Standard Costing

Standard Costing

Perhaps no accounting principle utilizes performance management concepts better than standard costing. One of the elements of cost accounting, standard costing is of particular benefit to those companies engaged in manufacturing.

Each type of standard has its strengths and weaknesses, but regular monitoring and making revisions based upon current conditions incorporates performance management concepts and would seem to present the best chance for success

A firm wishing to utilize finances efficiently monitors the following costs:

  • Direct Material Costs
  • Direct Labor Costs
  • Manufacturing Overhead

The process of standard costing is achieved, in part, i.e., identifying a standard cost for each. A typical company may employ a committee to develop a standard costing plan.
Such a committee often involves key personnel such as a Cost Accountant, Production Manager, Personnel Manager and Purchase Manager.

This group clarifies and classifying its costs in more detail, grouping them by some categories such as the examples below:

  • Functionality (production, Selling, Distribution, etc.)
  • Fixed Costs
  • Variable Costs
  • Direct Costs
  • Indirect Costs

Assuming a company establishes realistic standard costs, it may then monitor performance with an eye on increasing efficeintcy and minimizing waste.

To judge the company on its performance over time, the standard costing team will determine which type of standard to employ. Depending on its goals and industry environment, a company may choose one of the following types of standards:

Maximum Level Standards – presumes that maximum ideal environmental conditions and company conditions are most favorable.

Current Level Standards – developed from recent company conditions and industry environment. Current standards are usually adjusted annually.

Basic Level Standards – provides levels and baselines designed for long term use, perhaps based on average levels over a 10 year period. Basic standards don’t adjust for current conditions, and does not serve monitoring purposes as well.

Profit and Loss Statement

Profit and Loss Statement

Profit and Loss Statement Lesson

The Profit and Loss statement is one of the main business financial statements. Among the various financial statements, a Profit and Loss statement most closely resembles what is referred to as "the bottom line". Since the purpose of a business is to earn a profit, both the business owner and outside entities such as bankers and investors have a keen interest in revenues.

The last stage in the development of a company’s Profit and Loss Statement is to outline a list of expenses associated with the ongoing operations of a company. Typical items displayed include utilities, rent and salaries. Just as income interest earned is reflected among income items, a company should also show display interest paid among its expenses. The sum of all expenses is obviously – Total Expenses.

The final step in the Profit and Loss Statement is the resulting of calculating the result of subtracting Total Expenses from Total Income, the result of which is called Net Income.

A Profit and Loss Statement provides a snapshot of a firms’ financial viability for a certain period of time, usually one year. Therefore, the "bottom line" reveals the company’s net earnings or losses. Net is a key term, because after the warm glow of sales income is felt, then comes the reality check of expenses and other costs which eat into profits.

Among the common components found in an income statement are net sales, the costs of goods sold, the costs of inventory if applicable, and regular expenses such as office rent, payroll, supplies, etc? When both negative and positive finances elements are revealed on an income statement, key components contributing to profit or loss for the period can be identified.

The structure of a Profit and Loss Statement begins by showing income received. Any financial impacts which reduce income, such as customer returns, must be are reflected.After all gross sales and negative financial impacts on those sales are taken into account; the company arrives at a Net Sales figure.

Of course, it costs a company to set up and prepare to provide products or services. These costs are reflected in the next section of the Profit and Loss Statement called the Cost of Goods Sold. Among typical costs outlined in this section are purchases for inventory or other costs associated with preparing a product to sell. The cost of Inventory (minus depreciation) value purchased but not yet utilized is subtracted before a sum total of Cost of Goods Sold is derived.

Once all costs are associated with product preparation are accounted for, the Profit and Loss Statement subtracts this figure to arrive at the Company’s Gross Profit. All cash flow coming into a company is not limited to that earned in actual sales transactions. The company may also experience increased income from the interest paid on its accounts.After all sources of income are included, the Profit and Loss Statement shows the company’s Total Income.

Marketing in a Credit Credit Crunch

Marketing in a Credit Credit Crunch

A stalled economy threatens the viability of many small businesses. Some have experienced decreases in revenues that they cannot sustain. Slower sales have prompted some to institute personnel layoffs others are prone to cut advertising. But, a hasty decision could be a mistake. After all, the reason for advertising is to keep a consistent message in front of prospective customers. This is our advice for What is marketing? during a credit crunch.

