Predictive Business Analytics: Forward Looking Capabilities to Improve…http://library.books24x7.com.ezproxy.umuc.edu/assetviewer.aspx?booki…Chapter 10 – Predictive Accounting and Marginal Expense AnalyticsPredictive Business Analytics: Forward Looking Capabilities to Improve Business Performanceby Lawrence S. Maisel and Gary CokinsJohn Wiley & Sons © 2014 CitationRecommend?PREDICTIVE ACCOUNTING INVOLVES MARGINAL EXPENSE CALCULATIONSIn forecasting, the demand volume and mix of the outputs are estimated, and one then solves for the unknown level of resource expenditures that will be required toproduce and deliver the volume and mix. One is basically determining the capacity requirements of the resources. Estimating future levels of resource expense cashoutflows becomes complex because resources come in discrete, discontinuous amounts. For example, you cannot hire one-third of an employee. That is, resourceexpenses do not immediately vary with each incremental increase or decrease in end-unit volume. Traditional accountants address this with what they refer to as a "stepfixed" category of expenses.The predictive accounting method involves extrapolations that use baseline physical and cost consumption rates that are calibrated from prior-period ABC/M calculations.Managerial accountants relate predictive accounting to a form of flexible budgeting (which is normally applied annually to a 12-month time span).Exhibit 10.5 illustrates how capacity planning is the key to the solution. Planners and budgeters initially focus on the direct and recurring resource expenses, not the indirectand overhead support expenses. They almost always begin with estimates of future demand in terms of volumes and mix. Then, by relying on standards and averages(such as the product routings and bills of material used in manufacturing systems), planners and budgeters calculate the future required levels of manpower and spending.The predictive accounting method suggests that this same approach can be applied to the indirect and overhead areas as well or to processes where the organization oftenhas a wrong impression that it has no tangible outputs.Exhibit 10.5: Predictive Accounting Information FlowDemand volume drives activity and resource requirements. Predictive accounting is forward-focused, but it uses actual historical performance data to develop baselineconsumption rates. Activity-based planning and budgeting assesses the quantities of workload demands that are ultimately placed on resources. In step 1 in Exhibit 10.5,predictive accounting first asks, "How much activity workload is required for each output of cost object?" These are the work activity requirements. Then predictiveaccounting asks, "How many resources are needed to meet that activity workload?" In other words, a workload can be measured as the number of units of an activityrequired to produce a quantity of cost objects.The determination of expense does not occur until after the activity volume has been translated into resource capacity using the physical resource driver rates from thedirect costing and ABC/M model. These rates are regularly expressed in hours, full-time equivalents (FTEs), square feet, pounds, gallons, and so forth.As a result of step 1, there will be a difference between the existing resources available and the resources that will be required to satisfy the plan–the resourcerequirements. That is, at this stage organizations usually discover they may have too much of what they do not need and not enough of what they do need to meet thecustomers’ expected service levels (e.g., to deliver on time). The consequence of having too much implies a cost of unused capacity. The consequence of having too little isa limiting constraint that if not addressed implies there will be a decline in customer service levels.In step 2 a reasonable balance must be achieved between the operational and financial measures. Now capacity must be analyzed. One option is for the budgeters,planners, or management accountants to evaluate how much to adjust the shortage and excess of actual resources to respond to the future demand load. Seniormanagement may or may not allow the changes. There is a maximum expense impact that near-term financial targets (and executive compensation plan bonuses) willtolerate. These capacity adjustments represent real resources with real changes in cash outlay expenses if they were to be enacted.Assume that management agrees to the new level of resources without further analysis or debate. In step 3 of the flow in Exhibit 10.5, the new level of resourceexpenditures can be determined and then translated into the expenses of the work centers and eventually into the costs of the products, service lines, channels, andcustomers. Step 3 is classic cost accounting–but for a future period. Some call this a pro forma calculation. The quantities of the projected resource and activity drivers areapplied, and new budgeted or planned costs can be calculated for products, service lines, outputs, customers, and service recipients.At this point, however, the financial impact may not be acceptable. It may show too small a financial return. When the financial result is unacceptable, management hasoptions other than to continue to keep readjusting resource capacity levels. For example, the company can limit customer orders accepted. These other options may nothave much impact on expenses.Use of content on this site is subject to the restrictions set forth in the Terms of Use.Page Layout and Design ©2015 Skillsoft Ireland Limited – All rights reserved, individual content is owned by respective copyright holder.Feedback | Privacy and Cookie Policy (Updated 12/2014) | v.4.0.78.1531 of 110/5/2015 3:38 PM