Tag Archives | operations

Probable Losses

See Also:
Accounting Principles
Subsequent Events
Business Segments
Accounting Changes

Probable Losses Definition

Probable losses disclosure or the disclosure of loss contingencies is usually a concern for ongoing litigation proceedings or perhaps the discontinuance of an operation that will likely see a loss when it is sold. This form of probable accounting falls under the disclosure principle which states that a company must report a probable loss before it occurs if the amount can be readily estimated and it is likely the event will happen.

Probable Losses Example

Case Entertainment Co. has a business line that makes VHS systems. However, technology has reached a point where VHS systems have become obsolete to the new DVD disc players which is another line which Casa Entertainment owns. Looking to future Casa has decided that it would like to discontinue the VHS operations which have begun to show losses and expand the profitable DVD operations. Casa has had the plant and its operation equipment appraised as it gets ready to dispose of the line. After appraisal the company has shown that it will see a loss on the disposal of the assets of $125 million. The discontinuance of the operations net of taxes has shown that the company will post a further loss of $5 million. The income from continuing operations will be $400 million. Therefore the Casa should show the following on the bottom of it’s income statement.

Income from continuing operations……………………………$400 million
Discontinued Operations:
Loss from operation…………………………………………………… $(5 million)
Loss on Disposal………………………………………………………… $(125 million)
Net Income ………………………………………………………………….$270 million

Note: The following was most likely accrued for over the year or since the decision was made to discontinue the operation.

Probable Losses

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Overhead Definition

See Also:
Administration Expenses
Outsourcing
Predetermined Overhead Rate
Fixed Costs
Semi Variable Costs
Overhead Expense Reduction
Absorption Cost Accounting

Overhead Definition

The overhead definition is those ongoing expenses of running a business that do not directly relate to its core operations. It is ever present in the mind of accountants. The overhead definition includes the costs that are necessary for the business to continue operations, but that do not actually generate profits for the business.


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Overhead Explanation

Some examples include the following:

  • Rent payments
  • Utility bills
  • Advertising expenses
  • Insurance costs
  • Interest payments
  • Legal fees
  • Taxes
  • Other expenses

You can also call it overhead costs, overhead expenses, manufacturing overhead costs, factory overhead, or burden.

Overhead Variance

Overhead variance refers to the difference between actual overhead and applied overhead. You can only compute overhead variance after you know the actual overhead costs for the period. Overhead is applied based on a predetermined rate and a cost driver. This is essentially a way of estimating overhead costs before they actually incur. At the end of the fiscal period, it is possible to compare the actual overhead costs with the predetermined estimates. The difference between the actual overhead costs and the applied overhead costs are called the overhead variance.

Underapplied Overhead

When the actual amount of overhead expenses exceeds the applied amount of overhead expenses, the difference is called underapplied overhead. The predetermined rate underestimated the overhead costs for the period, and the applied overhead expenses were lower than the actual overhead expenses. The predetermined rate did not apply enough overhead expense for the period, so call the difference underapplied overhead.

Overapplied Overhead

When the applied amount of overhead expenses exceeds the actual amount of overhead expenses, call the difference overapplied overhead. The predetermined rate overestimated the overhead costs for the period, and the applied overhead expenses were higher than the actual overhead expenses. The predetermined rate applied too much overhead expense for the period, so call the difference between the two amounts overapplied overhead.

Overhead Formula

There is not set overhead formula due to the vast differences in overhead amounts based on business models. The overhead calculation is subject to many different approaches based on industry, the differences of overhead expenses, and more. This makes accounting for overhead costs more complicated than it may appear initially.

Overhead Accounting

Overhead Expense Allocation

One of the issues regarding overhead expenses is how to report them in the financial statements. They are not directly related to the core operations, however, ignoring overhead costs when determining the costs of production would not accurately reflect the full cost of production. Therefore, assign at least some portion of overhead costs to production activities and units of output.

Fixed overhead refers to the overhead not related to or applied to production. These costs do not fluctuate with production activity and are reported as period costs. Variable overhead refers to the overhead that is applied to production. These costs fluctuate with production activity. In addition, report them as product costs. Apply overhead to production activities. Also apply units of output using a cost driver and an overhead rate.

The cost driver is an activity that can be used to quantify and apply variable costs. For example, a certain amount of variable overhead expenses may be applied to production based on the number of direct labor hours involved in production, or based on the quantity of direct material used in production. The overhead rate is the rate at which you apply variable overhead to production and units of output based on the cost driver activity.

Reporting Overhead Variance

At the end of the fiscal period, the company must account for the amount of overhead variance. There are two ways to do this. First, transfer the overhead variance to the Cost of Goods sold account. Do this when the overhead variance is comparatively insignificant. The second alternative is to prorate the overhead variance to an inventory account, such as Work in Progress, Finished Goods, or Cost of Goods Sold. In this case, the apply overhead variance evenly across the units of inventory in the relevant account. Prorate overhead variance when the amount is comparatively substantial.

