Companies are often organized into departments by functions, such as operations, marketing, sales, corporate headquarters, etc. Typically, each one of these departments is then assigned specific responsibilities and referred to as either a cost center, a profit center, or an investment center.
To prepare for this Discussion, “Shared Practice: Cost, Profit, and Investment Centers,” review the Portz & Lere article in the Learning Resources for this week. Consider what you know from your professional background, the resources, research, and/or the regulatory environment in your home country.
By Day 3
Post the following:

Analyze how cost center accounting practices in German companies differ from the practices in your current or previous organization or one with which you are familiar.
Explain which country’s accounting practices you would prefer to use for your organization and why. Be sure to provide your rationale by using specific examples.
Provide an example of a profit center taken from your professional experience, the resources, or research. Explain why this is a profit center, including the methods of performance evaluation, and explain how it contributes to the success of the organization.
Provide an example of an investment center taken from your professional experience, the resources, or research. Explain why this is an investment center, including the methods of performance evaluation, and explain how it contributes to the success of the organization.
Cost Center Practices in Germany and the United States:
Impact of Country Differences on Managerial Accounting Practices
Kris Portz, St. Cloud State University
John C. Lere, University of Wisconsin—Milwaukee
Abstract
As business becomes increasingly global, it is important for managers to appreciate that practices that work well in one country may not work as well in other
countries. This article compares cost center practices under Grenzplankostenrechnung (GPK), a common approach to cost accounting in Germany, and typical
cost center practices in the United States. Differences between Germany and the
United States on Hofstede’s uncertainty avoidance dimension and in workforce
and management education provide possible explanations for differences in the
responsibility assigned to cost center managers between Germany and the United
States. Differences in cost center practices concerning classification of costs, measures to use when considering changes in costs, and the size and scope of the cost
center between Germany and the United States all support these differences in
cost center manager responsibility.
Keywords: cost centers, German cost accounting, Hofstede, responsibility accounting
Introduction
Although business is global, differences in countries may mean that the
practice of business is not universal.
Certain country differences can impact
the effectiveness of managerial accounting practices and, as a consequence, affect the appropriateness of the practices.
These country differences include differences in culture, defined using Hofstede’s taxonomy (2001), and workforce
and management education, which are
discussed in the present paper. Failure to
recognize the impact of country differences on the appropriateness of managerial accounting practices may lead to
a number of dysfunctional actions. A
company may benchmark against the
wrong set of companies. Managers and
accountants may accept “one size fits all”
solutions which do not fit all situations.
Companies may implement homecountry practices in subsidiaries located
in countries where the home-country
practices will be ineffective. The last decade’s growth in international managerial accounting research (Haka and Heitger 2004, 21) is a sign of the potential
importance of recognizing the impact
of country differences on differences in
managerial accounting practices.
This article considers the impact of
country differences on differences in
cost center practices between Germany and the United States. The goals of
the article are to 1. describe cost center
practices that are an important part of
Grenzplankostenrechnung (GPK), a
common approach to cost accounting
in Germany, 2. contrast these practices
with cost center practices commonly
employed in the United States, and 3.
offer possible empirically testable explanations for these major differences in
practices based on country differences.
The remainder of the article is divided into four sections. The next section
provides an analysis of previous research
and indicates where the present article
fits within the literature. This section is
followed by a section that describes differences between cost center practices
common in Germany and cost center
practices common in the United States.
Section three describes important differences in culture and education between Germany and the United States.
It also discusses how the differences between Germany and the United States
provide possible explanations for the
differences in cost center practices. The
article ends with a discussion of implications for managers and suggestions
for future research.
Analysis of Previous
Research
Because three recent articles review the literature on international
management accounting (Harrison
and McKinnon 1999; Chenhall 2003;
Spring 2010 • Vol. 25, No. 1
45
Portz and Lere
Haka and Heitger 2004), this article
does not include a detailed review. A
common thread to these articles is that
the dominant approach to distinguishing countries is based on culture differences and that Hofstede’s taxonomy is
the most common approach to distinguishing culture (Harrison and McKinnon, 1999; Chenhall 2003, 152-3;
Haka and Heitger 2004, 32). Haka and
Heitger (2004) do, however, consider
environmental factors that can have an
impact on how managerial account-
A Review of German
and U.S. Cost Center
Practices
Although cost center practices vary
somewhat from firm to firm in the
United States, there is enough similarity across firms that it is reasonable to
speak of common cost center practices
for the United States. Germany provides a unique opportunity for comparison. The Institute of Management
Accountants (IMA) has recently con-
“… a company with a GPK system will typically have
many more cost centers than will a company following
traditional United States practices.”
ing systems are designed in addition
to culture. They divide these factors
into four categories: (1) organization of
economic activity (2) political and legal
processes (3) culture (4) infrastructure
sophistication.
