Cost Accounting Software

Posts Tagged ‘Costs’

Attention Nonprofits! The cost of fundraising is becoming even more of a critical issue as donors increasingly factor it in their giving decisions. Here are 32 ways for your nonprofit to lower fundraising costs and conduct a high-impact campaign.
How to Lower Fundraising Costs

Using software for business applications both on and offline is common place today.  However, when starting any new business minimizing costs is usually a top priority and some software programs can be expensive. Depending upon the nature of the business there may be payroll, licensing, advertising, product development, and inventory just to name a few. Many of these expenses can’t be avoided thereby leaving the aspiring entrepreneur ‘strapped for cash’. As a result some of the necessary and sometimes costly business software that is needed may have to be placed on a future ‘wish list’ until the funds are available.

Such is the nature of a small startup business left ‘skimping’ along without all the necessary tools needed. The tradeoff is reflected in a lack of operating efficiency and a show of professionalism. These two points are critical in any new business venture.

Alas the advent of freeware! Dating back to the inception of the computer (right after Neanderthal man) these machines were enormous in size and miniscule in out put. Many independent minded engineers of the era were then more motivated by seeing how much these ‘machines’ could do and less impressed with the sheer size. This enthusiasm caught hold across the country and thus the development of incremental improvements on multiple levels, from multiple independent thinking minds and on a national level being shared! WOW, the best of the best.

Thus the beginning of the ‘freeware’ revolution fueled by computer enthusiast who felt they’re getting ripped off by the companies who manufacture the ‘pay for’ versions of many software programs. We’re now looking at a global pool of programming talent whose intellectual pool is far greater and more diverse than those of most manufacturers. As a result, the quality and capability of many open source products made available to anyone who may want to use it, is often times superior to the paid versions on the market today. In addition, the ability for each user to further customize these programs for their particular needs makes freeware even all the more attractive.

A brief rundown of some of the business software that is needed and their freeware counterparts would include ‘Open Office’ that mimics Microsoft’s own Office program, ‘Free Accounting Software’ and of course the ‘Firefox’ web browser and ‘Thunderbird’ email made available at the ‘Mozilla’ website for any and all to use.

When considering any software for business applications, doesn’t it make sense to compare the effectiveness of any available freeware first? With continuous updates and improvements, and all at no cost, it’s hard to believe that anyone would even consider a product they’d have to pay for when there is a freeware substitute available.

Sunk costs are usually defined as previously incurred costs that are not recoverable and should not be taken into account in decision making. Here is a slightly modified example of a sunk cost from Jerold Zimmerman’s “Accounting for Decision Making and Control” (Irwin McGraw-Hill):

Example. Abadabba Berman, the comptroller of the Schultz Cement Shoe Company, has contracted with Microstiff to design a proprietary accounting software package for the company at a cost of $15,000. After months of dealing with countless glitches and bugs the system just barely works. Finally one of the frustrated bookkeepers points out to Abadabba that for only $2,000 they could purchase an off the shelf package from Quickcrooks that would generate all the reports that the more expensive system provides with a fraction of the aggravations and crashes. Abadabba cannot bring himself to invest the additional $2,000 in the replacement system even though the company will easily save that much and more in the improved productivity of the accounting department. Abaddaba reasons that they have too much invested in the old accounting system to simply abandon it.

Abaddaba should consider the past investment in the expensive Microstiff software a sunk cost. He should ignore the past investment in deciding whether to abandon the software and replace it with the Quickcrooks package. According to cost accounting theory the only relevant costs to consider are the future costs associated with each option. If retaining the Microstiff software is more expensive going forward than buying the Quickcrooks package then the Microstiff software should be abandoned. The previous heavy investment in Microstiff should not be a consideration in making his decision.

Loss Aversion: Why Abaddaba Won’t Let Go of Microstiff

According to cost accounting theory Abaddaba’s choice to hold on to Microstiff is irrational. The best choice for the company is to abandon the software, not keep it. Now of course, the irrational choice for the company may be a very rational choice for Abaddaba personally. Why? Because the boss of the company, Dutch Schultz, has a notoriously bad temper and Abaddaba does not want to face Dutch’s wrath when he tells him that he made a $15,000 mistake going with Microstiff. So from Abaddaba’s perspective it is rational to cover his rear and stick with the bad software.

