When Dan Ustian, who had headed Navistar International’s engine unit, needed to decide how to meet new air quality requirements, he gambled $700 million on a fix that his engineers did not know how to implement. Two years past the EPA deadline, Navistar’s engine is still unable to meet emissions test standards, resulting in a $516 million loss to the company. Corporate management needs more than a financial accounting system to make intelligent decisions about corporate investments and product development — it needs managerial accounting decision- drivers.
Stock, bond and commodity exchanges, banks and governments apportion limited resources among their respective constituencies. These institutions use financial accounting as a primary information source for these allocation decisions. Stock analysts and investors look at corporate financial statements prepared in accordance with Generally Accepted Accounting Principles. Banks analyze financial statements, cash flow projections and financial performance.
Corporate management, on the other hand, needs to make day-to-day decisions about product development, market expansion and material sourcing. Information for these decisions cannot be gleaned from annual reports that rely upon financial accounting principles, because they are soon dated and not sufficiently detailed. Management accounting is a more precise tool for this purpose, because it measures recent, economically consequential activity, and is thus is able to efficiently guide managerial decisions.
Cost information is an important component of management accounting, and getting accurate cost information requires a shift in conventional accounting practices. Overhead now accounts for as much as 70 percent of the cost of an item. Traditional accounting methods can only provide estimates rather than real figures, because they use a single-cost allocation factor based upon averages to assign overhead costs. If you have questions about corporate management or investment strategies, consult a corporate investment attorney who is able to align the details of finance with the big picture of business.
Activity-based costing (ABC) takes a different approach, and calculates the resources that are consumed by a product or service to measure its cost. A premise of ABC is that overhead costs are generated by a number of activities and that different products use these activities in heterogeneous ways. ABC’s focus on activities puts it in direct alignment with managerial accounting principles and provides a strong foundation for strong corporate decision-making.
The attorneys at Hartman Simons and Wood LLP collaborate with your team to understand your business objectives and to provide the information needed to make critical decisions.