Looking Back to Assess the Present: Different Development Paths for Controlling in the US, Germany

Larry White, Gary Cokins | July 14, 2015 | 2

The world of the professional accountant working in public practice or in business is typically dominated by standards, regulations, and laws governing external financial reporting intended for the investment community and regulatory agencies. When financial information is presented or reported in any different form, it is often looked at with a certain level of suspicion and requests for reconciliation with the externally reported financial statement figures. This suspicion is a significant impediment to creating and using decision-useful management accounting information to provide internal insights and decision support. However, this is where management accounting information is most needed to create sustainable economic value. 

To help accountants and the profession assess the degree to which an unhealthy imbalance exists between the emphasis on external financial reporting and the need for internal management reporting information, we are going to compare the development and practices in two nations—Germany and the US—to consider: Which system provides a better balance for internal decision support and sustainable economic value creation?

US vs. German management accounting

While the job title of controller is familiar to those in the US, the definition and perspective of a controller in Germany is very different. German controllers are trained to create rigorous cost models that reflect the reality of the causal relationships among the resources, capacities, processes, products, and services being modeled. German controllers don’t have externally dictated “cost accounting” standards. They have a body of knowledge with underlying principles that guides them in modeling their organization’s operations. They are trained to create cost models in a manner that allows operating managers to understand how and where to improve costs, project the financial impact of operating or capital improvements, and make marginal, incremental, and strategic and operational decisions without a disconnect between the operating resources, the processes that consume the resources, and the cost information. This information allows managers to accurately make timely adjustments to operating resources and processes to correct problems. It also enables accurate projections of resource needs and costs based on demand scenarios. Managerial accounting truly becomes managerial economics.

In the US, limited management accounting education, history, and an intense focus on financial reporting standards has driven accountants down a different path—one that involves a primary focus on preparing financial information for external financial reporting purposes. This has led to a focus on applying “full absorption” accounting calculations for nearly all purposes.

In Germany, the calculations of the controller are not normally used for external financial reporting. They are primarily used for internal decision making and control of operations. Effective decisions at all levels of management is how long term, sustainable economic value is created in organizations. The results of decisions are eventually realized and reported in the external financial statements. Better decisions lead to better financial results in the long term.

Why do the Germans have a different approach?

German companies that use the controlling function most extensively are Germany’s largest, most sophisticated and globally competitive companies—think Siemens or Mercedes-Benz. German companies clearly see a competitive advantage from providing their managers with better information than their competitors to manage and control internal operations and costs.

It is remarkable that controlling is a unique professional practice confined to Germany that is little known and rarely taught or used in other countries; this is largely because of how these two different systems evolved.

Evolution in the US

Prior to the Great Depression of the 1930s, the focus of management accounting was on using accounting to improve management from the shop supervisor to the owner or senior executives. Industrial engineering and “scientific management,” heralded by Frederick Winslow Taylor and Henry L. Gantt, were supported by costing that was calculated and recorded by modeling operational and physical relationships. In that era:

  • broadly-averaged cost allocations of overhead expenses into product costs were considered sloppy, distorting, and misleading;
  • excess capacity costs were clearly identified; and
  • accounting was expected to reflect the reality of how the business’ resources were consumed by processes and products.

However, during the Great Depression, management accounting’s successful techniques were used to regulate “fair and reasonable profits” and reign in profiteering by companies. The result was a host of regulations around costing practices and pricing to achieve social objectives, to the detriment of using management accounting for improving operational and cost efficiency

After World War II, the US economy boomed and financial reporting standards and regulations focused accountants on linking costs to revenue in a general, more inaccurate way. Accountants began to neglect cause-and-effect relationships when allocating indirect and shared expenses to product costs since revenue, not the costs to increase revenue, were the major focus of the US’s growing economic prosperity. The rapidly expanding capital markets also focused on financial statement information and cost accounting adapted to provide convenient, but less insightful, costing methods.

In the late 1970s, US standard costing and production practices were shown to be insufficient to meet the operational, quality, and cost competition from Japanese imports. New costing methods, such as activity-based costing, throughput accounting, target costing for new product development, and other views of costing started to emerge to help deal with the lack of competitiveness in the US.

Evolution in Germany

German capital markets were slower to develop after World War II and corporate financing was primarily private investment or bank financing. German controlling practices developed to demonstrate to sophisticated lenders that a business understood how to get the most profit from its limited resources and invested capital. Tighter capital availability also meant that business executives wanted to get the most from their resources to avoid refinancing trips back to creditors.

A part of German controlling is an approach to management accounting known as “grenzplankostenrechnung” (GPK), which means marginal cost planning and accounting. GPK adapted standard costing and flexible budgeting practices at the detailed cost center level to model the nature of resources consumption as fixed or proportional relative to changes in output (normally an intermediate output in a process rather than just a final product or service) and provide detailed marginal cost information.