But this is not really the full story because even if Abaddaba was the owner of the firm the odds are that he would still make the irrational choice to stick with the crummy software. Why? Because he, like all of us, tends to be very reluctant to accept losses. Abaddaba’s failure to treat the prior investment as irrelevant is a species of a very common behavioral trait known as loss avoidance.

Varieties of Loss Aversion

For most people losses loom larger than gains. The pain we feel from a loss generally outweighs the pleasure we feel from a comparable gain. This is what the social scientists term loss aversion. Variations of loss aversions are common place in business and investing. For example, investors are, as a rule, much quicker to realize gains than losses. This is the reason why automatic stop loss orders are implemented when buying stock. An automatic stop loss triggers a sale when a stock investment’s price drops to a certain point. It is automatic and commonly used because it is the all too human trait of loss aversion that often keeps people from cutting their losses. The tendency is for people to hold on to losers in the hopes that the loss will reverse.

Real World Decisions

In the above example all the consequences of the different courses of action were specified. I told you what the dollar consequences of keeping the old software versus buying new software would be. Rarely in real world situations do we have precise dollar estimates for the results of different courses of action. The tendency to stick with losers, and thus not cut our losses, can be reinforced by the ambiguity surrounding real world decisions. If you are in a position of being emotionally invested in a bad decision, the tendency will be for you to filter out and skew data that would support abandoning the course of action you are invested in.

Practical Advice on Dealing with Sunk Costs and Loss Aversion

First recognize that there is no way to detach yourself emotionally from the consequences of important decisions that you have made. Recognizing that you have made a poor important decision is always going to be painful. What you can do is recognize that you have an emotional investment in your decisions and seek the advice of individuals who are not so emotionally invested. These individuals are less likely to filter out information that might call for abandoning a bad investment.

So who can you consult with about important decisions? If you are a small business owner it is important to have an outside advisor. Outside accountants, Small Business Extension Center staff, or volunteers from S.C.O.R.E are all good possibilities that will not break your budget. Trade or business associations often have staff available for advice on business operations. Also do not overlook the web as a possible resource of good advice. Almost every type of industry or business has forums where similarly situated owners can offer each other advice.

For larger businesses, independent boards of directors can fulfill the role of detached advisors as well as outside consulting specialists. Also remember loss aversion and the unwillingness to abandon sunk costs can exhibit itself in groups as well as individuals.

Finally, do not forget that even the smartest people make mistakes and often very big ones. Ignoring non-recoverable costs requires admitting that we have made bad decisions. Never an easy thing to do. But the ability to admit mistakes, abandon sunk costs and move on is vital to success in any enterprise.

As a manager in business the single most important information is that of costs. Many managers and small business owners consider cost accounting a nice thing to have, but not critical to the operation of the business.

An old adage comes to mind; “If you make sure all of the pennies are in the right place, the dollars will take care of themselves.” A truer statement could not be made.

Many people will look only to the bottom line, they will see fluctuations both routine and otherwise and may have a general idea why these happen, but do not really have a good understanding of why they exist and why they exist to the magnitude that they do.

These questions can be answered with the implementation of a comprehensive cost accounting system. In addition to this it can also expose inefficiencies and uncover highly efficient processes that can be exploited for future profit. These systems can also be the basis of productivity and performance measures and also provide a framework for a very successful and accurate scheduling system.

Many managers do not “believe”, the result provided by their cost accounting/job costing systems. Business owners have asked why the job cost reports show profitable jobs do but the company does not make money at the end of the month?

This is a valid question; the answer is that many costing systems fail to allocate direct and indirect overhead to the production function. This fails to take into account a huge cost of the business. Every line item on the corporate P&L should be allocated to each job or product line, this allows management to see how much Net Income each job or product line is responsible for on a monthly basis.

The final part of the system is a summarized P&L by job or product line on a monthly basis, the summary should match the net income of the company. This provides credibility to the accuracy of the costing system and provides excellent data to evaluate how and why the enterprise is making, or losing money.

One of the single most important factors that many cost accountants fail to take into account is that the data collection methods must be kept very simple. Many people design complex systems that are designed to collect very complex and detailed data. These systems often fail because it takes too much time and effort to collect the data. The key is collect basic data and then relate that to the production process.

Having current and accurate costing data is very beneficial to the operation of a business, it allows management to isolate problems and strengths, undertake sound pricing strategies, and is an excellent tool to evaluate performance of both managers and employees. This is not some needed only by “big companies”, every company should have a comprehensive cost accounting system in place.

