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Resource consumption accounting

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A study on resource consumption accounting and its present day scenario with a case study

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Resource consumption accounting

  1. 1. 1 1 COST AND MANAGEMENT ACCOUNTING Resource Consumption Accounting Submitted to- Prof. Subhrangshu Sekhar Sarkar Submitted by- Shuvankar Dey BAM13003 K. Arindam Kumar BAM13016 Prasenjit Mazumder BAM13035 MBA 2nd Semester Department of Business Administration 2014
  2. 2. 2 TABLE OF CONTENTS 1. ABSTRACT................................................................................................3 2. INTRODUCTION.......................................................................................4 3. RESOURCE CONSUMPTION ACCOUTING.........................................5 I. Principles of RCA........................................................................6 II. An example into the principles of RCA......................................7 III. Aspects of RCA...........................................................................10 IV. RCA benefits................................................................................11 V. ERP system..................................................................................12 VI. Differences between rca and traditional cost accounting...........13 VII. Benefits of ERP based RCA model over ABC method.............14 4. CASE STUDY.............................................................................................14 5. CONCLUSION............................................................................................17 6. BIBLIOGRAPHY........................................................................................18
  3. 3. 3 ABSTRACT This paper introduces to readers “Resource Consumption Accounting -( RCA)” and its application. RCA is a comprehensive, fully integrated cost management system focuses mainly on creating information for an enterprise’s optimization decisions. RCA breaks down this capacity of resources into productive capacity resource, non-productive capacity resource and idle capacity resource. RCA follows the principles of causality, responsiveness and work for modeling resource consumption and costs. Resource Consumption Accounting (RCA) is a superior management accounting approach that provides benefits not achievable through traditional U.S. Management accounting approaches.
  4. 4. 4 INTRODUCTION Background The role of management accounting is to provide the tools and information for planning, monitoring and controlling enterprise performance and effective decision support. Management’s ability to achieve the companies’ strategic objectives during the conversion of resources into saleable products and services directly depends on the quality of the data Management Accounting provides. Resource Consumption Accounting (RCA) is a superior management accounting approach that provides benefits not achievable through traditional management accounting approaches. How effectively an organization manages the information they have? In the 1980’s publication Relevance Lost, Johnson & Kaplan pointed out that U.S. management accounting did not meet the requirements to operate a company. Not much has changed since according to a 2003 IMA and Ernst & Young Survey. Some 2,000 CFO's and controllers reported: 80% cost management is important to their organizations’ strategic goals and yet confirmed that 98% [of their] cost information is distorted citing too many overhead allocations. The Consortium for Advanced Management International – RCA Interest Group survey confirmed 80% of U.S. companies still use traditional standard costing, which may account for only 23% being satisfied with their decision support information.1 Why RCA was developed The correct calculation and understanding of costs and cost flows are critical for any Management Accounting system. Resource Consumption Accounting (RCA) is a ‘made in the U.S.’ management accounting approach, based on GPKa (Grenzplankostenrechnung), and Activity-based Costingb (ABC) approaches. GPK has been used to great effect by manufacturers and service companies in Europe for several decades. ABC provides enhanced analytical capabilities and adds the process view of an enterprise’s costs. As stated in the International Good Practice Guidance published by IFAC PAIB Committee in July 2009, “A sophisticated approach at the upper levels of the continuum of costing techniques provides the ability to derive costs directly from operational resource data, or to isolate and measure unused capacity costs. For example, in the resource consumption accounting approach, resources and their costs are considered as foundational to robust cost modelling 1 White paper, Resource Consumption Accounting by Anton Van Der Merwe, Partner, Alta Via Consulting, LLC
  5. 5. 5 and managerial decision support, because an organization’s costs and revenues are all a function of the resources and the individual capacities that produce them.”2 RESOURCE CONSUMPTION ACCOUTING Resources Consumption Accounting ( RCA ) is a management accounting approach focusing on creating reliable information to minimize costs and maximize revenues to enhance the productive capability of the business, aiming greater success in a highly competitive market. RCA creates an integrated economic model of operations by breaking down the capacity of resources into productive capacity resource, non-productive capacity resource and idle capacity resource. RCA follows the principles of causality, responsiveness and work for modeling resource consumption and costs. RCA creates a cost model that supports managers decisions throughout the organization and aligns them with the organization’s enterprise optimization strategy. RCA forms the cost model which starts by understanding the organization’s strategy, it’s competitive position, the resource flows in the organization and their interaction to support each other to create products or services for sale.. Based in German cost management principles as found in Grenzplankostenrechnung (GPK), RCA works well with enterprise resource planning (ERP) systems, capturing information at the lowest levels to accurately determine the costs. It digs down to the resource level—for instance, costs related to the machine, the date product is manufactured on, the number of laborers on the line, units of electricity required to run the machine, etc.