Balanced Scorecard

The Balanced Scorecard (BSC) is a conceptual framework enabling an organization in clarifying its vision and strategy, thus effectively translating them into action. This performance management approach provides feedback around both the internal processes and external outcomes, essentially focusing on four indicators: Customer Perspective, Internal-Business Processes, Learning and Growth and Financials.

The concept of Balanced Scorecard was developed in the early 1990’s by Robert S. Kaplan and David P. Norton. They describe this innovation as follows:

"The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation."


Sample Balanced Scorecard report made with Power Point(ppt)
There are currently about forty different companies offering Balanced Scorecard software. Some of the most established include ActiveStrategy, Cognos, Corda, Corvu, Dialog Strategy, Pilot Software... Many can be used for project management, but they are more designed for strategic planning and corporate use and they lack the flexibility needed in project management. In most cases, we have found that Excel and Power Point are the easiest solution. Automating your balanced scorecard reports is easier done if you can access to the database that contains the relevant data.

Business indicators to motivate the team
Hence, the approach of Balance Scorecard is an effort to improve its processes, motivate and educate employees, and enhance the information systems, while monitoring the project’s progress toward the organization’s strategic goals

The key to success of a business is dependant on good management information. Thus while monitoring profitability and cash flows, a business also need to keep its Key Performance Indicators (KPI) under a tight check.

Examples of key performance indicators on a balanced scorecard
Key Performance Indicators are quantifiable measurements that reflect the critical success factors of an organization. Based on beforehand agreed measures, they reveal a high-level snapshot of the organization. They vary depending on the kind of organization they characterize; for instance a business may have a KPI as the annual sales volume, while KPIs of a social service organization may have to do more with the number of people helped out. Moreover, colleges may have number of students graduating per year, as one of their KPIs.

Thus before any Key Performance Indicators are selected, it is vital to identify what the organization’s goal is, which are in turn dependent upon the its mission and its stakeholders. Consequently, KPIs act as a measure of progress towards these goals. Whatever they may be, they must be critical to the success of the organization.

The application of Key Performance Indicators provides business executives with a high-level, real-time view of the progress of a company. They may consist of any combination of reports, spreadsheets and charts. They may be sales figures (global or regional), trends over time, supply chain information or any other long-term consideration which may be essential in gauging the health of the organization. However, it should be noted that Key Performance Indicators should not only reflect the organizational goals but should also be quantifiable.

For a Key Performance Indicator to be of any value there must be a way to accurately define and measure it. This is so because a KPI may meet the criteria of reflecting the organizational goal, which may for instance pertain to being the most popular company. However, since a company’s popularity can not be measured or compared to others, therefore the KPI would be useless.

Considerations regarding how a Key Performance Indicator is to be measured should also be established in advance. Definitions as to exactly how the indicator is to be calculated and whether it is to be measured in dollar amounts or units should also be specified. Moreover, it is imperative that the organization then sticks to these definitions from year to year in order to allow for annual comparisons.

key performance indicators can be used for all types and in all areas of project management: IT (information technology), construction, engineering, risk management, supply chain, safety, quality, manufacturing, financial management, sales...After the Key Performance Indicator has been defined and a way to measure it has also been determined, a clear target has to be demarcated which should be understandable by everyone. The target should also be specific so that every individual can take actions towards accomplishing it.

Here it is needless to say that to achieve a particular target level of Key Performance Indicator for a company, every department has to work in synergy towards it. For this purpose, all the units of an organization need to define their respective KPIs which should in turn work towards accomplishing the overall KPIs of the organization.

It is important that after Key Performance Indicators and their relative components have been identified, they should be used as a performance management tool. Best ways to represent variance (from the target levels) should be defined, eventually making sure that everyone in the organization is focused towards meeting target levels of the Key Performance Indicators.

In terms of Customer Satisfaction, the approach analyzes the organization’s ability to provide quality goods and services and their effective delivery, while the financial perspective of the Balanced Scorecard generally represents the clear long-range targets. Now in order to lead to the success of the above two mentioned perspectives, the internal business indicator provides data regarding the internal business results against its measures. The fourth and the last major perspective concerns with learning and growth, which aims to align all of the above toward an overall organization’s success.

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A New Lease on Leasing?

A: Leasing accounting will likely remain unchanged for at least four or five years, after which it may come up for examination by international accounting standards regulators.

About a year ago, financial executives and leasing industry executives were closely watching the steady flow of information coming the G4+1, a group of mostly accounting academics and Big 5 representatives representing major accounting rulemaking bodies around the world, which had as its mission a desire to bring forth a radical change in the way leases are accounted for. This movement was the result to a great extent of a paper known in the leasing industry as the McGregor Report, written by Warren McGregor, a well-known accounting standard setter from Europe.

The Financial Accounting Standards Board issued the first newly crafted attempt to provide standards for lease accounting, known as Statement of Financial Accounting Standard 13, "Accounting for Leases," around 1979. Since then the relevant lease-accounting authoritative literature has morphed into a broad series of announcements, amendments, and papers dealing with many unique structural issues which the leasing industry has created in compliance with the specific nature of those rules established in 1979. The rules, by the way, are meant to define a point when the risks and rewards of ownership transfer from a lessor to a lessee, a seemingly basic concept.

FAS 13 has four basic rules for treating a lease as an operating lease for the lessee's book accounting purposes.

