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ACTG 6310

ACTG 6310. Other Controllership Topics. Hot Topics in Cost and Managerial Accounting. GPK Beyond Budgeting Lean Accounting – presented in term papers Six Sigma – presented in term papers Environmental Accounting – presented in term papers. GPK.

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ACTG 6310

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  1. ACTG 6310 Other Controllership Topics

  2. Hot Topics in Cost and Managerial Accounting • GPK • Beyond Budgeting • Lean Accounting – presented in term papers • Six Sigma – presented in term papers • Environmental Accounting – presented in term papers

  3. GPK • Grenzplankostenrechnung (Flexible cost planning and control system) • Pronounced GPK in the U.S. • Time-tested German cost accounting system • Sort of like variable costing used here in the U.S. • Very complex system with lots of detail • German cost accountants are very happy with the system, unlike U.S. counterparts with over 80% saying they are not pleased with their accounting system.

  4. GPK – What’s Different? • German accounting systems focus on providing information to managers • U.S. accounting systems focus on providing information for external financial reports • Management reports are often abstracted from financial data • Since the primary emphasis is on managerial reporting, systems are often tailored to meeting managers needs better.

  5. GPK – What’s Different? • Many more cost or resource centers used • German companies use between 8 - 20,000 cost centers with the average around 400-600 • U.S. companies use about 1 to a few per department • Detail, forecasting and variance analysis • Extended by cost center in German companies • Not usually extended in U.S. companies • Idle capacity • Allocated to all products in U.S. companies • Not assigned to manufactured products in German companies

  6. History of GPK • In 1950s and 1960s, Hans-Georg Plaut (automotive engineer) and Wolfgang Kilger (researcher) developed GPK • Purpose was to develop an accounting method which would support decision making.

  7. GPK Implementation • Separate costs • Costs must be separated into fixed and variable (referred to as proportional) costs • Assign variable and direct fixed costs only • Assigned to cost centers at the lowest level • Indirect fixed costs should not be charged to products. • Cost centers • Very small • Must have a robust relationship between its variable costs and their cost driver. • Only one person is responsible for each cost center. • A cost center will have 10 or less workers.

  8. GPK Implementation • Types of cost centers • Final cost centers (manufacturing process) • Primary cost centers (deal with management,etc.) • Allocation • Costs of primary cost centers are then assigned to final cost centers • Reciprocal method often used instead of the step method of allocation. • All costs, even selling and administrative costs, are allocated to cost centers.

  9. GPK Implementation • Cost centers are created in the General Ledger • General Ledger is used for management and control as well as financial reporting • A single manager may have multiple cost centers • Each cost center has well defined and differentiated activities

  10. GPK Implementation • Contribution margin accounting is used: Sales - Variable costs = Contribution margin I - Fixed costs (product) = Contribution margin II - Fixed costs (company) = Net income

  11. GPK Implementation • More cost classifications used, including • Fixed vs. proportional • Direct vs. indirect • Relevant vs. irrelevant for decision making • Primary vs. secondary costs • Type – production, R&D, G&A, Marketing/Dist. • Nonabsorbable vs. Absorbable • Production cost type • Production cost category • Cash-flow relevance • With all this detail, ERP is a definite help. • SAP (German IT system) has modules for GPK.

  12. Benefits of GPK • Cost control • Capacity decisions • Transparency for cost information • Make vs. buy decisions made easier • Sales and planning decisions are enhanced with focus on the contribution margin • Focus on contribution margin helps in managing bottlenecks • CM per bottleneck calculations

  13. Comparison between ABC and GPK • Variable/fixed cost breakdown • GPK breaks down costs and allocates only proportional costs to resource cost centers • ABC does not – it allocates all costs to activities • Long run/short run • GPK is more short-term oriented since a lot of fixed overhead costs are expensed currently • ABC focuses more on long-run • Cost drivers • GPK uses mainly cost drivers tied to output related resources (machine hours, labor hours, direct materials pounds) • ABC can use any cost drivers (engineering hours, number of purchase orders, number of setups)

  14. Companies Using GPK • Mostly German speaking companies • Lots of manufacturing companies but service companies use it as well, including: • Daimler Chrysler AG (2,500 cost centers) • (but not Chrysler in U.S.) • Porsche AG (450 cost centers) • Schering AG (3,500 cost centers) • Deutsche Telekom (20,000 cost centers) • Stihl AG & Co. (650 cost centers) • North America • Toronto’s Hospital for Sick Children (previously used ABC) • Stihl Inc. – North American subsidiary

  15. Why little GPK in the U.S. • Our systems are financial oriented • Costs are high to implement and maintain (may outweigh benefits) • Easier to downsize here • Not many English version manuals • Not many other companies in U.S. to model • Not many consultants are aware of it

  16. Trends of GPK • IMA has adopted GPK as its new cost accounting method • They are working on developing a method based on GPK principles that is not as complex • The IMA hopes to train academics, consultants and workers in the GPK methodology.

