Who Calculates Your Machine Cost or Labor Burden?

 Who Calculates Your Machine Cost or Labor Burden?

Do you hate doing office work like accounting and bookkeeping as much as I do?

Many clients have said to me “My Accountant calculates my machine cost.” (or labor burden). Most smaller and medium sized businesses (with less than 500 employees) have either in-house or outside accountants. They do an important job.

Many owners and managers in all sizes of organizations do not realize the huge variance between different types of accountants and the specific skill sets that they bring to your business. Due to the different perspectives and rules that each type of accountant bring to the table, they will have a major impact on your business and the quality of decisions you make. It is important for you to understand the differences.

A Financial Accountant who prepares your company’s tax returns, Income Statement and Balance Sheet will likely report projections and results in a much different manner than a Management Accountant. Accounting viewpoints can be as different as day and night.

A Financial Accountant may say your cost of an employee is $xx,xxx.xx per year, or a machine costs $xxx.xx per hour. This is a historical view as recorded in your accounting system. A Management Accountant may say "Wait a minute. Here is your REAL cost." You will need to know why these two accountants are coming up with very different results. This difference may easily be twice as much or more!

You will be surprised to learn that many real costs are not recorded, even in very good accounting systems! For example; Non-productive time or costs like wear and tear. Many costs may be hidden or mixed into other accounts which are not added into “payroll or machine costs”. Also in many cases, the past is NOT a good predictor of the future.

Wikipedia says “Management Accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.”

In contrast to financial accounting information, management accounting information is designed for internal use by managers of the organization Compare this view to information which is intended for use by shareholders, creditors, public regulators or taxing authorities. Management accounting calculations are usually confidential and not publicly reported. Their information is forward-looking, instead of historical. Management Accounting calculations are computed with management decision-making needs in mind, and are often based on management information systems, rather than being ruled by generally accepted accounting principles (GAAP) to which all public accountants are required to follow.

Just because you have a small or medium-sized business, it doesn’t mean you can’t afford a Management Accountant. Many Management Accountants work with small businesses at reasonable prices.

There are at least 46 types of certifications for accountants. For this article, let’s discuss just six types of accounting which may be of special interest to you:

Audit Accounting: Audit services are at the core of public accounting (CPA) work. CPA’s certify to third parties that the reports they are viewing are reasonable representations of a company’s financial position, and that the statements comply with generally accepted accounting principles (also known as GAAP a complex set of accounting principles and rules that CPAs must adhere to). Auditing work involves checking transactions, account balances, internal accounting control systems, and financial statements for businesses, public, and not-for-profit organizations. It enables new accountants to understand how financial transactions are supposed to be recorded and reported to third parties, and how businesses make money. An auditing career provides a solid foundation for future work in more specialized accounting arenas (e.g., tax, financial, investment, analytical, or management accounting).

Tax Accounting: Tax accountants (many, but not all, are CPAs) prepare corporate and personal income tax statements. They may also assist with strategies for minimizing and deferring taxes, and provide advice on when to expense items, how to approach a merger or acquisition, etc. They need to have a thorough understanding of economics and keep current with the ever-changing tax code. Because taxes are based on laws, many firms also require staff members to acquire additional legal training.

Financial Accounting: Financial accountants draw information from the general ledgers to prepare internal and external financial statements and management discussions and disclosures. They also take part in the business’s important financial decisions involving mergers and acquisitions, employee benefits planning and long-term financial projections. This work can vary from week to week, so it needs a combined understanding of accounting and finance.

Management Accounting: Management accountants work in companies and contribute to decisions about capital budgeting and business analysis. Major activities include time and cost analysis and projections, contracts analysis, and participation in efforts to control expenses. Management accountants are now major contributors to business decisions, working alongside marketing and financial managers to develop new, profitable business. They are not constrained by GAAP, and so may be able to provide information that’s more meaningful for day-to-day decisions

Budget Analysis Accounting: A budget analyst develops and manages financial plans in a business. This position requires strong quantitative skills as well as good people skills especially if they are involved in negotiations.

Bookkeeping: Is the recording of day-to-day financial transactions (e.g., sales, purchases, income, and payments). Bookkeeping should be performed by someone with strong organizational skills who enjoys a sense of order and control. To obtain the most value from bookkeeping staff, they should be trained by and/or report to someone with a strong accounting background. I.e. bookkeeping is generally considered to be a high-level clerical function and should not be confused with true accounting, which requires extended study and experience.

In conclusion:

There are a number of different ways that you and your accountants can analyze your numbers. So it’s good to ask yourself:

1. Which type of accountant is providing you with information and advice and what is their perspective?
2. Do you fully understand how they have arrived at their numbers, and why they took a particular approach? (i.e. Historic records vs. CAT cost method)
3. Does their approach make sense given the particular decisions that you need to make?

If you want to speak with a management accountant about possibly helping you, contact me, I may be able to refer you to someone.