January 2013 Edition

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Accounting Concepts:

Management and Administration of General Accounting: Measuring Departmental Efficiency - Part 5

This is the 6th article in a series about Management and Administration of General Accounting. This material is adapted from The Automated Accounting Systems and Procedures Handbook (John Wiley, New York 1991) Chapter 13.


A study of the general accounting environment and related financial reporting procedures provides a helpful one-time assessment of overall effectiveness.  What on-going mechanisms can be used to track the continuous effectiveness of the general accounting department?

In theory, one might think to track service level indicators, such as the timeliness of each accounting period's close, the timeliness of delivered financial information, or the accuracy of reported financial information.  Or one could track the cost drivers of the general accounting department.  These can include measurable indicators, such as the number of

• Manual journal entries.
• Budget centers.
• Accounts.
• Accounting companies.
• Audit adjustments.

In practice, however, organizations generally do not track any of this information as a means of measuring effective accounting department operations.  Instead, management expects a certain level of service from the accounting organization in performing its assigned duties of financial reporting, record keeping, and custodian of the financial records.  In this arrangement, the accounting department becomes a true service organization—expected to render a given amount of service for a certain level of expenditure.

This leads to a practical, more popular measurement of on-going departmental performance: The total departmental operating costs.  This cost data (largely staffing costs) can be looked at in different ways.

First, as a percentage of overall revenue, general accounting department costs can be used for interorganizational comparison of accounting department cost/effectiveness.  That is, based on industry cost studies, one should expect a certain amount of service when the accounting department operating costs are a certain percent of revenue.  Composite cost profiles of general accounting department data are commercially available.  This information is based on cross-industry surveys of general accounting departments in businesses of all sizes.

Second, accounting department cost information can be used to identify a trend when compared with prior period department operating costs.  Measuring and reporting any such trend provides a key indicator of departmental effectiveness.

The ability to contain (or reduce) departmental costs can be obviously measured in financial terms, but this must always be evaluated with respect to the level of service provided.  For example, a measurable reduction in overall costs can be considered successful if the department's service level is maintained.  Conversely, an increase in service level, obtained for the same level of departmental costs, is also an improvement.  It is true that service level (and workload) can be tracked by some of the indicators mentioned earlier, but, again, this is rarely done.  Figure 13-4 shows one approach to analyzing financial reporting effectiveness.


Copyright 2013 by Douglas A. Potter, all rights reserved.

About Author:
Doug Potter is the owner of The Newport Consulting Group a professional management consulting organization that provides clients with information systems planning, selection, and implementation services. He can be reached at dpotter@newportconsulting.com or through his Web site, http://www.newportconsulting.com. Note: The contents of this article were excerpted from Mr. Potters book "Automated Accounting Systems and Procedures Handbook" Copyright 1991 by Douglas A. Potter, published by John Wiley & Sons, Inc. New York.

Contact info:
Doug Potter
Newport Consulting Group
Email: dpotter@newportconsulting.com
Website: http://www.newportconsulting.com


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