The rules are summarized in Paragraph 7 of FAS 13 and are generally that:

The lease does not transfer title at the end of the lease.
The lease is for less than 75% of the economic life of the assets.
The lease doesn't contain a bargain purchase option.
The present value of the minimum lease payments is less than 90% of the fair value of the asset. (This is known as the '90%' test by most industry insiders.)

These tests are generally known as 'bright line' tests, meaning that one either passes or fails the test, and the accounting is driven off that result.

These guidelines of course have a degree of judgement in interpretation, however for the most part, they are relatively straight forward.

As a result of examining transactions structured with these rules in mind, some accountants concluded that assets were being left off balance sheets because they came to just under the 90% test.

Warren McGregor proposed that all leases be capitalized to some extent, by defining the asset for the lessee as being the value of the contractual payments, regardless of the '90%' test. Under McGregor, an asset equal to 89.9% (the PV) WOULD be recorded.

For instance, if the present value of the payment obligation were to equal 89.9%, under FAS 13 the asset would not be recorded on the lessee's balance sheet.

Sounds simple in theory, but picture this, what if the contractual payments were for only 25% with a contingent obligation for the balance of the value of the asset? Would this type of structure then result in less of an asset being recorded? It seemed like the simple proposal to put more assets on the balance sheet might actually result in less assets on the balance sheet.

In practice, the reality of that simple approach has become much more complicated than had been anticipated. Just as FAS 13 started life as a basic document, over the years it has morphed into a whole complex body of knowledge requiring the interpretation of experts

Added to this simplistic approach is the trend developing in the U.S. in particular, of U.S. subsidiaries of multi-nationals seeking to adopt an international standard of accounting each with—you guessed it— a different set of rules for leasing.

So, here we have (1) a U.S. set of rules, sometimes being criticized for the manner in which structures just barely pass the tests; (2) a rulemaking body seeking to establish a conceptually universal set of rules; (3) individual countries with their own adoption of leasing rules; and (4) an international standard setting body which conceptually follows U.S. rules but which allows a greater degree of interpretation by accountants.

The mission of McGregor's report was a noble one: that a standard set of rules would allow anybody, anywhere to be able to compare results (with respect to leasing) in a manner that is consistently applied around the world. The reality has been that just as there are different ways of doing business in each country, different sets of laws that regulate those ways of doing business, and different sets of cultural nuances to those business practices and laws and interpretations have made arriving at a common set of accounting rules a very difficult task to accomplish.

advertisement We started this discussion with a reference to the G4+1. Yet the G4+1 has been disbanded and has been replaced somewhat by a new international accounting rulemaking body, with the hope that it can start to make some progress on standardizing rules on a global basis, allowing for global reporting, stock markets and investment opportunities. That body, however, has prioritized its objectives and has concluded that leasing is not as high on its priority list as the attention it seemed to be getting. Rather, other areas are more pressing, such as consolidation accounting.

As a result, leasing is not on the current agenda of the rulemaking body, and given the researching, exposure and discussion periods needed, perhaps a change may come about in 4 — 5 years.

Industry requires capital to continue to grow and expand and leasing provides a substantial portion of that capital. Leasing consistently provides fully one-third of all capital funding requirements in the U.S. a huge industry estimated at about $250 billion a year. Leasing helps form the basis for solving many financial structuring challenges.

The leasing industry is a financial products industry. Just as investment banking and the many variations of investment banking change with the changing market conditions, leasing has also shown this innate ability to change and adapt as needed.

Our conclusion therefore would be that we have seen changes occur many times in the leasing industry and as rules changes, further changes will occur to adjust the way business is accomplished. We hope that the accounting rulemaking bodies consider the implications of their recommended changes and how it may affect industry in general and capital formation specifically.

However, those of us with years in the industry and confidence in the process believe that even if the rules change, some form of leasing will continue to exist because it serves as a critical component in the infrastructure of the capital formation process. Ask the Experts is a weekly column that aims to help finance executives like you find answers to difficult questions.

Submit your questions by E-mailing them to asktheexpert@cfo.com. Unfortunately, we cannot answer all questions individually.

While we will enlist professionals to try to answer your questions, Ask the Experts is meant only to create a dialogue on the topics. Consult legal or financial professionals before acting on any of the advice given by our expert panel.


Joe Sebik, CPA
Vice President, J.P. Morgan Leasing
Member, Equipment Leasing Associations Accounting Committee

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Equipment Leasing: Introduction to Leasing

A lease is a contract in which a customer (lessee) pays a monthly, quarterly, semi-annual or annual rent to an owner (lessor) for the right to use equipment (airplane, computer, barge) for a specific amount of time (i.e. 60 months.

Although leasing began in 2010 B.C.,modern leasing began in the early fifties. The creation of the Investment Tax Credit in 1962 spurred additional growth through "tax-oriented" leasing. New products were quickly developed to meet the growing demand. Over the last 50 years, many leasing companies developed non-tax oriented products such as income funds, operating leases, limited partnerships, vendor programs, and residual sharings in order to remain competitive.

Equipment leasing blossomed over the last 20 years due to:

The banking industry entered the picture, giving credibility to a marketplace which had been previously regarded as a last-resort financing alternative.

The accounting profession produced a document (FASB 13) to help standardize lease reporting in financial statements.

The Internal Revenue Service issued guidelines (Rev Ruling 55-540 and Rev Proc 75-21) to aid lessors and lessees in structuring leasing transactions.

Why do businesses lease:

Cash flow - monthly payments are generally smaller for leases than for loans and they usually require a smaller or no downpayment.

