⬛ ⬛ CHAPTER 1

Introduction to
Management Accounting
and Cost Accounting
FEATURE STORY
JETS Unlimited SE is a European-based airline Carol: I noticed that too. But the decline is a
positioned in the low-cost flight sector. Since cyclical effect. I checked with the reports
its foundation in 2008, the company has been from the previous two years. We’ve had
successfully competing with the incumbents in this situation every year around this time.
the market. Joana Hansen, Head of Operations I’m not expecting this to become a negative
and member of the executive board, meets with trend. That’s why I didn’t highlight it in the
Carol Marino, Chief Management Accountant, report.
to discuss the most recent management report Joana: The other thing I wanted to talk to you
and other upcoming decisions. about is the pending decision about outsour-
cing our on-board catering. You know, we
Joana: Carol, thanks for sending me last month’s have the offer of an external airline caterer
management report this morning. I’ve already on the table. Have you made any progress in
had a couple of minutes to look at it. the analysis?
Carol: No problem. I’m sorry, though, that it Carol: My team needs one more day to finalize
came through a day later than usual. My the presentation for the management board.
team and I had to adjust data for the extra- We were able to extract all relevant infor-
ordinary effects resulting from the strike at mation from the cost accounting system. It
Paris Airports two weeks ago. looks as if outsourcing is a feasible option.
Joana: I saw that. More than 50 of our flights But I want to wait until all the number crun-
were cancelled. We’ve lost 10 per cent of the ching has been finalized.
monthly revenues, and operating profit is Joana: I’m glad I’ve got you and your team. The
down by almost 35 per cent! other board members have become incre-
Carol: Yes, but without this one-time effect, asingly impatient in this matter. They want
our sales and profits would have been in line a decision soon. However, I’m not going to
with the plans. Fortunately, they’ve now rea- decide anything without having seen a tho-
ched an agreement in Paris, so that further rough cost­–benefit analysis.
strikes are called off. I’m confident that next Carol: Absolutely. We’ve measured the per-
month’s plan will be met. formance of our internal catering services
Joana: Another thing that caught my attention over the last two years. This is a good basis
was the capacity utilization. Our seat-load- for comparison with the outsourcing offer. A
factor has slightly decreased from 87 per large amount is characterized by fixed costs.
cent to 84 per cent. This means that our pla- If we’re able to eliminate most of the fixed
nes are less utilized. Is this anything to worry costs within a year, the outsourcing deal
about? makes sense.

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 2 Chapter 1  Introduction to Management Accounting and Cost Accounting

Joana: Another component of this decision Carol: You’re right, that part should not
will be more difficult to assess. If we’re really be neglected. However, our accounting
going to accept the outsourcing deal, we’ll system will hardly help in this aspect.
have to downsize and restructure the exi- This will rather require a lot of tact and
sting catering operations. This also means sensitivity.
laying-off employees. We’ll have to answer
some ethical questions, too.

LEARNING OBJECTIVES
After completing this chapter, you should be able to:
1 Define the purpose of accounting
2 Understand the importance of accounting information for doing business
3 Describe the “Accounting Family” and differentiate financial accounting from management
accounting
4 Explain conceptual differences in management accounting between countries and world
regions
5 Understand the German approach to “Controlling” compared to Anglo-American
management accounting
6 Describe the role of a controller in an organization
7 Discuss ethical aspects of accounting

The Purpose of Accounting

Information Needs in Business
Imagine you take the job of general manager in a medium-sized manufacturing company
that is active as supplier for most of the major car manufacturers around the globe. You
make decisions, you coordinate activities of other people working inside and outside of your
own company, you motivate your direct employees, you explain tasks and goals, etc. What
do you need most in order to accomplish your tasks? A brand-new computer? A personal
assistant? A big office? These things might all help, but your most important resource most
likely is – information!
Information has probably become the most valuable resource in modern business. In today’s
business environment, rational decisions and actions – that is, those that help achieve company
goals – would be virtually impossible without access to information. Companies spend a great
deal of effort, time, and money on making sure that the right information is available to the
right people in order to make the right decisions and initiate the right actions. Information is
required for many different tasks:
1. Planning: Simply speaking, “planning” is about anticipating potential future events and
developments or future consequences of today’s decisions and actions, respectively. Plans
are by nature uncertain, because nobody can anticipate the future with absolute certainty.
But plans can be made more “robust” when they are based on past experience and when they
take into account what is already known about future developments. Businesses ­therefore
strive to base plans on a solid foundation of information about past achievements and
potential future developments.

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 The Purpose of Accounting 3

2. Documenting: A documentation of what has happened and what has been done in the
past can be a valuable source of information in business – for a number of reasons: First,
it can be a reference for future decisions and actions. Knowing how things have been done
previously can help us avoid making the same mistakes again. Documenting the past
therefore is a necessary (albeit not sufficient) condition for learning. Second, businesses
also rely on documentation when it comes to assigning responsibility and accountability
for past actions and decisions. Documentation can help clarify whether the right people
have been involved and who has actually made a particular decision. Third, documenta-
tion can also serve as a justification: given the information available at the time of the deci-
sion, management had to act the way it did. Given hindsight, a different decision might
have been more advisable, but documentation proves that the decision was justified at the
time it was taken.
3. Decision making: Decisions involve choices between alternatives. Even the decision not
to do anything is a choice – one could have done something instead. A rational decision
maker will try to make sure that they take the right decision – that is, picking the one
alternative that promises the greatest reward. Generally speaking, decision makers will
try to identify the alternative that offers the highest probability of achieving the defined
goals. Identifying this optimal alternative is possible only by having information on likely
future consequences of each decision alternative, necessary conditions for each alterna-
tive to be realized, or potential conflicts with other decisions that have to be made at the
same time.
4. Monitoring and Feedback: Businesses want to make sure that things evolve in the intended
manner: goals have been set with the intention of achieving them, projects have been started
in order to be completed as planned, and rules have been set based on the expectation that
they are observed. Planning and decision making therefore inevitably involve an element
of control. Again, this control would be impossible without information – both about the
original goals and plans as well as about actual achievements and developments.
Acting in a business environment is therefore virtually impossible without using information
of various kinds. The users of business information hold different positions and follow diffe-
rent interests. It is common to distinguish information users belonging to the company from
those that are outsiders to the company. The most important type of information user within
the company is certainly company management. But management tasks are not concentrated
only at the top of a company. Key account managers, project managers, product managers,
or team leaders in the company’s research and development (R&D) department all perform
management tasks. Their scope of responsibility as well as the primary object of management
differs. Depending on their area of responsibility they need information on different subjects
and to differing degrees of detail, but they all must make decisions, must plan ahead, and must
control goal achievement.
Company employees with management functions are not the only users of information,
though. Even if not working for a particular company (be it in a management position or in a
purely operational role), one might still have a high interest in collecting information on that
company’s business activities:
■■ Investors must decide whether they want to become owners of the company (for instance by
purchasing shares in the company). Thus, they are interested in the company’s past perfor-
mance as well as in its future outlook.

