« Part I: The NAHB Chart of Accounts Income Statement: Comparative, Compliant . Fletcher L. Groves III . . and Utterly Useless. Part III: CFO insight into the problems with the NAHB Chart of Accounts Income Vice President and lead consultant Statement » for SAI professional staff. Search
SAI Web Site Welcome to SAI About SAI Consulting SAI Consulting Services Resources SAI Library Results Based Consulting Contact SAI
Purchase the book:
Part II: The Problem with the NAHB Chart of Accounts Income Statement (initially published on EFA on January 17, 2012, updated, incorporated, and republished here, every year, as the second in a five-part series)
Pipeline Workshops™, sponsored by BUILDER and BuilderMT, are designed to transfer in-depth knowledge and create an intuitive, instinctive understanding of production principles and disciplines, focused specifically on homebuilding production management.
Click here for more information and Registration.
From Part I of this series, readers of Escape from Averageness know that we disagree with the cost allocation structure of the Income Statement recommended by the National Association of Homebuilders in its Chart of Accounts:
Recent Posts
Yes – the NAHB Chart of Accounts permits comparisons with other builders. Yes – the NAHB Chart of Accounts complies with GAAP reporting requirements. Yes – it allows certain consultants to give the same presentation every year at IBS. However, to the extent that the NAHB Chart of Accounts presents its Income Statement as anything other than a true delineation of costs based on their behavior in regard to Revenue, it is – from a management standpoint – utterly useless. The Pipeline: A Picture of Homebuilding Production
Pipeline Workshops™
The NAHB COA Income Statement is useless because it prevents a builder from understanding how it makes money. Strong words, purposely stated. For anyone headed to the 2014 International Builders Show in February, planning on attending sessions on the Business management and Operations track, reading that post and the posts that follow in this series should raise legitimate reservation, and challenge conventional thinking and advice, regarding any session extolling this method of cost allocation. Several years ago, we surveyed a group of CFOs in the homebuilding industry, on the matter of the NAHB COA Income Statement, in order to learn more about the format and the utilization of their company’s particular Income Statement. Most of the survey participants were the Chief Financial Officers of their company, but the group included a number of Controllers and Vice Presidents of Finance. It included both large and small builders, both publicly-held and privately-held companies. It included SAI clients. First, we inquired about the format and use of their particular Income Statements: Q: Does the format of your Income Statement comply with the NAHB Chart of Accounts? 50% said their Income Statement does not comply with the NAHB Income Statement format. Q: How many versions of your Income Statement do you produce? 40% said they produced multiple versions. Q: Do you use any version of your Income Statement prepared in a Contribution Income Statement format? 20% said they used a Contribution Income Statement. Q: Do you analyze breakeven on either a community or enterprise basis? 40% said they used breakeven analysis or other CVP tools. Then, regarding the more critical issue of the assignment/allocation of costs: Q: Where do the following equivalent line items appear on your Income Statement (either as a part of Cost of Sales or a part of Operating Expense): Indirect Construction Cost, Selling Expenses (including Commissions), and Financing Costs? On this multi-point question, 50% reported that they allocated Indirect Construction Cost to Cost of Sales (where NAHB insists it should be, despite the fact that it is, in effect, a non-variable cost that should be allocated to Operating Expense); 60% said they allocated Selling Expense (including Commissions) to Operating Expense (where it should be, insists NAHB, notwithstanding the fact that Commissions are clearly a variable cost that should be allocated to Cost of Sales); 40% responded that they allocated Financing Cost to Operating Expense (where NAHB insists it should be, except that construction-related Interest only behaves like a non-variable (fixed) cost if the construction line of credit is fully-drawn all the time, or if the LIP balance never varies; and, loan fees are legitimately a part of overhead only if they are non-variable costs that do not fluctuate with the volume of Revenue). The fact is, there are arguments for treating aspects of Indirect Construction Cost, Selling Costs, and Financing Costs as a Cost of Sales (a direct, variable cost), and there are arguments for treating parts of them as an Operating Expense (an indirect, non-variable cost); the variable portion should be Cost of Sales, and the non-variable portion should be Operating Expense. The problem becomes, if you have to ascribe it fully to one-of-two categories, the costing method of the NAHB-recommended Income Statement is absorption costing, not variable costing. The NAHB Income Statement is acceptable as a traditional, GAAP-compliant, externally-focused, functionally-oriented classification of costs, but the effect of functional cost allocation is to indiscriminately blend costs that are either variable or non-variable, in terms of how they behave in relationship to changes in Revenue volume. This practice obscures cost behavior, and it prevents the use of important management accounting tools. Generally-speaking, in order to use Cost-VolumeProfit (CVP) – which includes breakeven analysis – you must have a Contribution Income Statement; to have a Contribution Income Statement, you must use a variable costing approach. But, don’t take just our word for it. Next: Part III: CFO insight into the problems with the NAHB Chart of Accounts Income Statement (this issue is addressed in a Pipeline workshop; learn more here: http://buildervelocity.com or http://saiconsulting.com/buildervelocity-pipelineworkshops/) January 19, 2014 @ 12:41 pm Uncategorized
Welcome to SAI | About SAI Consulting | SAI Consulting Services | Resources | Results Based Consulting | Contact SAI | © 2018 SAI Consulting, Inc. All rights reserved Techozoic 2.1.1 by Jeremy Clark. | Top | Log in Web Site Created and Hosted by WolfStalks.com
Part IV: Academic Insight into the Problems with the NAHB Chart of Accounts Income Statement Part III: CFO Insight into the Problems with the NAHB Chart of Accounts Income Statement Part II: The Problem with the NAHB Chart of Accounts Income Statement Part I: The NAHB Chart of Accounts Income Statement: Comparative, Compliant . . . and Utterly Useless. Pipeline Workshops™: RB Builders: Lessons from the Pipeline© Velocity Accelerators®: Creating A Savvy, Motivated, Mutually-Accountable Homebuilding Team® “The absence of business logic is simply astounding.” Velocity Accelerators®: Critical Chain Project Management Velocity Accelerators®: Building Information Modeling: “Competitive Advantage or Necessary Investment?” Velocity Accelerators®: Epic Partnering™: Unifying the Value Stream
Recent Comments Ken Forfar on “Risen” Fletcher Groves on Pipeline Workshops™: What Builders Say About It Mark Hodges on Pipeline Workshops™: What Builders Say About It Lusant Ordoñez on “God with us.” Pipeline Workshops [Homebuilding] | SAI Consult... on Pipeline Workshops™: Come. Participate. Learn.
Archives March 2018 February 2018 January 2018 December 2017 November 2017 October 2017 September 2017 August 2017 July 2017 June 2017 May 2017 April 2017 March 2017 February 2017 January 2017 December 2016 November 2016 October 2016 September 2016 August 2016 July 2016 June 2016 May 2016 April 2016 March 2016 February 2016 January 2016 December 2015 November 2015 October 2015 September 2015 August 2015 July 2015 June 2015 May 2015 April 2015 March 2015 February 2015 January 2015 December 2014 November 2014 October 2014 September 2014 August 2014 July 2014 June 2014 May 2014 April 2014 March 2014 February 2014 January 2014 December 2013 November 2013 October 2013 September 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010 August 2010 July 2010 June 2010 May 2010 April 2010 March 2010 February 2010 January 2010 December 2009 October 2009 September 2009 August 2009 July 2009 June 2009 April 2009 March 2009 February 2009 January 2009