Use vs. ownership - many businesses have discovered they don't need to own the equipment they use. In the past renting and leasing were frowned upon. Today's psychology looks more to the economics rather than the moralities of ownership.

Tax benefits - Depreciation and interest on debt produce potential tax benefits.

Better-looking financial statements - certain leases provide the user with "off-balance sheet" accounting treatment.

Leasing is governed by the Financial Accounting Standards Board (FASB), and the Internal Revenue Service (IRS) and the Uniform Commercial Code (UCC).

Please see various articles on FASB, IRS and the UCC

Confusion arises when these regulatory bodies do not agree. Since lease contracts are fairly complicated, regulatory bodies must decide whether the language of the contract governs the transaction or whether the intention of the parties should be followed.

The following highlights the major differences between FASB and IRS. Basically, ownership interest is transferred to the lessee when:

FASB


explicit transfer of ownership

bargain purchase option exists

term of lease is at least 75% of equipment's economic useful life

present value of payments is at 90% of the equipment's fair market value



IRS


explicit transfer of ownership

bargain purchase option exists

lessor makes less than 20% "at risk" investment in the asset

payments significantly higher than fair rental value

part of the rent can be construed as a recovery or principal or interest



Ownership interest remains with the lessor only if none of these criteria are met. Because the criteria differ somewhat, ownership interest may transfer to the lessee according to one authority and remain with the lessor according to the other.

As far as state and local taxing authorities are concerned, ownership resides with the lessor unless title has been explicitly transferred. This usually makes the lessor responsible for remitting sales and personal property taxes as well as billing the lessee.

In general, there are two major lease types, capital leases and operating leases. Until 1986, both types of leases were very popular leasing products for the equipment leasing industry. However, the 1986 Tax Reform Act, which strongly deemphasized federal tax benefits and lowered corporate tax rates, discouraged the use of capital leases and encouraged the use of operating leases.

A capital lease typically transfers ownership of the equipment from the lessor to the lessee at the end of the lease. Whereas, in an operating lease the lessee returns the equipment to the lessor at the end of the lease without any further obligation.




Tax-oriented leases - Lessors receive tax benefits provided by the federal government. Examples include accelerated depreciation, and tax credits. These types of leases are not as attractive today since they no longer carry the tax benefit of the Investment Tax Credit.

Full-payout leases - transactions in which the total payments other than the residual cover the lessor's total equipment cost. This type of lease would normally be a capital lease for accounting purposes, but could be structured either way for taxes.

Operating leases - used for short-term equipment rental. An example would be an equipment manufacturer who creates a specific rental market, such as specialty railcars and oil tankers. These leases have become very popular with most companies looking for income rather than tax savings.

Leveraged leases - complex financial arrangements in which a third-party lends money to the lessor who puts in some equity to buy an expensive piece of equipment, such as a jumbo jet. The lender bases his credit decision on the creditworthiness of the lessee and makes the loan to the lessor on a non-recourse basis. The lessor keeps all the tax benefits and uses the leverage to create a high return on investment.

Sales-type leases - this term is defined by FASB 13 for manufacturers who build equipment and then lease it to their customers. These leases are structured like direct financing or capital leases for accounting purposes. This type of lease has also been effected due to the restriction of instalment sale accounting and the disproportionate allowance rule. Nonetheless, captive finance companies use this type of structure frequently to help finance parent's products and customers.

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Accounting Theory

The basic concepts of accounting as we understand them today were first published in Italy in 1494 by Luca Pacioli (1445 - 1517.) He described them in a section of his book on applied mathematics entitled Summa de Arithmetica, geometria, proportioni et Proportionalita. Pacioli was a Franciscan monk whose life and work was dedicated to the glory of God.

Accounting is the process of measuring and recording the financial value of the assets and liabilities of a business and monitoring these values as they change with the passage of time. When we refer to a business we could be referring to an individual, a company or any other entity for which accounting records are to be kept (for example a church, club or other non-profit organisation.)

The assets of a business are those things that belong to the business that have a positive financial value i.e. items that could be sold by the business in exchange for money. Examples of assets include land, buildings, vehicles, stock, equipment, rare gold coins, bank accounts with positive balances and money owed to the business by its debtors.

The liabilities of a business are those things that belong to the business but unlike assets have a negative financial value i.e. items that will require the payment of money by the business at some point in the future. Examples of liabilities include unpaid bills, unpaid taxes, unpaid wages, rusty motor vehicles, stock that has passed its use-by date, overdrawn bank accounts and money owed by the business to its creditors.

The equity of a business is defined as the value of the assets minus the value of the liabilities. In other words the equity is the financial value that would be left if all the assets were sold and the money from the sale was used to pay off all the liabilities. Another way of expressing this is to say that the equity is the amount of money that would be released if the business was to be wound up.

The assets, liabilities and equity of a business are all financial measurements that relate to a particular point in time. The financial statement that is used to present this information is known as the balance sheet. The balance sheet is a statement of the assets, liabilities and equity of a business as they exist at a particular point in time.

The relationship between the assets, the liabilities and the equity can be represented algebraically by what is commonly known as the accounting equation. If we use the letter A to represent the assets, the letter L to represent the liabilities and the letter P to represent the equity then the accounting equation is

P = A - L
This equation states that the equity is the value of the assets minus the value of the liabilities. This equation is more commonly written as

A = L + P

This equation states that the value of the assets is equal to the value of the liabilities plus the equity. This is just another way of saying the same thing. Because the equity is defined as the value of the assets minus the value of the liabilities then this equation is always true by definition.

