Benefits of Unit Cost Analysis

I worked for Monsanto in the Agricultural division as a young accounting assistant. I was transferred from corporate to agricultural, entering a whole new world. At that time, the agricultural division was the most profitable division in the organization. What made it a new world for me is that there were no computers.

My first responsibility was to compose the domestic gross profit statement. I asked where I could find the computer to begin setting up the spreadsheet. My boss laughed and handed me a columnar pad with thirteen columns and a calculator.

Each month I would use a 20-pound report for each product and transfer the respective products gross sales, freight, quantity sold and cost related expense onto my paper. I would calculate the sales and cost unit by product, add up all the information and produce a gross profit statement. During this process, I needed to clearly explain why any sales or cost unit deviated from budget down to $.005.

I realized I was the computer. In this accounting environment, the belief was that computers are good, but people are smarter. A spreadsheet can't tell you why. And to know why, you have to understand the nature and components of unit cost.

A unit cost reflects the costs incurred to produce, store and sell one unit of a particular product. Unit costs include:

· Fixed costs - depreciation, monthly rents, organizational cost allocations, and any cost incurred whether or not production occurs; and
· Variable costs - labor, materials, electricity, any cost that increases or decreases depending on the output produced.

Total cost/total output equals unit cost. The total cost and total output is usually derived from a budget or forecast and can change annually, quarterly or monthly. The static unit cost is a "best guess" based on past results, used to analyze the variance between static unit cost and actual unit cost. This variance analysis creates an awareness of input costs, planned output and planned productivity.

Input costs are products and services used to create output. Examples of variances are:
· Increase/decrease in cost of material,
· Increase/decrease in freight in,
· Loss of vendor discounts,
· Missed vendor discounts.

Planned output is the estimated number of units. Examples of variances are:
· Material shortages,
· Decrease in available labor,
· Equipment breakdown,
· Raw materials spillage,
· Production for a customer who later canceled the order,
· Over production based on incorrect scheduling,
· Overtime required due to unscheduled production,
· Overtime required due to a labor shortage,
· Increase/decrease in labor benefits,
· Increase in hourly wage.

Planned productivity is the number of units produced by the current employees. Examples of variances are:
· Acquisition of new machinery that is less labor intensive,
· Improvements in the production process.

A change in fixed costs can also contribute to the variance. For example,
· Change in fixed cost allocations,
· Increase/decrease in support staff costs,
· Change in monthly depreciation or rents.

Unit cost variance analysis can reveal these changes. In some instances, poor communication results in a standard cost unit that is over or understated. These variances also alert management to changes that can be address quickly before the end of the next monthly cycle, such as addressing discounts with vendors or finding vendors to supply materials at a lower cost. Monthly cost variance analysis completed within the short monthly closing cycle can lead to increased profit and efficiencies.

To help you understand unit cost, the various components, and profit implications:
The Preservation Manager's Guide to Cost Analysis
Cost Reduction Analysis: Tools and Strategies

Filing Your Income Tax Doesn't Have to Be Painful

Filing your federal income tax doesn't have to be painful. The IRS has downloadable free tax preparation software for tax filers who have an adjusted gross income of $57,000 or less. How to you know what your adjusted gross income will be? Hey, what is adjusted gross income?

Adjusted gross income (AGI) is the amount of income you have minus the credits available. The lower your adjusted gross income the less tax you pay. And if your adjusted gross income is less than $49,708, you may qualify for the earned income credit, even if you don't have a child. It is an opportunity to take advantage of credits offered by the IRS. Never think that an amount is too small. On average you save $15-$25 for every $100 of allowable deductions.

First, add up all your income documents, including self-employment, W2s and 1099s. Then review the available credits and subtract ballpark amounts you use to reduce your income. This will give you a rough estimate of your AGI. You can use the link at the end of this post to search for the IRS sponsored free tax software.

Adjusted Gross Income Credits:

• Educator expenses: Taxpayers can deduct $250 for each eligible educator ($500 if married filing jointly and both are educators). An eligible educator is a kindergarten through grade 12 teacher, instructor, principal, or aide who worked in a school for at least 900 hours during a school year. Qualified expenses include ordinary books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. An ordinary expense is one that is common and accepted in your educational field.
• Certain business expenses of reservists, performing artists, and fee-basis government officials.
• Health savings account deduction: amounts you contributed to an HSA in 2011.
• Moving expenses: If you relocated more than 50 miles from your home for your new job.  
• Deductible part of self-employment tax. 
• Self-employed SEP, SIMPLE, and qualified plans. 
• Self-employed health insurance deduction. 
• Penalty on early withdrawal of savings: If you received a form 1099-INT or 1099-OID the penalty should be listed. 
• Alimony paid.
• IRA deduction.
• Student loan interest deduction: any interest paid when making student loan payments.
• Tuition and fees for qualified education for yourself, your spouse or dependents.
• Domestic production activities deduction. 

If you don't have any of these credits, your AGI will be the sum of your income.

If you have any specific questions, please leave a comment and I will answer the question so others can benefit.

