Human resource accounting

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 16:21:00 PDT 2018

Human resource accounting involves the tracking of all costs related to employees in a separate report. These costs may include the following:

• Employee compensation
• Employee payroll taxes
• Employee benefits
• Employee training

Such an accounting system can be used to determine where human resources costs are especially heavy or light in an organization. This information can be used to redirect employees toward those activities to which they can bring the most value. Conversely, the report can be used to identify those areas in which employee costs are too high, which may lead to a reduction in force or a reallocation of staff away from those areas.

A more comprehensive human resource accounting system goes beyond the simple tracking of employee-related costs, and addresses the following two additional areas:

• Budgeting. An organization's annual budget includes a component, in which is concentrated all employee costs being incurred from across the organization. By concentrating cost information by its nature, management can more clearly see the total impact of human resource costs on the entity.
• Employee valuation. Rather than looking at employees as costs, the system is redirected toward viewing them as assets. This can involve the assignment of values to employees based on their experience, education, innovativeness, leadership, and so forth. This can be a difficult area in which to achieve a verifiable level of quantification, and so may have limited value from a management perspective.

From an accounting perspective, the expense-based view of human resources is quite easy - employee costs from the various departments are simply aggregated into a report. The employee valuation approach is not a tenable concept for the accountant, since this is an internally-generated intangible asset, and so cannot be recorded in the accounting system.

Related Courses

Human Resources Guidebook 
Payroll Management 

Turnover ratios

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 15:24:00 PDT 2018

A turnover ratio represents the amount of assets or liabilities that a company replaces in relation to its sales. The concept is useful for determining the efficiency with which a business utilizes its assets. In most cases, a high asset turnover ratio is considered good, since it implies that receivables are collected quickly, fixed assets are heavily utilized, and little excess inventory is kept on hand. This implies a minimal need for invested funds, and therefore a high return on investment.

Conversely, a low liability turnover ratio (usually in relation to accounts payable) is considered good, since it implies that a company is taking the longest possible amount of time in which to pay its suppliers, and so has use of its cash for a longer period of time.

Examples of turnover ratios are:

• Accounts receivable turnover ratio. Measures the time it takes to collect an average amount of accounts receivable. It can be impacted by the corporate credit policy, payment terms, the accuracy of billings, the activity level of the collections staff, the promptness of deduction processing, and a multitude of other factors.
• Inventory turnover ratio. Measures the amount of inventory that must be maintained to support a given amount of sales. It can be impacted by the type of production process flow system used, the presence of obsolete inventory, management's policy for filling orders, inventory record accuracy, the use of manufacturing outsourcing, and so on.
• Fixed asset turnover ratio. Measures the fixed asset investment needed to maintain a given amount of sales. It can be impacted by the use of throughput analysis, manufacturing outsourcing, capacity management, and other factors.
• Accounts payable turnover ratio. Measures the time period over which a company is allowed to hold trade payables before being obligated to pay suppliers. It is primarily impacted by the terms negotiated with suppliers and the presence of early payment discounts.

The turnover ratio concept is also used in relation to investment funds. In this context, it refers to the proportion of investment holdings that have been replaced in a given year. A low turnover ratio implies that the fund manager is not incurring many brokerage transaction fees to sell off and/or purchase securities. The turnover level for a fund is typically based on the investment strategy of the fund manager, so a buy-and-hold manager will experience a low turnover ratio, while a manager with a more active strategy will be more likely to experience a high turnover ratio and must generate greater returns in order to offset the increased transaction fees.

Related Courses

Business Ratios Guidebook 
The Interpretation of Financial Statements 

Understanding the Invoice Process and its Challenges

by Brian Edgmon @ ACOM Solutions Inc.

Thu Feb 08 10:07:58 PST 2018

Receiving an invoice is the first step in the AP department payment process, but many people do not understand all the steps necessary in receiving, verifying, and tracking those invoices. It can be a complicated process and involves many steps that are crucial in maintaining accurate financial records. Manual invoice processes can present challenges to […]

The post Understanding the Invoice Process and its Challenges appeared first on ACOM Solutions Inc..

Payroll records

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 12:00:00 PDT 2018

Payroll records contain information about the compensation paid to employees and any deductions from their pay. These records are needed by the payroll staff to calculate gross pay and net pay for employees. Payroll records typically include information about the following items:

• Bereavement pay
• Bonuses
• Commissions
• Deductions for pensions, benefits, charitable contributions, stock purchase plans, and so forth
• Direct deposit information
• Gross wages
• Hours worked
• Manual check payments
• Net wages paid
• Salary rates
• Vacation and/or sick pay

The information in payroll records have traditionally been stored on paper documents, but can also be recorded as electronic documents.

Payroll records can be considered a subset of the information stored in human resources records, which can contain considerably more information than items pertaining to just employee pay and deductions.

