getting to the bottom line.ppt - fbs systems
TRANSCRIPT
What’s at Stake?
• USDA forecast
– 36% decline in farm incomes
• 9% drop in revenues
• However, falling production expenses
• Russell benchmarks
• Must be able to drill drown to discover unique opportunities
Traditional Approaches
• Spreadsheets
• “Peanut butter” spreading
• “Plugged costs” in production apps
• Enterprise analysis
• FBS “report time” cost analysis
• Unreconciled
– Other centers
– Balance Sheet
Information Constraints
• Materiality– Item material if its omission or misstatement is
likely to influence judgment of reasonable person
– Item is immaterial if it will not affect decisions
• Cost-Benefit– Costs of furnishing information should not
exceed its benefits
• Conservation– Take the most conservative approach when
stating income or net worth
Goals
• Managerial Accounting
– “Cost of production”
– Cost of sales
– Product costing
– Evaluating department (activity) performance
(Management Segments / Responsibility Centers)
• Financial Accounting
– Creating accrual financial statements
– Valuing inventories
Of what?
What are opportunities?
Baselines for projections
Management Determines
• What information is really relevant
• Why variances between planned and actual performances occur…
• And use that information to promote learning and future improvement
Review
• Cost
– Resource sacrificed or forgone to achieve a specific objective
• Cost Object
– Anything for which a measurement of costs is desired
Two Major Cost Objects
• Products
• Responsibility Centers
– Departments
– Activities
ProductResponsibilityCenter
ResponsibilityCenter
Review (continued)
• Cost Assignment
– Tracing accumulated costs that have a directrelationship to a cost object
– Allocating accumulated costs that have an indirect relationship to a cost object
Review (continued)
• Direct Costs
– Can be traced to the cost object in an economically feasible way
• Indirect Costs
– Cannot be traced to the cost object in an economically feasible way
Review (continued)
• Variable Costs
– Change in total in proportion to changes in the related level of activity or volume
• Fixed Costs
– Remains unchanged in total for a given time period despite wide changes in the related level of total activity or volume
Review (continued)
• Variable or fixed based on:
– Cost object
– Time period
• Examples:
– Labor
• Variable to project
• Fixed to the center (in given time period)
– Licenses
• Variable to company
• Fixed to the vehicle (in given time period)
Review (continued)
• Cost Driver
– Variable in activity or volume that causes a change in level of costs
• Relevant Range
– Band of normal activity or volume in which there is a specific relationship between the level of activity or volume and the cost in question
– Costs are fixed in relationship to a given range of activity or volume and time span
Relevant Range Example
• Acme Trucking
– Two refer trucks
– (Fixed) rent per truck of $40,000 / year
– Maximum annual usage / truck = 120,000 miles
– Predicted total hauling of 170,000 miles
Relevant Range Example
Relevant
Range
for 170,000
Miles
$120,000
$80,000
$40,000
120,000 240,000 360,000
Miles of Hauling
To
tal F
ixe
d C
os
ts
1 Truck 2 Trucks 3 Trucks
Review (continued)
• Are all fixed costs indirect?
� Yes
� No
• Are all variable costs direct?
� Yes
� No
Cost Behavior
Direct Costs Indirect Costs
Variable Costs
Cost Object: Crop
• Seed
• Custom hire
• Day labor
Cost Object: Crop
• Fuel
• Hourly machine rent
• Farm labor
Fixed Costs
Cost Object: Crop
• Cash rent
• Crop insurance
• Real estate taxes?
