Categories
Accounting and Bookkeeping

Why Understanding Variable Costs is Crucial for Profitable Business

Sound planning, budgeting, and forecasting significantly impact an organization’s survival, potential growth, and profitable tenure. These inevitably significant processes are the ones that enable an organization, at large, to set the KPIs, their short- and long-term goals, and ultimately the propensity to make an informed decision.

A budget is a carefully thought-out roadmap that an organization is expected to abide by with the intention to achieve the set goal. A lot goes into curating an ideal budget. One needs to crucially scrutinize the organization’s cash flow, its current financial position, and other critically material past records.

Variable Costs and their Importance

Variable costs refer to the direct costs and variable overhead incurred during the production or manufacturing of a product or service, excluding all fixed costs. They specifically pertain to costs that are directly influenced and affected by changes in production.

Management plays a crucial role in actively managing these costs, as fixed costs have already been incurred and cannot be reversed. Therefore, these costs require direct involvement and attention from management.It enables cost-volume-profit (CVP) analysis and break-even analysis by determining the contribution margin which improves resource allocation by the business. Now, to know these things you or your accountant must know to calculate variable cost per unit, and a variable costing income statement.

How to find Variable cost per Unit?

Understanding the variable costs per unit formula and its applications can help businesses make informed decisions about pricing, production, and profitability. By calculating the variable costs per unit, businesses can determine the minimum price they need to charge to cover their costs and make a profit.

For example, if your company sells sets of plates for $400 but each set requires $250 to create, test, package, and market, your variable cost per unit is $250.

Variable Costs Formula

The formula for calculating variable costs is straightforward. You need to multiply the variable cost per unit by the number of units produced or sold. Here is the formula:

Variable Costs = Variable Cost per Unit x Number of Units

For example, if a company produces 10,000 units of a product with a variable cost per unit of $10, its variable cost would be:

Variable Costs = $10 x 10,000 = $100,000

A Variable Costing Income Statement

A variable costing income statement is a financial report in which you subtract the variable expenses from revenue, resulting in a contribution margin. The contribution margin is the incremental profit earned when a product’s sales exceed its variable costs.

Variable Costs and its impact on Budget

1) Business activity independent

Variable Costs Graph

Variable costs are directly connected to the production activities such as raw materials, energy, temporary labor costs, or leased employees needed to manufacture products. The Schematic below shows roughly how the total costs increase with the number of units (Or product quantity). This information is often useful to “Price” the product.

2) Time-wise adaptability

Variable costs can vary and are dependent on time since they are directly related to the manufacturing of the products. Note that, if you extend your time frame, all costs including fixed costs become variable in theory. Why? Because you can find “better deals”, high rent vs. low rent, or high salaries vs. low salaries.

Ways to reduce the impact of variable expenses on your budget:

1. Determine the annual average for each variable expense in your budget

While determining the annual average for the variable expense, instead of looking into the last 12 months’ figures, take into consideration the average of 3 years’ worth of expenses. This will help you account for anomalies that may impact your variable expenses.

2. Add a buffer

After you have determined the average for each variable expense, add a buffer to it. A buffer of 3% to 5% should be more than enough to cover your price increases and anomalies that might result in an outlier year for the expense.

3. Track your actual spending

Compare your actual expenditure for each variable expense to the budgeted amount. Look for the areas where the expenditure went over budget or under budget for each expense category.

Variable Cost in Business

4. Set up a savings account for variable expenses

This is a crucial step in this process. Each month the actual expenses are under budget for any variable expense, move the excess into a savings account for variable expenses. This will create a reserve you can draw from during months when your expenses are higher than usual.

5. Reassess variable expenses annually

It is important to resist the temptation of using the same variable expenses projections in the budget each year, even if there is a substantial amount in the variable expenses savings account. Following such a practice is highly erroneous. It is crucial to reassess variable expenses regularly, particularly those that can be controlled more effectively.

Conclusion

In conclusion, variable costs are an essential aspect of any business operation. Understanding the concept of variable costs is vital for businesses to make informed decisions regarding their pricing, production, and overall financial health.

Variable costs vary based on the level of production, and this makes them different from fixed costs, which remain constant regardless of production levels. The formula for calculating variable costs per unit is relatively straightforward and can help businesses in determining the cost of producing each unit of their product.

By identifying and analyzing variable costs, businesses can effectively manage their expenses, increase their profit margins, and remain competitive in their respective industries. By implementing effective cost management strategies, businesses can reduce their variable costs and increase their bottom line.

Unison Globus is committed to helping businesses of all sizes manage their finances, including their variable costs. Our team of experienced professionals provides a range of accounting and financial services designed to help businesses reduce costs, increase revenue, and grow their operations. Contact us today to learn more about how we can help your business succeed. Want to outsource accounting or bookkeeping services for your business? Get a trial of our services now.

Categories
Accounting

ChatGPT for Accounting – A Camouflaged Blessing

As risky and uncomfortable it seems, Change is in fact an undeniable prerequisite for fabricating something unique and meaningful. Technology and change go hand in hand and are apparently constantly in a state of Flux. With ChatGPT being the latest uproar in the digital market, our march newsletter would revolve around AI and ChatGPT.

