Innovation & Proactivity in Cost Accounting
May 09, 2016
Once again, our costing accounting team has taught continuing professional education (CPE) classes for CPAs in both public and private firms. Our most recent class consisted of approximately 20 individuals virtually all from industry. Tara and I both recognize that every class we teach, we learn something from the participants which is innovative and useful when dealing with our clients and their cost problems.
Our recent class consisted of inexperienced and veteran cost accountants each offering varying perspectives on a variety of subjects. Every personal experience was helpful in providing new and unique perspectives to help the class members enjoy an informative session.
One of our attendees was a cost manager from a food manufacturer where a standard cost system had been implemented. The system was based on the development of current information for inventory valuation and individual product profitability. However, it also supported management control information for all departments of the business. This was being accomplished by publishing the most common variances at a frequency useful to the management team.. This also provided additional insight into how to best manage the company. After conversing with the attendee, I got the impression the system had been in place for quite some time and they had fine-tuned the system to the point that typical issue been worked out.
Based on my experience, many cost managers typically reconcile their systems annually. However, it may be many years before the system is updated and compared to actual results. This is necessary to ensure the system properly reflects the cost recovery processes in the plant. In this particular case, the company had decided to reconcile their cost system the general ledger on a monthly basis. At the end of every monthly reporting period, the cost system was being compared to the actual results to search for over or under recovered costs which might require revisions in the costing system.
For many companies, computing the full range of variances (including all direct cost variances, as well as the overhead variances) can be considered a type of reconciliation. However, what was unique about this particular company was the comprehensive review of all costs reconciled to the entire cost system for the month. I believe this frequency, although highly desirable to help support the accuracy of the cost system, was unusual in most industries for a variety of reasons.
Such a prompt review process can result in changes whether it is in overhead or indirect costs. These can be dealt with and incorporated into the costing system which allows any changes in the process to be reflected on a monthly basis in the standard cost system. This can be of great benefit to the management team, particularly to the extent that they have to make adjustments in processes or product selling prices to remain competitive and profitable in the market.
This individual was obviously a talented cost manager and was managing his company’s costing information in a way that was unique and proactive.
Categories: Cost Accounting
Nonprofit Board Member Alert
May 05, 2016
If you are a volunteer board member for a nonprofit organization, one specific issue to keep in mind is the IRS’s trust fund recovery penalty. If any entity — nonprofit or for-profit — fails to properly remit Social Security taxes and/or income taxes withheld from employees’ wages, the IRS will directly approach the organization’s “responsible persons” for the tax payments and a potential 100% penalty.
In general, the penalty will not be imposed on any unpaid, volunteer member of the board of a tax-exempt organization if the member: (1) is solely serving in an honorary capacity, (2) does not participate in the day-to-day operations of the organization, (3) does not participate in the financial operations of the organization, and (4) does not have actual knowledge of the failure on which the penalty is based.
However, for an active member who has governing responsibilities, it is still important to ask questions about who is handling these tax payments (a staff member, the executive director, a payroll service, an accountant?) and what checks and balances are in effect to make sure no problems arise. Annual reviews or audits may also be helpful to verify compliance.
Categories: Non-Profit
How to Save for A Vacation
May 03, 2016
Warm weather is here and soon it will be summertime! In a perfect world we would all have fully funded vacation accounts to pay for our annual family getaway. The reality of it is most of us are just now starting to think about our summer vacations. Here are some ways to save for your family vacation.
Use your tax refund – now: Do you usually get an IRS tax refund? If so, too much money is being withheld from your paycheck. Fill out a new W-4 and adjust your withholding so it’s close to what you will owe at the end of the year. Take the extra money you will now have in your paycheck and transfer it to a vacation savings account.
Sacrifice now for fun later: Do you have services such as satellite, cable or a cell phone plan that you no longer need or use or could easily downgrade. How about weekly movie rentals or going to the movies? Remember: You’re just trading today’s fun for the fun you’ll all have during your vacation. Just put the money you would save each month on these items into a special vacation fund.