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 4 Chapter 1  Introduction to Management Accounting and Cost Accounting

■■ Creditors must decide whether they can safely lend money to the company or whether they
run the risk of losing their money (for instance, should the company go bankrupt in the near
future). They will therefore look for information on the company’s creditworthiness, its past
track record of servicing debt and on its expected future business success.
■■ Suppliers and customers must decide whether they should enter into a business relationship
with the company. This decision will depend on the company being able to fulfill contractual
obligations.
■■ Society might be interested in learning about how the company uses natural resources, treats
its employees and deals with the potential negative effects of its business activities on society.
Thus, even without a direct business relationship many people might want to get information
on what a particular company is doing or how it is dealing with a certain problem.
■■ Last but not least, public authorities need information on the company’s business activities.
A very important reason is the need to determine the company’s tax burden. Levying taxes is
possible only if tax authorities can determine the tax base. Taxes on company earnings there-
fore can be set only if tax authorities have information on how the company has determined
its earnings and whether all business activities have been properly taken into account when
determining earnings.
With potential information users and information needs being so diverse, it is clear that there
is no single information source within a company that could fulfill all possible information
needs. The information required is of a very different nature: some users look for “hard facts”
and pieces of information that can be expressed in monetary values. Others will rather need
“soft,” textual information.

Different Sources of Information for Businesses

We have described various uses of information in a business organization and also have out-
lined the many different types of users of information. We have not yet, though, talked about
sources of information: where can decision makers and other users find all the information
they need for their job?
A considerable amount of the required information relates to the company itself and its activities.
The company therefore needs systems and tools to track its diverse business activities: ordering
raw materials from suppliers, hiring new staff, paying open bills, planning the manufacturing
program for the next period, checking the quality of goods produced, delivering orders to custo-
mers. A modern business is a continuous stream of individual activities, which in their entirety
define “what’s going on” in the organization. The amount of information that can be collected is
enormous and companies implement a variety of tools and systems to keep track of it.
But not all types of events and activities are equally well suited to be recorded and tracked in
a systematic manner. Some events, states, or developments will best be expressed in terms of
qualitative information – that is, information that is predominantly in verbal or textual form:
rumors about competitors’ future activities, complaints from customers, news about promising
results in the research department. Information of this kind might be extremely valuable for
users both inside and outside the organization and will be best expressed in qualitative form
(text). Other events and states, though, can readily be expressed in quantitative form – that
is, information that can be expressed in numbers. Inventory levels, monthly sales revenues,
purchasing expenses, number of staff in the manufacturing department can all be documented

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 The Job of an Accounting System 5

and further processed in numerical format. Quantitative information of this kind accounts for
a large part of the business information that is continuously recorded and processed within a
company. Organizations typically have set up dedicated systems for this purpose, the centerpi-
ece being the accounting system.

Information

Qualitative Quantitative

Non-financial data Financial data

Example: Example: Example:

“Employee morale has “Through further automation “Operating income in the
suffered severely since our last we were able to reduce last quarter was 10% below
round of restructuring” defect rates to 0.5%“ the budget“

Can be recorded by the Accounting System

Exhibit 1.1  Types of business information

A Definition of Accounting
Accounting denotes the system that records, analyzes, and reports all business transactions of
a company in a systematic and comprehensive manner in order to provide useful information
to users inside and outside the company. Accounting is a “system” because it comprises various
elements that are logically connected with each other: individuals (accountants) use various
tools (for instance computers and accounting software) and follow certain procedures in order
to produce its main output: information. Accounting systems typically record only quantitative
information.
Accounting is not the only system to keep track of quantitative information within a company.
Quantitative information might also be recorded and processed in customer databases, quality
management tools, production planning systems, or HR files – to name just a few. But accoun-
ting is typically the central piece in a company’s information landscape.

The Job of an Accounting System

As we have previously outlined, not all events and developments can be tracked in the company’s
accounting system. Clear rules are needed to determine what accounting does and what it does
not do. Without going into too much detail we can say that the accounting system:
1. records and stores
2. the stocks and flows
3. of scarce goods and resources

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 6 Chapter 1  Introduction to Management Accounting and Cost Accounting

4. that have a value to the company in order to

5. ensure efficient and effective use of these goods and resources.
This general accounting definition contains a number of important concepts and notions:
■■ First, the basic accounting system is primarily concerned with keeping track of what is hap-
pening or has happened. Accounting as such does not judge or interpret events and states; it
merely documents them. Accounting is expected to be neutral and objective.
■■ Second, accounting records and documents both stocks and flows. Stocks always refer to a
certain point in time. The question how much money you have in your pocket can be answe-
red only by referring to a certain date and time: today it might be this sum, but tomorrow it
might be a totally different sum. Stocks therefore must be linked to points in time. Flows, in
turn, happen over time: money is spent or earned, resources are consumed or built up. Flows
refer to a period between two defined points in time. The basic accounting system deals with
both: points in time (for stocks) and periods (for flows).
■■ Third, stocks and flows are recorded only for scarce resources and goods. An economic good
or resource is scarce if and when the amount available is not sufficient to satisfy the total
demand for it. Scarcity leads to the central problem of all economic actors: since the available
amount is limited, one has to make optimal use of what is available. If a resource were avai-
lable in abundance, no business actor would have to care about the amount consumed – there
would always be more available if needed. It therefore only makes sense to keep track of the
stocks and flows of scarce goods and services. Abundant goods can simply be ignored.
■■ Scarcity provides a value to goods and resources: since the amount available is not sufficient
to satisfy the needs of all business actors, these business actors must compete for what is
available. Those who have a higher need will be willing to give up more in return for recei-
ving the scarce resource. The value of a good or service is therefore determined by its supply
in relation to the demand for it. Goods and services that do not have value need no specific
attention, since their consumption or production will not alter the business actor’s economic
performance. This performance, in turn, depends on the values consumed in relation to the
values generated. It is this comparison that is used as the central yardstick of business per-
formance in accounting.
■■ Last but not least, the preceding statements should have made clear that keeping track of the
stocks and flows of scarce resources serves the primary purpose of allowing the best possible
use of these goods in the company. In order to avoid waste (that is an unnecessary consump-
tion of scarce, valuable goods and services) one has to keep track of their generation and
consumption. From this thought we can derive the basic economic principles of efficiency
(the relation between input and output) and effectiveness (the relation between goals set and
degree of achievement of these goals).