A balance sheet is commonly divided into two sections. One section shows the value of the assets and the other section shows the value of the liabilities and the equity. Each section will be broken down into more or less detail depending on the intended use of the balance sheet. Because the accounting equation is always true the totals of each of the two sections of the balance sheet should always be the same i.e. the balance sheet should always be in balance.

The financial measurements we have looked at so far are used to describe the financial position of a business at a particular point in time. For this reason the balance sheet is also known as the statement of financial position. It presents a summary of the business' financial position at a particular point in time. However in order to gain a complete financial picture of a business we need to recognise that the financial position of the business is undergoing constant change.

As a business engages in various commercial activities such as buying, selling, manufacturing, maintaining equipment, paying rent and other expenses, borrowing, lending or investing then the value of the assets, liabilities and equity will change and these changes will have an effect on the balance sheet. The only thing we can be sure about at any point in time is that the accounting equation A = L + P will always apply. In other words even though the balance sheet is always changing from day to day we can be certain that it will always balance or should do so if it has been prepared correctly.

Recognising that the financial position of a business is constantly changing leads us to the definition of two additional financial measurements that relate to a period of time (unlike assets, liabilities and equity that relate to a particular point in time.)

The income of a business is the sum of those things that increase the value of the assets without any corresponding increase in the liabilities or any new investment by the owners of the business. Examples include revenue from the sale of goods, equipment or services supplied, rent or interest received and capital gains.

The expenses of a business are those things that reduce the value of the assets without any corresponding reduction in the liabilities or any capital drawings by the owners. Examples include the cost of stock and raw materials, rent or interest paid, electricity bills, telephone, wages, taxes, dividends, depreciation and donations to charity.

The income and expenses of a business are financial measurements that relate to a specified period of time rather than a specific point in time. The financial statement that is used to present this information is known as the income statement. The income statement is a statement of the income and expenses of a business as they occur during a specific period.

If we use the letter I to represent the income over a specified period of time and the letter E to represent the expenses over that same period we can represent the relationship between the assets, the liabilities, the equity, the income and the expenses by using a modified form of the accounting equation as follows

A = L + P + (I - E)

This equation states that the value of the assets is equal to the value of the liabilities plus the equity plus the excess of income over expenses. Another way of writing this equation is

A + E = L + P + I

This equation states that the value of the assets plus the expenses is equal to the value of the liabilities plus the equity plus the income. This is just another way of saying the same thing. However it is helpful to express it in this way when we come to consider the practice of bookkeeping below.

The income statement is commonly divided into two sections in a similar fashion to the balance sheet. One section shows the total income and the other section shows the total expenses. Like the balance sheet each section will be broken down into more or less detail depending on its intended use. However unlike the balance sheet the totals of each of the two sections are unlikely to be the same. The difference will usually be shown as a separate item at the bottom of the income statement and if the total income exceeds the total expenses it will be given a title such as retained earnings, net profit or excess of income over expenditure. If the total expenses exceed the total income it will instead be called something like retained loss, net loss or excess of expenditure over income.

Income and expenses are financial measurements that relate to the performance of a business during a specified period of time. For this reason the income statement is also known as the statement of financial performance. It describes the performance of a business during a specified period. It is sometimes also referred to as the profit and loss statement.

In order to produce a balance sheet or an income statement it is necessary to have a systematic method of recording all the activities or events that have an effect on the financial measurements (A, L, P, I and E) described above. Traditionally these events were entered by hand into a set of books or accounts. More recently it has become common practice to enter these into a computer accounting system. Each entry is referred to as an entry and the practice of maintaining these entries in the accounts is referred to as bookkeeping. The act of placing a particular entry into an account is known as posting. The total of all the entries in an account is known as the balance of that account. The accounts themselves are referred to collectively as the general ledger or sometimes just the ledger.

Because each business will have different assets, liabilities, income, expenses and equity categories the accounts it uses to record its activities will vary from one business to another. This set of accounts that a business creates in the general ledger is known as the chart of accounts.

Each account in the ledger will be categorised into one of the five types of financial measurements described above (A, L, P, I or E.) Because the accounting equation

A + E = L + P + I

is always true the total of all the A and E account balances in the ledger must be equal to the total of all the L, P and I account balances if the ledger is to represent a logically correct picture of the finances of the business. If this is the case then we say that the accounts are in balance or that the ledger is in balance. For the ledger to remain in balance whenever an entry is posted to an account matching account entries must be posted at the same time to ensure that the total of the A and E account balances remain the same as the total of the L, P and I account balances. For this reason bookkeeping is often referred to as double-entry bookkeeping.

Most postings consist of two entries but there is no reason why there cannot be three or more entries posted at the same time provided that the ledger remains in balance.

Traditionally a report was prepared showing the total of the A and E account balances and the total of the L, P and I account balances to ensure that these totals were the same. This report was known as a trial balance. Because most computer accounting systems will not allow entries to be posted unless the accounts remain in balance this has in many ways obviated the need for a trial balance.

An entry that increases the balance of an A or E account or reduces the balance of an L, P or I account is known as a debit. An entry that reduces the balance of an A or E account or increases the balance of an L, P or I account is referred to as a credit. Traditionally hand-written books were divided into two columns. Debits were entered into the left-hand column and credits into the right. In fact the traditional definition of a debit is an entry on the left-hand side of an account. Conversely a credit was defined as an entry on the right-hand side of an account. In order for the ledger to remain in balance the total debits must equal the total credits.