German controlling has found its costing methods extremely powerful and has seen limited benefit from any of the advanced cost methods developed outside Germany since the 1970s (e.g., throughput accounting, lean accounting).  German controlling is seen as a separate function from financial accounting.

What does German controlling offer professional accountants in business?

German controlling and its management accounting techniques represent a very different view of cost modeling because it recognizes the representation of an organization’s resource and process cause-and-effect relationships as its primary principle. If the costing model that a German controller builds does not directly lead to internal improvements, greater insights and understanding, better decision making, and operational improvements by operating managers, then it is considered to be a failure.

Key characteristics of German cost modeling include:

1. Primary customers are internal operating managers who make decisions about resources (e.g., assets, levels, and types of employees), processes, products, services, channels, and customers.

2. The financial model must calculate costs that reflect cause and effect resource relationships, the available resource capacities, and operational quantities demanded from resources with minimal distortion.

3. Enhancing decision making at all levels in the organization is the goal. German controllers create the information to analyze profitability using very detailed multi-level contribution margin-type income statements. Each level provides different margins that are used for various management decisions. The marginal contribution aids in differential cost-related decisions. The product contribution, which includes the cost of equipment (such as depreciation, maintenance, energy, and floor space), is used for product-level decisions like pricing. Customer contribution enables customer profitability analysis. The German models facilitate projections and estimates based on large and small process changes, strategic and operational decisions, and proposed changes in resources.

 5. Resource costs are traced and assigned based on strong causal relationships (not on generalized, weak causal, or non-causal cost allocation factors). The budgeted and actual costs specific to each cost center and the output being produced (e.g., maintenance hours or machine hours) include only those costs that have been defined as the responsibility of the cost center manager. The costs of supporting resources (called secondary costs) are added to the primary costs in all cost centers based on usage while maintaining the distinction between fixed and proportional costs.

6. Nonmanufacturing costs, such as distribution, marketing, selling, and customer service, are often assigned to product or product line margins in the profit and loss statement using a form of activity-based costing where strong causal relationships and traceability exist. They may also be reported in other internal management views of cost by each individual channel and/or customer.

Financial accounting and managerial accounting—different principles for different purposes

In today’s high pressure external financial reporting environment, German controlling reminds accountants that the creation of management accounting information will have its greatest impact when the operating and costing model is designed with internal decision makers at all levels in mind. The principle of causality is critical to internally focused management accounting and needs to be applied using a fundamentally different approach from external financial reporting standards and principles. The purpose of managerial accounting is to create value by providing executives, managers, and employee teams with actionable, quality information to make better decisions about the application of resources.

How can the accounting profession and professional accountants adjust the balance between internal and external reporting?  How can management accounting be developed to provide organizations the skills they need?   What is your feedback on what can be done to redress the balance?


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Larry White

Larry White became a member of the IFAC Professional Accountants in Business Advisory Group in January 2015. He was nominated by the Institute of Management Accountants (IMA). Mr. White is the executive director of the Resource Consumption Accounting Institute. Previously, he was a senior business advisor in Deloitte’s US Federal Government Practice. He also served 28 years in the US Coast Guard where he was commanding officer of the Coast Guard Finance Center. Mr. White is a current member and former chairman of the IMA Board of Directors. Previously, he was a member of the International Public Sector Accounting Standards Board (IPSASB) and a member of the Association of Government Accountant’s Professional Certification Board for the CGFM designation. Mr. White holds a bachelor’s degree from the US Coast Guard Academy and a master’s degree in business administration from Columbia University (US). He is a Certified Management Accountant, Certified Financial Manager, Certified Public Accountant, and Certified Government Financial Manager. See more by Larry White

Gary Cokins

CPIM, Analytics-Based Performance Management LLC

Gary Cokins (Cornell University BS IE/OR, 1971; Northwestern University Kellogg MBA 1974) is an internationally recognized expert, speaker, and author in business analytics and enterprise performance management systems. He is the founder of Analytics-Based Performance Management LLC, an advisory firm. His career included working in consulting for Deloitte, KPMG, EDS (now part of HP), and SAS. He has authored many books including Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics.  See more by Gary Cokins


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Larry White September 3, 2015

German controlling techniques apply equally to both manufacturing and service industries. A few English language references from the Institute of Management Accountants publications are: Management Accounting Quarterly: http://www.imanet.org/docs/default-source/maq/maq_fall08_germancostacctmethods-pdf.pdf?sfvrsn=0 Strategic Finance: http://www.imanet.org/docs/default-source/sf/11mackie-pdf.pdf?sfvrsn=0 Thank you for your comment.

Shirish Pandit September 2, 2015

Very insightful article, thanks to Gary & Larry. The historical background and differences in motivations provide good insight into the varied developments. Would like to know if controlling in "service based SMEs" in Germany is indeed really as effective as in the manufacturing / industry-based companies? Are German controllers equally good at understanding the service-based business models? Thanks


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