The “Accounting Family”

It is the basic accounting system that keeps track of all business activities that match the above
criteria. Quite often, the accounting system is further divided into specialized subsystems. The
most important link between all accounting subsystems is their common information base. We
will explore these individual accounting subsystems in this section.

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 The “Accounting Family” 7

The basic accounting system serves as the foundation for its other accounting siblings, namely
financial accounting on the one side and management and cost accounting on the other. These,
in turn, process the basic accounting data further in order to generate the reports, analyses, or
forecasts required by decision makers. The accounting subsystems take different perspectives
on how values are determined and serve different economic purposes. This is the root cause for
the differences between them.

Financial Accounting Management Accounting

Focuses on external reporting that is Measures and reports financial as

directed by authoritative guideline well as other types of information
(e.g. IFRS, US GAAP, HGB) that are intended to support
managers in decision making

Accounting System

Records, analyzes, and reports all

provides provides
financial and non-financial
information information
quantitative company
information in a systematic and
comprehensive manner

Exhibit 1.2  Accounting systems

Accounting information serves different purposes and is used by users with different needs.
As we have outlined in the previous sections, this information variety can be generated only if
the company’s accounting system is further differentiated. The “accounting family” comprises
several “relatives.” And just as in a family of humans, family members share certain common
traits, but differ from each other in some other characteristics.

Financial Accounting
Many different stakeholders want to learn more about a company’s business. Creditors might
want to know whether the company stands a good chance of paying back loans. Investors
might want to assess whether the company has a successful business model that promises high
returns in the future. Tax authorities have to determine a base for the company’s tax payments.
Suppliers and customers need to know whether the company will be a reliable business partner
to deal with. All these parties have one thing in common. They are outsiders to the business.
But being outsiders to the company, they all lack hands-on information on the company’s daily
operations and business transactions. They will find it very hard to get information themselves
that is both reliable and meaningful and can be compared with information provided by other
companies.
The information needs of external decision makers therefore must be satisfied by the company
itself. The system collecting and preparing this information is called “financial accounting.”
Financial accounting is responsible for processing the basic accounting data further in order to
prepare reports that are useful to external decision makers.

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 8 Chapter 1  Introduction to Management Accounting and Cost Accounting

However, if companies were left on their own to decide what information they publish to out-
siders and what not to publish, the reports would be very different in the best case if not com-
plete chaos. At least we could say they would not be comparable to other companies’ reports.
However, comparing is what outside decision makers like investors and creditors normally do.
They compare businesses to decide what the best investment is, or what interest rate to charge
for a loan.
This problem is resolved by setting clear rules on what kind of information companies must
make available to the public and how this information is to be structured in order to be of use
for external parties. Financial accounting therefore is subject to extensive regulation – both at
a national and international level. Statutory provisions and international guidelines like IFRS
(International Financial Reporting Standards) determine which financial information must be
made available, when and how often this has to happen, and how the information is to be gene-
rated and presented in order to serve external decision makers’ needs.
However, business organizations will be reluctant to provide too many details about their ope-
rations and individual business transactions. After all, public information is accessible to eve-
rybody – including competitors! This is why the information provided in financial accounting
reports is not as detailed and is rather based on the company as a whole. Financial accounting
information need not go into each and every detail. External decision makers need not know
about individual business transactions (even though sometimes they might want to get more
insight). Instead, they can confine themselves to aggregate information that provides a suffici-
ently good picture of the company’s financial performance. Financial accounting therefore provi-
des only very limited information on the company’s individual products, customers, or projects.
For instance, a financial accounting report of Apple Inc. would disclose the profit for the year for
the whole company, but it would not provide the profit margin made on its latest iPhone model.
On the other hand, external decision makers have a strong interest in receiving complete infor-
mation: no relevant transactions or business developments are to be left out because this might
bias their decisions. Financial accounting therefore must record and report events and trans-
actions also if they are exceptional (“extra-ordinary”), but material (that is, influencing the
company’s overall business situation). Whether the company faces financial problems because
it cannot sell its products in the market or because it suffers from the effects of a natural disaster
might have the same effect on the company’s creditors. Therefore, all material events and trans-
actions must be taken into account when preparing financial accounting reports.
Financial accounting information is predominantly dealing with the past – for at least two rea-
sons: First, companies would be very reluctant to provide information on their future plans and
goals to the general public. It would simply be unrealistic, unfair, and probably unfeasible to ask
them to publish this information. Second, external decision makers rely on the information pro-
viding a faithful picture of the company’s performance. Information about the future is uncer-
tain and subjective by nature. Nobody knows for sure what will happen – not even the company
itself. Information about the future is difficult to standardize and even more difficult to analyze
without access to detailed data. The reports prepared by financial accounting therefore follow a
different path: Their main objective is to provide a complete, objective, and well-structured over-
view of the company’s past and present financial performance. It is then up to external decision
makers themselves to draw conclusions about the future from the information provided.