It is interesting to note that neither of these definitions of debit and credit are intuitive or immediately obvious. Neither can they be deduced easily from their commonly understood meanings. This partly explains why students who are learning accounting for the first time have difficulty understanding the meaning of debits and credits. The traditional definitions come from the commonly established practice of manual double-entry bookkeeping that puts debits on the left and credits on the right.

It is worthwhile repeating the more precise definitions of debit and credit given above as they are derived from the accounting equation since familiarity with them is essential for a proper application of accounting practice to the process of setting up and maintaining a general ledger.

A debit is an entry in a general ledger account that increases its balance if it is an A or E account and reduces its balance if it is an L, P or I account.

A credit is an entry in a general ledger account that reduces its balance if it is an A or E account and increases its balance if it is an L, P or I account.

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Activity-based costing

In a business organization, Activity-Based Costing (ABC) is a method of assigning the organization's resource costs through activities to the products and services provided to its customers. It is generally used as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing and identification and measurement of process improvement initiatives.

Historical development

Traditionally cost accountants had arbitrarily added a broad percentage of expenses onto the direct costs to allow for the indirect costs.

However as the percentages of indirect or overhead costs had risen, this technique became increasingly inaccurate because the indirect costs were not caused equally by all the products. For example, one product might take more time in one expensive machine than another product, but since the amount of direct labor and materials might be the same, the additional cost for the use of the machine would not be recognised when the same broad 'on-cost' percentage is added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another.

The concepts of ABC were developed in the manufacturing sector of the United States during the 1970s and 1980s. During this time, the Consortium for Advanced Manufacturing-International, now known simply as CAM-I, provided a formative role for studying and formalizing the principles that have become more formally known as Activity-Based Costing.

Robin Cooper and Robert S. Kaplan, proponent of the Balanced Scorecard, brought notice to these concepts in a number of articles published in Harvard Business Review beginning in 1988. Cooper and Kaplan described ABC as an approach to solve the problems of traditional cost management systems. These traditional costing systems are often unable to determine accurately the actual costs of production and of the costs of related services. Consequently managers were making decisions based on inaccurate data especially where there are multiple products.

Instead of using broad arbitrary percentages to allocate costs, ABC seeks to identify cause and effect relationships to objectively assign costs. Once costs of the activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly products.

Activity-based costing was first clearly defined in 1987 by Robert S. Kaplan and W. Bruns as a chapter in their book Accounting and Management: A Field Study Perspective. They initially focused on manufacturing industry where increasing technology and productivity improvements have reduced the relative proportion of the direct costs of labor and materials, but have increased relative proportion of indirect costs. For example, increased automation has reduced labor, which is a direct cost, but has increased depreciation, which is an indirect cost.

Like manufacturing industries, financial institutions also have diverse products and customers which can cause cross-product cross-customer subsidies. Since personnel expenses represent the largest single component of non-interest expense in financial institutions, these costs must also be attributed more accurately to products and customers. Activity based costing, even though originally developed for manufacturing, may even be a more useful tool for doing this.

Methodology
1. Cost centres
Cost centres are divisions that add to the cost of the organization, but only indirectly add to the profit of the company. Typical examples include Research and Development, Marketing and Customer service.

Companies may choose to classify business units as cost centres, profit centres, or investment centres. There are some significant advantages to classifying simple, straightforward divisions as cost centres, since cost is easy to measure. However, cost centres create incentives for managers to underfund their units in order to benefit themselves, and this underfunding may result in adverse consequences for the company as a whole (reduced sales because of bad customer service experiences, for example).

Because the cost centre has a negative impact on profit (at least on the surface) it is a likely target for rollbacks and layoffs when budgets are cut. Operational decisions in a contact centre, for example, are typically driven by cost considerations. Financial investments in new equipment, technology and staff are often difficult to justify to management because indirect profitability is hard to translate to bottom-line figures.

Business metrics are sometimes employed to quantify the benefits of a cost centre and relate costs and benefits to those of the organization as a whole. In a contact centre, for example, metrics such as average handle time, service level and cost per call are used in conjunction with other calculations to justify current or improved funding.


2. Fixed cost

In cost accounting, a part of management accounting, fixed costs are expenses that do not change in proportion to the activity of a business, within the relevant period or scale of production. For example, a retailer must pay rent and utility bills irrespective of sales. Unit fixed costs, called average fixed costs (AFC), decline with volume, following a rectangular hyperbola as the inverse of the volume of production: AFC = FC/N.

Variable costs by contrast change in relation to the activity of a business such as sales or production volume. In the example of the retailer, variable costs may primarily be composed of inventory (goods purchased for sale), and the cost of goods is therefore almost entirely variable. In manufacturing, direct material costs are an example of a variable cost. An example of variable costs are the prices of the supplies needed to produce a product.

Along with variable costs, fixed costs make up one of the two components of total cost. In the most simple production function, total cost is equal to fixed costs plus variable costs.

In microeconomics and business, the difference between fixed costs and variable costs (and the related terms average cost and marginal cost) is crucial, as each will influence production decisions for profit maximization differently. In the most simple cases, fixed costs do not affect production decisions, because they cannot be changed, and management will choose to produce if sales prices are above the cost of each additional unit (marginal cost).