The present article considers environmental factors that fall into two of
these categories: culture as defined using Hofstede’s taxonomy (culture) and
workforce and management education
(infrastructure sophistication).
The present article is unique in
that it considers managerial accounting practices in Germany. Germany
has not been included in prior work
on the impact of country differences
on managerial accounting practice
differences. Unlike most previous
work, this article bases its analysis
on data from secondary sources. This
approach permits a more general description of practices that is not subject to company specific differences
and the perceptions of respondents.
This does, of course, mean that the
practices compared may not reflect
the precise practices of any specific
company. Being more general, however, the description of practices may
be more indicative of the impact of
country differences on the practices.
46
Spring 2010 • Vol. 25, No. 1
ducted a number of studies of Grenzplankostenrechnung (GPK), a very
common approach to cost accounting in Germany (Kilger, Pampel, and
Vikas 2002, 15). Because cost center
practices are a very significant part of
GPK, the IMA studies provide a basis for describing common cost center
practices in Germany.
Differences in cost center practices
between Germany and the United
States can be divided into four categories: differences in the definition
of a cost center, differences in output
and activity measures used in the cost
centers, differences in the way in which
costs are classified in cost centers, and
differences in the responsibilities assigned to the heads of cost centers.
Cost Center Definition
In order for a subunit of a company
to be a cost center under GPK, it is
necessary that a single output measure
can be identified for that subunit. This
single output measure is intended to
describe the operations of the cost center (Sharman 2003, 32). In the United
States, the only limitation imposed
on a cost center is that the decisions
made by the head of the cost center
are primarily ones that have an impact
on cost (Horngren, Datar, and Foster
2006, 197). Therefore, the limitations
placed on a United States cost center
are much less restrictive than the limitations imposed under GPK. This allows for cost centers that encompass
much broader operations.
Achieving the goal that operations of
the cost center can be represented by a
single output measure tends to result in
cost centers in Germany that are more
narrowly focused than are cost centers in
United States firms. For example, a cost
center in the United States that drills
parts might be divided into at least two
cost centers in Germany. One cost center would set up the drilling machines;
the second cost center would operate
the machines to perform the drilling
operation. Such a division would permit the firm to describe the operations
of each cost center by a single measure.
The output of the machine setup cost
center might be machine setups while
the output of the drilling cost center
might be parts drilled.
Achieving a narrow focus in GPK
cost centers tends to yield small cost
centers. Friedl, Küpper, and Pedell indicate that a GPK cost center is typically composed of ten workers or less
(2005, 57). Because the less restrictive United States definition of a cost
center tends to yield cost centers with
broader operations than does the GPK
definition, cost centers in the United
States tend to be larger.
The difference in the definition of
a cost center also means that a company with a GPK system will typically have many more cost centers than
will a company following traditional
United States practices. An example
of this difference in number of cost
centers is provided by Sick Kids (a Toronto children’s hospital). At Sick Kids,
implementation of GPK resulted in a
dramatic increase in cost centers. For
example, in pilot departments, implementation raised the number of cost
centers from 29 to 97 (Mackie 2006,
35-6). Another example of the large
number of cost centers under GPK
is provided by DeutscheTelekom,
DT (German Telecom). The Inte-
Portz and Lere
grated Cost and Accounting System (IKE), an extension of GPK, at
DeutscheTelekom, DT, “captures cost
information about the efforts of approximately 120,000 people working
in 40,000 cost centers.” (Sharman and
Vikas 2004, 34).
Output and Activity Measures
The importance of an output measure in defining a cost center under
GPK results in differences between
Germany and the United States in the
measures used in cost centers. Measures
used in a GPK cost center are intended
1. to represent the output of the cost
center, not the output of the firm and 2.
to relate to the usage of resources.
