Farm Financial Standards Council case study: Management accounting for agricultural enterprises

Farm Financial Standards Council Model Case

Do you think that this case study with its proposed solutions will be useful to agricultural enterprises seeking to employ management accounting techniques? Why? Be specific in identifying benefits and possible drawbacks to the proposed solutions.

The case study of John and Mary Farmer and the designated proposed solution is in fact in line with management accounting techniques. The solution itself elucidates that it plans on giving the managerial accounting system a support cost center for equipment, shop and maintenance, not to mention general farm (Farm Financials Standards Council). Production cost center will exist for each land owner and for each separate level of production (Farm Financials Standards Council). The Farm Financials Standards Council further explains that "a profit center will be established for each commodity for each year. Additionally a cost center will be established for general, sales and administration as well as for financing." These plans and values reflect some of the basic core values of management accounting techniques. First of all, management accounting can help managers in planning and decision making, which this solution clearly does, and helps managers with general system control, making sure that the methods fulfill the objectives set (Atrill & McLaney, 1994). Thus, in this manner, one of the foundations of management accounting is upheld in this proposed solution: it constantly looks forward towards the future.

One way that this solution best reflects paragons of management accounting are via the allocation methods which allow everything from crop production, crop harvesting and processing to a cost driver based on hours. This is wise as the model has selected the most fundamental unit to assess the cost related to those issues. With the second choice of cost driver being left at the "management's discretion" also reflects wisdom as it leaves a majority of the power, control and autonomy up to the management, which is one of the main goals and values of the management accountancy technique.

One of the limits of this proposed solution is that it falls into one of the pitfalls of management accounting in that it appears to be based on historical data. Using historical data for making future decisions may not always result in the best decision for one's business (Debarshi 2011). Thus, while it's useful to leave so much decision-making up to the management's discretion as it gives the clients the control that they desire and need, sometimes it's better to assign this power elsewhere. Also, the proposed solution is somewhat more complicated than what Mary and John are presumably used to and might be more intricate than what they're prepared to carry out. Furthermore, this proposed schema is juggling numerous elements of the farming journey -- storage, processing, sales, production, harvesting, and other areas. With such a wide scope, the solution begins to look more ambitious than practical: "It is really very difficult to develop such a Management Accounting System where all the related people are not well equipped with full knowledge of all these related areas" (Debarshi, 2011). Furthermore, while John is interested in getting a managerial accounting system up and running for the next generation, it's not completely clear how user-friendly this one will be for the present generation.

The suggested solution could benefit from the objectivity of an evaluation from an accountant not involved with managerial accounting, to make sure that there isn't a personal bias influencing the solution (Debarshi, 2011). Lastly, there is nothing in this proposed solution that acknowledges the love of community service that Mary and John have continually had in their lives. There's no reason that one part of the schema can't allot for the donation of excess crops to needy schools, churches, soup kitchens or community centers. Such an addition would reflect a real attention and acknowledgement of the desires of the client.

Discuss the assertions this author is making in terms of variable and fixed costing and why ABC may make more sense in these types of settings. Justify your answer with good reasoning. You should attempt to integrate the thoughts of this article and your critique of it with the comments made above.

Dr. Roger K. Harvey argues avidly for eliminating fixed/cost variable philosophies in business assessments and decisions based on that fact that this is a model historically founded in traditional cost accounting systems used by manufacturing companies, used and developed in the beginning to the middle of the 20th century (Harvey, 2010). Harvey explains that via this model, costs were either a variable because they were believed to fluctuate with volume or were considered fixed when they didn't (Harvey, 2010). Harvey elucidates the problem that would occur when accountants and managers would debate about a cost being a variable or fixed, in which case they would deem these aspects semi-variable or semi-fixed (Harvey, 2010). Harvey thus exposed the inefficiency of this cost system as it then leads to poor strategic decisions. Harvey thus concludes that this model is not only inefficient, but outdated and that customer-driven costs should play a bigger role.

Customer driven costs, Harvey boldly asserts, are what are truly going to drive costs, as opposed to volume (2010). Thus, instead of thinking about one's business in terms of fixed or variables, one should adjust and think of them in terms of customer driven costs. Harvey proposes instead something called Activity-Based Costing (ABC), arguing that it gives the business person a more vivid picture of the expenses and fees directly connected with doing their specific business -- by linking it directly to the activities that their specific business revolves around (2010). The process is such: the activities that make up one's business are identified. Those activities are assigned to objects based on their rate of consuming activities (Harvey, 2010). The entire process gives a more streamlined and clearer approach to organizing the costs related to a business as it groups and separates them via things that a business person can clearly picture: the activities or tasks that need to get done. The key is that "ABC identifies and assigns costs not based on their perceived behavior (fixed or variable), but rather based on what activities cause them and who consumes those activities" (Harvey 2010). This distinction is truly important as in business, particularly in the farming business; the perceived behavior of costs is often extremely mercurial. Changing the perspective to one which examines the actions which compose a business and those who utilize those actions is a much more dynamic and accurate way of conducting and organizing a business.