Cost Object: Crop
• Depreciation
• Repairs
• Liability insurance
Inventoriable Costs
• Are regarded as assets when they are incurred
• Become Cost of Good Sold when product is sold
• Include all manufacturing costs
Types of Inventory
• Direct Materials
– In stock and awaiting use in the manufacturing process
– In farming: ______________
• Work-In-Process
– Goods partially worked but not yet completed
– In farming: ______________
• Finished Goods
– Goods fully completed, but not yet sold
– In farming: ______________
Period Costs
• All costs other than COGS
• Treated as expense in period they are incurred
• Are expected to benefit revenues in the current period, not future period
• Include design and distribution costs
• In farming: ______________
Inventory Costs
Production
Costs
WIP
Inventory
Finished Goods
Inventory
Profit
Center
Production Cost Centers
Record as
incurred
Transfer at
harvest
Transfer when sold (or
revenue recognized)
Inventory vs. Period Costs
Production
Costs
Corn Cost
Center
As Incurred
Soybean Cost
Center
Corn Profit
Center
Soybean Profit
Center
As Inventory
Sold
S,G&A
Finance
CostsAs Incurred
Allocation of Indirect Costs
Production
Costs
Corn Cost
Center
As Incurred
Soybean Cost
Center
Corn Profit
Center
Soybean Profit
Center
As Inventory
Sold
S,G&A
Finance
CostsAs Incurred
Machinery Cost
Center
Support
Service
Centers
Production
Processes
G&A Financing Marketing
Profit Center
Revenue
Labor
Equipment
Facilities
Shop
Irrigation
Transportation
Production
Management
Growing
Harvesting
Processing
Crop Centers
Direct Expenses
Direct Profit
Production Profit
Operating Profit
Net Income
Accrued Costs
Quarter 1 Quarter 2 Quarter 3 Harvest
Support Operations Cost Centers
Direct Costs
Allocations
Indirect Costs
Fertilizer Chemicals
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lsConsolidated Companies
Ledger Accounts / Total Dollars
Profit Center / Total Unit Cost
Marketing Center / Unit Cost of Goods Sold
Production Center / Unit Cost of Production
Project-Group / Job-Costing / Benchmarks
Consolidating Center / Contribution Margin
Service Center / Fixed, Variable Costs
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lsConsolidated Income Statement, CCA
Income Statement, Consolidated Cost Analysis (CCA)
Crop Audit / Smart Feeder Cost Analysis, CCA
Crop Audit Cost Analysis
Crop Audit Cost Analysis
SF Group Reports / CA Project Report
CCA, Standard Cost/Vendor Monitor
CCA, Standard Cost/Vendor Monitor
Internal Cost Strategies:
• Optimize cost center capacity to match levels of production
• Optimize levels of production to match cost center capacity
• “Sell” excess cost center capacity
• Replace sub-optimal cost centers through outsourcing
• Producing products is what causes costs to occur
• Often results in product-cost cross-subsidization
Traditional Assumptions
Costing Systems
• Job-Costing
– Distinct product
– FBS Production Project
• Process-Costing
– Masses of identical or similar units of a product
– FBS Marketing Project
• Activities create costs
• ABC systems determine why costs occur and how they are absorbed into “cost objects” rather than simply allocating what has already been spent
Allocation Decisions
• Indirect costs can be allocated the same time as direct costs
• Indirect costs may be “lumpy”
• Production costs can be better anticipated
• The system is easier to maintain
• Permits overhead variance analysis
Why Standard Rates?
Time Period Effect
• Use longer periods to calculate
• Numerator (Cost Pool)
– Seasonal cost patterns
– Non-seasonal erratic costs
– Winter shop time!
• Denominator (Allocation Base Quantity)
– Fluctuating seasonal output
– Annual crops!
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lsConsolidated Companies
Ledger Accounts / Total Dollars
Profit Center / Total Unit Cost
Marketing Center / Unit Cost of Goods Sold
Production Center / Unit Cost of Production
Project-Group / Job-Costing / Benchmarks
Consolidating Center / Contribution Margin
Service Center / Fixed, Variable Costs
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lsConsolidated Companies
Ledger Accounts / Total Dollars
Profit Center / Total Unit Cost
Marketing Center / Unit Cost of Goods Sold
Production Center / Unit Cost of Production
Project-Group / Job-Costing / Benchmarks
Consolidating Center / Contribution Margin
Service Center / Fixed, Variable Costs
Dimension # 1: Lines
• Use “wide open” ranges for lines to allow for additional accounts, products, etc.
• Summary or individual lines?
• Accounting source or production source?
• Specialized lines:
– Shadow expense account
– Material inventory adjustment
– Roll up consolidating centers
Template Tips
• Create “master” template, proof, then clone
• You’ll need separate templates for:– Production vs. marketing (crops)
– With and without Operating Profit and Net Income Lines
– For specific stages of livestock for (multi-stage operations)
• Use “View by Field” to check for errors (duplications, skips)
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lsConsolidated Companies
Ledger Accounts / Total Dollars
Profit Center / Total Unit Cost
Marketing Center / Unit Cost of Goods Sold
Production Center / Unit Cost of Production
Project-Group / Job-Costing / Benchmarks
Consolidating Center / Contribution Margin
Service Center / Fixed, Variable Costs
Crop options:Feeding options:
• Current line
• Total sold
• Total produced
• Internal sales
• External Sales
• Current line
• Sold + moved out
• Total sold
• Total produced
• Internal sales + moved out
• External Sales
Dimension #2: Divisors
Total Unit Costs (TUC)
• Total costs that have to be covered
• Defined minimum price needed from market to cover costs
• 3 units:
– Total
– Base unit produced (acres)
– Marketing unit (bushels)
Why Bother with TUC?
