Overhead accounting error
Image from wikipedia
As I have written in a previous post, when error are discovered in financial statements, these errors should be corrected at the next available opportunity. This can mean re-stating published accounts. What to do is governed by IAS 8 — Accounting Policies, Changes in Accounting Estimates and Errors.
Finding examples of errors in published accounts for example or teaching purposes is not always that easy. In March 2014, Bloomberg reported an error in the financial statements of SolarCity, a large US solar energy company. The company made an error in how overhead costs were allocated between cost of sales and other expenses it seems. While overall profits/costs were not affected, the cost of sales figure increased by about $20m per annum for 2012 and 2013. You can read the full article here.
Doctor Decade – a musical twist on academic life, and for a good cause.
Okay, a first for this blog but it’s a good cause. Doctor Decade is serious and friendly academic whose advise, research and music has inspired me over the last 6/7 years. His music is quite good, and offers a bit of a tongue in cheek view of some academic things. And it’s all for a good cause too. Just subscribe to his YouTube channel and help him get ads there to make money for charity. It only takes a few clicks.
Promotions on price
As a management accountant, when price is dropped we probably want to be sure that we still make a profit- or at least cover cost. An article I found on inc.com gives some very useful hints to ensure that price promotion is effective in the longer term. Your can read is at this link.
How the cloud makes businesses possible
I have written a few posts previously on cloud computing and how it affects costs, software and business models.
I came across a nice article in Forces which details how businesses like Instagram and Snapchat can use the cloud to grow very quickly at minimum cost. Once such businesses grow, they can acquire a large value (e.g. WhatsApp recently), without actually having much in terms of what accountants would associate with value i.e. assets.
You can read the full article here.
Tax deductible expenses – ABBA style
In most tax jurisdictions, a business can deduct expenses which are solely for the business. For example, employee wages are deducted to arrive at taxable profits. But some expenses are not allowable against taxes, for example entertainment.
The words “wholly and exclusively for the purposes of the business” are often used to describe the expenses that are allowable. A recent article in The Guardian has a great example – the costumes worn by ABBA. Apparently Swedish law determined that any stage costumes could not be worn on the street. Can’t image myself in an ABBA costume walking down the street, so I think this would be a whole and exclusive business expense without much doubt.
You can read the full Guardian article here
Non-financial performance measures – example of one difficulty from Deutsche Bahn
According to a report in Der Spiegel, German rail company Deutsche Bahn has had quite an increase in the volume of customer complaints last year (2013). Complaints reached a new record in fact and were 50% higher than previous years.
For a rail company, customer complaints are probably one key non-financial performance measure. Ideally, the complaints should be as low as possible and I am sure a there’s a target in Deutsche Bahn on this measure. Reading the report though, it’s easy to see why using non-financial performance metrics can be tricky. Apparently the increase is down to ow things. First, more complaints arose due to poor weather – something beyond anyone’s control. And second, a new system for customers made it easier to complain. So, a simple year on year comparison of customer complaints would be quite useless. Maybe even setting a target is tricky too, as weather, strikes and many other non-controllable factors could come into play.
Despite such difficulties with non-financial measures, they will always augment monetary measures. While money is typically quite a stable measure , it can’t capture qualitative factors like customer satisfaction.
Operating leverage – seasonal woes at UPS & Fedex
Apparently, logistics firms UPS and Fedex ran into a bit of bother during the pre-Christmas parcel rush – see this article on Forbes by Steve Banker.
The problem may be one of bad planning. Simply put, Steve Banker suggests both firms did not have enough capacity in terms of aircraft or parcel sorting at their highly automated distribution centres. While Banker talks about strategic planning, when I read his article I immediately thought about operating leverage – which would of course be part of the strategic planning.
Operating leverage can be simply defined as the percentage of fixed costs compared to total costs. If UPS or Fedex wants to add capacity, by either leasing aircraft or adding more automation, this will increase fixed costs and operating leverage worsens as these fixed costs affect profits. Alternatively, firms like UPS or Fedex could instead hire more temporary staff, which represents a variable cost. No doubt they do this, but from my limited knowledge it would seem Amazon have this well organised. Increasing variable costs does not affect operating leverage, and is thus preferable in the longer term.
Of course it may be that firms like UPS and Fedex actually need to increase capacity and thus fixed costs. But as Banker points out in the Forbes article, investing to cover short term seasonal capacity issues implies over or idle capacity at other times.
Taxing bitcoin
You may have heard of bitcoin, the online “currency” causing quite a stir in recent times. Unlike many other online payment systems, bitcoin is outside the normal banking and currency systems – see more here about its history etc.
Being outside the normal banking and currency systems means the value of a bitcoin is difficult to determine. And, without going into too much detail here, speculators have caused the value of bitcoin to rise.
So now for the tax bit. An article from the Wall Street Journal last December noted some difficulties the IRS (and other tax authorities I’m sure) are facing. First, is a holding of bitcoin an asset which might be subject to capital gains taxes? It may be, but the first thing one needs to value an asset is a value ideally based on a market or cost basis. This might be tricky with bitcoin, given that it is not a real currency and the market is unregulated. Second, could gains or losses be treated as income? This is probably workable, as a gain or loss could be recorded on sale of bitcoins. But normally, marginal income taxes are higher than capital taxes. This would be fine for the tax authority I am sure, but holders of bitcoins might argue for the asset option – and so might their tax advisors. Only time will tell which option will be used.
