The proposed solution to the John and Mary Farm Case study mainly pertains to financing the farm accounts well. Both John and Mary were concerned to know the total difference in the production cost between their and their son’s farms. Owing to the fact that they both shared machinery and instruments for farming, it is but obvious to look into the profitability of both the farms, individually. Neither of them asked for any share or rent for the machinery, thus the sole profit for either of them was dependent upon the crop sold.
The son of John and Mary was more inclined towards production of crop and enhancing its quality through effective farming techniques. He was not too keen to deal with the managerial, accounting and financing part of the business. Thus, in order to know the profitability of each farm for each year independently, it was essential to adopt advanced and automated farm accounting techniques.
John was thus very much eager to appoint these techniques to effectively utilize the financial outcomes. A managerial accounting system is what is expected out of the solution. This will not only help the current generation produce profit, but also will help the coming generations to yield from it.
This technique will fruitfully yield in developing a good resource for the farms for future references. The preparation work will start with making entries into automated systems of manual data books. The preceding year entries should not coincide with those of the current year. Also all the different crops and pieces of land should have separate data book entries. The machinery expenses, part time labor, cost of seeds etc. should find their place in the book. Merger of no two attributes should be done. This will provide a transparent picture in front of the farm owners. Also necessary steps, to enhance the growth and optimize outputs, can be sought [Hipolito, Et Al, 2008].
The only drawback visible is the inefficiency of making a record table. Old farmers do not seem to appoint such methods. Besides, higher illiteracy rate among them forbid them to manage manual records. No regular audit and review of these entries can also serve as a failure to the system.
Activity Based accounting v/s Traditional Accounting
Activity based accounting is a rather new terminology adopted under Activity Based Costing (ABC) methodology. The process involves allocation of equal weightage to all the different activities incorporated in the procedure and cost calculation, thereafter, depending upon the finances associated with each activity. This gives a clearer picture to the finance manager. Methods to increase profit can easily be concluded depending on the financial reports generated thereafter.
Traditional Accounting techniques involve a summed up weightage given to the work and calculation of cost after studying it. In the Farm Financing case, it is more beneficial to use the activity based accounting as one can get the total information of all the costs involved that incorporate those of seeds, maintenance, machinery, labor etc. One can even cut down on a few grounds and utilize in other works this way. It’s beneficial as it gives more freedom to the finance manager as well as the owner.
If the activity based accounting is not used, the problems that can emerge are related to individual costing of products, personalized finance dedication to important processes, slowing down the non-yielding ones and encouraging new ones that yield better, employing newer methods for more profit, optimization of result by cutting down on transportation and labor charges etc. The farm owners can use part time labors and not full time ones, as that wastes their resource, unfortunately [D. H. Stamatis, 2001].
The alternative solution of accounting farm procedures on activity basis is a much better and preferred methodology that even involves cost cutting scope, in times of scarcity.
Fixed Cost v/s Variable Cost
The author said that it is very unfair for those who pay regular fixed cots for a particular commodity, when they hear that every other one is paying only a nominal chunk of what they are paying, for the same service. If the news of such variable dispositions spread, it can negatively harm the image of the company. The goodwill can be presumed to be lost, entirely. Thus, it is more important to get this thought out of the business model.
Activity Based Accounting (ABC) is a much better alternative than this one as it pays attention to even the minutest of details in the financial report, individually. This will make it emphasize more of the pattern of growth, yielding out on preceding years’ income, method to adopt a more profitable strategy and building up managerial standards to look after the condition and provide regular reports about the progress of the issue and also review of the past reports.
If a department has just one staff member, the expense is fixed. Multiple numbers of people provide more scope of multiplying work, better quality results and competition leading to efficient output [Roger K. Harvey, D.B.A., .
The cost cutting techniques can only be used in ABC as the variable and fixed accounting do not provide freedom for them. No organization can shut down an important department by terminating the service of the one and only employee in it. Variable numbers give more options, opportunities and exposure.
Hipolito, Et Al, Fundamentals of Agribusiness Accounting’2008 Ed, 2008, Rex Bookstore, Inc.
Roger K. Harvey, Throw Out Fixed and Variable Cost Thinking— In Activity-Based Costing for Distribution Decisions1, from < www.valueassociates.org/Web%20Articles/White1.pdf>, accessed on 22nd November, 2009, Value Associates
Stamatis D. H., Advanced Quality Planning: A Commonsense Guide to AQP and APQP, 2001, Productivity Press