The time period over which payroll records must be retained will depend upon government requirements. The Internal Revenue Service typically states a required retention period in each document it issues dealing with payroll issues. In general, wage calculations should be retained for two years, while collective bargaining agreements should be retained for three years.

Related Courses

Payroll Management 

Financial model

by Steven Bragg @ Articles - AccountingTools

Wed Mar 28 16:52:00 PDT 2018

A financial model is a mathematical representation of the key variables impacting an organization, which is used to make estimates of how future scenarios will impact the performance and financial position of the business. This model is usually constructed on an electronic spreadsheet, using summary-level revenues and expenses, and employing formulas that change the results of the model when certain variables are altered. For example, variables could be used to model the impact of an increase in energy prices, a decline in product prices, a product recall, a change in the rate of sales growth, or a successful employee strike that results in increased compensation and benefit costs.

A financial model is useful for estimating the effects of a number of scenarios within a short period of time, though its effectiveness depends on how well the model mimics the business. An analyst can use a financial model for a number of purposes, such as:

• Acquisitions. To determine the range of possible outcomes that an acquirer can expect with an acquiree, depending on the actions it takes after the deal has been closed.
• Budgeting. To develop several scenarios as part of the budgeting process, to decide which scenarios to pursue when a detailed budget is constructed.
• Capital budgeting. To determine a range of outcomes that might impact the cash flow return related to a prospective fixed asset purchase.
• Risk analysis. To determine which variables can have the greatest negative effect on a firm, as part of a formal risk analysis.

There are two potential problems with financial models. One is that a model may not properly account for the variables that will impact the model's projected future results. The other problem is that a more complex model is at risk of having calculation errors built into it, which can be difficult to detect.

Related Courses

Budgeting 
Capital Budgeting 

Throughput definition

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 15:19:00 PDT 2018

Throughput is the number of units that pass through a process during a period of time. This general definition can be refined into the following two variations, which are:

• Operational perspective. Throughput is the number of units that can be produced by a production process within a certain period of time. For example, if 800 units can be produced during an eight-hour shift, then the production process generates throughput of 100 units per hour.
• Financial perspective. Throughput is the revenues generated by a production process, minus all completely variable expenses incurred by that process. In most cases, the only completely variable expenses are direct materials and sales commissions. Given the small number of expenses, throughput tends to be quite high, except for those situations in which prices are set only slightly higher than variable expenses.

For operations, throughput can be increased by enhancing the productivity of the bottleneck operation that is constraining production. For example, an additional machine can be purchased, or overtime can be authorized in order to run a machine for an extra shift. The key point is to focus attention on the productivity of the bottleneck operation. If other operations are improved, the overall throughput of the system will not increase, since the bottleneck operation has not been enhanced. This means that the key focus of investment in the production area should be on the bottleneck, not other operations.

For financial analysis, throughput can be increased by altering the mix of products being produced, to increase the priority on those products that have the highest throughput per minute of time required at the constrained resource. If a product has a smaller amount of throughput per minute, it can instead be routed to a third party for processing, rather than interfering with the bottleneck operation. As long as some positive throughput is gained by outsourcing, the result is an increased overall level of the throughput for the company as a whole.

Related Courses

Constraint Management 

Competitive advantage

by Steven Bragg @ Articles - AccountingTools

Tue Mar 27 14:27:00 PDT 2018

Competitive advantage is the ability of an organization to gain a material edge over its competitors. Having such an advantage can result in above-average profits or high levels of customer loyalty. There are many types of competitive advantage that a business can take advantage of, such as the following:

• Having a supply of unusually inexpensive raw materials
• Having access to a low-cost labor force
• Owning a patent that is key to a product category
• Having a large field servicing operation that can maintain products on short notice
• Having a large chain of retail stores through which goods can be sold
• Having a highly-regarded Internet store that experiences a large number of return visits
• Having a design team that routinely produces leading-edge designs
• Having a short product development cycle that pushes new products into the marketplace faster than what competitors can achieve

An example of how a core competency is used is to leverage a strong field service operation by noting the company's 24-hour response time when pitching a prospective sale to a customer. Another example is being able to offer a commodity product to a customer at an unusually low price, since the seller's workforce is located overseas, where labor costs are reduced by more than half.

Competitive advantage can be taken away by a determined competitor in one of two ways:

• Match and then exceed the advantage offered by the company; or
• Undermine the company's position by developing an entirely new competitive advantage that is highly prized by customers.

It is essential to maintain a competitive advantage, in order to sustain long-term profitability. This means that management must be aware of the advantage and continually reinforce it with ongoing investments in the targeted area.

A competitive advantage can even be achieved by unethical means, such as by offering bribes to the purchasing manager of a customer. Since other sellers are presumably not willing to engage in unethical behavior, the use of bribes can be seen as a competitive advantage.