This emphasis on measures of cost
center output is so basic to GPK that,
according to Krumwiede (2005, 34),
CIBA Specialty Chemicals doesn’t use
“GPK per se because of its complexity
and because, in chemical manufacturing, it’s difficult to predict the output
quantity as some batches produce
more or less product than expected.
GPK requires that you are able to
predict outcomes fairly well, as in the
auto industry.”
In the United States, measures used
often do not represent the output of the
cost center. Under activity-based costing
(ABC), the measures selected represent
cost drivers for activities performed in
the cost center. Such a measure may
or may not represent the output of the
cost center (Horngren, Datar, and Foster 2006, 144-5). Other measures commonly used in the United States, such
as direct material cost, direct labor cost,
and direct labor hours represent measures with which a particular portion of
the cost center’s cost varies rather than
cost center output (Horngren, Datar,
and Foster 2006, 32).
Because GPK measures are also selected to relate to resource usage, some
measures that represent the output of a
cost center might not be as appropriate
for use in GPK. For example, a measure
such as number of setups might not be
an appropriate GPK output measure.
While it may represent the output of a
cost center, it may not be as closely tied
to resource usage as are other measures.
If there are differences in the setups
performed by the cost center such that
some setups take longer, a measure such
as setup hours might better relate to use
United States are divided into variable
costs and fixed costs. As used in the
United States, the term “variable cost”
is a more general term. It is typically
applied to costs whose total change in
proportion to change in some measure
“Measures used in a GPK cost center are intended (1) to
represent the output of the cost center, not the output of
the firm and (2) to relate to the usage of resources.”
of resources. In such a case, setup hours
would be preferred to number of setups
as an output measure for the cost center
(Keys and van der Merwe 1999, 3).
The emphasis on resource usage
means that many measures commonly
used in the United States may not be
appropriate output measures under
GPK. While the relationship between
cost and some measures used in the
United States is one of cause and effect,
the relationship is often only a statistical one. As discussed below, measures
only having a statistical relationship
with cost may not provide GPK managers with the information appropriate
to their responsibilities.
The GPK focus on defining cost
centers with one measure of output
that is related to resource usage leads
to cost classification under GPK
that is narrower than is typical in the
United States. A fundamental feature
of GPK is that cost center’s costs are
divided into those that are (1) proportional and (2) fixed.
Classifications of Costs
in a Cost Center
Classification of costs in a cost center into proportional costs and fixed
costs is a third important way in which
GPK cost center practices differ from
those of the United States. For that
portion of the center’s cost deemed to
be proportional, an increase (decrease)
in the output measure for the cost center is accompanied by a proportional
increase (decrease) in cost. The remaining costs of the cost center are classified as fixed. Traditionally, costs in the
of activity or volume which may or may
not be a measure of output (Horngren,
Datar, and Foster 2006, 30).
The very precise meaning of “proportional costs” under GPK can easily cause confusion. As used in the
United States, “variable costs” as well
as activity-based costing costs that vary
with unit-level, batch-level, and product-level activities are typically proportional costs to the measure with which
they vary. Therefore, a United States
cost center may include many costs
that vary proportionately with some
measure. As used in GPK, however,
“proportional costs” are limited to only
those costs that are proportional to
changes in cost center output. Because
a GPK cost center is defined so that its
operations can be represented by one
output measure, its proportional costs
all vary with the same measure.
The importance of the proportional/fixed cost dichotomy to GPK firms
is illustrated by Krumwiede’s (2005,
32-3) discussion of Magna Steyer, a
supplier of original equipment to auto
manufacturers. “Magna accountants
told me they don’t use ABC … because
ABC doesn’t separate fixed and [proportional] costs.”
Responsibilities of Cost Center
Managers
The final area in which GPK cost
center practices differ from United
States cost center practices relates to
the assignment of responsibilities to
cost center managers. There are two
important aspects of this assignment:
Spring 2010 • Vol. 25, No. 1
47
Portz and Lere
• The manager is responsible for seeing that costs adjust in response to
changes in output of the cost center.
• A manager may be responsible for
more than one cost center.
