricing Regulations.This period withitsdisastrous political developments had a strong effectaccounting, because, rather than nationalization, theindirect control of industry asitsonGerman government choosecourse towards a government controlled economy. Thisresulted in a codification of prior ideas to developassure comparable data for controllingallmeasurement procedures and thusparts of theeconomy. The major regulatorymeasures (passed as decrees) were the following:(1) Wirtschaftlichkeitserlassvom12.11.1936(2) Buchfuehrungsrichtlinien (accounting guidelines) of(3) Leitsaetze fuer die Preisermittlungoeffentlichen Auftraegen15.11.193811/11/193717aufgrund der Selbstkosten bei{LSO} (pricingguidelines forallpublic contracts) of
8(4)Kostenrechnungsgrundsaetze{KRG}(cost accounting guidelines) of 16.1.193918The Decree of 11/11/1937 prescribedmadethe adoption ofthe organization of accounting systems,Uniform Charts of Accounts-shownin exhibit2-mandatory, andspecified a fourfold(insert exhibit 2 here)purpose, which had to be met by every accounting system, namely to provide(1) accountingandfinancial statements (accounting for period results),(2) cost accounting (accounting for pricing(3) business statistics (for internal(4)and per unit cost measurement),and external comparison), andplanning (projection for future periods).Particularly requirement#2 brought major changespractice by introducing imputed cost itemsandto thetying financialGermanaccountingand managerial accountingtogether into one system.2.Theintegrated financial/cost accounting process.The new system was designedindividual businessadopted astricttoaccomplish measurement purposesand the overall economiclevel at thesametime.therefore,input resource consumption definition for costing as proposed bySchmalenbach. For example, interest expenses paidregarded as sufficient to measureregardless of source-becameto third partieswere not any longercost. Instead capital utilization fora certain processthe accepted resource definition, becauseassess efficient input factor utilization in a single firm as well as incontext.It,at theThese requirements were regardedasit-permits toan overall economicminimal necessary comparativeinformation, to provide "true" performance based guidance for entrepreneurial andgovernmental decisions. In orderto standardize allmeasures which might cause differen-
9cesbetween expenses and cost similardifferent financing proceduresto the already discussed issue resultingfrom(borrowed versus equity capital) four mandatory groups ofimputed cost were introduced. In additionto financing, legal organization (corporation v.sole proprietorship), asset utilization patterns (systematic balance sheet value baseddepreciation-v.machine usage based consumption), andwere subjectedspecific-often uninsurable risksto this treatment, resulting in the use of(1)imputed management(2)imputed(3)imputed depreciation, and(4)imputedOnthe procedural level,salaries,interest,riskcharges19.allactual expenses potentially requiring adjustmentswere debited to "neutral" expense accountsin class 2;imputed cost are debitedaccounts in class 4 and credited to corresponding accounts in classof classes 4 and 2statement,all-afteroriginalsome intermediatesteps-2.to costSince the accountsare closed out to the incomeand adjusted entries remain traceable, neutralizing each otherbefore financial accounting profits are calculated. At thesametime, operational resultscan be calculated by routing manufacturing cost including imputed cost through a special"Betriebsergebnis"(operations) account. This procedureisshownin exhibit 320.(insert exhibit 3 here)Regarding depreciation, the principle of a single write downto zerowasmaintained for financial accounting, using acceptable (largely tax based) guidelinefor assets,whereasfor costing purposes otherlivesprocedures (such as output relateddepreciation or a valuation basis different from financial records) were admissible(it isnoteworthy, that in such a system differences arising from inflationary developmentsaffecting specific orallcost items as well as delayed repairsand similar events can be
10accommodated, evenactuallifeifthiswas not foreseenat that time).spans were treated as a special depreciationThe system attemptedtoOver- or underestimation ofrisk.measure "normal" manufacturingcost,andto separatecost items occurring only in connection with specific orders ded to whatiscostwere definedreferred to in theundin relationship to capacity utilizationUSas practical capacity.However,time the system was geared towards actual rather than standard costing.Itandat thatalsoprescribed specific steps for overhead cost allocation and distribution (at normalcapacity).In determining the admissable capital usage charge the notion of "requiredcapital" (betriebsnotwendiges Kapital)was developed, which assumed thepossibility ofassessing capital needs for certain types of production (established by comparisonindustry-wide basis). This notion even todaymaycomparing actual capitalization with a "mostefficient" input,difficult todetermine optimaloffersomeon aninteresting opportunities foralthoughitisadmittedlylevels.In addition to accounting standardization, the system provided pricing guidelinesfor allgovernment orders (LSO-Leitsaetze fuer die Preisbildung bei oeffentlichenAuftraegen). For this purposes a general scheme was adopted-see exhibit 4-.(insert exhibit 4 here)In order to keep records at acomparablelevel reflecting all typical cost, special costitems (Sondereinzelkosten) are not routed through regular accounts but treated as itemschargeable directly to the special orders or products. The system also required theseparation of materials overhead from general production overhead.Theapplication ofallrequirements incorporatedin thesystematic partitioning of the managerial accounting intoit's3decreesmajorresulted in aparts,namely
11(1) costaccumulation (Kostenartenrechnung), for purposes of cost classificationand adjustments,(2)Cost distribution to consuming departments according to the causationprinciple or established distribution ratios (Kostenstellenrechnung), which can beseen as the major departmental control procedure, and(3) cost allocation to products, jobs, or output batches(Kostentraegerrechnung)for purposes of pricing.This approach-shownin exhibit 5-is stillmaintainedin all(insert exhibit 5 here)textbooks and costing regulations.andin theItcan also be foundin practically allother EuropeanEast Bloc countries (with the modifications required by political doctrine).After the end of the warallpriorgovernment accounting regulations by decreewere invalidated. However, the Association of German Manufacturers (Bundesverbandder Deutschen Industrie) reissuedessenti
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