A management accounting system – in a police car!
More and more, technology is used to help many of us do our job. I read an article a few months in the Wall Street Journal about how increasing integration of technology in NYPD police cars is helping officers fight crime. Of course, in-car systems are not confined to NYPD, and many European police forces use technology in patrol cars.
The article mentions a smart car, which is being trialed in one NYPD precinct. The car is equipped with number plate recognition, video cameras and even radiation detectors. All data collected is transmitted back to a central location, where it can be analysed at a high level if needed. The technology also allows officers make decisions while on patrol – for example, ignore a car with an outstanding parking ticket, but stop if if stolen.
So, where is the management accounting system is this police car? Ok, this is a trial, but it is likely to reflect what an actual patrol car will do in the near future. I define management accounting as the provision of information to make decisions. Using this simple definition, there are two ways we could describe the smart patrol car as part of a management accounting system 1) it provides officers with information to make decisions on the spot and 2) the information gathered may also be used to inform higher-level policy and strategic decisions.
The AK 47 – a good example of production and cost standards
(Photo from Kalashnikov Muesum)
On December 23 last, Mikhail Kalashnikov the designer of the infamous AK 47 machine rifle died. I had some thoughts about the AK 47 which led me to write this post. But before I convey my thoughts, let me say that I am not trying to glorify one of the world’s most lethal assault weapons, nor do I condone violence.
As a child who grew up in Ireland, I knew at a young age what a Kalashnikov was. In the 1980’s it was the favoured weapon of the IRA and I had seen images of it on TV news reports. I also remember the news reports saying it was favoured for its simplicity and ease of repair.
So, when Kalashnikov died last year, I started thinking about how the AK 47 was made. It has been made (with a few variants, such as the lower cost AKM) since 1947, and is still in production. It has a simple gas mechanism, few parts and lots of space between the parts.
The manufacture is thus relatively simple, and as it seems to have not changed much since the 1940’s, this may be one of the best examples I could think of in terms of standards as used in standard costing. With 70 years of production history, I would guess that there are standard times for assembly of the various components of the AK 47. And, production planning based on such a long experience of making pretty much the same thing is likely to be quiet simple. Simple design, standard times and good planning of course contribute to lower cost – and my reading around on the AK 47 has revealed that keeping costs down was one design goal. So, I guess it comes as no surprise with its efficient design and production, that the AK 47 is cited as a weapon responsible for more deaths than any other. Not the main point if this article of course, but I hope you get the link to standard costing techniques.
Here’s a good related article from The Economist.
Artificial intelligence in Accounting
In the latter part of 2013, I noticed several new developments in cloud accounting software. I suppose one of the key advantages of cloud accounting software is that it allows the software provider to concentrate on what they do well, while at the same time allow other software providers to integrate with their products. And, some of these products include some level of artificial intelligence.
To give an example of a non-cloud product first, Irish firm OCRex use optical character recognition to help accounting practices do bank reconciliations when smaller clients don’t do this – see http://www.ocrex.com/home. This software reads scanned bank statements and reconciles opening and closing closing balances, and leaving the accountant with the job of checking for missing items only. Thus, this product is intelligent in that it matches items on the bank statement using amounts and other information like to a reference.
Now let’s take this idea to the cloud. Several accounting software products can now scan emails., faxes and scanned documents to determine not only the amount of a business transaction, but also determine what kind of transaction it is. For example, xero software offers an add-on which reads transactions and posts automatically to the correct expense account. From my understanding of the xero add-on, it also learns as it goes, learning what supplier is posted to which expenses account etc. This certainly has a lot of potential for small businesses, reducing processing time and storing documents in the cloud.
What is the margin on the Apple iPhone 5S and 5C?
This is a question I often asked, well about all iPhone models since my iPhone 3. Below is a link to a post by Wendy Tietz which includes good estimates. It is set out like a student exercise too, so give it a go if you have the time. Seems Apple make quite a margin, and it seem the mobile operators subsidise quite a bit too.
Non-finance experience essential for finance leaders
A short article in CIMA’s Insight e-zine caught my attention recently. I have written posts before on the non-accounting skills accountants need – such as good communication skills and technology skills.
This CIMA article also notes the importance of skills and experience in other areas for finance staff/management accountants who want to climb the career ladder to become finance leaders or directors. 69% of finance directors surveyed by a recruitment firm reported the need to learn and understand the business operations. I could not agree more. My own experience as a management accountant really did not blossom until I learned the basics of how production planning in the factory where I worked. With this to hand, it was much easier to make the link between what happened on the floor and how money was made or lost.
The article also notes that students should apply theoretical knowledge as soon as possible. Again, I could not agree more. Setting up a standard costing system in the same factory as above really helped me understand what I learned, but also appreciate that textbooks do not teach you everything. For example, it was easy to set machine running standards as the machine suppliers had a wealth of experience and could easily tell you how many units an hour could be produced under varying conditions.
The full articles is worth a read – see here Non-finance experience essential for budding finance leaders.
Should you put your small business accounts in the cloud? | Guardian Small Business Network | Guardian Professional
A good friend and colleague, Dr Gerhard Kristandl is mentioned in this article from The Guardian.
(Image from The Guardian)
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