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Meaningful Metrics for a Smart Society
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Date: 2019-03-26 Page is: DBtxt001.php L0700-TVM-MA-MANAGEMENT-ACCOUNTING

TRUE VALUE METRICS
MANAGEMENT ACCOUNTING
Very powerful foundation for money transactions and profit performance
A lot to do to get impact management up to this standard

What is TVM Management Accounting?
TVM Management Accounting is a way to improve decision making where the priority is to improve quality of life for everyone and eliminate the unsustainability of a dangerously materialistic consumer economic system that puts profit ahead of people and does dangerous damage to the environment
TVM Management Accounting is a way to facilitate accountability in an effective way
.
MEASUREMENT MATTERS
Measure Change in State and you Measure Progress

Accounting for ALL the
SOCIO-ENVIRO-ECONOMIC SYSTEM

MANY CHALLENGES
to improve Quality of Life (SOCIETY) with no damage to the ENVIRONMENT and increase PROFITS
and to understand behavior of COSTS, PRICES and VALUE throughout the system


Management Accounting for ALL the segments of the system
Conventional management accountancy addresses performance related to what goes on within a reporting entity wirhin a reporting envelope and about financial resources. Everything else is ignored within the core framework of conventional accountancy.
TrueValueMetrics (TVM) addresses performance in a complete holistic way ... everything should be taken into account ... that is, everything that is material should be taken into account.
Three (3) segments
The idea of a 'triple bottom line' (TBL) was articulated in the 1990s (by John Elkington), but economists have thought in these terms since the early days of classical economics. There were three 'factors of production': Land, Labor and Capital ... not so very different from the Planet, People and Profit of the TBL.
TVM builds on this by framing the data so that there is accounting for both the STATE (balance sheet) and the FLOWS (P&L accounts) ... and doing this for All of the socio-enviro-economic system which incorporates social capital, natural capital and economic capital.
As regards FLOWS, TrueValueMetrics differentiates between the good flows and the bad flows in a way that is not much different from the revenue (credits) and the cost (debits) of conventional accountancy.
How many numbers to report?
It is just one number that have been used for generations to report performance ... that is profit. All sorts of additional numbers have been derived from this to understand profit performance of an organization and how this profit relates to stock price performance. Essentially everything in the modern economy is profit centric. This is both reasonable and catastropic.
Scientists and academics of many different disciplines have numbers associated with their speciality, but there is little way for these numbers to be used for effective management reporting about anything in their present form. They are important, and should be taken into account in a coherent rigorous way.
Too many different numbers is a problem. People cannot manage when there are too many different numbers, and especially when they appear to be telling different stories.
Accordingly TVM subscribes to the idea that LESS is MORE, and the goal is to have just three (3) numbers to describe socio-enviro-economic performance ... a number each for socio (social capital), enviro (natural capital) and economic (economic capital which includes financial capital).
Accounting (numbering) for progress
Every well trained accountant knows that the change in capital (balance sheet) over a period of time is the same as the profit (that is revenues net of costs) during the same period.
This is important because it means that progress can be measured and reported on without having any knowledge of the activities that have caused the changes in the capital.
TPB note: This idea has been important in my career, though it eventually made me extremely unpopular. I have carried out hundreds, if not thousands of project evaluations for the UN, the World Bank and others and in almost every case the project reporting and the funding agency analysis was concluding that the projects were being usccessful. To the extent that the money was being spent doing the activities planned for the project, there was success ... but in terms of what the project was meant to accomplish, the impact was negligible. For some of the bigger projects, the broader balance sheet analysis together with some understanding of macro-economic behavior, it was pretty clear that the projects were having net bad impacts.
Dambisa Moyo in her 2009 book: 'Dead Aid - Why Aid Is Not Working and How There Is a Better Way for Africa' drew pretty much the same conclusions that I had been drawing. I would argue, however, that what she now thinks is the solution is in fact merely another way that will get bad impact.
Accounting (numbering) for performance
The characteristics of an effective system for numbering performance include:
... There must be numbering for the three dimensions: socio, enviro and economic.
... The numbering must reflect the scale of the GOOD and the scals of the BAD
... The numbering must enable better decision making by ALL of the ACTORS
... The numbering must enable accountability for ALL of the ACTORS
... The numbering must enable better design of ALL the ACTIVITIES or PROCESSES (including throughout the supply chain, during use and in post use waste chains)
... The numbering must enable accountability for ALL the ACTIVITIES or PROCESSES (including throughout the supply chain, during use and in post use waste chains)
... The numbering must enable better decisions in a PLACE (village, city, community, country)
... The numbering must enable accountability with resoect to the PLACE (village, city, community, country)
... The numbering must enable better PRODUCTS