—to provide high quality underlying information in the system. Traditional systems typically provide distorted cost data and just don’t produce the kind of detail available with RCA.When a manager faces a special decision, such as whether to outsource or to make a product, they should feel confident that RCA is providing accurate data to support the decision. Resource Consumption Accounting greatly enhances the ability to leverage technology using analytical approaches, and reporting mechanisms, to establish alternative perspectives on the same data. 2 White paper, Resource Consumption Accounting by Anton Van Der Merwe, Partner, Alta Via Consulting, LLC
  6. 6. 6 PRINCIPLES OF RCA Causality The principle of causality is the most important concept covering cause and effect relationship. Causality requires resource flows and their costs to be modelled from resource to consumers (support and direct) through the value chain on strict cause and effect basis. It means the final product and service will not reflect full cost as defined by generally accepted accounting principles. Full cost requires non-causal allocation of costs to the unit level of a product or service. The term was established in 1963 by Professor Gordon Shillinglaw.3 Responsiveness The principle of responsiveness ensures the compliance with the principle of causality in modelling the resource consumption with main focus on cost behaviour. Responsiveness governs the fixed and proportional costs relationship between resource pools. The principle of responsiveness has a number of advantages – 1. Allowing inverse relationship between total cost and total volume when manufacturing more complex products. 2. Providing managers specific insights into resources when they relate them to changes in product output. 3. Enabling the accurate modelling of an organization’s economic flow of goods and services regardless of its complexity.4 Work (or Process) visibility The principle of work (or process) visibility is adopted from Activity-Based Costing (ABC) and is applied with quantity based drivers when needed for decision support or process improvements. Sometimes tracing resource flows between cost objects does not yield sufficient information for managerial decisions while it is necessary to know what activity is executed in the resource consumption between resource pools. This principle applies to 3 Application of Resource Consumption Accounting (RCA) in an educational institute, by Syed Ajaz Ahmed Mehboob Moosa, Department of Accounting and Finance Institute of Business Management, Karachi 4 -do-
  7. 7. 7 activity modelling by including such activities in the model which add critical and ongoing information that managers need frequently.5 AN EXAMPLE INTO THE PRINCIPLES OF RESOURCE CONSUMPTION ACCOUNTING6 We have taken an example of a construction company, “Outdoor Builders” and its endeavour to develop decks and porches for a project. The following example will highlight on the importance of the 3 principles and at the same time provide better understanding of the same. RCA focuses on operational costs and resource consumption. The RCA model uses many more cost centers than traditional accounting methods. Each cost center’s resources must be homogenous and must be the responsibility of only one manager. By grouping resources around a simplified output measure, cost centers are simpler to manage. The Outdoor Builders example in Table 1 tries to explain that principle of RCA . Under Normal Costing, Outdoor Builders has two cost centers, Decks and Porches. RCA typically has more cost centers than Normal Costing, but managers that have implemented RCA prefer this because they are easier to manage. For instance, it is very difficult to measure the deck or porch cost center’s performance from job to job because of all the variables that go into each deck. RCA attempts to break these down into more manageable measurements. At Outdoor Builders, the Decks cost center is broken down into six different cost centers that have an easy to measure output. Measuring the performance of the Footings Cost Center based on the total hours for each footing provides managers more relevant information to make decisions than the old Decks Cost Center. Additionally, these cost centers can then be aggregated to summarize any higher level of information. These summaries are easy to obtain at any level, including the old Deck Cost Center or at the overall company perspective. Similarly, the performance of the stairs cost center is based upon the no. of steps and the others are measured upon the required area covered by each items 5 -do- 6 “Resource consumption accounting” by SherleyA.Polejewski,Department of Accounting,University of St.Thomas
  8. 8. 8 Table 1 - Outdoor Builders Cost Centers Normal RCA Measure Decks Footings Railings Framing Stairs Support Posts Decking # of Footings Ln. Ft. Sq. Ft. # steps # support posts Sq. Ft. Porches Walls Roofing … Sq. Ft. Roof Sq. Ft. Normal Costing’s method of explaining relationships are based on monetary values, but expressing this relationship on a monetary basis causes fixed cost distortions. By using quantitative relationships based on causality, RCA produces more accurate results as a predictive model. Diagram 1 shows an example of how the different costing systems view work in Outdoor Builders. UsUnder Normal Costing, a value based relationship is established. Normal Costing lumps all the cost of the cost center together, $100,000 in this case, and then divides by the driving factor. The end result is $500 cost per footing. This monetary relationship is then used to compare jobs and cost of upcoming jobs. The problem is, as the later example explicitly shows, that this monetary value is not causal and can be deceptive when managers use this information to make decisions.