A major distinction between German and United States cost center
practices relates to the primary responsibility of cost center managers. GPK
considers the cost center manager’s
prime responsibility to be seeing that
costs adjust in response to changes
in the output of the cost center. This
link between the objective of managers and GPK is clearly indicated in the
definition of GPK translated from the
introduction to the preeminent German cost accounting textbook. GPK
is “a comprehensive and sophisticated
method of planning and monitoring
costs based on resource drivers. Selecting the resource drivers and separating
the costs into fixed and proportional
components ensures that cost fluctuations caused by changes in operating
levels, as defined by marginal analysis,
are accurately predicted as changes in
authorized costs and incorporated into
variance analysis.” (Kilger, Pampel, and
Vikas 2002, 7). “Authorized” is used in
the translation for a word that conveys
the meaning of target or allowed costs.
Therefore, this definition underscores
the emphasis on assuring that costs
adjust in response to changes in cost
center output.
This emphasis on cost adjustment
focuses the manager’s effort and attention on one thing, responding to
changes in the output of the cost center. As a result, GPK is likely to lead
to greater responsiveness of costs to
changes in cost center output than do
systems common in the United States
in which the manager has broader responsibilities.
Because the primary responsibility
of a cost center manager in the United
States is typically more broadly defined
as to control all costs incurred within
the cost center (Horngren, Datar, and
Foster 2006, 197), opportunities for
cost reduction such as by reducing
48
Spring 2010 • Vol. 25, No. 1
Table 1
Summary of Cost Center Practices in Germany
(Grenzplankostenrechnung) and in the United States
Germany
United State
Definition of a cost center
Limited so that a single
measure can represent cost
center output
Limited such that decisions
made by head primarily
affect cost
Size of cost center
Fairly small
Larger
Number of cost centers in
firm
Large number
Relatively few
Output or activity measures
One measure that represents
output of the cost center as
opposed to output of the
firm; relates to resources
used by center
Multiple measures are common and often represent
something with which costs
of the center vary; relationship between cost and measure may result from resource
use or because of statistical
association
Classification of costs in a
cost center
Fixed and proportional;
proportional costs change in
proportion to changes in cost
center output
Fixed and variable; variable
costs change directly with
some measure, which may or
may not be a measure of cost
center output
Primary responsibility of cost To control costs such that the To control all costs incurred
proportional costs change in within the cost center
center managers
proportion to the changes in
cost center output
Typical number of cost centers controlled by manager
Several
cost center output and by tradeoffs
that reduce one cost while increasing
another cost by a smaller amount are
more likely to be identified and implemented by cost center managers in the
United States than by cost center managers in Germany (Friedl, Küpper, and
Pedell 2005, 61).
A second difference between Germany and the United States in assignment of responsibilities to cost center
managers relates to the number of
cost centers managed. Although only
one manager is typically in charge of
each cost center in both Germany and
the United States, a GPK cost center
manager is often responsible for more
than one cost center while cost center managers in the United States are
typically responsible for only one cost
center. When GPK was implemented
at Sick Kids, managers who had previously been responsible for a single cost
One
center were now responsible for four or
five GPK cost centers (Mackie 2006,
36).
Table 1 summarizes these important differences between cost centers
under GPK and cost centers typical in
the United States.
Influences on Cost
Center Design
In developing a link between country differences and cost center practice
differences, this article considers the
difference between the major responsibilities assigned to cost center managers under GPK and in the United
States to be the one directly related to
differences in country culture and education. Differences between Germany
and the United States in: (1) classification of costs (2) measures used (3)
limitations used in defining a cost cen-
Portz and Lere
ter all support this difference in assignment of responsibilities.
The section begins by discussing
cross-country culture and education
differences as possible explanations for
the differences in major responsibilities
assigned to cost center managers.
Culture Influence
on Major Responsibilities
A number of social researchers
(Kluckholn and Strodtbeck 1961, Hall
1977, Hofstede 2001, and Trompenaars
and Hampden-Turner 1998) have designed theoretical frameworks to explain why people from different countries do things in different ways. This
article uses Hofstede’s taxonomy, which
distinguishes a country’s culture based
on its position on five dimensions:
power distance, uncertainty avoidance,
individualism/collectivism, masculine/
feminine, and Confucian dynamism.