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 The “Accounting Family” 9

Cost and Management Accounting

Now let us turn to decision makers within the company itself. The most important group of
internal decision makers is managers. Managers must make decisions, set goals, and motivate
others to work for these goals, they must plan ahead and monitor whether plans have been
achieved. Management is not confined to the company’s top management only. In fact, manage-
ment tasks can be found at different hierarchical levels. Project managers, key account mana-
gers, and product managers all have a need for accounting information in order to accomplish
their tasks. Their main information source is management accounting. Management accoun-
ting processes the accounting data in order to prepare information that is of use to internal
decision makers. Since many decisions deal with avoiding unnecessary resource consumption
and an efficient use of available resources, cost information is probably the most important
type of management accounting information. In fact, cost accounting – that is the system that
gathers, analyzes, and reports cost information in the company – is often considered the cen-
tral element of management accounting. But management accounting comprises more than
just cost information, since managers also need more than only cost information for their
decision making.
Since managers are primarily concerned with the performance of their own company, compa-
rability and standardization of accounting information is of lower relevance. Instead, the infor-
mation must fit to the specific management question that has to be tackled in a given situation:
The decision to accept an order at the price demanded by the customer will require different
information than the plan to extend company operations to a new country. The annual review
of customer satisfaction will be based on a different set of information than the weekly quality
report. Apple Inc. needs to know exactly how much profit they earn on one single iPhone
produced and sold to a customer in a particular country. Many more examples could be given
for the extremely high information variety demanded by managers. The key success factors for
management accounting consequently are “focus” (information must be targeted towards the
specific management task) and “relevance” (information must fit managers’ needs).
Fortunately, management accounting is free to process and to structure the information
as needed. Management accounting is hardly regulated at all (with the exception of some
industries that are subject to a higher degree of regulation). In fact, management accoun-
ting is not mandatory at all – companies implement a management accounting system only
because they have a need for the information. Management accounting can then process
basic accounting data as needed, can compile individual reports and analyses, and can
choose the level of detail and frequency that is most appropriate for the management task in
question. We summarize the most important differences between management accounting and
financial accounting in the table in exhibit 1.3.
From the above, it is immediately clear that accounting data – if it were to be exchanged between
companies – would be very difficult to compare across different organizations. Scope and con-
tent, structure, and interpretation of management accounting information is difficult to assess
for an outsider, there are no national or supra-national standards or legal regulations that could
serve as a common yardstick across companies. Usually this is not a problem, because the only
users of management accounting information are company managers. They need to understand
the information they receive – but nobody else does.

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 10 Chapter 1  Introduction to Management Accounting and Cost Accounting

Financial Accounting Management Accounting

Information users External – investors, creditors, Internal – all management
suppliers, government and tax ­functions within the company
authorities
Purpose of information Help investors, creditors, and Help managers plan and ­control
others make investment, credit, business operations
and other decisions
Focus and time dimension Reliability, objectivity, and focus Relevance and focus on the
on the past future
Obligation for preparation Mandatory Not mandatory
Type of report, regulation Financial statements restricted Internal reports not restricted
by accounting standards (IFRS, by accounting standards –
US GAAP, HGB, etc.) ­tailored to specific decisions
Presentation of accounting Content and format highly Not standardized, individual
information ­standardized across companies contents and formats
Verification Annual independent audit by No independent audit
certified public accountants
Level of detail Summary reports primarily on Detailed reports on parts of the
the company as a whole company (products, customers,
market segments, etc.)
Frequency At least on an annual basis, Varying, often on a weekly or
sometimes quarterly monthly basis
Exhibit 1.3  Differences between financial accounting and management accounting

Financial accounting and management accounting are not totally separate. They not only share
the company’s basic accounting data as their common information base. They possess some
more common traits. The most important one is the focus on company performance: They
both measure company success by netting value generated and value consumed, but differ in
the value concept used and the scope of activities considered when measuring value. This will
further be outlined in Chapter 2.

Is Accounting a Universal Language?

We have described accounting as the major information source of decision makers in business.
Their information needs differ depending on whether they are members of the business or not.
This gives rise to the distinction between financial accounting on the one hand and manage-
ment accounting on the other. Justified as this differentiation is, one might still assume that
each one of these two disciplines is homogenous across nations. After all, aren’t many problems
and challenges that a typical decision maker faces similar or even identical all over the world?
Typical management tasks such as keeping track of inventory levels, documenting resource
consumption for a specific product, or planning future personnel cost are universal in nature.
Shouldn’t then managers’ information needs be universal as well? The same reasoning of course
applies to financial accounting. Investors or creditors have the same economic interest across
countries, no matter which language they speak. Shouldn’t accounting be a “universal language
of business” all over the world?

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 Is Accounting a Universal Language? 11

This view of accounting as a globally oriented business discipline can be maintained only at a
very abstract level, though: if we disregard cultural, regulatory, or institutional differences bet-
ween countries then the fundamental economic problems can indeed be dealt with in a com-
mon “accounting language.” The problem is that at such a high level of abstraction, accounting
loses its link to daily operational business. A global accounting language might be feasible – but
at the cost of losing its benefit to decision makers!
As we will see during the entire course of this book, accounting has found quite different solu-
tions in different countries to the same fundamental business problems. You are asking why?
Decision makers all over the world might be confronted with the same kind of business deci-
sions, but their information needs are not universal: they have different cultural mind-sets, act
under different legal regimes, and are part of different institutional environments.
The same also applies to accounting researchers. Very few of them are truly “global minds.”
Most of them have been trained in specific national environments (universities, businesses,
professional bodies, etc.) and work in the same environment. Their case studies and corporate
contacts typically reside in the same country. It is only natural, then, that accounting academics
will focus their attention on business problems as they appear in this specific national envi-
ronment. They write about the results of their work in their working language and they read
journals and books that are published in their working language. How should an academic or
accounting practitioner learn about new concepts and approaches if these are made available
only in sources they have no access to and are explained in a language they do not understand?
Another reason for the diversity of accounting across the world is probably a mixture of over-
confidence and reluctance to change. Unfortunately, sometimes we tend to believe that the way
we do things and the way we have done things in the past is always right. Accountants are no
different in this respect.
Doing accounting research across countries of course is possible. Indeed, a subdiscipline of
accounting – so-called “comparative accounting” – is explicitly focused on differences in the
accounting systems across countries. This book is not about comparative accounting, but we
consider it both necessary and interesting for a business student to understand at least the basic
differences in accounting systems and practices between countries. Since we deal with cost and
management accounting in this book, we put the emphasis on this subdiscipline and only very
briefly touch on the world of financial accounting.