Fixed costs should not be confused with sunk costs. From a pure economics perspective, fixed costs may not be fixed in the sense of invariate; they may change, but are fixed in relation to the quantity of production for the relevant period. For example, a company may have unexpected and unpredictable expenses unrelated to production, and these would not be considered part of variable costs.

It is important to understand that fixed costs are "fixed" only within a certain range of activity or over a certain period of time. If enough time passes, all costs become variable. Similarly, not all indirect costs are fixed costs; for example, advertising expenses or labour costs are indirect costs that are variable over a slightly longer time frame, as they may not be subject to change in the short term, but may be easily adjustable over a longer time frame. For example, a firm may not be able to vary the number of employees (and hence labour costs) in the short term due to contract obligations, but be able to lay employees off or otherwise change these costs.

In accounting terminology, fixed costs will broadly include all costs (expenses) which are not included in cost of goods sold, and variable costs are those captured in costs of goods sold. The implicit assumption required to make the equivalence between the accounting and economics terminology is that the accounting period is equal to the period in which fixed costs do not vary in relation to production. In practice, this equivalence does not always hold, and depending on the period under consideration by management, some overhead expenses (such as sales, general and administrative expenses) can be adjusted by management, and the specific allocation of each expense to each category will be decided under cost accounting.

In business planning and management accounting, usage of the terms fixed costs, variable costs and others will often differ from usage in economics, and may depend on the intended use. For example, costs may be segregated into per unit costs (costs of goods sold), fixed costs per period, and variable costs as a proportion of revenue. Capital expenditures will usually be allocated separately, and depending on the purpose, a portion may be regularly allocated to expenses as depreciation and amortization and seen as a fixed cost per period, or the entire amount may be considered upfront fixed costs.

3. Variable cost

Variable costs are expenses that change in proportion to the activity of a business. In other words, variable cost is the sum of marginal costs. It can also be considered normal costs. Along with fixed costs, variable costs make up the two components of total cost. Direct Costs, however, are costs that can be associated with a particular cost object. Not all variable costs are direct costs, however; for example, variable manufacturing overhead costs are variable costs that are not a direct costs, but indirect costs.Variable costs are sometimes called unit-level costs as they vary with the number of units produced.

For example, a manufacturing firm pays for raw materials. When activity is decreased, less raw material is used, and so the spending for raw materials falls. When activity is increased, more raw material is used and spending therefore rises. Note that the changes in expenses happen with little or no need for managerial intervention.

A company will pay for line rental and maintenance fees each period regardless of how much power gets used. And some electrical equipment (air conditioning or lighting) may be kept running even in periods of low activity. These expenses can be regarded as fixed. But beyond this, the company will use electricity to run plant and machinery as required. The busier the company, the more the plant will be run, and so the more electricity gets used. This extra spending can therefore be regarded as variable.

In retail the cost of goods is almost entirely a variable cost; this is not true of manufacturing where many fixed costs, such as depreciation, are included in the cost of goods.

Although taxation usually varies with profit, which in turn varies with sales volume, it is not normally considered a variable cost.

In most of the concerns, salary is paid on monthly rates. Though there may exist a labour work norm based on which the direct cost (labour) can be absorbed in to cost of the product, salary cannot be termed as variable in this case.

4. Cost driver

A Cost Driver is any activity that causes a cost to be incurred. The Activity Based Costing (ABC) approach relates indirect cost to the activities that drive them to be incurred. In traditional costing the cost driver to allocate indirect cost to cost objects was volume of output. With the change in business structures, technology and thereby cost structures it was found that the volume of output was not the only cost driver. Some examples of indirect costs and their drivers are: maintenance costs are indirect costs and the possible driver of this cost may be the number of machine hours; or, handling raw-material cost is another indirect cost that may be driven by the number of orders received; or, inspection costs that are driven by the number of inspections or the hours of inspection or production runs. Generally, the cost driver for short term indirect variable costs may be the volume of output/ activity; but for long term indirect variable costs, the cost drivers will not be related to volume of output/ activity. John Shank and Vijay Govindarajan list cost drivers into two categories: Structural cost drivers that are derived from the business strategic choices about its underlying economic structure such as scale and scope of operations, complexity of products, use of technology, etc and Executional cost drivers that are derived from the execution of the business activities such as capacity utilization, plant layout, work-force involvement, etc. To carry out a value chain analysis, ABC is a necessary tool. To carry out ABC, it is necessary that cost drivers are established for different cost pools.

Direct labour and materials are relatively easy to trace directly to products, but it is more difficult to directly allocate indirect costs to products. Where products use common resources differently, some sort of weighting is needed in the cost allocation process. The measure of the use of a shared activity by each of the products is known as the cost driver. For example, the cost of the activity of bank tellers can be ascribed to each product by measuring how long each product's transactions takes at the counter and then by measuring the number of each type of transaction.

Limitations

Even in activity-based costing, some overhead costs are difficult to assign to products and customers, for example the chief executive's salary. These costs are termed 'business sustaining' and are not assigned to products and customers because there is no meaningful method. This lump of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.

Although some may argue that costs untraceable to activities should be "arbitrarily allocated" to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.

