INTERNAL ACCOUNTING ENGINEERING
Internal Accounting provides a unique set of Cost Analysis accounts to capture month end balances of cost information, and to provide the basis for sophisticated Cost Account reporting. These accounts are balance accounts, used only a month-end to summarize the internal working accounts.
(9-1) General variances: May include price variance, payment variance and efficiency variance figures. External variance may also be shown within these general Internal Accounting balance accounts.
(9-2) Depreciation variances: Shows differences between External and Internal depreciation.
(9-3) Non-operating variances: Shows changes in extracurricular Expenditures and Revenues.
(9-4) Expenditure-Cost variances: Matches Expenditures to Costs. Expenditures DR and Cost Elements CR here. (Account 9-4 serves the matching goals of traditional Pre-paid Expense Asset accounts.) Now Internal Accounting can match expenses to production costs, as well as expenses/costs to revenues.
(9-5) Departmental variances: Shows differences between actual departmental operating costs and budgeted departmental absorbed amounts charged to production. Now we have a handle on over-absorbed and under-absorbed variances for direct production, administration, sales, indirect production and service departments.
(9-6) Open for Company use.
(9-7) Calculated Profit P&L: Shows differences between Cost of Sales with Revenues. (Cost of Sales is charged to Revenues). For better results, Internal Accounting will automatically apply the standard cost in these transactions and re-title this P&L, Calculated Standard Profit P&L. Standard costs can reveal finer variations in sales volume using P&L. Internal Accounting goes beyond Total Cost of Sales reports and Total Revenue reports and provides Total Product Cost reports, to sub-sub-account detail, specifically for the Manager.
The Internal Accounting Calculated Profit P&L more adequately calculates Sales Commissions based on standard profit. Using standards and budgets, Internal Accounting can better control commissions independently of variances in prices or production efficiency. By more accurately measuring the sales efficiency of your company, Internal Accounting provides one of its most valuable reports, the Internal Accounting Calculated Profit P&L.
(9-8) Adjusted Operating Profit P&L: Internal Accounting now includes variances between actual and budgeted amounts as adjustments to Calculated Profit in order to track Operating variances down to the lowest level of detail possible. Ignoring non-operating variances (9-3), and beginning with data from (9-7), Internal Accounting will automatically adjust Calculated Profit by including efficiency variances, purchasing variances, production variances and direct wage variances (9-1), depreciation variances (9-2), expenditure-cost variances (9-4), and departmental under-and-over absorption variances, including Administrative and Sales variances (9-5). All these data are detailed and accumulated in the Internal Accounting Adjusted Operating Profit account. In this way, Internal Accounting provides an unusually comprehensive series of Cost Accounting reports.
(9-9) Taxable Profit P&L: Now add non-operating variances (9-3) to Adjusted Operating Profit (9-8) and with precision Internal Accounting produces a figure suitable for your annual Income Statement. The bottom line, Taxable Profit, is finally derived from a clear, accurate, comprehensive and scientific application of a managerial cost accounting.
Summary of Results:
At month end, Internal Accounting Integrates with financial accounts, and Internal Accounting accounts are treated as working accounts. They detail Costs for the month finally must be summarized into balance account entries and Financial reports.
Depreciation (2-4) is used to populate a special Depreciation Variance balance account (9-2) to compare external and internal depreciation figures.
Obviously, Non-Operating Expenditures (1-9) are not matched by Cost data, but only by Non-Operating Revenues in Non-Operating Variance balance account (9-3). Some Expenditure (1-n) accounts may be summarized into Asset contra accounts; for example, clearing accounts for closed Fixed Assets, or special stores purchase or insurance accounts.
By identifying accrued monthly expenditures, and by comparing these figures with an Expenditures budget, Internal Accounting provides detailed Expenditure analysis. Internal Accounting also provides a facility to compare Variances between budgeted Cost Elements and actual Cost Elements. To go further, Internal Accounting automatically populates Expenditure-Cost Variance accounts (9-4) to compare Expenditures (1-n) with the expired portion or Costs (2-n).
Stores Withdrawals (2-3) are taken from Assets (0-0), not Expenditures (1-3).
The difference between Actual (3-n) and Absorbed Rated Departmental Costs (4-n) is captured in special balance accounts (9-5). Over-absorbed and under-absorbed departmental activities are revealed at a glance down to sub-sub-account detail. Product transfer accounts (4-n) may have fewer accounts than Product accounts (3-n). Internal Accounting allows the User to decide to use one or more rates for Administrative Departments and Sales Departments when transferring to Cost of Sales (8-n).
At month-end, the difference between Product accounts (5-n) and Product transfer accounts (6-n) are captured in unique Internal Accounting accounts corresponding to WIP Assets. Internal Accounting recommends that Users maintain several WIP sub-accounts and sub-sub-accounts for best results.
At month end, the Product Inventory accounts (7-n) transfer to Asset accounts, since they are Contra accounts to Assets. Compare these amounts with budgets for true cost insights.
At month end, Cost of Sales accounts (8-n) are charged to an Internal Accounting Calculated Operating Profit balance account (9-7), which corresponds exactly with an Income Summary account to help compare sales costs with sales revenues. Internal Accounting recommends Users record their external sales revenue balance into the Calculated Operating Profit account (9-7), for a superior monthly result analysis report.
Regarding standard Revenue accounts, Internal Accounting reminds the User to pay careful attention to the use of non-sales Revenue balance accounts. These should be charged to Adjusted Operating Profit accounts (9-8), keeping sales Revenue and Non-Sales Revenue separated.
The Non-Operating Variance accounts (9-3) were already mentioned in the discussion of Classes 1 and 2, but must be repeated here because Revenues, rather, non-operating Revenues are moved there to compare with non-operating Expenditures (1-9). Non-Operating Revenue figures are often underestimated.