Although they differ somewhat on
each dimension, Germany and the
United States differ most significantly
on the uncertainty avoidance dimension (Hofstede 2001, 87, 151, 215,
286, 356). Germany is considered a
strong uncertainty avoidance country
while the United States is considered
a weak uncertainty avoidance country.
According to Hofstede: “Many readers of my earlier work have interpreted
‘uncertainty avoidance’ as ‘risk avoidance’… . But uncertainty avoidance
does not equal risk avoidance.” “More
than an escape from risk, uncertainty
avoidance leads to an escape from ambiguity.” (Hofstede 2001, 148).
Based on Hofstede’s discussion of
strong and weak uncertainty avoidance
cultures, one would expect systems in
which managers are faced with relatively little ambiguity in strong uncertainty avoidance cultures. Managers in
weak uncertainty avoidance cultures are
more likely to function in systems presenting them with greater ambiguity.
Assignment of cost center manager
responsibility under GPK is consistent
with the strong uncertainty avoidance culture found in Germany. Un-
der GPK, a firm has narrowly defined
cost centers where a manager who is
responsible for the cost center focuses
on controlling proportional costs. As
a result, cost center managers are able
to become very competent at managing narrowly focused operations with
a repetitive output. Such a structure
tends to reduce the ambiguity that a
manager faces.
Strong uncertainty avoidance also
results in a preference for focusing
on accomplishing a set of tasks. Once
workers know their duties, their primary goal is to complete their assigned
tasks (Schmidt 2007, 47). Because of
the focus on managing costs so that
they respond to changes in output,
managers have well-defined roles within cost centers and can focus on their
designated repetitive, consistent, predictable tasks. This too tends to reduce
the ambiguity faced by managers.
Because of its weak uncertainty
avoidance culture, managers in the
United States generally prefer less
structure and more flexibility. Managers are often encouraged to work interdepartmentally to improve productivity and efficiency. The strict cost-center
criteria of GPK is inconsistent with a
desire for flexibility by United States
managers. Small cost centers focusing on narrow tasks may make United
States managers feel too confined or
even constrained from being creative.
As a result, the prevalent United States
culture may make it difficult for managers to accept the structure and rigidity of GPK.
Education Influence
on Major Responsibilities
Significant differences also exist between workforce and management education in Germany and in the United
States. In Germany, young people are
trained as skilled workers for specific
jobs through apprenticeships. Practical work with on the job training alternates with classroom courses over
an apprenticeship period. At the end
of the apprenticeship, workers receive a
certificate, which is highly valued and
instills a sense of occupational pride.
Therefore, German managers oversee highly qualified individuals who
are specially trained for their positions
(Schmidt 2007, 52). The United States
workforce generally lacks such specific
training. Workers are often considered
“jack of all trades” with little formal
training for specific jobs other than
what may be acquired on the job.
Most German managers are educated as technical experts. In fact, over
60 percent of German manufacturing
companies are run by engineers with
Ph.D. degrees. Any management skills
are usually learned on the shop floor.
Managers in the United States, on
the other hand, tend to be educated as
MBAs rather than as technical experts.
An effective manager in the United
States leads or guides a group. A manager usually does not produce personally but is good at making others in the
group produce through “motivation”
(Schmidt 2007, 53).
Because German workers are innately self-motivated and often work
hard for the good of the group, efforts
to “motivate” them would be seen as
unnecessary hand-holding and an insult to their professional pride. Therefore, German managers see little reason to learn about motivating or even
supervising personnel. They assume
work will be done well without any
prodding (Schmidt 2007, 53). Overall,
United States firms give management
authority to make strategic decisions
whereas German businesses see managers as less of a key factor to success.
Differences between workforce
education in Germany and the United
States are consistent with the difference in assignment of responsibility
between GPK and United States cost
center practices. A narrow focus in
cost center manager responsibility in
Germany facilitates well-defined specific jobs for which young people can
be trained. Because the United States
workforce generally lacks such specific
training, such well-defined jobs are
not necessary to facilitate education.
Spring 2010 • Vol. 25, No. 1
49
Portz and Lere
The difference in education between
German managers and United States
managers is also consistent with differences in the assignment of responsibilities between GPK and United States
cost practices. United States managers
tend to be educated to manage which
implies a broader range of responsibilities including motivating while management education tends to be very informal in Germany and therefore may
not support as broad responsibilities.