Eat out less, save big: The typical family with kids can spend on average $239 a month on restaurant food. If you have to eat out look for restaurants that have “kids eat free” nights or restaurants who offer buy one entrée get one free. Another way is to have “Pantry Week” which is for one week out of the month, stay out of the grocery store and restaurants and eat only what you have in your pantry. The money you save could be easily diverted into your vacation fund.
Credit card rewards: In the months prior to vacation use a credit card that accumulates rewards for everything you purchase. Let the rewards pile up, then use them toward planes tickets, hotels or to even purchase gift cards for chain restaurants you’ll visit while on vacation.
Host a garage sale: A garage sale is a great way to earn extra vacation cash from items you no longer use or need. If you’re kids are old enough to help let them pick out some of their older toys to sell and set up a special kids table with a sign like “All proceeds go to the purchases of our Disneyland souvenirs”.
Keep your change: Another way to save extra cash for vacation is to throw all your spare change into a change jar. You’ll be surprised how quick that can add up when it comes time for vacation.
No matter how you save for vacation keeping your vacation fund separate from the rest of your money can help you resist the temptation to use it for other things before it is needed for vacation.
Carol Baker, Accountant
Categories: Other Resources
What Is The Purpose of Your Reporting?
May 03, 2016
As accountants, we are naturally good at reporting data. Do you ever take a moment to consider how many items you report on a daily basis? Weekly? Monthly? More importantly, do you know why such information is essential?
During the seminars I teach, I ask participants if they were to stop providing the data in their reports would others notice? It’s always interesting to observe the room as they ponder that thought. What would your answer to that question be?
Decision makers require specific information to analyze situations and ultimately make quality decisions about the future of the business. However, the key is have the right information and the right reports. Timing and accuracy are essential. Reporting on factory rent every hour is pointless. Reporting on material usage every month may be too late.
It is your job as the individual providing the key information to know and recognize what the end user requires to complete the circle. Take the time to discuss what they are looking for and how you may adjust your reporting to achieve success. Ultimately, you want your leadership to be able to take action and make the right decisions.
I challenge you to think about what you are currently doing and take the time to audit your process. Meet with the end user to gauge their needs. Be open to modifications. Analyze your system and generate what is needed, not what has always been done.
Categories: Cost Accounting
Business Equipment: Break Even Analysis
Apr 29, 2016
Break-even analysis is used to determine the break-even point for a business. This is where the total revenues equals total expenses. In other words, the break-even point is where a company produces the same amount of revenues as expenses either during a manufacturing process or an accounting period. Such analysis can be a very valuable analytical tool to determine if action must be taken to increase sales or decrease your costs. Some business owners do not know their break-even point and instead enter each month blindly. This can be extremely dangerous as you are unable to be proactive, only reactive. Leading a business down such a road may result in an inability to recover and ultimately the failure of a business.
A more non-traditional application for a break-even point is using the calculation to help determine if an additional capital expenditure is worthwhile. If you are considering making a large investment by purchasing a new piece of equipment you will require a more methodical decision-making technique to determine benefit. Break-even analysis can be one of those techniques. Purchasing a new piece of equipment may reduce your variable costs. However, it will increase your fixed costs, such as interest and depreciation. If the decrease in variable costs is not more than the extra in fixed costs, it is not a viable investment. In theory, your break-even point should be reduced with the purchase of new equipment.
There are some important considerations to be made when calculating your business’s break event point for a new piece of equipment. You must know what the fixed costs will be for the equipment, the new variable costs, and the associated sales. These are all the necessary parts of a break-even analysis. It all seems simple enough, but if you are looking to purchase this machine, you do not yet have it to know these things for certain. It is important to do as much research and have as much valuable information as possible. Keep in mind, the dealership selling the equipment wants to make a sale and may inflate some of the positive numbers. This may mean you will be working with averages which may be on the low end or high end. Nevertheless, this can be a very valuable tool in determining if it is a viable option. If your sales will have to be so high to cover the costs of a new machine, then it may not be worth it.
Like all calculations, it is vital to have quality and accurate general ledger numbers to compare and understand. Do not review the implications of a purchase from one side – the expense side. Instead, make sure you consider the overall impact. Break-even analysis is your big picture view.
By: Tara West, CPA, CMA
Categories: Cost Accounting