getting to the bottom line.ppt - fbs systems

Getting to the Bottom

Line

Norm Brown

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

Before We Get There…

• Terms

• Theory

• Tools

• Tie-out

• Take-home

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)

• Do relevant ranges apply to variable costs?

� Yes

� No

• Example?

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

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Activity Cost Centers

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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Consolidated Income Statement

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Historical Income Statement

C/A/M/M Income Statement

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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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

Profit Center

• Mechanism for allocating period costs to commodity

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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Marketing Center

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)

Crop Year Complete History

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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


• 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


• Balance by Account

– Unformatted

– Displays $ that have been posted to group or project

– Cross-check to verify Ledger Account Bridge is set up correctly

Cost Center Allocations

Automatic Management JE

Cost Center WIP Adjustment

Inventory Valuation Current Detail Expense

Recap

Automatic Accural JE

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

Tie SFIV Detail to NPPC

Cost Analysis

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Project Cost Analysis

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

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Standard Cost/Vendor Monitor

Cost Center Allocations

Standard Cost

/ Vendor

Monitor

Inventory Valuation Current

Detail

SCVM Trend

3-Way Split Cost Analysis

3-Way Split Crop History

3-Way Split Fuel User-Defined

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

Consolidated Cost Analysis

Projected Cost Analysis

Budget-Actual

Income

Statement

Cash Flow Unit Monitoring

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getting to the bottom line.ppt - fbs systems

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