Differences in Financial Accounting

Financial reporting evolved in each country within its own borders, which resulted in sub-
stantial differences. But why would national legislators and regulators set different rules and
frameworks for the same basic financial accounting problems? The national differences are
deep-seated and they can be explained mainly by three factors: (1) the sources of finance, (2)
the existing legal system, and (3) the link between accounting and taxation.
1. The sources of finance: When companies grow they are in need of capital. What sources of
capital do they have? They can borrow from a family member, from a bank, or even rely on
state-financing. Alternatively, a company could issue shares on a stock market. While the
first group would be creditors and provide debt financing to the company, issuing shares
would be a type of equity financing.
In the past, companies in different countries relied on different sources of capital. While in
some countries equity financing was predominant, creditor financing was preferred in other
countries with less developed equity capital markets. Examples of countries with preferred

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 12 Chapter 1  Introduction to Management Accounting and Cost Accounting

debt financing are France, Italy, and Germany. Typical countries with preferred equity finan-
cing are the UK and the US. As a result, financial accounting information has been tailored to
the particular information needs of the providers of capital. Today, creditor preferred coun-
tries have shaped financial accounting regulations to protect creditors’ interests. Financial
accounting rules and legislation therefore lead companies to minimize profit in order to limit
the distribution of earnings to company owners and maintain a high level of equity instead.
Companies must follow a prudent valuation of assets and treat unearned profits differently
than potential future losses. For instance, they would rely on historical cost data and be very
suspicious about current (and volatile) market prices in financial accounting reports.
In contrast, countries with a strong tradition in equity financing shaped accounting require-
ments to the needs of equity investors. These countries expect financial accounting to
provide a “true and fair view” of a company’s current business performance. This guiding
principle will lead to different rules, though, when it comes to (re-)valuating assets and
liabilities, for instance. The same asset (let’s say real estate owned by the company and used
for company operations) might therefore have different book values depending on whether
financial accounting follows German or US standards.
2. The existing legal system: Over time, in countries across the world, two types of legal
systems have developed: Case law and code law systems. The case law system originated
in England and is characterized by a legal system that is based on case by case decisions
rather than general rules that apply to many situations. As a result, in a case law system, we
have large amounts of detailed rules for individual cases. Accountants in these countries
appreciate the clear guidance for each and every particular situation. A downside is the ever
growing size and complexity of such a rules-based accounting system.
In case law countries, accounting regulation is typically in the hands of private institutions
(“standard setters”), usually with some formal (governmental) backing. Developing new
rules follows an inductive approach. That is, only if a particular accounting problem comes
up, the standard setter starts to develop new accounting guidelines. Usually, this is done by
researching how a particular accounting problem has been solved in the past in practice.
Preparers and users of accounting information can to some extent participate and influence
the development of a new standard.
In contrast, code law systems are characterized by few, more abstract and general rules to give
guidance in a wide range of situations. It has its origin in continental Europe. Accounting
regulation is typically in the hand of governments. The development of new accounting
rules follows a deductive approach and is principle-based. A general, rather abstract, rule is
developed and applied to all kinds of situations without getting too specific.
Today, typical code law countries are Japan, France, Spain and Germany. Case law countries
are the US and basically all countries that have been influenced by the UK (commonwealth
countries). Also, the International Financial Reporting Standards (IFRS) are influenced
by promoters of a case law system, even though the institution that creates the IFRS (the
International Accounting Standards board – IASB) claims IFRS to be rather principle-based.
3. The link between accounting and taxation: Governments usually levy taxes from companies.
In some countries, the tax authorities utilize information provided in financial accounting to
determine taxable profit. Tax accounts must be identical to financial accounts (the s­ o-called
principle of congruency). In this way, companies can kill two birds with one stone – they
prepare financial statements and file them at the same time with their tax office.

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 Is Accounting a Universal Language? 13

In other countries, tax accounting and financial accounting are separate. Special accounts
have to be filed for tax purposes. This sounds inefficient? Why the double work? The ­problem
is that the objective of financial accounting is usually very different from tax accounting.
While the firm might want to attract investors with a strong financial performance, they are
on the other hand not necessarily interested in paying high taxes. Showing high profits in
financial accounting and low profits in your tax files would not be possible if you prefer (or
are required!) to use only one set of financial statements for both purposes. Countries with
a traditional link between financial accounting and taxation are Germany, France and Italy.
It is obvious that a strong link to tax accounting is often found in countries that do not have
an explicit equity investor focus. Financial accounting is influenced through the back door
by fiscal considerations of a particular government. You can imagine that this might harm
the information aspect of the financial reports.A country with a clear separation between
financial accounting and tax filings is the US. Thus the US claims that its accounting rules
(the US GAAP) are more relevant for investors.
Whatever system you may favor, you begin in any case to understand that financial accounting
can differ from country to country. Is this the end to a global regulatory framework for finan-
cial accounting? Not necessarily! In fact, supra-national frameworks are already in place today
and national frameworks gradually converge. This process is called harmonization. But as long
as the above factors hold true, and governments stick to their local traditions in accounting,
financial accountants will still have to adapt to national differences in their systems.

Differences in Cost and Management Accounting

Unlike financial accounting, management accounting is typically not subject to detailed regu-
lation and statutory provisions. It is up to the individual company to decide how – and whe-
ther at all – it wants to implement a cost and management accounting system. One might
assume, therefore, that superior practices are developed and once they have been implemen-
ted by one company can easily be adopted by its peers – both at a national as well as at a cross-
national level. However, to date, such a worldwide common body of best practices in cost and
management accounting has not evolved. Instead, we can observe quite large differences in
cost and management accounting approaches between countries. This is due to a number of
reasons:
1. First of all, regulation of financial accounting has a strong, albeit indirect, effect on
management accounting practices. National legislation and international accounting rules
determine the scope of accounting duties (Who has to document what, and to what level
of detail?), and the structure of annual accounts (How is the information presented to third
parties?). Regulatory environments that place the main emphasis on protection of creditors’
interests (as for instance the case in Germany) force companies to be very prudent and
conservative when setting up financial accounting information. This information is con-
sequently not well suited for supporting internal decision makers who need the “true and
fair view” of the company’s current business performance. This view is much more com-
mon in the Anglo-American accounting sphere. German management accounting, there-
fore, had to develop its own approaches and new ways of handling business situations that
differ from what is recorded and reported in financial accounting following German rules.
Management accountants in the US, in contrast, can base their work much more closely on
financial accounting information than their German counterparts.