... The numbering must enable accountability for the performance of PRODUCTS
While there are many different characteristics needed for an effective numbering of performance, the good news is that the double entry accountancy construct enables this to be done with relative ease in a completely coherent manner.
Standards and variance analysis / Standard Value Profile
Standard costs and variance analysis has been a powerful management tool for corporate cost and profit performance for a long time. This same basic idea can be used to enable an approach to management accounting for the 21st century.
A typical standard cost may be descibed as the cost that should be achieved in production based on technical (engineering) considerations. The standard cost may be detailed in any way that makes variance analysis meaningful. For example, there may be a standard cost related to the work on the products as they go through a specific department. Total production times standard cost for the department in a period may be compared with the actual costs incurred by the department. The difference is a variance which shows how the department is doing relative to what might have been expected. Differences need to be explained. Is it the product cost calculation or is it the department operations. Whatever it is should be fixed. This management process should result in performance improvement as ways to reduce the standard cost are explored as well as ways to improve department performance. Both improving standard costs and improving department costs are measures that help keep score of performance improvement.
Standard costing and variance analysis is a powerful methodology that helps in the understanding of how costs behave. Most 'actual' cost accounting systems have an enormous overhead cost, lots of data, and relatively little useful information. Most of the effort goes into understanding the data and rather little into understanding what is going on with the costs themselves, whether it is a product cost or a process cost. A standard cost system enables a massive reduction in the amount of data needed, and allows for much more thinking about hose the product or process can be improved so that costs are improved.
TPB note: I introduced a standard cost system when I was the CFO for Southern States Inc., a company manufacturing air break switches for the electric utility industry. One of the deapartments was a foundry that produced upwards of 10,000 different castings, most of them in relatively small quantities. An existing 'actual cost system' was expensive with lots of paperwork and massive amounts of data. It did not help at all. Worse, a simple performance metrics used in the foundry for many years ... unit cost per pound of casting ... had resulted in the engineering design department attempting to cost reduce the castings by designing them to weigh less. The development of a 'standard cost' system radically simplifed the analysis system. Every casting, no matter what the detail design went through several steps. Estimating the cost of each of these steps was relatively easy and quite accurate. Some of the steps cost the same no matter what the weight. Other steps varied according to weight. A standard cost for each product could be computed easily based on the technical characteristices of the casting.
Variance analysis made it possible to get some understanding of how the standard costs related to the actual cost. Multiplying the production quantity for each casting times the standard cost for each casting gave a total standard cost for the foundry (and the different sections of the foundry). The accounting system produced the actual costs fot the foundry for the period (and the sections), and comparing the two enabled assessment to be made about the performance of the foundry. The difference ... or variance ... helped to improve the accuracy of the standards and helped to improve the design of the castings and helped to improve the performance of the processes in the foundry. The standard cost system was relatively simple, but it was a powerful tool to improve the performance of the organization.
Standard Value Profile
The Standard Value Profile works in much the same way as Standard Costing ... but everywhere. . The profile (SVP) has a set of numbers that describe a product, not unlike the standard cost referred to above, but it is more complete and includes the cumulative past impacts on social capital, natural capital and economic capital as it has reached this stage in its life cycle, together with what might be described as the net present value of what is likely to happen as the product moves beyond this stage to future use and then the post use waste phase.
As a reminder ... in conventional accountancy, the balance sheet is a record of the accumulated impact of an organization up to the point in time of the balance sheet ... and the valuation of this balance sheet by capital takes this book value and adjusts it to reflect a net present value of future results. Much the same calculation may be done to be incorporated in the standard value profile.
The profile (SVP) has a set of numbers that describe a product, not unlike the standard cost referred to above, but it is more complete and includes the cumulative past impacts on social capital, natural capital and economic capital as it has reached this stage in its life cycle, together with what might be described as the net present value of what is likely to happen as the product moves beyond this stage to future use and then the post use waste phase.
As a reminder ... in conventional accountancy, the balance sheet is a record of the accumulated impact of an organization up to the point in time of the balance sheet ... and the valuation of this balance sheet by capital takes this book value and adjusts it to reflect a net present value of future results. Much the same calculation may be done to be incorporated in the standard value profile.