Rather than making a hurried decision that may make things worse, a company should consult its marketing plan for guidance. The Marketing Teacher provides applicable guidelines which will help formulate tactics in response to a slumping economy.

There are many factors to consider when conducting a situation analysis. Prominent among them is a review of a company’s Marketing Environment.

A good way to organize a situational analysis of the marketing environment is the use of a device called PEST Analysis. PEST looks at environmental factors such as Political Factors, Economic Factors, Sociocultural Factors and Technological Factors.

During an economic downturn, a company’s Marketing Planning and the Marketing Manager might perform what is called a Marketing Audit during which time he/she would review the current marketing plan against internal and external marketing environments. See below:

Internal Environment

Customer Relations

Price

Product Profitability

Distribution

Promotion

People

External Environment

Understanding customer needs

Understanding the buyer decision process

Understanding brand perception

Segmentation, Targeting, Positioning

Consumer values

The Marketing Manager needs to utilize the most current data and information resulting from the Marketing Audit and the PEST Analysis results. The status review should lead the Manager to re-evaluate its objectives to determine if they are indeed smart objectives, in light of current economic times.

SMART objectives are those that are specific, measurable, achievable, realistic, and timed. By conducting a situational analysis and reviewing the marketing environment a Marketing Manager is equipped to adapt and monitor its response changing conditions without making knee-jerk decisions.

Marketing Budget

Marketing Budget

Failure to properly cost and budget your marketing plan could lead to problems. While insufficient funding for such items as equipment or staffing may immediately come to mind when budgeting for the whole business, it’s the lack of a properly constructed marketing budget that dooms many marketing plans and campaigns. A marketing budget is the marketing plan written in terms of costs.

Summary of the Marketing Budget

Marketing budgets ensure that your marketing plan or campaign is realistically costed. Some pre-budget research into your industry and market, your competitors and your business’s historical marketing metrics helps marketing managers make a more informed calculation. You should cost out all general marketing and marketing communications expenses. You could also work in conjunction with an accountant to make sure that the figures are complete and realistic.

Marketing Budget

A marketing budget is an estimate of projected costs to market your products or services. A typical marketing budget will take into account all marketing costs e.g. marketing communications, salaries for marketing managers, cost of office space etc. However much of the budget is concerned with marketing communications e.g. public relations, website, advertising, etc. Both are considered here.

The costs in a marketing budget will be allocated according to the campaign and the media to be utilized. Some prior research will be necessary for the cost estimates to be as realistic as possible. This is called advertising or marketing communications research.

Helpful Pre-budgeting Research

Knowledge of key industry and market factors must be taken into account when developing your marketing plan. Your plan will also be influenced by researching your competition. You will want to allot funding in a way that exploits the weaknesses of your competitors and emphasizes your strengths.

Other information that can guide your spending plan is found in your internal records. What advertising expenditures have proven successful for your business? For example, you can review internal records and determine the return on investment of your advertising dollars. A periodic examination of the performance of these records may lead you to drop certain media that have not proven fruitful.

Typical general marketing expenses:

  • Advertising agency commissions
  • Salaries for marketing managers
  • Salaries for marketing support e.g. marketing assistants.
  • Office space
  • Fixtures and fittings
  • Travel costs
  • Other direct and indirect marketing costs, including marketing communications costs (see below).

Typical marketing communications costs:

Marketing and Finance

Marketing and Finance

Introduction to Financial Statements for Marketing

Often marketing professionals are criticized since they are viewed as creative and innovative people that tend to spend the company’s money without worrying about how effectively or efficiently it is being spent.

The Cash Flow Statement

The components of an income statement can be turned into a Cash Flow Statement. The main work of a Cash Flow Statement occurs in the first column. It starts with a snapshot of your beginning cash balance. Next, it itemizes the amount of each source of income on a line of its own. The beginning cash balance plus the sum total of all income sources is totaled for your Available Cash Balance.