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 14 Chapter 1  Introduction to Management Accounting and Cost Accounting

2. Although a comprehensive set of rules and regulations for management accounting is

missing both at the national and the international level, management accounting prac-
tices are nevertheless influenced by the legal and economic framework. Industries
might be subject to specific regulation as regards setting of market prices (such as price
controls in monopoly situations), might have to follow specific rules as regards product
costing schemes for public contracts (such as civil engineering), or might operate under
schemes protecting them from foreign competition. Deutsche Telekom, for instance,
the biggest telecommunications service provider in Germany, has long been in a quasi-
monopoly position for most telecommunication services. Its prices, then, were subject to
regulation and Deutsche Telekom had to provide detailed documentation on its cost struc-
ture and on costs incurred for providing particular services to customers. These infor-
mation requirements had immediate effects on the set-up and the focus of its internal
cost accounting system, because it had to serve the needs of external regulatory bodies.
Likewise, specific economic conditions such as high inflation or tax regimes will have a
direct effect on what management accounting has to cope with and which tools and con-
cepts it uses in order to do so.
3. A third important factor explaining national differences in management accounting can be
traced back to academic and professional accounting education. In some countries, strong
professional bodies (such as the Chartered Institute of Management Accountants – CIMA in
the UK or the Institute of Management Accountants – IMA in the United States) oversee the
training of future management accountants as well as act as the central professional body for
trained management accountants. Bodies such as CIMA therefore have a strong influence
on tools and practices employed in their country – all the more so since many practicing
management accountants have not studied what could be considered a “relevant subject” for
their profession (such as business or economics) and thus the common body of technical
knowledge is often acquired through the professional association. In other countries, there are
only voluntary professional bodies for management accountants, which have a much weaker
role both in training and in representing the profession in the outside world. Countries such
as Germany or Belgium, for instance, have put management accounting training mainly into
the hands of universities. In Germany, most management accounting practitioners have lear-
ned their profession during their studies. “Career changers” entering management accoun-
ting from other disciplines are the exception rather than the rule. Their use of management
accounting tools and their skills in certain techniques and concepts mostly depend on aca-
demic curricula and less on what other professional peers have been practicing in the past.
4. Although management accounting might seem to be a “number-focused” discipline it is
subject to cultural and historical influences. Different cultures have different ways of
dealing with uncertainty or power differentials between individuals. Management accoun-
ting practices will reflect such differences when it comes to long-term planning, setting
of incentive schemes, or implementing performance measurement systems, for instance.
Likewise, national management accounting practices are influenced by other countries
through a shared common language (an important factor for the worldwide dissemination
of Anglo-American management accounting concepts) or historical periods of close ties
between countries (such as colonialism). Both factors make it more likely that countries also
share management accounting concepts and approaches.

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 Is Accounting a Universal Language? 15

National Differences in Management Accounting – Problem or Strength?

We have outlined several factors that explain why management accounting practices differ bet-
ween countries and world regions. We have not yet asked a question that is closely connected
to it: Would it be desirable to have a single, uniform way of practicing management accounting
across the world? Or to put the question differently: What’s wrong with having differing ways
of doing management accounting across countries?
The answer to this question is not easy and indeed many scholars and practitioners have spent
a great deal of time and effort investigating not only the causes of national differences but also
potential benefits that could be gained from harmonization. The most common arguments
against a nationally fragmented system of management accounting are the following:
■■ National and regional differences in management accounting lead to inefficiencies. With
businesses more and more acting on an international or even global scale, they need systems
that are uniform across all countries they operate in. The time and effort invested in harmo-
nizing plans or processes across national subsidiaries could be better used for more produc-
tive ventures.
■■ National and regional differences in management accounting cause confusion and lead to
misunderstandings. If the same notion has different meanings across countries, and is inter-
preted (and acted upon) differently by management accountants, a business will not achieve
its full potential: decisions made at local level might be in conflict with each other, plans and
strategies are interpreted differently, accounting data is processed in different ways and leads
to different decisions depending on which national management accounting paradigm is
prevailing.
The case against national differences in management accounting is not so clear-cut, however.
Indeed, there are equally valid arguments in favor of such differences. Advocates of a globally
diverse landscape in management accounting put forward the following arguments:
■■ National and regional differences in management accounting are a source of competitive
advantage. Better management accounting concepts and practices will lead to better manage-
ment decisions. Diversity of management accounting practices is thus fostering management
innovation. Why should such diversity be sacrificed in favor of a potentially less effective
uniform system?
■■ National and regional differences in management accounting are a source of increased
­corporate performance. Companies compete not only in product quality or service levels
offered to customers. They also compete in management practices and business processes. If
some management accounting practices prove to be more effective than others, companies
will adopt them. Other and less useful concepts will be abolished, since companies conti-
nuously strive to increase their performance and therefore are on the lookout for concepts
and practices that help them in this quest.
National and regional differences in management accounting are a matter of fact. The que-
stion of whether these differences should be considered positive or negative is somewhat
academic, since we have to deal with them in any case. Experience tells us that diversity of
management accounting practices has not significantly diminished in the past few decades,
although information exchange and communication among management accounting scholars

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 16 Chapter 1  Introduction to Management Accounting and Cost Accounting

and practitioners has become easy and almost costless across nations. No matter whether you
consider differences between German and Anglo-American management accounting ineffici-
ent and harmful or natural and potentially productive, they are a matter of fact which one has
to deal with.

German “Controllers” versus “Management Accountants”

This book deals with concepts and tools as they are used in cost and management accounting
systems of German-speaking countries. Lots of similarities may exist in other countries, espe-
cially in Central Europe.
Unlike in most other countries, those who use these tools and concepts are not called “manage-
ment accountants” in Germany, but “controllers.” This term needs some further explanation.
The term “controller” (or “controlling” to denote the discipline as such) has its origins in the
American controller or comptroller – itself a combination of the French word “compte” (for
“account”) and the English notion of “counterroller” (somebody who checks scroll copies). The
“comptroller” in its original sense is therefore a function specializing in supervising and c­ heck­ing
budgets or public accounts. Private enterprises in the US frequently have assigned the title of
“controller” to the top financial accountant who is in charge of supervising accounting staff and
preparing accounting information for both internal and external decision makers. This might
be called the “institutional perspective” on controlling.
The role of a “controller” is not synonymous with the general control function in management
accounting. In fact, we have already outlined that controlling is an integral part of the accoun-
ting function. Decision makers have to ensure that set targets are achieved and budgets are
observed. Planning without control would be useless. Thus, controlling in its functional per-
spective is an integral part of management accounting.
The German notion of “controller” and “controlling” is again somewhat particular, as it denotes
not only one subtask of management accounting, but the entire discipline: Controllers in the
German sense of the word occupy themselves with a wide range of tasks that are all focused
on providing support to company management: planning and control, information manage-
ment, coordination, and performance management – to name just the most important ones. A
German “controller” is considered the critical counterpart to management: While management
is responsible for setting goals, making decisions, and enforcing these decisions, the control-
ler is responsible for supporting managers by analyzing options, planning ahead, monitoring
past performance and coordinating activities in order to ensure goal achievement. In German
literature, controllers are therefore often compared with air traffic controllers or harbor pilots.
Their main task is to keep an object (a ship, air traffic, a process) under control, i.e. within defi-
ned boundaries or limits that have been set by other entities (management).
A German controller – unlike its US namesake – is typically not involved in financial accoun-
ting (see Exhibit 1.4). The typical German accounting system is marked by a clear separation
of financial accounting on the one side and management accounting (or rather: “controlling”)
on the other. This separation has its roots in German regulation of financial accounting. Under
German rules, the main purpose of financial accounting is the protection of creditors: great
care must be taken by companies not to overestimate their profits or overvalue their assets.
German  financial accounting regulation forces companies to be very conservative in their

