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Accounting Method Cost and Returns

Posted by Norman Brown

Oct 3, 2016 12:52:26 PM

Accounting Methods A (Accrual), B (Hybrid), C (Cash) and ABC (Integrated Cash, Accrual and Managerial).  We learned that most farmers "default" to Method C because of its ease of use while larger firms choose Method A because of its wide acceptance by accounting professionals.  However, when we plot management value against effort expended we gain a new perspective.

 Growth_Path_Value-Effort_Chart-1.jpg

Method C as previously noted, requires minimal effort but delivers very little value (cash-basis ledger balances for tax returns). 

Method A produces accrual financial statements that summarize the overall profitability of the business, but doesn't explain what internally contributes to that profit or loss. Moreover, this method requires professional oversight and a great deal of manual accrual adjustments so requires the most effort of all the methods.

Method B demands diligent inventory control and production records but also generates directcost analysis at the commodity and location level.

Finally, Method ABC, while requiring the same effort as Method B, automates accrual financial statements and tracks activity as well as field and feedlot level costs and margins.

Growth_Path_Chart-1.jpg

This table defines the levels of management detail that become available moving from Method C to Method ABC.

If you're currently using, say, Methods C or A are you permanently "stuck" at that level?  Next month we'll describe how progressive producers are climbing the "Growth Path."

 

Topics: cash or accrual

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