Next, simply make a grand total of all outgoing cash. Now, after subtracting the Total Cash Out Flows from the Available Cash Balance you will arrive at the Ending Cash Balance for the first month. To see how the cash "flows", simply move the Ending Cash Balance to the top of the next months’ column and enter the figure as Beginning Cash Balance. Complete these steps, entering in the appropriate dollar amounts across from each source of income and expense and you will be in a position to monitor your cash flow.

What can a Balance Sheet, Income Statement and Cash Flow Statement tell you about your Marketing Plan? Perhaps your original owners’ equity is too committed to capital to launch an expansive marketing campaign. Past results may show advertising had to be scaled back due to insufficient inventory. You may not have funds to sustain a long term marketing strategy.

In summary, a company’s financial statement tells what has occurred and provides data to aid you in making informed projections for the future. Monitoring them may lead to the appropriate revisions in your marketing strategy.

You must monitor the efficiency and effectiveness of your marketing activities, as well as other important business functions such as production and the quality of products or services. However since the purpose of a business is to earn a profit, finances had better be one of your marketing foundations.

There are some key financial tools that are essential to this monitoring task. Taken together they provide an overview of the firm’s health and future prospects:

1.The Balance Sheet

2.The Profit and Loss Statement

3.The Cash Flow Statement

It may not be readily apparent to you how financial statements are relevant from a marketing perspective. You may ask – What can these financial statements tell me about my Marketing Plan? First, let me outline each briefly and then elaborate on why they will be so important to you and your future success.

The Balance Sheet

The Balance Sheet has two main purposes; (1) Listing the assets of your company and (2) Listing the liabilities of your company. Some examples of assets that might appear in a balance sheet are cash on hand, accounts receivable (amounts owed to your firm), furniture, company vehicles, etc. Some examples of liabilities that might appear in a balance sheet are accounts payable (amounts your firm owes to others), loan amounts payable within a year, your equity investments made, etc. In a typical start-up firm, owners’ investments may be temporarily shoring up the lack of sufficient accounts receivable.

The Profit and Loss Statement

The Profit and Loss Statement is also called an Income Statement. As you might imagine, the income statement provides some hints about how efficient the young firm is being run. Typical components found in an income statement are net sales, the costs of goods sold, the costs of inventory if applicable, and regular expenses such as office rent, payroll, supplies, etc. When both positive and negative finances are displayed on an income statement, key components contributing to profit or loss for the period can be identified.

Financial Ratios

Financial Ratios

Lender and investors are able to glean a lot of valuable information from the data available in a company’s’ financial statements and records. Their priority is insuring that they are repaid for any loan or financial investment. Anyone contributing to your company financially wants to know:

Lender and investors are most assuredly interested in a company’s profitability since that is a good measure of ability to repay financial assistance. To measure this aspect they employ a calculation called the Net Profit on Sales Ratio.

Net Profit on Sales =  Net Profit /
Net Sales

 

  • How much of your business you really own
  • Whether there is enough ready cash on hand
  • What is the status of current liabilities?
  • Are profits reaching their potential?

Certain financial ratios provide a wealth of information on the health of your business and answer the questions outlined above. There are many ratios that may be applied to assist in a lending or investing decision the following are some very key ratios a business owner should be aware of:

Lenders are particularly interested in liquidity which reveals the ability to pay bills and the availability of ready cash. They use a calculation called the Current Ratio.

Current Ratio =  Current Assets / Current Liabilities

A 2 to 1 ratio is generally acceptable although acceptability may vary per industry.

Before loaning or investing, a financial entity may review a company’s level of ownership and compare that with claims due to creditors. To check this aspect of your finances, they use a calculation called the Worth to Dept Ratio.

Worth to Debt Ratio = Net Worth /
Total Debt

Contribution Analysis

Contribution Analysis

Occasionally a company is confronted with unplanned events which call for the use of decision-making tools beyond those found in the basic accounting methods.

Price – Variable Costs Per Unit = Contribution Margin Per Unit

On an individual special order project a company’s product contribution to profit may also be calculated as shown below:

Products Contribution to Profit = Contribution Margin Per Unit x Units Sold

In today’s manufacturing context some companys are more and more likely to entertain the potential of spur of the moment opportunities and vehicles to achieve increased revenues. By the very nature of such decisions, they do not have the luxury of regular costing information and additional effort is needed to improve understanding of potential costs. A useful method which may improve the understanding of these costs is called contribution analysis.