  9. 9. 9 Diagram 1 – RCA Quantitative-Based Model RCA looks at relationships based on cause and effect and applies monetary values later, not as the leading relationship. Costs that cannot be expressed in causal relationships are not applied to product costs. Diagram 1 shows how RCA approaches the Footings cost center. Instead of looking at the monetary value, RCA looks at the cause and effect relationship between hours and the number of footings. Our example has 1,000 hours for 200 footings, equaling 5 hours per footing. From the RCA perspective, the number of footings is driving the amount of hours up. These additional hours are what drive the monetary up. By calculating the 5 hours per footing, we will be able to better predict the cost of future jobs. Plus, the 5 hours per footing is more helpful information for a manager than the cost of the footing to manage his/her cost center. The third important principle in understanding Resource Consumption Accounting is the nature of costs (Responsiveness). RCA separates costs according to their behaviours into, while Normal Costing assumes all costs are variable. Table 2 is a good example of how this principal provides managers with better decision support. The Normal Costing example pools all the cost center’s costs together and divides by the number of hours. This gives the cost center a cost rate of $100 per hour. RCA, however, recognizes that these costs are not going to rise and fall at $100 per hour evenly because there are fixed equipment costs involved. Footings Cost $100,000000 CCoosstt // FFoooottiinngg $$550000 200 FFoooottiinnggss Normal RCA Footings Hours 1,000 Hours HHrrss // FFoooottiinngg 55 200 Footings
  10. 10. 10 RCA separates the costs into both Variable and Fixed Classifications and provides two hourly rates for managers. This distinction allows us to better see how volume changes affect our costs. Separating the fixed costs from the variable costs also allows us to highlight idle capacity, as you can see in Table 3. This is one of the major strengths of RCA. In order for managers to manage their idle capacity, they must be able to quantify it. RCA explicitly defines the idle capacity and gives this information to managers to utilize unused resources and make better decisions. Table 2 - Cost Behavior 1,000 Hours Normal RCA Labor $30,000 Variable Costs Materials 20,000 Labor $30,000 Equipment 50,000 Materials 20,000 Total Cost 100,000 Variable Rate $50 / Hr Fixed Costs Equipment 40,000 Equip. Unused Capacity 10,000 Normal Cost Rate $100/ Hr. Fixed Rate $50/ Hr. Aspects of RCA7 COMPREHENSIVE VIEW OF RESOURCES Foundational to RCA is the view of resources. Resources such as equipment, material, and employees, enable the business activities/processes and other outputs in an enterprise. Resources serve as the primary source of costs and provide managers with insight into capacity, utilization and resource efficiency. 7 White paper, Resource Consumption Accounting by Anton Van Der Merwe, Partner, Alta Via Consulting, LLC
  11. 11. 11 UNAMBIGUOUS VIEW OF COST BEHAVIOR By correlating required inputs with outputs in the enterprise, RCA is able to provide a consistent view on consumption and cost behaviour. RCA answers the endless debates about fixed and variable and their use in decision making. Apart from providing managers with accurate throughput, contribution and gross margins, RCA also recognizes the need for ‘different costs for different purposes’ and deploys various concepts to clearly delineate decision support information. QUANTITY-BASED COST MODEL RCA expresses causal relationships in quantities versus dollar values. In an RCA cost model, values follow quantities. Valuation in the cost model occurs only when consumed quantities are multiplied with output (cost) rates. This quantity-based model of enterprise operations allows managers to simulate input price changes independently of internal improvements in efficiency. Therefore, managers can obtain predictive results that combine project consumption factors and expected input prices. MULTI-LEVEL MARGINAL P/L VIEW RCA supports the separation of SG&A from direct and indirect (unit) costs to provide more transparent profitability reporting. Expenses representing direct (unit) costs for products and services sold flow into the P/L as Cost of Goods Sold (CoGS). Other indirect costs are assigned to the product P/L at causal and decision relevant levels, such as Product Linear Service Line Level, Customer Level or Regional Level. Managers now have the ability to consider multiple (contribution) margins based on the direct and the different group levels of indirect costs. RCA BENEFITS Management Aspect Benefit Analysis » A clear delineation of costs affected by decisions at different levels within management Decision Support » Maintaining the integrity of cost behavior through consumption relationships enhances analysis and decision support Corrective Action » Improved through accurate predictive results, more timely information, authorized/flexed budgets and extensive variance analysis
