Public Accounting Practice


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PUBLIC ACCOUNTING PRACTICE

Logistical functions are on integral part of the two main financial reports of business – the balance sheet and the profit and the loss statements (P& L). However, the primary deficiency in determining logistical costing and analysis in the method by which standardized accounting costs are identified classified and reported.

The first problem results from the fact that accounting practice aggregates costs on a standard or natural account basis rather than on an activity basis. The process of classification and assignment helps but does not satisfy the requirements for total – cost analysis. In reality, many expenses associated with logistical performance cut across organizational units. For eg. – efforts to reduce inventory will reduce inventory carrying cost, but they may also lead to more back orders, which would increase total transportation cost. The result is deficient data for integrated performance measurement.

In order to design and evaluate logistical operations, it is necessary to identify costs associated with performing specific activities or tasks, such as the warehouse expenses for a specific SKU (stock keeping unit). This means that the individual logistical activities must be identified and that costs be allocated or assigned.

An overlapping deficiency of accounting involves the traditional methods of reporting transportation expenditures. It remains a standard practice in retail accounting to deduct freight from gross margin figure. In part, it seems to be based on the belief that managers can do little about inbound freight. However, the problem extends beyond where freight is accounted for and reported. In many purchasing situations, freight is not reported at all as a specific cost. Many products are purchased on a delivered price basis, which includes transportation cost.

A final deficiency in traditional accounting practice is the failure to specify and assign inventory cost.

Full costs associated with the maintenance of the inventory such as insurance and taxes, are not identified and assigned, thereby resulting in an understatement or obscurity in reporting inventory cost. For eg.- If a brand manager is not held responsible for his brand’s inventory carrying cost, he is not motivated to reduce inventory levels.

The financial burden for assets committed to material, WIP and finished goods inventory is not identified, measured, and separated from other forms of capital expense incurred by the enterprise.


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