• Managers want it
• Lenders expect it
• People who don’t know what they don’t know
• “A lot of companies are struggling to attribute non-manufacturing costs to a product.”
-Les Heitger, I.U.
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lsConsolidated Companies
Ledger Accounts / Total Dollars
Profit Center / Total Unit Cost
Marketing Center / Unit Cost of Goods Sold
Production Center / Unit Cost of Production
Project-Group / Job-Costing / Benchmarks
Consolidating Center / Contribution Margin
Service Center / Fixed, Variable Costs
Analysis Pyramid
Project
ProductionCenter
Marketing Center
2006 Crop Year
2015 Profit Center
Project
ProductionCenter
Marketing Center
2014 Crop Year
Project
ProductionCenter
Marketing Center
2015 Crop Year
Elusive “Crop Year” Report
• Most contentious/lengthy for FFSC to resolve
• Total Unit Cost / multi-period production costs
• Incompatible with GAAP—requires interest & G&A to be capitalized
• Problem accentuated with long production cycle and stage transfers (cow-calf)
Crop Year Solutions
• Ad hoc reports outside of accounting
• FBS “wild card” production/marketing centers by year
– “Traditional” approach
– Requires marketing centers by year
– Imbedded year in codes
– Only valid after crop is completely sold (period costs flushed through and meaningful divisor)
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lsConsolidated Companies
Ledger Accounts / Total Dollars
Profit Center / Total Unit Cost
Marketing Center / Unit Cost of Goods Sold
Production Center / Unit Cost of Production
Project-Group / Job-Costing / Benchmarks
Consolidating Center / Contribution Margin
Service Center / Fixed, Variable Costs
E.CLIPSE Module Reports
• Current Detail
– “Work papers” for centers/groups/projects
– Detail on every direct or allocated transaction going through WIP and FG
– Identifies all problems related to:
• Inventories
• Group/project dates
– In separate “parallel” database
• Crops=CASxxx24.MDB
• Feeding=SFSxxx17.MDB
E.CLIPSE Module Reports
• View History
– “Snapshot” inventory of every production center/group/project as of the calculation date
– “Rolls up” to WIP Inventory Change, GL and Balance Sheet
– Sums accounts across stages
– Recommend pasting to Excel each month
– In separate “parallel” database
• Crops=CASxxx25.MDB
• Feeding=SFSxxx18.MDB
E.CLIPSE Module Reports
• Balance by Account
– Unformatted
– Displays $ that have been posted to group or project
– Cross-check to verify Ledger Account Bridge is set up correctly
Report Tie-Out
IV Summary by
Group or
Project
WIP Inventory
Change Report
Livestock
Inventories
Crop Inventories
Feed Inventories
Crop Inputs
Inventories
Balance
Sheet
Assets
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lsConsolidated Companies
Ledger Accounts / Total Dollars
Profit Center / Total Unit Cost
Marketing Center / Unit Cost of Goods Sold
Production Center / Unit Cost of Production
Project-Group / Job-Costing / Benchmarks
Consolidating Center / Contribution Margin
Service Center / Fixed, Variable Costs
Report Differences
Time Slice
• Income Statement
• Cost Analysis
• Likely will be beginning and ending inventories
• Therefore, must include WIP adjustment accounts made to WIP centers
• Will tie to other financials
• More timely
Closeouts
• SF Group Reports
• CA Project Reports
• Only work when inventories zeroed out
• Only includes direct or allocated entries to specified production or centers
• Will not tie to financials
• More accurate
Re
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lsConsolidated Companies
Ledger Accounts / Total Dollars
Profit Center / Total Unit Cost
Marketing Center / Unit Cost of Goods Sold
Production Center / Unit Cost of Production
Project-Group / Job-Costing / Benchmarks
Consolidating Center / Contribution Margin
Service Center / Fixed, Variable Costs
Standard Cost/Vendor Monitor
• Recap by Center
– Reduced to lowest common denominator
• Ledger account
• Service center
– Can be used for
• Budgets
• Financial statements
• Benchmarking
– Yet avoids “peanut butter spreading” errors
Re
po
rtin
g L
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lsConsolidated Companies
Ledger Accounts / Total Dollars
Profit Center / Total Unit Cost
Marketing Center / Unit Cost of Goods Sold
Production Center / Unit Cost of Production
Project-Group / Job-Costing / Benchmarks
Consolidating Center / Contribution Margin
Service Center / Fixed, Variable Costs