  12. 12. 12 Organizational Control » More effective through seamless integration of predictive and actual results Performance Measurement » Providing valid benchmarks of actual performance by associating required inputs with the actual outputs produced WHAT IF YOU ALREADY HAVE AN ERP SYSTEM? Effective Management Accounting systems require consistent data for operational, tactical, and strategic information. ERP systems were designed with this aspect in mind. Moreover, ERP packages already provide RCA functionality, notably SAP. Users of these systems incur no incremental IT investment to obtain superior management information. A comprehensive RCA implementation can be accomplished in a number of ways: – implement RCA across the enterprise -out approach – implement RCA in one area first with subsequent roll-outs to the rest of the organization – develop an RCA proof-of concept before implementing it on the operational system -in approach – implement those RCA principles which provides the most benefit as a first iteration and improve level of detail and granularity over time A key benefit for implementing RCA is it unleashes the power of the ERP system already in place. ERP systems have been very effective in providing more data, but not necessarily better data. What management needs is relevant information structured to enable them to achieve enterprise objectives. Moreover, in the resource consumption method the principle of responsiveness is replaced with the principle of variability for the operational modeling.
  13. 13. 13 DIFFERENCES BETWEEN RCA AND TRADITIONAL COST ACCOUNTING RCA TRADITIONAL METHOD 1) RCA attributes the cost of excess or idle capacity to the person or to the level responsible for influencing the resources but doesn’t allocate it to the products. Excess or idle capacity is not identified and thus cannot be associated with the appropriate persons or levels and is routinely allocated to the products. 2) RCA facilitates capacity analysis by making the use of theoretical volume for cost rates and also making excess or idle capacity visible to managers. This method confuses capacity analysis by using master-budget volume for cost rates and not accounting for excess or idle capacity. 3) RCA uses replacement cost depreciation method to provide useful internal cost decision support information. This method uses depreciation method prescribed by the external reporting system that often does not reflect economic reality. 4) Resource Consumption Acconting pulls cost of resources consumed to cost objects by using non dollar, Quantified output-consumption relationships based on causality. Pushes cost of resources supplied to cost objects by spreading all costs incurred over finished goods units produced. 5) Identifies and assigns costs as innately fixed or variable (proportional) at the resource level, accurately specifying the nature of costs. Identifies and assigns costs as innately fixed or variable at the product level, obscuring true cost consumption patterns. 6) RCA recognizes that indigenous proportional costs can be consumed in a fixed manner and provides required treatment. Provides no recognition of cost consumption patterns at the resource level. 7) Provides decision makers the ability to track and group cost information at virtually any level—from the Groups costs at a department or product level with little or no provision for tracking or accessing costs at lower levels.
  14. 14. 14 resource level to the organization level. 8) RCA also facilitates operations management with quantified actual nonfinancial information to compare to planned or standard quantities. Nonfinancial information is often sparse or unavailable since costs are frequently allocated based on percentage relationships without tracking resource quantity consumption BENEFITS OF AN ERP-BASED, RCA APPROACH OVER ACTIVITY- BASED METHODS (ABM) INCLUDE: 1. The RCA model automates gathering, and building the relationship, of actual financial and operational data into comprehensive, applied business model. The relationships between resources, cost drivers and cost objects are automatically updated in the course of work. In contrast, the ABC model relationships are often discerned through subjective interviews and other time-study snapshots. 2. RCA provides a forward-looking business model. This is in contrast to the activity-based system, which is generally backward looking using historical information without recognition of current and future business changes. 3. RCA focuses on managing resource capacity as the basis for managing attributable costs, with costs driven by quantities of capacity demanded. ABC, using full absorption approach, drives all supplied cost through the business, regardless of the actual quantity of resource demanded by service receiver. 4. RCA recognizes resource interdependencies between the cost centers themselves and retains the transparency of the individual cost elements that make up the cost centre pool. ABC models are of a step-down nature, ( from resource to activity to cost object ) without recognizing fully burdened resource costs. CASE STUDY8 CLOPAY PLASTICS COMPANY Headquartered in Cincinnati, Ohio, Clopay has U.S. film manufacturing operations in Augusta, Ky., and Nashville, Tenn., as well as others in Germany and Brazil. The company manufactures plastic products, such as film, that are sold to consumer product companies for use in hygiene and healthcare products. In addition to providing innovation in the plastic film 8 “RCA at Clopay” by B.Douglas Clinton & Sally A. Webber ,Department of Accountancy ,Northern Illinios University.