Cost, Price and Value
ALL of these are important
GO TOP
What is the cost?
Conventional cost accounting adds up all the financial costs of the inputs, and all the costs associated with production such as labor costs, machine use costs, etc. but anything to do with externalities is excluded. Conventional cost accounting only accounts for the costs within the reporting envelope.
It is becoming increasingly apparent that the costs that are not accounted for in conventional accountancy are material to the measurement of performance and should be taken into account in a rigorous manner.
Cost, Price and Value ... three key numbers
Cost, price and value are very key numbers about any economic activity. Though modern society is founded on economic activity, and though there are massive datasets about prices. ... that is what a buyer pays for a product or services, and what prices stocks and other financial interests are trading at, what prices commodities are trading at, etc. etc. there is a surprising lack of information about cost and value.
The explanation why there is little information about costs may well be that those that make decisions would be embarrassed at the internal value chain within their organizations.
Corporate accountancy is only about money cost and money price. True Value Metrics (TVM) uses cost, price and value. The value derivatives of cost, price and value are key numbers that describe economic activity. The relationship between these numbers determines the performance of almost any economic activity. All of these measures are important ... any one missing and the understanding of the dynamic of societal progress is compromised.
What is the cost?
Conventional cost accounting adds up all the financial costs of the inputs, and all the costs associated with production such as labor costs, machine use costs, etc. but anything to do with externalities is excluded. Conventional cost accounting only accounts for the costs within the reporting envelope.
It is becoming increasingly apparent that the costs that are not accounted for in conventional accountancy are material to the measurement of performance and should be taken into account in a rigorous manner.
Cost and value
Cost and value make it possible to calculate value adding ... something that is very important for society. For this to be of greatest use, the calculation of cost must include not only the money cost but also the value consumed associated with the activity.
What is this? In the case of the oil industry, the costs of crude oil production include payments made for royalties, licenses, etc, as well as the costs of exploration, drilling and extracting the oil from the oilfield, and shipping the product to refineries and to market ... but the costs do not take into account in any financial metric the depletion of the resource, and what it would take to replace this resource. This is a huge problem, because the resource being depleted has taken many millions of years to accumulate, and the cost of this
There are other examples ... see ????
Price and value
In some cases price and value are the same. In this situation the value chain through delivery to the final consumer is extracting from the consumer a price that is equivalent to the value. The consumer does not get anything of the added value. In fact the typical business model is one that aims to extract as much revenue from the market as possible.
The use of resources does not automatically mean that there is either going to be efficient or effective use of resources.

