|
James Brimson in his book "The Handbook of
Process-based Accounting, Leveraging Processes to Predict Results
published by American Institute of Certified Public Accountants, page
84says:
- "Earned Value is monetary value at a
standard resource consumption rate needed to complete a unit of output.
"For all primary activities, earned value is computed by multiplying
actual work accomplished by the process standard. "
A primary process is one that has output provided to another
department or external customer. The opposite of a primary process is a
secondary process where the process output is provided internal to the cost
center or department. For example, management department would be a
secondary process.
A process standard consists of all identifiable resources that are
required to produce one unit of process output.
So an easy example would be to think of a restaurant. When you order one
pizza the resources are so much flour, so much tomato sauce, so much cheese,
so much oven time, a platter for pizza, cooks time, gas for oven, etc.
All processes can have a standard.
If people's time and equipment time is not fully used, then those unused
resources are put into unused capacity. Once you see how much
resources are in unused capacity, you can decide to:
- sell off unused capacity
- use part time staff as they do in a call center
- make additional sales to utilize that unused capacity
Earned Value Reporting
Earned Value Reporting shows how much value for the reporting period was
earned. So lets take a simple example. Assume the following expenses for a
one person accounts payable cost center of $15 per hour or $30,000 per year.
- accounts payable clerk earns $10 per hour based on working 2,000
hour per year
- desk, phone, computer, office space, and supplies come to $5 per
hour
So if the clerk processes: 1,700 accounts payable invoices @ 1 hour per
invoice, then this cost center earned 1,600 hours.
1,600 earned hours times $15/hour equals earned value of $24,000
400 unearned hours times $15/hour equals unearned value of $6,000
This is not the clerks fault necessarily that she processed less invoices
if less invoices came in to be paid. The more important questions are:
- What did the clerk do to add value to the organization during those
300 earned hours?
- Did the clerk process the invoices accurately and pay them on time?
- Did the clerk process the invoices in one hour on average?
Earned value reporting is a very powerful tool and provides much more
useful information than reporting department expenses.
Calculating Earned Value Variance
Continuing our example let's now look at Calculating Earned Value
Variance: Lets assume that the clerk still processes 1,600 invoices, but it
takes the clerk 1.25 hours.
In this example, we would say:
Earned value: 1,600 invoices @ 1 hour per invoice equals 1,600
hours earned @$15/hour equals $24,000
Actual Cost: actual hours worked on invoices 1,700 hours @$15/hour
equals Actual Cost of $25,500
Earned value variance:
Earned Value:
$24,000
Actual Cost:
$25,500
Earned Value Variance: $ 1,500
Unused Capacity
$4,500 (300 hours times $15/hour )
Earned Value Benefits:
- Understand unused capacity and can take
action to see how best to use this capacity
- Understand how much of total variance was
due to volume rather than inefficiency
Call John Antos, Jim Brimson or Pat Dowdle at
972-980-7407 to find out more about Earned Value Reporting and Benefits.
|