  15. 15. 15 industry, Beyond the manufacturing area, there are five departments that support the Augusta operations, including shipping, materials management, quality assurance, plant maintenance, and administration. Before the RCA pilot, the Augusta Clopay plant used a traditional standard costing system and generally based their standard product costs on planned machine hours and sales in pounds. They allocated support department costs to the production departments using the direct method based on various allocation bases including machine hours, pounds produced, purchased pounds, and headcount in each production department. These costs consisted of indirect labour, support labour, office supplies, and other depreciation. Production departments then added their own overhead costs to the fully absorbed support costs in creating a standard cost for overhead. PROBLEMS WITH CLOPAY’S PREEXISTING PRODUCT COSTING METHOD Clopay’s pre-existing costing system was a classic example of a full-absorption method creating the potential for fixed-cost death spiral effects.  The primary issue was that costs for individual products changed based on unrelated changes to other products or resource costs associated with other products  The second was costing issue related to assigning depreciation costs based on financial accounting. Where two machines differ in terms of age and cost, the pre- existing Clopay system allocates higher costs to products made on the new machine, even though the products made on the old machine could be very similar.  Third, cost assignment affects customer and market issues as well. When product managers realized Clopay was going to eliminate or phase out a product , they lowered the selling price on alternate products or increased the volume of low-priced commodity products to increase volume for the remaining products. Given an expected decline in volume, managers knew those overhead cost dollars would be spread over a decreasing number of units and, in turn, would cause the cost per unit to increase, making the profit per unit decline. Clopay management recognized that they were relying on inaccurate cost information and intuition that unfortunately provided a poor substitute for strategic cost information. Moreover, the current system couldn’t simulate cost results given changes in resources such as an additional machine or upgrading an existing one. As a result, Clopay agreed to serve as an RCA case study to investigate the differences between RCA and its current system.
  16. 16. 16 Clopay used RCA to create 23 resource pools for costs in two categories: general support and production departments. Using 23 resource pools as opposed to eight support and six production departments offered the opportunity to better trace costs by type into resource pools. More resource pools provided more detailed information, which made for more accurate data to use when making strategic decisions. This approach provided greater homogeneity than Clopay could achieve by using departments that contained a diversity of costs. RCA assigns costs based on causality but doesn’t insist on using activity drivers for cost assignment where such drivers are either unnecessary to achieve accuracy or aren’t desired for some other purpose, such as achieving a greater understanding of processes or how to manage them. RCA excluded fixed costs that couldn’t be traced based on causality— the largest of these costs were due to idle capacity, which resulted in a total of 6% fewer conversion costs assigned by RCA than with the pre-existing Clopay cost system. Clopay implemented additional RCA features by using replacement cost depreciation for product- costing purposes and theoretical capacity for denominator volume RCA BENEFITS CLOPAY REALIZED ◆Properly attributing costs to specific production processes and their outputs resulted in more accurate cost assignment and a better understanding of resource consumption patterns. ◆The achievement of more accurate cost assignment provided the ability to conduct resource planning using only relevant costs. ◆The use of replacement cost depreciation eliminated the issue of unequal cost assignment for similar products that consumed the same resources and support activities. ◆Product costs included only the cost of resources used. ◆The amount of excess/idle capacity was made available to managers based on unconsumed theoretical capacity. ◆Cost assignment based only on causality eliminated costs that were previously assigned based on unrelated changes to other products. ◆Incentive to non strategically lower selling prices to artificially manipulate cost allocation amounts to specific products was eliminated.
