Gpk Accounting

Topics: Management accounting, Costs, Variable cost Pages: 5 (1065 words) Published: January 23, 2009
German Accounting - GPK

Leave it to the Germans to develop a costing model based on detail, precision and improving overall control. Flexible Analytic Cost Planning and Accounting (GPK) is a powerful tool, having withstood 60 years of alternative methodologies and widespread hands-on use across Europe. In manufacturing companies, particularly those with a homogenous product line, GPK can be used to define the effects of resource consumption to the bottom line while greatly illustrating to management their marginal cost tiers. The nature of GPK is to show managers what their true production costs are in order to drive strategy. But isn’t that the goal of most other cost accounting methods, such as activity-based costing and Japanese target costing? By understanding GPK through its applicability, comparisons can be made to these other methods to determine if it is superior, necessary or, indeed, complementary to them. It is quite noteworthy that Andreas STIHL AG & Co., KG, a privately held firm, uses GPK and GAAP-based systems to assist in their corporate strategy. This speaks to the value of a GPK model, which is first measured against a traditional target costing approach.

GPK vs. Target Costing
In broad terms GPK and target costing are similar in that they both are used to drive cost control. It is the extent – or motive - of cost control efforts, however, that contrasts the two. Target costing begins with desired profit margin. A firm identifies the profit required to justify production and subtracts it from the competitive market price to derive their target cost standard. Based on current production costs and capacity levels the company can hone in on their target cost reduction amounts through resource allocation, supply chain management, or product re-designs. Both methods consider customer demand at implementation and, therefore, “pull” costs through production. There is a known standard at which production outcomes are deemed efficient or feasible. Processes and resource consumption are adjusted accordingly. Yet, while target costing is used to address profit control, GPK is used to address cost control. Compared to GPK, target costing appears much more simplistic. As such using desired profit margin to back into production efficiencies will usually downplay the need to implement some upfront accountability by the cost centers involved. A product feature may receive a higher proportion of production cost and resources depending on how important it is deemed in generating the desired level of profit. A GPK approach is more likely to identify wasteful use of resources.

GPK vs. ABC
Sharman notes in his article that ABC, or PK (Prozesskostenrechnung) in Germany, “has recently been incorporated as an extension or sophistication of GPK”. 1 From here the similarities and differences can be examined. In broad terms both methods approach costs by assigning to cost centers. To some extent managers are responsible for spending variances using ABC although with GPK each manager is responsible and accountable for all expenses originating from their department. ABC does assign costs using more realistic cost drivers than a traditional CVP approach, but with not nearly the detail and flexibility as GPK. ABC models tend to be based on historic performance rather than an adjustment of operational capacity and resources based on anticipated outputs. Figure 1 below uses the Maple Hill Dairy Farm case to illustrate how ABC and GPK might report contribution of a single product line. In this illustration ABC considers total costs – variable and allocated fixed - to derive a net contribution margin. Further, multiple activities drive costs within the various cost centers. By contrast GPK is much more detailed, producing various margin tiers. These different margins are used by management to help determine short-term and long-term strategy, as well as to identify the variable product costs and allocate...

References: 1. Sharman, Paul A., German Cost Accounting, Strategic Finance, December 2003, pp 31.
2. Krumwiede, Kip R., Rewards and Realities of German Cost Accounting, Strategic Finance, April 1, 2005. Found online at
http://www.allbusiness.com/finance/3592029-1.html
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