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A SHORT HISTORY OF ACCOUNTING AND BUSINESS

Preface
The history of accounting is as old as civilization, among the most important professions in economic and cultural development, and fascinating. That’s right, fascinating! Accountants invented writing, developed money and banking, innovated the double entry bookkeeping system that fueled the Italian Renaissance, were needed by Industrial Revolution inventors and entrepreneurs for survival, helped develop the capital markets necessary for big business so essential for capitalism, turned into a profession that brought credibility for complex business practices that sparked the economic boom of the 20th century, and are central to the information revolution that is now transforming the global economy. Twenty-first century accounting will resemble rocket science and will continue to be among the critical professions of the new century. Accountants have not excelled in public relations, but their story is fascinating. And here it is.
There are no household names among the accounting innovators; in fact, virtually no names survive before the Italian Renaissance. It took archaeologists to dig up the early history and scholars from many fields to demonstrate the importance of accounting to so many aspects of economics and culture. This book covers the great events. From merchants and scribes long before writing and money, to today’s global information networks.
Accounting history is summarized in seven chapters. An overview places accounting in perspective. In some ways accounting hasn’t changed since Paciolli wrote the first textbook in 1494. On the other hand, accounting has led the information revolution. Many aspects of 21st century accounting will be unrecognizable by today’s professional leaders. Understanding the role of financial needs today and in the future requires an understanding of the past. The role of accounting in the ancient world is coming into clearer focus with new archaeological discoveries and innovative interpretations of the artifacts. It is now evident that writing developed over at least five thousand years—by accountants. The roles of trade, money, and credit also have long and complex histories. It is difficult to overestimate the importance of double entry bookkeeping. It was central to the success of the Italian merchants, necessary to birth of the Renaissance. The Industrial Revolution depended on inventors and entrepreneurs, not accountants. It is the survival of their firms that required innovative accounting and, later, the development of a profession. Big business, particularly the railroads, required capital markets that depended on accurate and useful information. This was supplied by the expanding accounting profession. The earliest of the Big Eight started in mid-nineteenth century London. Turn of the century America saw the rise of really big business, governable because of improvement in cost accounting. But the Crash of 1929 and the subsequent Great Depression demonstrated problems with capital markets, business practices, and, yes, considerable deficiencies in accounting practices. Many aspects of current accounting practices started with the flood of business regulations from the Roosevelt administration. The earliest electronic computers were funded to assist the World War II efforts. By 1950 massive efforts were begun to automate accounting practices, a continuing process. A global real-time integrated system is a near reality, suggesting new accounting paradigms replacing double entry and generally accepted accounting principles.
Why read this book? What we do today in accounting is based on a 10,000-year history. Understanding this history is necessary to comprehending the linkages of accounting to career potential, financial regulation, tax, accounting systems, and management decision issues. This history also is a powerful tool to predict the accounting of the next generation.
Overview—Accounting Toward the 21st Century: Where are we Now? How Did we Get Here?
Accounting at any point in time and place can represent the level of civilization then and there. As civilization began around villages and developed into empires, scribes invented record keeping systems and kept running inventories of wealth, trade, and tribute payments. Accountants invented writing using abstract record keeping as temple (and later imperial) wealth and complexity expanded. Double entry bookkeeping played a crucial role of Italian merchants’ superior trading skills. Would the Renaissance have been possible without double entry?
Business history involves long-term processes that incorporated dozens of specific innovations. For example, the Industrial Revolution included many inventions from Watt’s steam engine to Hargreave’s spinning jenny. Equally important were the entrepreneurs who used the inventions successfully, often combining several innovations to create a successful business, and the changes to society associated with a new urban labor class. The concept of time took on a whole new meaning. This was a revolution not because it occurred quickly, but because it changed civilization in fundamental ways. The middle class (that’s most of us) is a direct result, as is the associated mind set—the work day, commuting, a standard of living well above subsistence, and so on. Accounting’s role was primarily one of business survival, which led to economic innovation.
Railroad history is tied directly both to the Industrial Revolution and the development of capital markets to finance large business enterprises. After all, the locomotive was a steam engine turned sideways to drive wheels. The business people organizing the first railroads were big thinkers, planning the use of technology that did not exist. Railway surveying, roadbeds, tracks, rail bridges, tunnels, locomotives, and freight and passenger cars did not exist (except for prototypes). Capital markets were expanded and new contractual arrangements invented to finance railroad construction and operations. The railroads also introduced new accounting problems, like how to deal with a vast infrastructure that wears out or becomes obsolete.
The inventors and the entrepreneurs of the Industrial Revolution were not cost accountants. But the entrepreneurs that survived the inevitable depressions were. Continued success (and avoiding bankruptcy) required accounting expertise. Beginning in the 19th century the rise of the accounting profession benefited business and investors, especially big business, banks, and other institutional investors. Accounting expertise added both knowledge and credibility to complex financial transactions.
The first mammoth monopoly was Standard Oil, organized as a holding company in 1870. The first billion-dollar corporation was U. S. Steel, formed in 1902. Henry Ford’s moving assembly line turned the automobile industry into a gigantic industry. Autos are useful to analyze the dominance of American big business in the first half of the 20th century and many of the problems in the second half. These include several accounting topics—both successes and stubborn problems.
British and American cost accountants and engineers developed calculations and reporting techniques that allowed the corporate moguls to control vast business empires from corporate headquarters. Part of the process was to buy out or destroy competitors, part of the business history. It is not clear that these practices were illegal or considered unethical. In any case, accountants were willing participants. The cost accounting (and to a lessor extent, auditing) techniques were essential to the dominance of American industry in the first half of the 20th century.
Monopoly practices, price fixing, speculation, and market manipulation are part of the Big Business story. So are the market collapse of 1929 and the Great Depression. This massive market failure led to bigger government and increasing regulation, including the securities markets and accounting. Accounting is highly regulated directly because of government response to perceived market and accounting abuses. The role of government is subject to continuing debate, but there is no doubt about the direction of government in the 20th century. The Reagan Revolution may have slowed down the process, but certainly didn’t reverse it.
The current world of business and accounting is based on the computer and the Information Revolution, which has been ongoing for nearly 50 years and is exploding into the 21st century. The computer proved to be a perfect fit to business. Computers efficiently crunch the repetitive transactions of accounts receivable and payable, inventories, and payrolls. IBM had the vision early and Big Blue dominated the history of business mainframes and became a billion dollar blue chip multinational. Technology exploded and new industries (and billionaires) created: personal computers, networks and the Internet, and "killer applications" software such as the electronic spreadsheet. The explosion continues as business and accountants struggle to keep pace with incredible technology progress.
Capital markets are complex, global, operate 24 hours a days, and rely on accounting information. The role of accounting expands as technology advances. Soon, virtually any information can be transmitted instantaneously across the globe. Who will be up to the challenge? The visionaries will most likely succeed, those with 20th century blinders likely to drop by the wayside.
To understand accounting today and predict tomorrow, one must know the history of accounting. That accounting history parallels the rise and development of civilization. Accounting has been surprisingly inter-connected with technology. The accounting-technology-civilization connection is the focus of this book.