Performance ... Efficiency and Effectiveness
Less Data ... More Information ... Better Understanding
GO TOP
Performance ... Efficiency and Effectiveness
Performance is both efficiency and effectiveness. The profit and loss account summarizes the activities of the organization in money terms showing the revenues and the expenditures. The profit and loss account that is presented to outsiders tends to show the least amount of information allowed by law, while the internal cost, analytical and management accounts will show all the information needed to facilitate good decision making ... decision making that will improve profit performance and help the company achieve its goals.
Progress
There is PROGRESS during a period when the STATE at the end of the period (EoP) is better than the STATE at the beginning of the period.
For more on this go to the link
Open L0700-CC-PROGRESS-PERFORMANCE
Open L07-TRENDS-OVERVIEW


Cost efficiency … how much actual was relative to standard
Cost efficiency is how much the actual cost was relative to what the cost should have been … often expressed as a standard cost. There are many ways to evaluate cost performance including also comparison with activities undertaken in other places or with activities undertaken by other organizations.
Well designed data systems makes it possible to compare how much something actually cost with what it should have cost.
Cost efficiency is a measure of how well something is done. Cost efficiency answers the question about whether or not resources used are more or less than would normally be expected? Comparative cost efficiency answers the question about cost relative to other similar works at another time or in another place.
Cost effectiveness … How much value for the cost?
Well designed data also makes it possible to measure the relationship between the cost and the impact … that is the change in value arising for the community. Cost effectiveness is a measure of how well doing something results in getting the desired impact. Did the use of resources solve the problem that is being addressed or not. Did the use of resources have a favorable impact on the community and quality of life … and was the impact what should have been achieved.
Cost effectiveness is the more complex idea of relating cost to the value of the accomplishment. The idea is simple in theory, but becomes more difficult as the problems being addressed are more complex. TVM uses techniques to get an overall idea of cost effectiveness, and then goes into more detail to assess the way different initiatives contribute to progress. This may require multi-variate analysis of the datasets where there are multiple interventions being used.
TVM accounts for value with as much rigor as possible even though value is perceived differently depending on many subjective elements. TVM uses a system of standard values which makes it possible to compare cost with value on a uniform basis.
Standard costs and standard values facilitate analysis and avoid data overload. Separately TVM allows for the analysis of standard values and the use of this set of metrics to understand differences between societies and to help with the determination of priorities.
External resources complicate analysis. The performance of the community is a function of the amount of external resources needed to maintain a good quality of life. A low performing community is unable to maintain its quality of life without getting external resources. A high performing community needs no external resources to maintain and improve its quality of life.
There are organizations that use large numbers of unpaid volunteers. The labor resource is money free to the organization, but the “opportunity cost” for the volunteers is not zero, and the optimum opportunity for the organization should be bigger than the value of just “stuffing envelopes”!

Derivatives of Cost, Price and Value
PROFIT or LOSS / VALUE ADD or VALUE DESTRUCTION
GO TOP

