agMIS Important MA topics explained

The initial format in agriculture for an accrued or accrual income statement, was an adjustment to the cash-basis statement of Revenue - Expenses = Net income (shown in blue in the chart below). The generally-accepted format elsewhere, however, is different (below right). Completed correctly, however, bottom-line results of both methods are the same.

Cash-basis adjusted to accrued or accrual	Traditional accrual format
+ Revenues $ 500,000 - Expenses 455,000 = Cash-basis income 45,000 + Beginning inventories 65,000 - Ending inventories 75,000 = Net accrued income $ 35,000 =========	+ Revenues $ 500,000 - Cost of goods sold 420,000 = Gross profit (margin) 80,000 - Period expenses 45,000 __________ = Net accrued income $ 35,000 =========
Lenders often prefer this format because it can be derived from tax reports, and from inventories that can be identified and verified.	Managers prefer this format, because it reflects the way they manage and accordingly, the way they keep records. Investors prefer it because it provides insights into the business and its management.

The traditional accrual format above introduces some terms not universally defined in agriculture, so let's examine them here.

Cost of goods sold -- Accounting texts define it as the income statement account to which the cost of the product is transferred when inventory is sold.

Product costs - In accounting usage, 'product costs' ('cost of the product' in the transfers mentioned above) are defined as 'only the costs necessary to produce or complete the product'. In traditional factory terms, it's the sum of direct materials, direct labor, and overhead, and specifically excludes 'Period costs'.

Period costs -- Defined in accounting textbooks as 'all non-product expenditures for managing the firm, selling its products, etc.'. Sometimes referred to as 'operating expenses'.

Important note: Our purpose here is not to define these terms for agriculture. We use the terms to explain how management accounting methods used elsewhere, can equally apply to production ag. In time, we believe it inevitable that agriculture will migrate to and adopt similar methods, and the terms that define them.

At the present time, defining 'product costs' and 'cost of goods sold' in ag is in the hands of industry sub-groups. Will those definitions be consistent across all groups? How will the diversified producer cope, if they're not?

The pork industry defines 'cost of goods sold' as the sum of (a) some breeding costs, (b) all feed costs, and (c) the cost of animals purchased for ultimate resale. Other expenses -- from animal health to depreciation, hired labor, rent, utilities and more -- are period expenses. Will it achieve uniformity in results, with early labor costs reflected as 'cost of goods sold', while a finishers' labor costs, for example, reflect as period costs?

How to cope both with expected-life depreciation and accelerated depreciation at the same time? How to include unpaid family labor in management accounting, without corrupting financial accounting results? And coping with assets valued sometimes at market levels, other times at cost?

Properly-designed management accounting and MIS tools make easy work of solving these needs, at user-defined levels. And that also means management information that's useful, timely, and helpful -- all year long. And when year-end comes around, those same tools provide the information that, among other things, can reduce accrual accounting to just three accounting entries!