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PAy per Click succes Secret

by Siripong Roongruangsuwan

The landing page is one of the most significant elements in PPC. There are many resources about how to optimize the landing page. Within this article, you will discover and learn best practices, basic great tips and inside secrets of how to build and optimize your own landing page as an affiliate marketing entrepreneur. It is obvious that if you can not turn those visitors into buyers, you will not make any money on the internet through PPC online advertising.

For affiliate marketing entrepreneurs, the most effective approach to maximize profits on the internet is to provide a solid review page and quality content for what visitors are looking. Below are the best practices and basic great tips you must know when you are advertising your affiliate products through PPC online advertising.

1. Make a Strong Review and Recommendation. With the strong unbiased reviews and recommendation, there are better opportunities to turn your visitors into buyers. Many studies reveal that people are always looking for their solution toward to their problem. Also, they love the personal recommendation with unbiased. To write the strong reviews, you should test the products hardly by yourself. This is the best way to give the strong recommendation. However, it can cost you a lot if you go for this approach. Another great way is to do effectively research the product in detailed. You can research others' opinions, read reviews, participant in the forums for exchanging and try trail version of those products.

The real secrets of giving strong recommendation are to: (1) test heavily the products by yourself (2) exchange the ideas and opinions in the forum about those products (3) research effectively the products in detailed and (4) provide great real customer testimonials.

2. Address Clear Benefits for Readers. Many researches and experiments reveal that benefits are very influenced for visitors. With those clear benefits, it is easier to convince those visitors to make a purchase. Thus, you have to give clear statement of benefits on your landing page. However, it is much easier to turn the visitors into the buyers if you can address the strong benefits direct to what visitors are searching.

The real secrets of the power of benefits are to: (1) list all possible benefits for each products in your review page or landing page (2) highlight the strong benefits for what visitors are looking and (3) keep those benefits short and cut to the point.

3. Highlight Search Keywords in the Landing Page. Obviously, you are advertising and building the landing page based on the given focus keywords (or search keywords). Thus, it is a great idea to highlight those keywords into the landing page. You should include those keywords in the title, header and content as much as possible.

The real secrets of including those keywords are to: (1) choose the niche keywords for what those visitors are looking (2) include those keywords into title, META tag, header, and content (3) choose and insert secondary keywords (another niche keywords) into the landing page and (4) focus on the keyword density; it should be around 2-5% of total words.

4. Provide Easy Navigation for Leading to Merchants' Site. The key to your success for converting those visitors to buyers is to lead those visitors to the merchants' site. You have to provide easy navigation for leading to those sites. The easier your navigation is, the more opportunities for visitors to click and visit are!

The real secrets of navigation are to: (1) provide more than one exit links leading to merchants' site (2) lead the visitors to the right landing page and (3) ensure that those links are workable.

5. Compare Multiple Products at a Time. Another best practice for building great review landing page is to provide the comparison among 3-10 affiliate products at a time. This has been proven that it is the most effective way to grab the visitors' attention. If you provide less than 3, it seems that you do not conduct a well research. Otherwise, it will be too much if you compare more than 10 affiliate products at a time in the landing page.

The real secrets of comparison are to: (1) list all possible advantages and disadvantages of those affiliate products (2) keep those comparison short and precise and (3) give ranking number for those affiliate products with unbiased.

6. Keep it Clear, Complete and Concise. Obviously, the landing page should be a simple single page where you put all possible reviews, recommendations, comparison, customer testimonials and ranking. Many studies reveal that the golden rule of highly successful and conversion rate landing page is to keep your landing page clear, complete and concise.

The real secrets are to: (1) review, revise and minimize the content and (2) format the landing page properly (e.g. font, layout and size).

Final thought, the landing page is one of the most significant elements in PPC online advertising. For affiliate marketing entrepreneurs, the review page is a crucial page for advertising their affiliate products through PPC online advertising in the affiliate marketing business.

About The Author
Siripong R. or zMillionDollars is a recognized authority on the subject of building super-profitable pay per click campaigns. His website, www.iPayByClick.com, provides a wealth of informative articles and resources on everything you'll ever need to know about pay per click advertising.

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