  17. 17. 17 ◆Properly identifying resource consumption based on the innate nature of particular costs enhanced managers’ ability to understand resource interrelationships and use the underlying information to support incremental decision making quickly. CONCLUSION RCA is a very emerging and productive cost accounting method which is well suited for today’s contemporary and complex business activities. As with any new system, there are some drawbacks to RCA. RCA is expensive to implement. There is significant planning time required, and an integrated ERP system must be implemented as well. This will prove to be difficult because RCA is very new and very few companies around the world have implemented these methods. Also, RCA may not be a good fit for companies with non- routine activities. Causal relationships will be hard to define for non-routine activities. Overall, Resource Consumption Accounting is emerging cost management methods that may help managers make better decisions. By separating cost behaviours, RCA highlights idle capacity and reduces fixed cost distortions. These features are critical to help solve the pandemic of inadequate management accounting systems. Thus, it is hoped that with further research and development to eradicate the shortcomings in this useful accounting based system, we can see high prospects of the implementation of the RCA in various diverse businesses in the future.
  18. 18. 18 BIBLIOGRAPHY  Webber, Sally and Douglas Clinton. “Resource Consumption Accounting Applied: The Clopay Case” Management Accounting Quarterly. 2004, Fall. Vol. 6, No. 1. 1-14.  Sharman, Paul A. “Bring on German Cost Accounting” Strategic Finance. 2003, December. 1-9.  Friedl, Gunther and Hans-Ulrich Kupper. “Relevance Added: ABC with German Cost Accounting” Strategic Finance. 2005, June. 56-61.  Keys, David E. and Anton Van Der Merwe. “Gaining Effective Organizational Control with RCA” Strategic Finance. 2002, May. 1-7.  Merwe, Anton Van Der and David E. Keys. “The Case For Resource Consumption Accounting” Strategic Finance. 2002, April. 1-6.
  19. 19. 19 APPENDIX APPENDIX A Activity Based Costing Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) into direct costs compared to conventional costing. CIMA (Chartered Institute of Management Accountants) defines ABC as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilize cost drivers to attach activity costs to outputs. ABC is based on George Staubus' Activity Costing and Input-Output Accounting. The concepts of ABC were developed in the manufacturing sector of the United States during the 1970s and 1980s. During this time, the Consortium for Advanced Management-International, now known simply as CAM-I, provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing. Methodology of ABC focuses on cost allocation in operational management. ABC helps to segregate  Fixed cost
  20. 20. 20  Variable cost  Overhead cost The split of cost helps to identify cost drivers, if achieved. Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The cost driver is a factor that creates or drives the cost of the activity. Steps to implement Activity-Based costing 1. Identify and assess ABC needs - Determine viability of ABC method within an organization. 2. Training requirements - Basic training for all employees and workshop sessions for senior managers. 3. Define the project scope - Evaluate mission and objectives for the project. 4. Identify activities and drivers - Determine what drives what activity. 5. Create a cost and operational flow diagram – How resources and activities are related to products and services. 6. Collect data – Collecting data where the diagram shows operational relationship. 7. Build a software model, validate and reconcile. 8. Interpret results and prepare management reports. 9. Integrate data collection and reporting. APPENDIX B Grenzplankostenrechnung (GPK) is a German costing methodology, developed in the late 1940s and 1950s, designed to provide a consistent and accurate application of how managerial costs are calculated and assigned to a product or service. The term Grenzplankostenrechnung, often referred to as GPK, has been translated as either Marginal Planned Cost Accounting or Flexible Analytic Cost Planning and Accounting. The GPK methodology has become the standard for cost accounting in Germany as a "result of the modern, strong controlling culture in German corporations". German firms that use GPK methodology include Deutsche Telekom, Daimler AG, Porsche AG, Deutsche Bank, and Deutsche Post (German Post Office). These companies have integrated their costing
  21. 21. 21 information systems based on ERP (Enterprise Resource Planning) software (e.g., SAP) and they tend to reside in industries with highly complex processes.[4] However, GPK is not exclusive to highly complex organizations; GPK is also applied to less complex businesses. GPK's objective is to provide meaningful insight and analysis of accounting information that benefits internal users, such as controllers, project managers, plant managers, versus other traditional costing systems that primarily focus on analyzing the firm's profitability from an external reporting perspective complying with financial standards (i.e., IFRS/FASB), and/or regulatory bodies' demands such as the Securities and Exchange Commission(SEC) or the Internal Revenue Services (IRS) taxation agency. Thus, the GPK marginal system unites and addresses the needs of both financial and managerial accounting functionality and costing requirements. Resource Consumption Accounting (RCA) is based, among others, on key principles of German managerial accounting that are found in GPK.

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