IRS free tax preparation software

Unemployment Conversations-Are They Right

The unemployment conversations tend to focus on older workers, duration of unemployment, and professions. But are they right? The unemployment numbers for December 2011 have been crunched and published by the Bureau of Labor Statistics, U.S. Department of Labor. While the results are unremarkable in that they confirm that unemployment is still too high, hovering around 8.5%, drilling down reveals a different unemployment conversation than is currently circling the Internet.

When looking at the unemployment percentages by age group, those ages 25-34 are the highest group of unemployed at 24.4%. The unemployed workers 55 and over constitute 14.7% of the unemployed, with the remaining age groups 20-24, 35-44, and 45-54 hovering at 17%. This changes the conversation in terms of "older workers" that range from 40 and over to 55 and over depending on what you read. This suggests that employers are actually more receptive to "older" workers than the hype would have us believe.

There is concern over the recent revelations that employers are considering those who have been unemployed for more than six months undesirable. Unfortunately, the report does not present a breakdown by age for the duration of unemployment. What the report shows is that 44.5% of those actively collecting unemployment have been active for 27 or more weeks.

The highest areas of unemployment are construction at 16%, professional and business services at 9.3%, and leisure and hospitality at 10.8%. The lowest areas of unemployment are government workers at 4.1%, education and health services at 5.5%, financial services at 5.6% and mining at 6.9%.

The percentages are based on the number of unemployed persons as of December 2011. This number adjusts for those not actively seeking work and those who are institutionalized. The remaining unemployed population is 13,097,000. Of this number, the greatest population of unemployed is the age group 25-34. Over the flip side, of the 140,681,000 employed in the labor force the highest percentage of employment is seen in the 45-54 age group.

The conversations can change towards older workers that are the largest percentage of the employed work force and have lower unemployment ratios than their younger counterparts. Long-term unemployment is a chronic condition at this stage in the economy not limited to age. Education and health are indeed fields to explore. The unemployment in construction is a real key for economic growth.

Bureau of Labor Statistics-The Employment Situation December 2011

Which Version of QuickBooks Accounting Software is Right for Your Business

Is QuickBooks accounting software right for your business? QuickBooks offers a range of products for use in desktop, server and on-line accounting environments. QuickBooks signature is ease of use and behind the scenes accounting that occurs as users enter transactions for accounts payable, sales and accounts receivable, payroll processing and inventory management. QuickBooks accounting software includes industry specific forms and general ledger accounts ranging from 65 industries (QuickBooks Online) to more than 150 industries (Enterprise).

Evaluating QuickBooks Accounting Software provides a detailed look at the accounting functions available in each version of QuickBooks and an overview of the pros and cons of using QuickBooks accounting for your business.

QuickBooks Customer Credit/Refund Processing

Understanding customer credit/refund processing in QuickBooks is critical to maintaining the general ledger account balances and easing the burden of bank reconciliation. QuickBooks has three options to process customer credits and/or refunds:

 

1. Retain credit on the customer account for use when paying another invoice,
2. Issue a refund by check or credit card, and
3. Apply the credit to an outstanding invoice on the customer account.

Issuing credit memos for customer credit processing ensures that the original transaction is reversed properly to the accounts receivable, inventory, income and cost of goods general ledger accounts (See example). Choosing one of the three customer credit options ensures the customer is receiving the type of refund application he or she desires.

 

However, many organizations circumvent the accounts receivable refund process by setting the customer up as a vendor and issuing a refund check through the check writing option. Reimbursing a customer by writing a vendor check does not reduce the income incurred through the original invoice. This procedure leaves income is overstated by the amount of the refund. If the customer's refund check does not use the item tab, inventory will not reflect the return of the product.

 

In addition, organizations processing customer payments by credit card often misunderstand the flow of credit card receipts to the operating account. For many organizations, customer credit card payments flow directly to the operating account. When the customer credit card payments are part of the operating account, the customer refund can be issued as if it were a check. This will then be reflected in the credit card processing software maintained outside of QuickBooks. For example, using the bank's credit card processing software, a customer refund is issued to the credit card. The customer refund must also be entered using the QuickBooks customer credit processing to ensure cash and the customer account are correctly recorded. To issue the customer credit in the credit card processing software only causes cash and income to be overstated.

 

Circumventing the established QuickBooks process for handling customer refunds can cause cash to be overstated, income to be overstated, cost of goods is overstated and inventory is understated if the goods are returned. This also puts additional strain on bank reconciliation process by increasing the amount of time needed to reconcile the exceptions that occur in the credit card processing and in creating the journal entries needed to reset the general ledger accounts affected circumventing the process. 

QuickBooks Budgeting Tips

Using QuickBooks to create and monitor your annual budget is simpler than it appears. Because QuickBooks budgeting requires month-by-month entry for the annual budget users often shy away from using the budget module. However, with a few simply changes you can create a budget that works for your business, is easy to review and easy to change.

The Secret to a Painless Budget

The secret to a great budget is simplification. Do you really care about each detailed account when you are reviewing your organization's performance? Only if there is a question, and using the budget report can provide one click detail.