  17. Beyond Budgeting • Formal budgeting, developed in the 1920s, has gotten out of hand • The budgeting process takes on average 4 ½ months and 30% of senior management’s time • The budget is often out-of-date early in the year and only 20% of companies change it • The budget is used as a performance evaluation tool • Majority of workers are dissatisfied with the budgeting model • Jack Welch, former CEO of GE, “the budget is the bane of corporate America. It never should have existed.” • In 1997, some professionals frustrated with the corporate budgeting process established the BBRT (Beyond Budgeting Round Table). • Main goal is to abolish budgeting totally!!!!!

  18. Beyond Budgeting • Today’s business environment demands adaptability. • Budget limits change, has too many controls, stifles creative thinking and innovative actions. • Budget is NOT CUSTOMER ORIENTED. • Businesses need to focus on strategy more, not past results from budgets • 85% of managers spent less than one hour a month discussing corporate strategy. • 60% of managers did not link strategy to the budget.

  19. Beyond Budgeting Principles Can use all of these principles or only a few: • Create relative targets • Beating benchmarks or the competition • Continuous strategy-setting • Bottom-up, continuous process • Anticipatory Systems • No tie between forecasts and reward system. • Forecasts set at least six quarters in the future. • Resources on Demand • Resources are allocated to business units that need them the most. • Alleviates spend equal amount as last year’s budget

  20. Beyond Budgeting Principles • Fast, Distributed Information • Available quickly • Relevant and reliable • Both lagging and leading indicators • Comparisons with competition • Relative Team Rewards • Individuals and groups are rewarded • Self-governance Framework • Decentralized into many smaller, self-managing units • Empowered Managers • Managers set both short and medium term goals • Managers decide how to achieve their set goals

  21. Beyond Budgeting Principles • Accountability for Dynamic Outcomes • Management is evaluated on what they could have achieved, given the circumstances. • Network Organization • Self-managing units form independent, customer-focused entities • Market is the determining factor, not the planning, budgets, and controls • Market Coordination • Self-managing units can either purchase support services from external support or from the organization’s central support. • Supportive Leadership • Managers of self-managing units are allowed to take risks and make mistakes without fear of punishment.

  22. Benefits of Beyond Budgeting • Faster response time • New, innovative strategies • Lower costs • Customer loyalty

  23. Comments on Beyond Budgeting • “Beyond Budgeting is an idea that promotes an agile and innovative, forward looking, customer and people oriented enterprise, that empowers its entrepreneur-managers to continuously develop new and original solutions to unexpected and non-programmable opportunities and problems.” – Michel J. Lebas, Professor of Management Accounting, H.E.C. School of Management, France.[1] • [1] Beyond Budgeting, 2007.

  24. Comments on Beyond Budgeting • “Recent events have shown that there has never been a better time for a radical reassessment of how we manage organizations. We face rapid change despite having more limited sight than at any time since the 1940s. A climate of international terrorism and volatile stock markets does not encourage planning beyond weeks and months, never mind months and years. We need more adaptive processes and a culture that supports them. Instead, too often we have fixed targets and fixed plans. They no longer make sense. Beyond budgeting is a provoking alternative we should take seriously.” – Charles T. Horngren, Littlefield Professor of Accounting, Emeritus, Stanford University.[1] • [1] Beyond Budgeting, 2007.

  25. Comments on Beyond Budgeting • “Stretching allows people to constantly reach for the goal. And people are getting more and more comfortable with the idea that you can get the best out of people not by fighting budgets, which are all about minimal numbers, but by getting people to do the best they can, and measuring their progress toward it – against last year, against what competitors are doing. We’re in the process of enriching our organization through the stretch concept. Operating margins are 50 percent higher than they were for the first one hundred and eight years of our company, and in a tougher global environment.”- Jack Welch, CEO, General Electric.[1] • [1] Beyond Budgeting, 2007.

  26. Conclusion • GPK - more detail • Beyond Budgeting – less detail, more customer-focus • BOTH CAN HELP IMPROVE THE MANAGEMENT OF YOUR COMPANY!!!!

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