Cost Classification,
Measures Used, and Cost
Center Definition
In order for managers under GPK
to fulfill the responsibility of ensuring that changes in output levels are
reflected in changes in costs, the managers must know which costs are expected to respond to changes in output
levels. Therefore, the GPK emphasis
on classifying costs into proportional
versus fixed identifies the costs that the
managers can and are expected to control, the proportional costs.
Identifying proportional costs,
those that change in proportion with
cost center output, as opposed to variable costs, those that vary with some
measure, also enhances the ability of
GPK managers to fulfill their responsibility. Because the output measure
for a cost center is chosen to relate to
resource usage, the GPK concept of a
proportional cost is more strongly tied
to cause and effect than is the concept
of a variable cost. While there may be
a cause and effect relationship between
a variable cost and cost center output,
variable costs often have only a statistical association with some measure that
is often not cost center output. Therefore, the identification of proportional
costs provides a GPK cost center manager with information on costs that he
or she should be able to control as cost
center output changes while identification of variable costs may or may not
provide such information.
The United States cost center manager, however, is typically responsible
50
Spring 2010 • Vol. 25, No. 1
for managing the costs of a cost center
in ways that include, but are not limited to, the cost control responsibility
of a GPK cost center manager. Identification of variable costs as well as
those costs identified under activitybased costing as changing with changes in the amount of unit-level activity,
batch-level activity, or product-level
activity is appropriate to support the
broader responsibilities of a United
States cost center manager. Because
a cost center manager in the United
States is responsible for controlling
costs in a much wider variety of ways,
he or she can potentially make use of a
much broader set of measures. In addition, the broader focus of a cost center
in the United States may mean that
the cost center does not have a single
output measure. Therefore, multiple
output measures may be appropriate in
the United States.
Cost centers with a narrow focus are
necessary in order to assign responsibility for ensuring that proportional costs
change in response to changes in cost
center output to GPK cost center managers. Only with a very narrow focus can
a cost center’s operations be described
using one output measure. This narrow
focus explains the relatively small size of
cost centers under GPK and their relatively large number per firm.
The GPK practice of assigning multiple cost centers to a manager likely
arises because the GPK definition of
a cost center leads to many, fairly small
cost centers. If a unique manager was
assigned to each cost center, a company
would have an extremely large number
of cost center managers, each with a
fairly limited set of responsibilities.
This would not seem to be an efficient
use of resources.
In the United States, the responsibilities of a cost center manager are
typically broader than those under
GPK. In order to make the types of
decision typically made by a United
States cost center manager, the cost
center must be more broadly defined
to allow for cost trade offs. This is consistent with the larger size of a typi-
cal United States cost center and with
the smaller number of cost centers in a
typical United States firm.
Discussion
This section discusses cross-country
differences in culture and education as
potential explanations for cost center
practice differences and offers implications of these explanations. These
implications are divided into ones of
interest to managers considering implementing GPK and ones of interest
to those considering future research.
Implications for Managers
When considering potential implementation of GPK, it is important to
consider both the types of decisions
that a company wishes its managers to
make and the possibility that culture
and education differences between the
United States and Germany may make
GPK less effective in a United States
company than in a German company.
GPK cost center practices focus
managers’ decisions primarily on cost
reduction as a response to changes in
cost center output. Therefore, it is important for a company to consider the
extent to which it wants managers to
look for ways to reduce cost center
cost 1. by reducing the cost center output, 2. by looking for tradeoffs among
costs and 3. by considering other ways
to reduce costs that are not related to
changes in cost center output.
Typical United States cost center
practices are better designed to support
decisions related to these types of cost
reduction than are GPK practices.
In addition, because culture and
education differences imply different
preferences and preparation for responsibilities, it is also important for firms
considering implementing GPK cost
center practices to consider
1. if firm managers will be effective
with the narrower job focus and limited ability to be involved in strategic
or interdepartmental decision making under GPK and
2. if the focus on narrow tasks will make
Portz and Lere
managers feel too confined or even
constrained from being creative.
Suggestions for Future
Research
This article uses differences in cost
center practices between the United
States and Germany to explore possible relationships between (1) culture
and (2) education of the workforce and
managers and managerial accounting
practices. In doing so, it suggests sever