Public accounting practice:
The two main financial reports of business enterprises are the balance sheet and the profit and loss statements (P&L). The purpose of the balance sheet is to summarize assets and liabilities and to indicate the net worth of ownership. The P&L statement reflects the revenue costs associated with the specific operations over a specific period of time. As the name profit and loss implies, its purpose is to determine the financial success of operations.
These two are mainly suited for investors, taxation and auditing purposes and not for logistical purposes
- The first problem results from the fact that accounting practices aggregates cost on a standard or natural account basis rather on activity basis. The practice of grouping expenses into natural accounts such as salaries, rent, utilities and depreciation fails to identify or assign the operations responsibility .In reality many expenses, associated with logistical performance cut across organizational units. For example efforts to reduce inventory will reduce inventory-carrying costs, but they may lead to back-orders, which would increase the total transportation cost.
- The practice of classifying the costs on a natural basis also creates a problem in activity-based cost analysis. In order to design and evaluate logistical operations it is necessary to identify costs associated with performing specific activities or tasks, such as the warehousing expenses for a specific SKU. This means that the individual logistics must be allocated or assigned.
- Transportation expenses- Freight is not accounted for. Many products are purchased on a delivery price basis, which includes transportation cost.
- Failure to assign inventory costs
- Finances committed to Raw materials, WIP, Finished goods not carefully separated from other capital expenses.
40 Comments