agMIS     ...important MA topics explained

back

A case for standard costing in ag

Accounting textbooks define standard cost as 'an estimated or pre-determined cost of performing an operation or producing a good or service, under normal circumstances'.  And standard cost accounting as the use of standard costs in the accounting records, followed later by analyses of variances and appropriate adjusting entries to the accounting records.

One can hardly ponder the implementation of a standard cost method, without realizing it defines what every farm producer actually does today.  The entire production cycle, as well as most of the marketing cycle too, must pass before he or she can ultimately determine a final cost of production.  Moreover, the typical farmer is too busy during the production cycle to devote much time or effort to analyses, which most often is done in the post-production period.

An obvious conclusion is to use management accounting and MIS systems that acknowledge those facts of farm life.

Two of the many important advantages of management accounting and MIS systems, are their timeliness, and their usefulness -- especially when compared to any alternative general ledger methods.

Timeliness -- The focus of general ledger accounting is year-end, and interim reports have that focus.  Many in fact, require abbreviated year-end processes before mid-year reports can be prepared.  Properly designed management accounting and MIS tools, on the other hand, are instantly responsive, with latest 'as of' information.

Usefulness -- Focus on management tasks plus absence of accounting-type overhead involving debits, credits, and account numbers, are two very important benefits, particularly for non-accountant managers.  But that's only the beginning.   

Typical day-to-day farm management decision processes involve quantities expressed in non-dollar quantities and on topics other than account numbers, and good MIS software recognizes this important fact.  And in the end, 'accounting' results become by-products of those processes.

As an example, a farm may need to document its costs to operate important machinery as a basis for allocating those costs among its various enterprises.  At year-end, a financial summary of that costing system may look like the one below.
 

  Accrual accounting using standard costs

In standard cost accounting mode, basis for the 2nd and 3rd accrual accounting entries made during the year is the standard unit cost multiplied by the quantity harvested or produced, to be followed later (when variances and their causes are determined) by variance entries that adjust balances in finished goods, cost of goods and income accounts.

The farm with adequate management accounting and MIS capabilities, however -- and absent demands from third parties for mid-year financial statements -- will have no need for interim 'accounting' reports and can simply continue to make 'actual cost' year-end entries.  In either case, however, It should not forego important variance analyses.

Study the management-usefulness of the report illustrated below; it's a typical management accounting type of report, in this case about on-going costs of 4 lots of cattle.  Perhaps some of its costs are not 'product costs' in accounting terms, and maybe there are other categories not being tracked.  Nevertheless, the report - along with auditable details to support it -- can both ease the task of making the year-end accrual-accounting entries, as well as analyzing and defining variances from a 'standard' set earlier or elsewhere.