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Overhead Definition

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Overhead Definition

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Nonrecurring Items

See Also:
Restructuring Expense
ProForma Financial Statements

Nonrecurring Items

In accounting, report abnormal or infrequent gains or losses in the company’s annual report as nonrecurring items. They are rare events or activities that are not part of the company’s normal business operations. They may also be called extraordinary items. You must disclose the details of any extraordinary items in a footnote in the company’s financial statements.

Extraordinary Items

Extraordinary items can distort a company’s earnings. Therefore, analysts will often prepare a pro forma income statement, excluding the effects of the extraordinary items, to see what the company’s financial performance would’ve looked like without the distortion of the abnormal occurrence.

Nonrecurring Items Examples

Examples of nonrecurring items include losses due to fire or theft, the write-off of a company division, the acquisition of another company, or the one-time sale of a large piece of property.


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Nonrecurring Items

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Job Costing

See Also:
Implementing Activity Based Costing
Standard Costing System
Process Costing
Activity-based Costing (ABC) vs Traditional Costing
Absorption vs Variable Costing

Job Costing Definition

Job costing is defined as a method of recording the costs of a manufacturing job, rather than process. With job costing systems, a project manager or accountant can keep track of the cost of each job, maintaining data which is often more relevant to the operations of the business.

Job Costing Meaning

Job costing, generally, means a specific accounting methodology used to track the expense of creating a unique product. Due to the fact that certain projects, such as construction, require different operations, accountants use this methodology to trace the expenses of each job in order to use this information for analysis and tax needs. Job costing forms have spaces to include direct labor, direct materials, and overhead.

Costs stay in the work-in-process account throughout the job. When the job is finally completed, they are transferred to the finished goods account. By using this method, accountants can make sense of complicated jobs which are moving towards the process of completion.

Indirect costs, like overhead, are applied as a fraction of direct costs. This is usually done in one of two ways: an association with labor hours or using activity based costing. This way, either through use of labor or certain tools, overhead will not be left out of the equation and a company can make sure to cover all essential costs using job costing.

Industries which produce products as jobs use this method. This includes job costing for construction, but goes much farther than just this. Shipping, auditing, maintenance and repair, installation, and any industry which creates products unique to each need. In this situation, job costing is often the most efficient method.

Job Costing Example

For example, Roy was once the curator of a large museum in the United States. Connecting with the science community on many levels, he has enjoyed his career. After some time, Roy decided he would make a career change. He has since started a company which provides maintenance work on historical works which reside in museums.

Roy has all the connections he needs for this business: other curators, archaeologists, and the entire community in his rolodex. After a little effort, he was able to connect with the people who perform this work. Roy will take the role of salesperson, but he needed to hire a team to perform operations. Roy is quite successful. His one concern, an area of ignorance for him, is how the bookkeeping will take place. So he hires an accountant, sets a meeting, and begins to learn about how his business will overcome this need.

The Most Efficient Accounting Methodology

The accountant shares that job costing will be, probably, the most efficient accounting methodology. Roy can keep track of the costs for each of his contracts by implementing this type of accounting. He will be able to find which items take more or less time to maintain. Additionally, he can make sure to create company profits by adding a margin on top of his costs. By using a job costing software, bookkeepers can run the system quite smoothly.

Roy can rest at ease with this accounting method. Knowing he can rely on his accountant, Roy begins to contact prospect customers and former peers. He has confidence that his business will be a success. He looks forward to gaining his first customer.

Job costing is just another way to know your economics or financials. Click here to download the Know Your Economics Worksheet to shape your economics to result in profit.

Job Costing

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Job Costing

 

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Data Communication Redundancy

See Also:
Technology Assessment Criteria
How to Respond to an Imminent Disaster Threat
Technology Strategy for Small to Medium Sized Companies
How to Evaluate IT Systems
How do You Know When it is Time to Buy New Software

Data Communication Redundancy

Many businesses today have mission critical communication and data sharing needs. Whether these needs arise from customer or regulatory (e.g. SarbOx) requirements, truly redundant communications and data backup services are vital to the business’ operations and for disaster recovery scenarios. For many businesses, including even very large businesses, data communication redundancy is often the exception rather than the rule. Many attempt to accomplish this by having either alternate providers of in-ground hard-wired copper or fiber connections to their facilities or by having these connections at different entry points or tied to different communication centers.

The problem with this “solution” is that at some point all these underground cables come together in common conduits. Then, they are subject to being damage/cut by above ground activities. As such they are not truly redundant and create an unmitigated risk for those companies.