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 The Role of a Controller in a Business Organization 17

assumptions. Financial accounting information therefore is not directly suited to internal deci-
sion making, since it is not necessarily showing the “true and fair view” of a company’s current
(and expected future) economic performance. Under these circumstances company manage-
ment would be ill-advised to base its decisions on financial accounting information only.
Instead of dealing directly with financial accounting issues, German controlling has gone to
great lengths to adapt financial accounting information for management purposes. This has
given rise to a comprehensive and interrelated system of financial accounting and manage-
ment accounting information – with the latter being based on the former. This double-circuit
system differs considerably from the single-circuit system known in many other countries
that use the same set of accounting information both for internal and external reporting and
decision making.

Budgeting

Operative planning

Strategic planning

Management reporting

Capital budgeting

Financial accounting

US
Liquidity management / treasury
France
External reporting
Germany

Tax planning

0 10 20 30 40 50 60 70 80 90 100
focus of controller function (% of respondents)
Exhibit 1.4  Differences in occupational tasks between management accountants.
Source: Adapted from Stoffel (1995).

The Role of a Controller in a Business Organization

Today’s controllers have a much more comprehensive set of tasks to accomplish than their early
ancestors. A controller no longer is confined to supervising his master’s treasury or keeping
public accounts. The modern controller is more of a business partner to management. In fact,
“controlling” (as a task or function) is not exclusively done by “controllers” (as members of a
certain profession or institution). Instead, controlling happens right at the interface between
managers and controllers (see Exhibit 1.5).

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 18 Chapter 1  Introduction to Management Accounting and Cost Accounting

Managers set goals and make decisions about measures and resource uses best suited to achie-
ving these goals. Decisions made must be enforced; staff must be motivated and guided in
order for all organization members to contribute to goal achievement. In order to accomplish
this demanding set of tasks, managers rely on the support of controllers. One of the controller’s
main tasks is to provide transparency to management: transparency about the economic fra-
mework the business is operating in, transparency about alternative routes available to rea-
lize set goals, and transparency about possible effects of these alternative routes. Controllers
must be able to turn “data” into “information.” In order to do so, they must be familiar with
the key methods and tools needed to collect, analyze, transform, and communicate business
information.
While managers predominantly are decision makers and motivators, controllers have the
traits rather of coordinators, analysts and methods experts. These two profiles complement
each other and it is the intersection of these two profiles where “true” controlling happens.
Modern controlling does not renounce its accounting origins, though. Accounting informa-
tion still is a key input for a controller’s work, but it is not the only input. Controllers need
a more than thorough knowledge of both financial accounting and cost accounting, but in
order to fully live up to management’s expectations, a controller must be familiar with many
more techniques in strategic and operational planning, information processing, and process
management.

The manager operates The accountant has

the business the information authority
Control

Manager Controller

Is responsible for the decisions Is responsible for the transparency

and the results in cost centers and reliability of the data
or profit centers

Exhibit 1.5  Controlling as team work between controller and manager.

Source: Adapted from International Controller Association (ICV) and the International Group of
­Controlling (IGC) (2012): Die Kernelemente des Controllings - das Verständnis von ICV und IGC,
­Wörthersee/St. Gallen.

It is with this profile of a modern controller in mind that we have written this book. It is inten-
ded to familiarize readers with the basic set of tools and methods needed to work as a critical
counterpart to management and to act as key support to a business’s decision makers. Welcome
to the world of cost accounting and controlling!

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 Ethical Aspects of Accounting 19

Ethical Aspects of Accounting

At the end of this first chapter, we should not forget to briefly discuss ethical challenges in
accounting. After numerous accounting scandals in the recent past, ethical behavior is more
important than ever. We would even go beyond that and state that, in accounting, ethical con-
duct is probably even more important than in any other business function.
When doing business you must make decisions. Making decisions is about choosing from seve-
ral options. The solution to a problem will not always be clear and obvious. Instead, finding a
solution will require your judgment.
Management decisions are often related to the distribution of resources among stakeholders in
the company. By choosing one alternative, managers will benefit one party while others have
to go away empty-handed. A cost-cutting initiative might be applauded by investors because
it increases company profits, but it might at the same time lead to employees losing their jobs.
A newly built warehouse might lead to considerable increases in logistics processes, but at the
same time it destroys the natural habitat of a scarce butterfly. There is no universal recipe for
these dilemmas.
Business ethics deals with basic concepts and fundamental principles of decent human con-
duct in business activities. In other words, it deals with the question what is morally good
or bad, right or wrong. Many firms have a code of ethics that might help in situations that
require judgment. A code of ethical business conduct is a written set of guidelines to help
managers and employees conduct their actions in accordance with the primary values and
ethical standards of the company. Siemens, a German multinational conglomerate company,
active in industry, energy, healthcare, and infrastructure, had gone through several severe
scandals concerning the unethical behavior of Siemens staff between 2002 and 2008. In
2009, Siemens issued comprehensive “Siemens Business Conduct Guidelines” that apply to
all Siemens employees worldwide. These guidelines contain the fundamental principles and
rules governing the way Siemens employees at all hierarchical levels should act and make
decisions.
Ethics is important in business, especially in accounting. Why? For two reasons. First, look at
what happened to firms that committed accounting fraud. Enron is probably the most shock­
ing example. The company was one of the big players in energy and commodities trading in
the US. In 2001, the company employed 22,000 people. Business magazine Fortune awarded
the company six times as “America’s Most Innovative Company”. Enron Corporation claimed
annual revenues of over $100 billion in peak times. In late 2001, a systematic accounting fraud
was revealed. Enron admitted that profits had been overstated by $1.2 billion and liabilities
understated by $30 billion.
On 2 December 2001, Enron filed for bankruptcy. The employees lost their jobs and their
retirement savings. Enron’s shareholders lost everything. CEO Jeffrey Skilling was jailed for
accounting fraud for 24 years. Arthur Andersen, Enron’s audit firm and one of the by then “Big
Five” went out of business only a little later. To sum it up: accounting fraud often has extremely
severe consequences, unfortunately not only for the perpetrators.
A second reason for the importance of ethical behavior in accounting is that the quality of
accounting reports is difficult to evaluate for readers. In this aspect, accounting differs substan-
tially from some other business functions.