1. Review your chart of accounts, whether numeric or alpha. It's easier if you print a profit and loss statement and highlight the results that matter, for example, total income, total cost of goods sold, total sales expense, and total general and administrative. The goal is to budget at a high level to make monitoring performance quicker.
2. For the accounts you have marked as important, set up an account that will be the parent account, for example, payroll liabilities. The individual payroll liabilities FICA, Federal, State, State Unemployment, Worker's Compensation, etc, will become subaccounts of this parent (this becomes clearer when viewing the chart of accounts in the hierarchical view).

 Reviewing Budget Reports in QuickBooks

QuickBooks supplies basic reports for reviewing budget performance. By modifying the reports and saving them with a new name, you can control how often you review and modify your budget.

For example, using the basic QuickBooks budget report Profit & Loss Budget Performance run the report to the screen. Choose Modify Report from the menu bar. Several tabs will appear. On the Display tab, change the report range date to quarterly. To view the difference between actual and budget, on the Display tab choose show actuals and show dollar difference. To reduce the amount of data shown on the report, choose the advanced tab and choose show only rows and columns with budgets.

Entering the Budget in QuickBooks

QuickBooks budget is set up for monthly entries. If your organization generates only annual budget amounts take the annual budgeted amounts and divide the amount by twelve. Enter the monthly amount in the January field and choose "Carry this across."

To enter a budget based on quarters, individually divide each quarter by 3 and enter the correct amount for each month of the quarter.

Using QuickBooks budgeting helps businesses stay on track. You can easily see when you are compared to your budget, and what you need to change. Using the budgeting module may seem like a lot of work, but in the end, it saves time and prevents surprises.

 

Occupy Wall Street and Stir the Corporate Conscious

The move to Occupy Wall Street is a direct outcry of an economically impoverished people unemployed due to poor investment and credit management compounded by corporate cash hoarding. The frustration is directed at Wall Street but is representative of corporate practices in the U.S. Hopefully the protests are a wake up call to organizations that it is time to exercise corporate social responsibility.

The economic crisis hit the wall in 2009, but it was a slow decline coupled with the result of sub-prime lending. As early as June 2007, Bloomberg Businessweek warned about The Real Cost of Offshoring. The attractiveness of cost cuts lured U.S. organizations offshore. However, the gross domestic product, reported as healthy by the Bureau of Labor Statistics, was actually a phantom index.

While rumors abound with whispers of conspiracy, accusations of greed and government favoritism, what do these rumors accomplish? We are a capitalist society, based on supply and demand, production and consumer. What can make the U.S. capitalistic economy great is self-regulation of wealth.

Henry George, sometimes referred to as the father of modern capitalism, summed this up in the preface of his book Progress and Poverty:

"To those who, seeing the vice and misery that spring from the unequal distribution of wealth and privilege, feel the possibility of a higher social state and would strive for its attainment."

Henry George's theory of capitalism is based on four ideas:

1. he who makes should have;
2. he who saves should enjoy;
3. what the community produces belongs to the community for communal uses; and God's earth, all of it, is the right of the people who inhabit the earth.

Taxing the rich will not change the economic situation. Making the federal government responsible for the economy will not change the situation. What can influence change in the U.S. economy is best accomplished by enacting the community premise: what the community produces belongs to the community for communal uses.

This is not socialism. The U.S. economy functions on consumerism, supply and demand. The concept of community in capitalism means that production belongs to the same community where the organization is incorporated and the fruits of production, the working capital realized by the organizations, should be reinvested in the community for communal use.

As of the second quarter of 2011, ten U.S. corporations are holding a total of $508 billion dollars in cash on their balance sheets. While this is theirs to have (1), these organizations have a corporate social responsibility to the community of the U.S. This means that organizations, not the federal government, are responsible for creating and sustaining the economic well being of the U.S. community by operating, hiring and producing on U.S. soil.

Simply put, organizations have a right and a responsibility to profit and are also the guardians of the economy. It is socially irresponsible when profits rise at the expense of the community and government where the profits are reported. Rather than shrinking from the economic crisis in the U.S., corporations should act to relieve the pressure.

• Analyze the percentage of production completed offshore. If this amount is greater than 20%, consider bringing back the production to U.S. soil. Contribute at least 50% of production to the U.S. economy.
• Shared services centers make sound business sense. North America currently has 29% of shared services centers. U.S. corporations can return their share of global shared services centers to North America.
• Analyze purchases and ensure that 50% or more are purchased from vendors operating within the U.S. 
• Choose U.S. based technology, contractors, and personal service firms. 
• Consider aggressively improving business-to-business transactions that will circumvent the need for credit lines. One method is electronic invoice presentation and payment, which will marry the seller and the buyer in an agreed upon payment cycle that fits the needs of both. 

As senior leaders issue a collective gasp, proactive leaders will see the benefits. At some point, all the cash hoarding will end as the consumer fades and products gather dust. Just as the sub-prime mortgage industry ended, so will the cash stores. Instead, organizations should invest in processes that will improve production, maintain U.S. employment and still turn a profit.

But that's just me.