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 part of the organization. What made it a new world for me was that there were no computers within this accounting department.

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

Each month, I used a 20-pound report for each product and transferred the respective product's gross sales, freight, quantity sold, and cost-related expenses onto my paper. I calculated the sales and cost unit by product, added all the information, and produced a gross profit statement. During this process, I needed to explain why any sales or cost unit deviated from budget to $.005.

I realized I was the computer. In this accounting environment, the belief was that computers are good, but people are more intelligent. A spreadsheet can't tell you why. To know why, you must 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. Total cost and total output are 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 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. Sometimes, poor communication results in an over or understated standard cost unit. These variances also alert management to changes that can be addressed 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. A monthly cost variance analysis completed within the short closing cycle can increase profit and efficiency.

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.

 

Is Corporate Cash Hoarding a Lack of Corporate Social Responsibility

Corporate social responsibility is not a high priority for U.S. organizations. There is a viable alternative to raising taxes on the wealthy and on corporations available to the American economy. This alternative can restore funds to the federal and state governments and decrease the U.S. unemployment rates. It may take courage, but exercising this alternative can result in a win-win situation for the American economy. And it is as simple as fulfilling corporate social responsibility.

Harvard's corporate social responsibility initiative defines corporate social responsibility as encompassing "not only what companies do with their profits, but also how they make them. It goes beyond philanthropy and compliance and addresses how companies manage their economic, social, and environmental impacts, as well as their relationships in all key spheres of influence: the workplace, the marketplace, the supply chain, the community, and the public policy realm."

Fulfilling corporate social responsibility helps keep capitalism in check. Harvard's initiative places economic success in part on the organizations that benefit from that success. Currently, American organizations are stockpiling cash while the American economy is experiencing joblessness and loss of disposable income. I can't say I know what they are doing with all that cash. I can say it sits on the balance sheet as a current liquid asset yielded insignificant returns. And I wonder-are these stockpiles a shirking of American corporate social responsibility? The echo from the depths of the economy might say yes.

Seeing all that unproductive cash, I wondered how organizations were obtaining so much cash in a shrinking economy. The average American household's disposable income has shrunk, so consumer spend certainly isn't a major factor. Digging deeper, I realized that many of these American corporations are offshoring jobs and reaching for increased automation in processes. According to the U.S. department of labor, "Cost cutting by U.S. industries in almost every sector of the economy will continue to change the workforce. To reduce labor costs, some jobs are being sent offshore while others are being replaced by technology or are being filled with lower cost workers."

This has real implications for the U.S. economy. As an accountant, I wanted to see the implications, so I decided to do a little analysis on an American organization I was familiar with. Using the annual 10-K reports filed 2007 through 2011 for this U.S. organization, I found that the organization increased net earnings by 36.5% across the five-year period. During this same period, the organization experienced only a 10% increase in cost of goods, and a 25% increase in G&A This same organization, during this five-year period, has offshored a large portion of its back office finance and product production equating to a shift in payroll dollars of approximately $803 million.

Could this organization be remiss in managing their economic, social, and environmental impacts, as well as their relationships in all key spheres of influence: the workplace, the marketplace, the supply chain, the community, and the public policy realm?

The impact of the payroll shift for this one organization on the U.S. economy equates to a 32% loss of federal revenue (individual states of residence lose taxes also). For example, the shift of $803 million dollars in wages and salaries to offshore locations denies the federal government $200 million in individual federal payroll tax, $50 million in social security tax, and $12 million in Medicare tax.

While the economy is composed of many factors, think about changing just this one factor in the U.S. If American corporations could loose their death grip on cash and exercise their American corporate social responsibility, these organizations could infuse the U.S. economy with the jobs that exist offshore. And, as a side note, the organization analyzed in the above example showed a loss in the basic earnings per share of 17.9% during the five-year period.

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Easing the Burden of AP with Electronic Invoice Presentment and Payment

So why aren't more U.S. banks offering electronic invoice presentment and payment solutions? After searching with Google and Ask, I found only one U.S. bank that offers this service, while at least ten European banks had this in place. Electronic invoice presentment and payment (EIPP) is really so simple. The process takes the guess work out of invoicing customers, receiving customer payments, and, for the buyer, makes accounts payable processing so much easier.

It is a matter of accepting the software constraints, selling employees on using the process (many employees are afraid of being replaced), and onboarding buyers. However, the buyers are the ones who benefit the most. The acceptance of the electronic invoices from suppliers carries the ability to send buyers files that can be imported directly into the buyer's software. The import carries all the documents needed to prepare the accounts payable invoice for payment-the original purchase order, the proof of delivery, and any buyer required document. This process automatically matches product price and quantity and rejects discrepancies. The invoices that match are entered directly, so employees only deal with the rogues.

Even though banks may not offer the service directly there are several third-party vendors who offer this, and buyers need to take this seriously. When I look at this from the AP managers view, I want it.

Roll in the Dough with Rolling Forecasts

I am working on rolling forecasts, a good way to replace your annual budget process and position your business for future growth. Rolling forecasts are not new. Rolling forecasts have been in use for some time, and large organizations undertake these with some regularity.
As a small or mid-size business, rolling forecasts can give you real power to control your financial future. The concept is simple, and involves setting targets for where you want to be profit wise in, say, five years. Lets say you want your profit level to be at $5 million, or $500K. Either way set the target.
What you are going to do is make a plan. But, instead of setting a one-year plan and going through an exercise of sticking to that plan, you are going to set a plan that involves real time business operations. The plan will be set up by quarters, so you will be setting up the first five quarters, or the next 15 months.
Now, instead of nickel and diming your financial expenses set the main levels of production and inventory expense, sales and marketing expense, and administration.

Have patience and wait under the end of the first quarter. How did you do? Where did you fall short? Is there a product that needs to be marketed more? Or costs too much to be profitable? Are you paying too much?

After the first quarter is complete, decide how you will achieve your sales and profit again for the next 15 months. Redo the second through fifth quarter of your original rolling forecast, and add another. Second now is the first quarter, third is now the second, etc.

After you do this for a few quarters, you'll get the hang of it. And you will be able to see where your business is going, and decide where you want it to go.

Google Checkout-Big Help for Small Business

Do you want to set up an on-line store for your products, but don’t think you understand the web techniques. Google has introduced Google Checkout, a gadget you can add to your website or blog that will allow your followers and customers to purchase directly from your site.

Customers Shop, Begin the checkout process, Sign into Google Checkout, Buy, and Receive a Confirmation. Sellers receive Fraud Protection, Have the Potential to Increase Sales, and offer Google Convenience to their Customers.

There are minimal transaction fees, based upon sales volume.

If you are looking for ways to expand your business, Google Checkout can be an excellent assistant.

Sales Tax made Easy-er

If your business sells product in several states, keeping up with the sales tax tables is always a challenge. And selling in a new state just adds to the burden. To make finding tax rates simpler, The FTA Links page presents a map of all 50 states.

When you click on the state in question, you will be taken directly to the states Department of Revenue. Here you can link directly to the sales tax rates and tables by county, if applicable.

Calculating sales tax for a home based business, such as Arts & Crafts, can be done using a spreadsheet, if you do not have a software package for inventories. My article How to Track Sales Tax in Your Arts & Crafts Business will give you step by step instructions on how to create a spreadsheet and set it up to calculate your sales tax.