Testing Managerial Accounting
Kerry and Angela Knuth farm more than 3,000 acres of corn and soybeans near Mead, Nebraska, including about a third that's custom farmed. They have help from their sons, Gregory and Garrison. About 60% of their farm is irrigated, making it both more productive and potentially more costly.
So Kerry was intrigued when he heard Idaho producer Dick Wittman talk about managerial accounting at The Executive Program for Agricultural Producers (TEPAP) in January 2008. (The Wittman family's work with managerial accounting was featured in a cover story of Successful Farming magazine in February 2009.) TEPAP is a program created by ag economist Danny Klinefelter of Texas A&M University.
It wasn't long before the Knuths had purchased software from Farm Business Software Systems of Aledo, Illinois. To help set it up, they hired John McNutt, an MBA with the accounting firm Latta, Harris, Hanon & Penningroth, LLP of Tipton, Iowa.
As a result, the Knuths now have 291 cost centers. There's one for their farm shop. Another for their soybean marketing. One for every farm by crop and year. All operations -- planting, scouting, irrigating, harvesting -- are set up as cost centers. Even their accounting software (an investment of nearly $10,000 with consulting fees) is set up as a cost center.
There are profit centers, too, for corn, soybeans, and custom work.
They used the system to track costs for their 2008 crops and are now in their second year of managerial accounting. Even though it can take several years of records to find areas for potential savings, they already have learned more about their costs.
Kerry believes many people who do custom work don't know all of the costs associated with it.
â€œHarvest costs way more than anybody realizes because of the wear and tear on everything and the man hours,â€ Kerry says. â€œIt takes three or four people when you harvest.â€
A more accurate knowledge of costs helps with marketing. This year the Knuths started making sales when corn futures hit above breakeven and continued as prices rose higher.
The Knuths already use strip-tillage on corn. With managerial accounting, they have a more accurate gauge of machinery costs, so they know how much they save by eliminating a trip over a field. This year they're evaluating strip-till in some soybeans to determine if it will pay over the whole farm. â€œWe might gain 2 bushels in yield but at a cost equivalent of 3 bushels more,â€ Kerry says.
Getting started in managerial accounting, or MA, isn't easy.
When McNutt visited the Knuth farm, it took two days just to enter the book value (or purchase cost) and current market value of their machinery, Kerry says. â€œIt drove me nuts.â€
â€œWe know emphatically that we couldn't implement MA without outside professional help,â€ Angela adds. â€œThe level of depth MA gets down to is both exciting and daunting.â€
Why go to so much trouble?