Chat GPT AI Overview

Artificial Intelligence is the simulation of human intelligence processes by machines, especially computer systems. It works by ingesting large amount of labelled training data, analysing the data for correlations and patterns, and using these patterns to make predictions about future states. In this way, a chatbot that is fed examples of texts, can learn to generate lifelike exchanges with people, or an image recognition tool can learn to identify and describe objects in images by reviewing millions of examples. Specific application of AI includes expert systems, natural language processing, speech recognition and machine learning.

One of the artificial intelligences that has become the talk of the town is Chat GPT. ChatGPT is an artificial intelligence chatbot, that was developed by Open AI and was launched in November 2022. Chat Generative Pre-Trained Transformer is a powerful AI bot that is capable of understanding human speech and producing in-depth writing that is easily understood by humans.

With so many uses of ChatGPT in daily life, the AI has garnered attention of people of every age group. It generates human like responses through texts. It holds the capability of answering questions in a lucid and conversational tone.

Below are some of the uses of ChatGPT:

  • Write codes.
  • Do translations.
  • Debug
  • Recommend you songs, party ideas, etc.
  • Write a compelling poem or prose.
  • Help you prepare for a Law exam.
  • Write an essay for your school or college project.
  • Give you the recipe for your favourite dish.
  • Give you the lyrics of any song.

Let us now look at some real time case scenarios to have a broader understanding of how this AI works.

Case 1:

In the below case, the user is trying to get the bug in his code get fixed with the help of ChatGPT:

Case 1 ChatGPT for Accounting

Case 2:

In the following sample, ChatGPT initially refuses to answer question that could be about illegal activities but responds after the user clarifies their intent.

Case 2 Chatgpt for Accounting

Case 3:

In this case, a user takes help of ChatGPT to write an introductory letter.

Case 3 Chatgpt for Accounting

 

The vigilant ability of ChatGPT to respond to complicated questions and prompts is one of its most impressive features. Its vast amount of training data and capacity to learn from past interactions are the two key factors that make the amalgamation of ChatGPT with the world of CPAs, a huge win-win. The propensity of ChatGPT is beyond interpreting context and maintaining coherent conversation.

ChatGPT for Accounting

You may have questions like “Can accounting be automated?”, “Can robots do accounting?”,
“Can accountant be replaced by ai?”,”Can robots replace accountants?”. Well, the usefulness of this tool can bring greater revolution in the conventional methods of working in the Accounting and Tax domain.

Let’s glance over at some of the surfaced advantages of this AI equipped Chatbot:

1. Automated financial reporting

ChatGPT can be integrated with financial system to generate reports, reducing manual effort and improving accuracy.

2. Budget forecasting

The tool can assist financial forecasting by quickly generating predictions based on historical data and current trends.

3. Data Analysis

Analysing large amounts of financial data and providing insights and recommendations to business stakeholders is one of the major USP of this AI based program. Checkout here more about Accounting automation.

4. Ad-hoc financial queries

ChatGPT can provide instant answers to routine financial questions, freeing up time for the accountants to focus on the higher-level tasks.

5. Process automation

ChatGPT can automate routine finance tasks such as invoice processing and payment reconciliation, freeing up time for the finance business partner to focus on more strategic initiatives.

Checkout here some use cases of chatgpt for accounting.

Let’s dig a little more into the details by elaborating one of the above advantages:

Data Analysis and Chat GPT

1. Data pre-processing

It can help clean, format and organize the financial data to make it ready for analysis.

2. Data analysis

ChatGPT uses natural language processing (NLP) techniques to perform financial analysis, such as trend analysis, ratio analysis, and forecasting.

3. Data Visualization

The precision in generating charts, graph and tables aids in visualizing and understanding the financial data with better clarity.

4. Insights and recommendations

ChatGPT can provide concise, easy-to-understand insights and recommendations based on the financial analysis.

5. Automated reports

The efficiency of the auto-generated financial report based on the data analysis, reduces the manual effort, providing stakeholders with timely information.

Having said all the above, the belief in “But it is not the faith in the technology. It is the faith in human”, still stands unaverred. Below are some of the cons that requires equal attention:

1. ChatGPT Isn’t insightful

The AI model is too “To the Point” it cannot provide an elaborated explanation of the hidden “Whys” and “Whats” of the respective topic.

2. ChatGPT is not Human

While it revolves around natural language processing techniques, it is still far from real scenarios that one encounters in the daily work routine. For e.g., the automation technique can provide auto generated Balance Sheets and Profit & Loss reports, but it takes the human intelligence to review the reports and establish the correctness of it.

3. ChatGPT is still Learning

It is still in an unfinished stage, it’s best to use it with a clear intention and understanding. Technology is best used as a support to your everyday tasks. One cannot negate the fact that it is the nuances of an individual’s emotional and intelligent quotients create a thin line of difference between an Artificial and Human intelligence.