With the buzz over the recent presidential election and the current financial crisis looming over the heads of Americans and American Corporations, the US transition to International Financial Reporting Standards (IFRS) seems to be placed on the back burner for the time being.  The old proverb “accounting is always changing” will hold true once again, as the United States and the rest of the world prepare for the seemingly substantial transition.  What some corporations may not realize is there may be another financial hurdle staring them in the face from a distance.

                        Many questions are still left unanswered as to exactly how IFRS will affect the US.  However, one thing can be held certain when implementing new accounting standards: costs. Accounting firms are beginning to predict overwhelming internal costs in the areas of employee training, IT conversions, and general ledger software.  As of November 17th, 2008, the SEC has reported that the average U.S corporation will spend nearly $32 million in IFRS adoption costs.     

            Rest assured, prior to convergence, is preparation and training for the transition into new IFRS principles.  Fortunately, some training efforts have already begun by the “Big Four” looking not only to train their employees, but also their clients.  “What’s underestimated is the educational effort it will require in the heartland, the bread basket of the U.S., including banks and other customers. It will certainly impact them all,” says Bob Dohrer, partner and practice leader of McGladrey & Pullen’s International Assurance Services Group.  Companies will also face important trade-offs with training issues due to the increased indirect costs of employees training during regular working hours.  If all goes as planned, the “Big Four” will be responsible for a substantial portion of the IFRS training of other US accounting firms and companies.  However, plan to expect training efforts from third party companies looking to cash in on the transition.  UK companies recorded an average of £625,000 for IFRS convergence training in 2005.  “From 20 to 25 percent of finance staff will need the in-depth, full-immersion courses.  I’d figure the cost in the neighborhood of $1,000 per day, per participant,” says Doher.

            Another escalading cost of IFRS convergence is that of IT conversions.  Along with new principles in costing, revenues, and expenses, comes the burdensome cost of updating companies IT software to comply.    A recent publication by KPMG states that tax payers and U.S. accounting firms will see increasing costs in tax software, due to the new book methods of IFRS. The author predicts that a fair amount of errors will take place in tax departments because of the implementation of new standards, software, and possible lack of proper training.

            Along with IT costs, come the costs of new general ledger software to comply with IFRS.  Most software companies are taking a somewhat dual approach to the conversion until they can fully develop software based on IFRS.  Several software companies such as SAP, Oracle, and Coda, have stated that they are taking a trial and error approach to IFRS compliance.  So far, most software companies are creating general ledger software that can comply with both GAAP and IFRS principles, until they can further evaluate their software based on how U.S corporations take to IFRS.  For the time being, software companies are mainly changing U.S. company’s general ledger software through an update process, which has proven to be much more cost friendly toward U.S. corporations.  Software companies have stated that as time goes on and IFRS software continues to develop, U.S companies will most definitely see cost increases in the price of software due to IFRS compliance.  However, many software companies plan to cut out some costs for U.S companies by providing software training directly to the consumers.  This plan will help eliminate extra training costs from third party training companies, which are sure to be very costly.

            As the transition to IFRS continues to draw closer and closer, US companies can be sure to expect higher internal costs in upcoming years.  IFRS implementations and principles may be vague for the time being, but US companies must certainly begin to prepare for the seemingly costly transition, which is sure to include higher costs in the areas of training and software compliance. 

Sources:

http://www.accountancyage.com/accountancyage/news/2034318/bill-mounts-cost-ifrs

http://www.coda.com/Art?AID=1663

http://www.cfo.com/article.cfm/12625195?f=home_featured

http://www.washingtonpost.com/wp-dyn/content/article/2008/11/18/AR2008111804087.html

http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2008/CPA/Oct/Conversion.jsp

http://www.taxgovernanceinstitute.com/documents/TGI/414200894736IFRS%20Tax%20Methods%20T.pdf

How much does it cost for a subscription per month for DDO? Also am I correct in saying its 15$ for the initial software and account with a month free?

Joe quits his computer-programming job, where he was earning a salary of $50,000 per year to start his own computer software business in a building that he owns and was previously renting out for $24,000 per year. In his first year of business he has the following expenses: salary paid to himself $40,000, rent, $0, and other expenses $25,000. Find the accounting cost and the economic cost associated with Joe’s computer software business.

Can you please check my answer:

The accounting cost of opening his own business is the cost of Joe’s salary plus his rent and other expenses. This equals $65,000.

In this case, the economic cost is the accounting cost plus the opportunity cost. This equals $139,000.