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 20 Chapter 1  Introduction to Management Accounting and Cost Accounting

Imagine you enter a car dealership to buy a car. The car dealer has two cars to offer. One is an
old, rusty convertible, while the other is a brand new limousine. The car dealer walks over to
the convertible and tells you that this is the best car he ever had for sale. It is of the finest quality,
would go 250 km/h fast and despite being 15 years old you won’t have to bother about repairs
in the future. Will you believe this? Probably not. Why? Because you can observe the quality
of the product. You can touch it, you can listen to the sound of the engine and you can take a
test drive. Eventually you will take the limousine (if you can afford it) or buy somewhere else.
In accounting you don’t have this choice. The product of accounting is a financial report. The
financial statements might come on shiny paper, bound into a colorful, expensive-looking
book called an annual report. Over more than 200 pages, the firm might tell you how great the
company was doing and how prosperous the future will be. It is signed and stamped by an audit
firm. Will you believe it this time? Probably yes, because you have no visible indication to doubt
the correctness of the numbers.
For these two reasons, ethical conduct in accounting is even more important than in any other
business discipline. The accounting scandals have shown that no regulation can completely
ensure that financial information is free from error and fraud. The only thing that can gua-
rantee the faithful representation of a company’s financial situation is high ethical standards of
accountants.

CHAPTER SUMMARY
■■ Accounting records, analyzes, and reports all regulation and legal regimes, different eco-
business transactions of a company in a syste- nomic conditions, historical influences, and
matic and comprehensive manner in order to different cultural backgrounds all influence
provide useful information to users inside and management accounting practices and lead to
outside the company. In doing so, it focuses on variations in how management accounting is
quantitative data. done across countries.
■■ Accounting is crucial for many business actors ■■ German “controllers” are the counterparts to
inside and outside the company, since it pro- Anglo-American management accountants.
vides information that is needed for planning Unlike their peers, however, German control-
ahead, for making decisions, and for assessing lers are typically not dealing with financial
business performance. accounting tasks, but mostly confine them-
■■ In order to best serve the information selves to cost accounting and management
needs of different decision makers, accoun- accounting.
ting has further split up into subdisciplines. ■■ The modern controller is more of a business
Financial accounting serves the information partner to management, who contributes to
needs of external decision makers (inve- company success by turning data into useful
stors, creditors, etc.) whereas management management information.
accounting focuses on the information ■■ Ethical behavior is of crucial importance in
needs of decision makers within the com- accounting. Accounting information must not
pany (management). be biased and accountants must continuously
■■ Management accounting is not uniform across strive to achieve the highest ethical standards
countries and world regions. Differences in in their work.

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 Review Questions 21

GLOSSARY
Accounting The information system that identifies, records, and communicates quantitative
information about economic events of an organization that occurred within a given time period.
Controlling The German management accounting discipline.
Cost accounting The system that gathers, analyzes, and reports cost information in the company.
Double-circuit system An accounting system that uses separate subsystems to generate
accounting information for internal and external information users.
Effectiveness The relation between goals set and degree of achievement of these goals.
Efficiency The relation between input and output.
Financial accounting The subsystem of accounting that deals with providing information to
external decision makers, such as investors, creditors, or the general public.
Flow An economic value that refers to a time period. Sales revenues or cash flows are typical
examples of flow concepts.
Management accounting The subsystem of accounting that deals with providing information
to internal decision makers, i.e. mostly managers of the company.
Single-circuit system An accounting system that uses the same set of accounting information
both for internal and external reporting and decision making.
Stock An economic value that refers to a certain point in time. Cash at hand, inventory levels, or
accounts payable are typical examples of stock concepts.

■ REVIEW QUESTIONS

R1. Describe the various uses of information in a business organization.

R2. Who are the primary users of information on a company’s business activities? How do the infor-
mation needs of internal and external users differ?
R3. What is the difference between quantitative and qualitative business information? Give examp-
les for each type of information and explain when it is most useful.
R4. What is accounting?
R5. Describe the purpose of an accounting system in a business organization.
R6. Distinguish between management accounting and financial accounting.
R7. Explain why financial accounting is subject to regulation while management accounting is not.
R8. What are the main reasons explaining the diversity of accounting practices across the world?
R9. Why do financial accounting and management accounting systems differ between countries?
R10. List the advantages and disadvantages of harmonizing management accounting practices.
R11. Explain the nature of “controlling” according to the German understanding.
R12. How does the job of a German controller differ in comparison to its US-American counterpart?
R13. Describe how the “controller” supports management in achieving set goals.
R14. Explain why ethical behavior is essential in accounting!

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 22 Chapter 1 Introduction to Management Accounting and Cost Accounting

■ EXERCISES

E1. National Differences in Management Accounting – the case of performance measurement and
performance reporting
“Fast & Furious Inc.” is a manufacturer of sports equipment with corporate headquarters in
Germany. It recently has established new sales and service subsidiaries in several countries,
among them China, Canada, and India. Now an individual performance measurement and incen-
tive system for the new country managers must be set up. In addition, a standard performance
reporting system for sales subsidiaries is to be developed.
The responsible management accountant at the German headquarters wants to prepare a propo-
sal that takes national differences into account. What national aspects must be considered when
setting up the new system of measuring and incentivizing performance? Collect ideas about the
reasons for such differences and their effect on the way the system is structured and implemented!
E2. Management Accounting across the World
Fred Zinger and Klaus Beier are management accountants working for “Mega Corp.” – a multi-
national company headquartered in Seattle, US. Fred is working for the business division “busi-
ness services” in the US, Klaus is management accountant of the same business division at the
German subsidiary. Although Fred and Klaus have been working together closely for many years,
they are each still struggling now and then with the way their colleague is doing his job. Fred does
not understand why Klaus is not concerned about preparing annual accounts of the German sub-
sidiary. Klaus, in turn, spends a good deal of his working time on preparing detailed cost plans and
investment budgets – a task that Fred is hardly concerned with.
Why are Fred and Klaus dealing with different tasks although they are management accountants
for the same company? How can these differences be explained?

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