Contribution analysis addresses the problem of identifying soft, or overhead costs associated with varying production projects. Generally, contribution analysis  aids a company by accounting for all known fixed, direct and variable costs and then subtracting that amount from revenues. The remainder is viewed as the volume of other costs which, though hard to pin down, actually contribute to production.

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To further hone in on these costs, some firms may even include some marketing costs; advertising, trade and consumer promotions, as direct costs. In this method , indirect costs consists of revenue minus direct costs. Contribution analysis is derived from other accounting priciples aimed at more correctly identifying costs such as Activity Based Costing(ABC).

For example – a large firm might employ contribution analysis to help in decisions on pricing, or how to get the most profit from an individual project. Such information is valuable if a firm were to consider a contract offer for a special order. The aim of the contribution analysis is to be to base the company’s pricing on a contribution margin calculated as described below

Contribution Margin Per Unit x Units Sold = Product’s Contribution to Profit

And using those results to arrive at the desired price –

Cash Flow Statement

Cash Flow Statement

Marketing and Cash Flow

The main purpose of a Cash Flow Statement (CFS) is to help the business owner plan and control the flow of income in order to meet scheduled financial obligations. The information illustrated in the Cash Flow Statement also aids lenders and investors in determining a company’s financial health.

Cash Flow Statement

Fishbourne Marketing Cash Flow Statement

January
February
March
April
May
June
Beginning Cash Balance

15,000

20,548

22,296

23,493

24,191

180,955
Cash inflows:
Accts. Rec. Collections
180,955
180,955
182,455
185,855
181,455
180,955
Loans on proceeds
Sales & receipts
5,000
0
3,500
0
4,500
6,000
Other:
Total Cash Inflows

185,955


180,955

185,955

185,955

185,955

186,955
Available Cash Balance
200,955
201,503
208,251
209,448

210,146
212,244
Cash Outflows (Expenses):
      
Advertising
300
300
300
400
400
400
Bank Service Charges
45
45
45
45
45
45
Credit Card Fees
35
35
35
35
35
35
Delivery
Health Insurance
478
478
478
478
478
478
Insurance
200
200
200
200
200
200
Interest
25
25
25
25
25
25
Inventory Purchases
1,000
1,000
450
750
450
1,000
Miscellaneous
300
300
300
300
300
300
Office
1,000
1,000
1,000
1,000
1,000
1,000
Payroll
83,300
83,300
83,300
83,300
83,300
83,300
Payroll Taxes
7,300
7,300
7,300
7,300
7,300
7,300
Professional Fees
250
250
250
250
250
250
Rent and Leases
1,000
1,000
1,000
1,000
1,000
1,000
Subscriptions and Dues
90
90
90
90
90
90
Supplies
200
200
100
200
100
200
Taxes and Licenses
44,629
43,429
44,629
44,629
44,629
44,829
Utilities and Telephone
130
130
130
130
130
130
Other
Subtotal

140,282

139,082

139,632

140,132


139,732

140,622
Other Cash Out Flows:
Capital Purchases
Loan Principal
125
125
125
125
125
125
Owner’s Draw
40,000
40,000
45,000
45,000
45,000
40,000
Other:
Subtotal

40,125

40,125


45,125

45,125

45,125

40,125
Total Cash Outflows
180,407

179,207

184,757

185,257

184,857

189,747

Ending Cash Balance
20,548
22,296
23,493
24,191
25,289
31,497

Much like other financial statements; the Profit & Loss Statement or the Balance Sheet; the Cash Flow Statement cannot be composed without first employing a record keeping system. The more Cash Flow Figures are derived from records of actual cash sales receipts, and invoices the more accurate it will be. Keeping a record of income accounts and expense accounts will generate many of the figures for a Cash Flow Statement.

Not all Cash Flow Statement Information is "actual" information. A statement will sometimes unavoidably contain educated guesses, estimates and projections. In fact, the Cash Flow Statement is the best way to forecast working capital needs.