Disaster Recovery

In addition, from a disaster recovery perspective when communications are lost in this way, the recovery time to restore them can be anywhere from a few hours to many days. For some businesses, the loss of communications ability for even a few minutes can have severely negative economic and customer relations effects.

Achieve True Redundancy

So how does a business achieve true redundancy? There are some technologies that help. For example, microwave and satellite links are redundant to fiber/copper in the ground but they suffer from bandwidth constraints, are not secure or in the case of satellite are very expensive.

Point-to-point Wireless Light Communications (WLC) is the only truly redundant, very secure and cost effective solution for the redundancy, security and disaster recovery needs of businesses today. Furthermore, WLC uses above ground devices to move data at fiber optic speeds and bandwidths through the air.

Communications are critical in businesses. If you are experiencing data redundancy, then there may be other areas of weakness in your company. Click here to download our Internal Analysis whitepaper to create the roadmap for your company’s success!

Data communication redundancy
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Data communication redundancy

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Direct Material Variance Formulas

See Also:
Direct Cost vs Indirect Cost
Direct Materials
Variance Analysis
Direct Labor Variance Formulas
Cost Driver

Direct Material Variance Formulas

Commonly used variance formulas for direct materials include the direct material price variance and the direct material quantity variance. Below are the formulas for calculating each of these variances.

Direct Material Price Variance

Direct material price variance measures the cost of the difference between the expected price of materials required for the operations and the actual price of materials required for the operations.

If the variance demonstrates that the actual price of materials required was higher than expected price of materials required, the variance will be considered unfavorable. If the variance demonstrates that the actual price of materials required was less than expected price of materials required, the variance will be considered favorable.

Using the formula shown below, a positive DMPV would be unfavorable and a negative DPMV would be favorable.

DMPV = PQ (AP – SP)

DMPV = Direct material price variance
PQ = Actual quantity of materials purchased
AP = Actual price paid for materials
SP = Standard price, or the estimated price of materials required for the operations

Direct Material Quantity Variance

Direct material quantity variance measures the cost of the difference between the expected quantity of materials required for the operations and the actual quantity of materials required for the operations.

If the variance demonstrates that the actual quantity of materials required was higher than expected quantity of materials required, the variance will be considered unfavorable. If the variance demonstrates that the actual quantity of materials required was less than expected quantity of materials required, the variance will be considered favorable.

Using the formula shown below, a positive DMQV would be unfavorable and a negative DPQV would be favorable.

DMQV = SP (AQ – SQ)

DMQV = Direct material quantity variance
SP = Standard price, or the estimated price of materials required for the operations
AQ = Actual quantity of materials required for the operations
SQ = Standard quantity, or the estimated quantity of materials required for the operations

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direct material variance formulas

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direct material variance formulas

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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Feasibility Study

See Also:
Current Ratio Analysis
Comparison Analysis
Customer Analysis
Mixed Economy
Variance Analysis

Feasibility Study Definition

The feasibility study definition is the study of the feasibility of creating benefit from a given project. It is one of the first steps in evaluating a business idea. Basically, a feasibility study proposal is the analysis which establishes whether a business or project is a worthwhile investment of time.


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Feasibility Study Explanation

A feasibility study, explained as the smart first step to starting any business, must be done. In regards to starting a business, a feasibility study outline is done by asking the following questions. It all starts by asking if it is possible.

Are the business operations even possible? If so, how would the company make money? Are there customers that are willing to buy the product? Once this is established, marketing feasibility must then be studied.

How many customers are there? And how much of a similar product do they buy? What amount will we sell? How would the company let customers know that it exists? How does the company persuade customers to use their product? What does the marketing and sales process cost? Will the business make enough money to support this? How much will the company charge for products? Operational questions come next when creating a feasibility study report.

How much would the operations, which create products, cost? How many units of products will the company have to sell, with the above amount of profit from each unit, to cover marketing and operational costs? Finally, you must ask financial questions.

How much will the company make in a year? How much will the entire startup costs, with employees, equipment, and marketing expenses, be?

Conclusion

In conclusion, a feasibility study follows this method. It establishes, first, if the project is even possible. Then it follows the method listed above to finally establish if there will be any benefit to owning the company after you put all of the effort forth. Do the feasibility study analysis this way, before opening operations, to prevent an expensive mistake.

The above feasibility study example provides the main questions to ask when considering starting a project or business. You will need to answer additional questions based on situational needs. Though no single process decides the answer, you can assume an indication of the results before the company is created.

A feasibility study checklist is available in books or online. Find a few books and reports you like. By following the methods in each of these books, you will be able to answer all of the unique questions and prove the company concept over time.

Guide your CEO by conducting the feasibility study to vet their ideas. Click here to learn how you can be the best wingman with our free How to be a Wingman guide!

feasibility study, Feasibility Study Explanation, Feasibility Study Definition

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feasibility study, Feasibility Study Explanation, Feasibility Study Definition

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