Profit ... derivative of money cost and money price.
The simple definition of profit is based on money cost and money price. In financial accounting and reporting to corporate stakeholders, profit is the key measure that drives everything. Cost and price make it possible to calculate margins and profits ... and this is what is done in normal corporate accountancy and financial reporting. As we shall see later, in modern financial reporting both cost and price are capable of being distorted so that the most favorable margins and profits are being reported ... something that is allowed by self-serving accounting rules (think FASB) but would not be tolerated where professional accountants embrace the fundamental core principles of accountancy.
But profit is more complex in modern financial accounting. Money profit is no longer just the delta between price and profit but might be something else. The accounts may not simply record assets at their cost but on some other basis ... including “mark to market”! This is a wonderful device for taking into account unrealized profit ... simply by recording their value in the balance sheet at a price that the assets could be sold for based on the present market. Fifty years ago, a practice like this would have been banned absolutely based on the prevailing accounting principles ... but lobbying and legislation has overturned old principles and replaced them with laws and rules that are convenient ... in a rising market ... and very dangerous at any other time! Convenience is not a good principle of accounting.
Profit is at the center of the capitalist economic construct ... and is a useful metric as it relates money revenue with money costs, and serves as a useful and practical proxy for performance and productivity. But profit is is not a good proxy for socio-economic performance and the way quality of life in a community changes ... nor the sustainability of the community. In fact, thoughtless optimizing or maximizing of profit is a fairly certain way of creating an unsustainable future.
Value adding ... derivative of value and cost.
If, rather than just money, the metric of performance is value adding ... that is the increment of value from an activity, then there is a very much better measure of progress and performance. Value ... that is value to society ... is almost totally excluded from modern financial and economic metrics. The reasons are many including (1) it has a subjective dimension that makes valuation difficult; and, (2) it has a devastating impact on the norms of financial valuation of corporate activity.
Cash flow ... derivative of money cost and money inflows.
Cash flow is a metric that relates to sustainability in a world where money is the medium of exchange. Cash is used to pay bills. Money inflows may come from revenues which are a function of price, or they come from financing or some change in the balance sheet like sale of assets. Activities that result in a persistent cash deficit will fail in due course, simply because the money runs out. The timing of the demise of the activities may be delayed by borrowing ... but that also will fail in due course.
Sustainability.
Activities that have value adding positive and cash flow being positive are sustainable ... and desirable. Activities that are cash flow positive and profitable are money sustainable but maybe not socio-economically sustainable ... and these activities have come to dominate rich developed economies in the post World War II period. By ignoring critical issues of value destruction society had the impression of wealth being created ... but much was mere puffery and the balloons were bound to break. But worse, society built the appearance of wealth while setting the stage for potentially catastrophic global disasters in the future.

Disbursement is no way to measure performance
A big reason why public sector budgeting is ineffective
GO TOP
Disbursement is no way to measure performance
The World Bank did a disservice to itself and to the whole process of development by using the amount of loan disbursed as a proxy measure for how much development progress was being made. It was a stupid idea and went on for years.
In the current global malaria control programs, the amount being disbursed is a more prevalent measure than the amount of malaria disease reduction. The idea of effectiveness measurement is missing!
TPB Note: I did my first assignment for the World Bank in 1978 when Robert McNamara was still the President of the Bank. The speed and amount of disbursement was a key metric of Bank performance, and was still an important metric 30 years later. Worse, far too many of the evaluations were done at a superficial level and in many cases by individuals and organizations that were unwilling to risk disappointing their client. My own career was not advanced by me trying to alert Bank staff to issues that needed to be addressed.

SOME EXAMPLES OF COSTING SYSTEMS
ILLUSTRATION ONLY / NOT ENDORESED BY TVM

Cost Accounting ... What is a Cost Accounting System?
What is a Cost Accounting System?
Provided by James R. Martin, Ph.D., CMA Professor Emeritus, University of South Florida
Open file 12856
Open External link
'http://maaw.info/Chapter1.htm#THEMATCHINGCONCEPTANDCOSTACCOUNTING'
Open external link

Cost Accounting in the Manufacturing Company

Cost Accounting in the Manufacturing Company
Material Flow Cost Accounting as an Approach to Improve Resource Efficiency in Manufacturing Companies
Mario Schmidt 1,* and Michiyasu Nakajima 2
Open file 12855
Open PDF ... Material-Flow-Cost-Accounting

GOVERNMENT COST ACCOUNTING
UK / HMG TREASURY UNIT COSTING PROJECT 2015
This 8 page pdf describes some of the work that HM Treasury has been doing to improve the performance of a variety of initiatives. The takeaway from this paper is that HM Treasury is doing significant work without being able to learn very much from the work. The essence of good cost accounting is to develop data that enables decision making that will result in better performance. Good cost accounting has to be based on an understanding of the aims of the organization, how an organization functions, how it makes decisions and what constitutes better performance. Without this sort of understanding, the work will cost a lot and produce very little.
Open PDF ...
'http://truevaluemetrics.org/DBpdfs/Cost-Accounting/HMG-Treasury-Unit-Costing-Project.pdf'
Open PDF ... HMG-Treasury-Unit-Costing-Project



The text being discussed is available at


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