The Typical Structure of a Cash Flow Statement.

A Cash Flow Statement is may be thought of as a budget that continuingly evolves as time goes by. The main work of structuring a Cash Flow Statement occurs in the first column. It starts with a snapshot of your beginning cash balance. Next, it itemizes the amount of each source of income on a line of its own. The beginning cash balance plus the sum total of all income sources is totaled for your Available Cash Balance.

Next, simply make a grand total of all outgoing cash. Now, after subtracting the Total Cash Outflows from the Available Cash Balance you will arrive at the Ending Cash Balance for the first month. To see how the cash "flows", simply move the Ending Cash Balance to the top of the next months’ column and enter the figure as Beginning Cash Balance. Complete these steps, entering in the appropriate dollar amounts across from each source of income and expense and you will be in a position to monitor your cash flow.

Cash Flow Statements may be depicted in several ways depending on the purpose of its use. A new start-up firm may show just six months or one year projections (showing column headings January through December) and later reduce it to a Quarterly Cash Flow Statement in year two. Lenders and investors like to see a five year Cash Flow Statement. It gives them an indication of a company’s continued viability over time and its ability to pay back a loan or provide a return on investments.

The construction of a Cash Flow Statements forces a business owner to be aware of how future financial events may impact its ability to meet obligations. Below is a Cash Flow Statement showing a six month period:

Annual Reports for Marketers

Annual Reports for Marketers

An Annual Report is a statement prepared by companies that are traded publicly. The development of an Annual Report provides inherent value in the process of reviewing major financial and operational achievements that occurred during the past 12 months.

An Annual Report does not have to be viewed as a staid document full of boring figures. In fact, an astute marketer can mine the basic elements for marketing gold. Just as promotion tactics are devised with marketing segments in mind, in like manner an Annual Report can be tailored to speak to the concerns of its audience.

The contents of Annual Reports may vary by industry, but usually includes the following:

  • A Balance Sheet
  • An Income Statement
  • Company stock pricing trends
  • A Letter to Stockholders
  • An Individual Report from the Chief Executive Officer
  • An Individual Report from the Chief Financial Officer
  • Major Accomplishments during the past year

In the United States, the contents of an Annual Report became more stringent after the passage of the Securities and Exchange Act of 1934. Prior to that act, some companies had been less than forthcoming or in some cases even deceitful in their reports. The financial aspects of an Annual Report are audited by a certified accountant.

The more detailed disclosure was required in order to better inform potential stakeholders such as those outlined below:

  • Current Shareholders
  • Potential Shareholders
  • Current Donors (if applicable)
  • Future Donors (if Applicable)
  • Potential Business Partners
  • Employees
  • Customers
  • Applicable Government Entities

Annual Accounts

Annual Accounts

Although the standard components of a basic annual report such as balance sheet, profit and loss statements and cash flow statements provide key financial information of interest to shareholders and others, there are occasions when more thorough information is desired. Some larger companys have subsidiaries, participate in joint ventures and operate in multiple geographic jurisdictions. The complexity of these operations demands the provision of the level of detail found in what is called Annual Accounts.

Annual accounts information also differs in showing data for multiple years as well as principal exchange rates and changes in accounting policies from year-to-year. Different accounting policies may result in different figures, so a firm must provide an explanation where applicable, so that all groups of shareholders and interested parties may be fairly informed. In many cases Annual Accounts provide notes and disclosures in applicable details such as deferred taxation, interest on borrowings, assets and liabilities reflected.

The composition of Annual Accounts is guided by applicable governmental bodies and legislation such as that found in the International Accounting Standards Board and American Securities Exchange Commission. In addition to substantially more detailed information, firms such as limited liability companys, insurance companies and savings banks, must also provide explanations for all applicable accounting policies utilized.

The following are examples of additional accounts providing information beyond the basic annual report elements:

  • Profit & loss by job
  • Income by customer summary
  • Expenses by vendor detail
  • Income tax detail
  • Audit trail
  • Profit & loss budget vs. actual
  • A/R aging detail
  • Collections report
  • Unbilled costs by job
  • Sales by item detail
  • Sales by customer detai
  • Purchases by item detail
  • Job estimates vs. actuals detail