Conclusion: ChatGPT for Accounting

ChatGPT can be a powerful tool but not an alternative to human intelligence. It is built on machine learning and will continue to evolve and improvise with an intent to be the asset to an organisation in the dynamic world of technology.

Categories
Auditing

Navigating the Changes: A Guide to SAS 142 and Its Impact on Audit Evidence

The American Institute of Certified Public Accountants (AICPA) issued the Statement on Auditing Standards (SAS) No. 142 titled “Audit Evidence” in May 2019. This standard replaces SAS No. 122, “Statements on Auditing Standards: Clarification and Recodification.” It is applicable to audits of financial statements for periods ending on or after December 15, 2022.

SAS 142 introduces significant changes to the auditing standards related to audit evidence. The standard introduces updated definitions, mandates, and guidelines concerning the adequacy and reliability of audit evidence. It also outlines auditors’ obligations in evaluating and documenting audit evidence in a comprehensive manner.

Effective Date of SAS 142

SAS 142 is effective for audits of financial statements for periods ending on or after December 15, 2022. However, early implementation is permitted for audits of financial statements for periods ending on or after December 15, 2018.

CPA firms should thoroughly comprehend the requirements outlined in SAS 142 in order to accurately determine the necessary adjustments to their audit methodologies and processes, thereby ensuring compliance with the new standard.Early implementation presents an advantageous opportunity for CPA firms to proactively prepare for the upcoming changes, enabling them to navigate the transition to the new standard smoothly and seamlessly.

Key Changes in SAS 142

SAS 142 introduces significant changes to the auditing standards related to audit evidence. The standard includes new definitions, requirements, and guidance related to the appropriateness and sufficiency of audit evidence, as well as the responsibilities of auditors for evaluating and documenting audit evidence.

Changes to the Definition of Audit Evidence

SAS 142 revises the definition of audit evidence to include information that is both relevant and reliable. This new definition emphasizes the importance of considering the source and reliability of information when evaluating audit evidence.

Responsibilities of Auditors for Evaluating and Documenting Audit Evidence

SAS 142 establishes new requirements related to the responsibilities of auditors for evaluating and documenting audit evidence. The standard requires auditors to evaluate the quality of the audit evidence obtained and document the nature, timing, and extent of the procedures performed to obtain audit evidence.

Impact of Technology on Audit Procedures

SAS 142 recognises the influence of technology on audit procedures and promotes its utilisation in gathering and assessing audit evidence. Technology enables auditors to access more pertinent and dependable information, automate audit procedures, and enhance the overall efficiency of the audit process.

However, the use of technology in audit procedures also presents challenges and limitations. Auditors should be aware of these challenges and limitations and ensure that the use of technology does not compromise the quality of the audit evidence obtained.

Importance of Appropriate Audit Evidence

One of the key changes in SAS 142 is the emphasis on the appropriateness of audit evidence. Audit evidence must be relevant, reliable, and sufficient to support the auditor’s conclusions. The standard defines the term “appropriateness” as the measure of the quality of audit evidence, indicating its relevance and reliability in providing support for the audit opinion.

Appropriate audit evidence is critical for audit quality, as it helps the auditor to reach valid and reliable conclusions about the financial statements. Inappropriate audit evidence, on the other hand, can lead to inaccurate and misleading audit opinions. Examples of inappropriate audit evidence include unreliable documents, incomplete records, or unreliable third-party confirmations.

To obtain appropriate audit evidence, auditors must exercise professional judgment when assessing the relevance and reliability of the evidence collected. The standard offers guidance on factors to consider, such as the source, nature, and reliability of the evidence.

How Unison Globus Can Help

As the effective date for SAS 142 approaches, CPA firms may need assistance in complying with the new standard. Unison Globus is a leading provider of audit and assurance services, and we can help your firm navigate the changes introduced by SAS 142.

Our team of experienced professionals has a deep understanding of the new standard and can provide guidance on how to comply with the new requirements. We can help your firm assess the impact of the standard on your audit practice and develop a plan to implement the necessary changes.

We offer a range of services to assist CPA firms in complying with SAS 142, including:

  • Audit readiness assessments
  • Audit process redesign
  • Technology enablement
  • Data analytics and automation
  • Training and education

Working with Unison Globus can help your firm to improve the quality and efficiency of your audit practice, while ensuring compliance with the new standard.

Conclusion

SAS 142 represents a significant change in the audit evidence standard, with a focus on the appropriateness of audit evidence and the use of technology in audit procedures. CPA firms need to be prepared for the changes introduced by the new standard and take action to ensure compliance.

In summary, SAS 142 introduces significant changes to the audit evidence standard and requires auditors to use professional judgment in evaluating the appropriateness of audit evidence. The standard also emphasizes the use of technology in audit procedures, presenting both opportunities and challenges for CPA firms.

At Unison Globus, we are committed to helping CPA firms comply with the new standard and improve the quality and efficiency of their audit practice. We can provide guidance and support to ensure that your firm is ready for the changes introduced by SAS 142.