August 2016 Blog Posts

  • Strategic Business Planning in Cleveland

    August 29, 2016

    strategic business planning

    Encouraging Effective Management Accounting


    Most discussions about managerial costing turn into comparisons of different costing methods & approaches. Previous costing solutions historically skipped the fundamental work for assessing their effectiveness against a set of concepts. Actually, it isn’t uncommon for the results from competing methods to point to contradictory decision alternatives. In the past experts have gone back and forth trying to push their preferred method without a principled basis to ground their approaches. This can be dangerous for achieving accuracy to support decision making.

    A good example is the use of simple activity-based costing. This method fails to consider the nature of costs. ABC lacks capacity information as well. The confusion is based on whether capacity resides in resources, activities, or both. Activities don’t have capacity of their own, activities merely consume resources.

    The profession must embrace a managerial costing principles based approach to cost modeling. This, of course, doesn’t mean that we are promoting a one size fits all approach to cost modeling or that every organization should perform cost modeling in the same manner. What it does mean is that managerial costing professionals can now assess how closely aligned their cost models are to the principles outlined in the Framework. If we collectively embrace these principles of managerial costing, then ultimately we must believe that principles are good for the profession and should be integrated into our practices.

    If we agree that establishing principles will encourage the revitalization of our industry, then we must dive deeper into understanding the principles themselves.

    Causality is the basis for all inferences in the scientific method. It is appropriate and essential, to apply causality to managerial costing, and as a principle it is the basis for discerning truth in cost modeling and its decision support information.

    This isn’t to say that management accounting is a science, but decision science, which managers apply in their optimization efforts, is dependent on cause-and-effect insights. The Framework defines the principle of analogy as “the use of causal insights to infer past or future causes or effects.” Thus analogy “applies when insights are used and inferences are made about known cause and effect relationships.”

    Given that these principles are self-evident, cost models that are consistent with causality and analogy would naturally provide information that aids managers’ decision making needs. Most current methods don’t consistently follow causality. As a result, they don’t produce efficient & reliable cost modeling solutions nor the clear, causal insights that decision makers need to perform their most important work.

    As an example, the CPA exam still teaches students to allocate all overhead costs from manufacturing support into one main manufacturing cost pool. This means that fixed overhead can no longer be analyzed in a meaningful way. Fixed and variable costs aren’t separated. These issues plague management accounting. These problems are even worse when we consider that textbooks defer to GAAP principles rather than principles needed for internal decision support when teaching traditional standard costing. They teach some adjustments from GAAP for management analysis but don’t teach any principles for internal decision support.

    The 2012 survey indicated that the availability of investment funding in relevant cost modeling technology wasn’t a significant financial constraint for most companies, but companies were reluctant to invest in new cost modeling methods. We believe these survey results may reflect increasing levels of regulation that have created commensurate amounts of uncertainty, effectively stalling investment.

    This may indicate a lack of proposals to justify improving cost information or the possibility that accounting and finance professionals lack the knowledge to provide an effective cost information solution. One approach already exists: resource consumption accounting, that has the ability to encourage the healthy promotion of management accounting’s role. This principles-based managerial costing approach completely conforms to the Framework but is now sparsely employed in practice. The 2012 survey reveals the gap between managerial costing’s problems and the practices needed to effectively achieve improved results.

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  • 3 Tips for Financial Planning in Your 40's

    August 15, 2016

    Finacial Planning in Your 40s

    If you're in your 40s, you are at a time in your life when you should be doing financial planning for your future and your family's future. Many people in their 40s say they need to be saving for college tuition for their kids, putting money into a retirement account and at the same time buying a house or saving for a down payment. Financial planning experts can help you see where your savings should be going. Not having a financial plan is worse than having a bad plan! These financial planning tips are meant to help people in their 40's find balance in their lives with spending and debt.

    The Tips

    Establish an Emergency Fun

    You should have three to six months of income in an account that's safe and liquid. You should also have in that account savings for planned expenses. For instance, if you know you will go on vacation next year, you should be setting aside money for that in your savings account. There's no right or wrong answer about how much cash to have on hand, but you need to be prepared in case your engine goes out or you lose your job.

    Eliminate Credit Card Debt, Student Loans and Medical Bills

    If you have credit card debt, you need to pay that down as quickly as you can. If you have student loan debt, then you should first look to see if it's tax-deductible based on your tax bracket. If not, then you should pay that off as soon as possible. In addition to financial planning, you should check the interest rates on your credit cards & student loans to see if you can get lower rates. If you have a lot of debt, you should be using all available funds to pay it off. If you have a little bit of debt you should use one-third to pay down that debt, and then use the rest for retirement savings.

    Max Your Employers 401K Match

    In your 40s, you should at least be saving as much in your 401(k) as your employer matches. Even if you weren't making any profit on that investment, your money doubles just because of the employer match. Every employer has a different retirement plan, you should find out how much you can contribute, and maximize your contributions up to that limit. People in their 40s can contribute up to $18,000 in a tax-deferred 401(k) in 2015.

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