The Tr-Ac-Net Organization Transparency and Accountability Network URL: www.tr-ac-net.org Email: peterbnyc@tr-ac-net.org Mobile: +1 212 772 6918, Landline: +1 917 432 1191 Community Accountancy PUTTING ACCOUNTANCY TO WORK FOR ALL OF SOCIETY STANDARDS AND VARIANCES FOR DISCUSSION ONLY Peter Burgess The Tr-Ac-Net Organization July 2008 TAN_CAS_003_03_StdVarAnalysis_080731.odt 1 Printed on Aug 5, 2008 at 04:20 PM WHY COMPARISON? What it is ... what should it be? One of the continuing questions should be know not only what it is but also what it should be. This is a simple question and an important question. It is also a question that much of society does not want to address. The answers are uncomfortable. Why is it that science and technology can put man on the moon, but food for people on this planet is too difficult. Community Accountancy is a system that can help to explain why the system is not working and what needs to be done to put things right. Community Accountancy is not the answer ... merely a powerful tool to find the answers, and to monitor progress. TAN_CAS_003_03_StdVarAnalysis_080731.odt 2 Printed on Aug 5, 2008 at 16:20 A8/P8STANDARDS Common usage The idea of a standard is common ... it may be described as the norm ... it is what is expected. It is an idea that is ubiquitous. But it is also a concept that is absent in the metrics of socio-economic performance and impact on community. TAN_CAS_003_03_StdVarAnalysis_080731.odt 3 Printed on Aug 5, 2008 at 04:20 PMSTANDARDS Standard cost accounting Standard costs ... Standard cost accounting is a tool that has helped cost accountants measure cost performance without getting deeply buried in detail. Standard costs are the theoretical cost that an item or service should have ... and when the actual costs are different, then it is time to find out why. The Tr-Ac-Net system structures knowledge about costs so that this knowledge can be used to compare what things are costing with what they should be costing. The system helps to clarify what is cost that is justified, and what is cost that merely reflects some aberration in the procurement and implementation system. Standard costs are a way of making better use of cost data. With standard costing it is possible to compare the actual cost performance with what it should have been. In Community Accountancy the idea of standard cost is also applied to value and used in the determination of community progress or added value. This is very useful where “value” varies between different groups and all views need to be take into account. Standard value accounting Standard values ... The same approach is used for value as for cost. Every activity produces something ... what is the standard value of this output? This can be determined in an arbitrary manner, and then it can be used in an analytical framework, and compared to alternative values that are justified from different other perspectives. The common standard allows comparison across geography and projects ... while not excluding alternative perspectives. In Community Accountancy the idea of standard costs is also applied to value. The concept of standard value greatly simplifies the determination of community progress and added value. Value is very subjective. A standard value provides for many different perspectives of value to be incorporated into analysis while also having some way to compare value adding in a uniform way across many communities. Standard, actual and variance Having cost standards may be interesting, but usually not very useful until they are compared in some way with the actual costs ... the variances analyzed. When there is variance analysis, it is possible to find information that is simply wrong ... or performance that is quite different from what had been assumed. All interesting and important ... and a guide to hat needs to be done to have improvement. Standard, actual and variance is a basic of performance assessment ... and tells how actual results where relative to what the results were expected to be. It is powerful. There are many ways of making the comparison, some of which are very detailed, some use comparison at a more aggregate level. The result of this type of analysis is usually significant additional information about cost performance and the potential for improvement. TAN_CAS_003_03_StdVarAnalysis_080731.odt 4 Printed on Aug 5, 2008 at 16:20 A8/P8Standards AND activity information When we use standards ... then it is possible to put activity information into perspective. Activities – Standard Cost Activities – Actual Cost The use of standards shows that the amount of activities that should have been produced for the money used ... and this may be compared to the amount of activity actually produced for the money. This does nothing to help assess the impact of the activity, but it does help to ascertain the relative efficiency of doing the activity. Some simple analysis can be used to determine whether the differences are caused by changes in the unit prices of the inputs ... higher prices for fuel ... higher wages for staff, etc. or whether the cause is a question of productivity with simply less production than was expected from the standard. The following graphic how community progress can be represented using changes in community value and the characteristics of activities to show the maintenance of the status quo, improvement or modest progress, and deterioration with poverty increasing. TAN_CAS_003_03_StdVarAnalysis_080731.odt 5 Printed on Aug 5, 2008 at 04:20 PMUNDERSTANDING COST AND VALUE BEHAVIOR COST, PRICE AND VALUE AND VALUE CHAIN Price has an important role in the matter of economic incentive ... and the question of sustainability. The value chain works and is efficient when the transfer pricing through the value chain provides a reasonable rate of return on capital employed within each piece of the value chain. If any of the links in the chain become unprofitable, the value chain becomes dysfunctional. TAN_CAS_003_03_StdVarAnalysis_080731.odt 6 Printed on Aug 5, 2008 at 16:20 A8/P8HOW PRICE IMPACTS COMMUNITY Price is a key variable in the performance of society. It is not as important as cost, but the way price is used in society determines the way value is shared between the various economic actors. The following graphic shows how an economic transactions that has costs and value is shared between the enterprise and the client depending on the price being applied to the transaction. For society as a whole the value adding is the difference between the value and the cost. For the client the value adding is what is left of value adding after the enterprise has taken out its profit. In the profit maximizing enterprise the goal is to have profit as much as possible, and the amount left in the hands of the client is of little consequence. Base Case In a lower cost case the enterprise profit increases at the same price point ... and the amount of value derived by the client stays the same. Lower Cost Case If the client and the enterprise are in the same community it does not matter so much whether the client or the enterprise has what share of the value added ... but where the enterprise is from outside the community it matters a lot. In the case where the enterprise is external ... the case of Foreign Direct TAN_CAS_003_03_StdVarAnalysis_080731.odt 7 Printed on Aug 5, 2008 at 04:20 PMInvestment (FDI) for example ... the value adding for the community is small because the profit leaves the community. If the costs are incurred in the community there is some multiplier effect ... but typically local disbursements are small and most of the costs, as for example in mining are equipment, fuel, expatriate payroll .... with rather little value for the community. The External Enterprise Case TAN_CAS_003_03_StdVarAnalysis_080731.odt 8 Printed on Aug 5, 2008 at 16:20 A8/P8