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Chicago Tribune from Chicago, Illinois • 50

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Chicago Tribunei
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Chicago, Illinois
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50
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Bulne 12 Section 4 Chicago Tribune, Monday, May 18. 1987 Accounting systems can trip up productivity Savings interest rates' In percent as of Tuesday Financial Super Initrtutton markw ect. account! Savings and loans Horizon Federal" 5.35 5 00 7.00 3vr tFl 1Vtvr 6.60 St. Paul" 5.30 5.30 6.25 3yrF 1V4yrF6.35 5vrF6.75 TalmanHome" 5.25 NA 6670(F) 1VtyrF6.44 5vr 7.13 United Savings 01 America" 6.50 NA 7.00 FJ 2V4yr 6.50 3Vtvr 7.00 Banks Evergreen Banks 5.35 5.35 6.750 3yr(F) 1yrF6.25 2yr 6.50 5vr 7.25 First National 5.55 4.70 6.60 1ttyrF6.95 Syr 7.80 10vrF6.25 Lake Shore Bank 6.50 5.25 7.50 1V4yrV6.75 Bank 5.50 NA NA NA LaSafle National 5.50 6.25 NA 14yrV6.34 1ViyrF6.85 avw 7.30 pioneer Bank Trust 5.30 4.75 6.80 1VyrF6.25 1yr 6.00 2vr 6.30 UnlbancTrust 6.60 5.20 7.580(F) 1ttyrF6.86 6yr 7.70 tion, order lead time, factory flexibility, time to launch a new product and labor skill accumulation through time. Yet these are, especially today, the real drivers of corporate success over the mid-to long-term.

For example, most purchasing departments are evaluated principally on the contract cost of procurement. But this fails to factor in how the lousy quality of purchased goods can diminish final product quality. Not only is the ultimate producer's reputation tarnished by suppliers' poor quality, but hard dollar costs (fixing defective supplier material, warranty work) soar. Still, these costs are barely considered in most firms. The authors sadly conclude that advances in accounting to improve managing all but ceased in 1925.

They add: "Ironically, just as management accounting systems became less relevant to the organization's operations and strategy, many senior executives began to believe that they could run their firms 'by the The problem mushrooms today, when those numbers so misrepresent new realities. Many firms are gingerly exploring the use of nonfmancial measurements. But the effort is in its infancy, and the urgency of need is (increasing daily. Tribune Media Services Tom Peters On excellence machine). In fact, overhead is increased, because the plant manager has to negotiate and administer a contract with the new supplier and handle the incoming components, not to mention the increased initial uncertainty of delivery and quality with any supplier.

All that stuff costs money. So the real net savings is the $2,000 in direct labor minus the $5,000 subcontract cost, minus, say, $1,000 in real, added overhead or a loss of $4,000. Nonetheless, thanks to the miracle of traditional accounting, the plant manager takes a bow. Such perverse outcomes are commonplace, say professors H. Thomas Johnson and Robert S.

Kaplan in their new book, "Relevance Lost: The Rise and Fall of Management Accounting." In fact, the authors report that some experts say "cost accounting is the No. 1 enemy of productivity." Industrialists trained in engineering, such as Andrew Carnegie, perfected modern accounting to assist "Rates are "simple interest" only, not annualized yields. Information is gathered each Tuesday; therefore variations In interest rates are possible by time of reading. Some institutions offer more IRAs than are listed. "Rates shown are for minimum deposits only; some Institutions offer higher rates for money market or Super NOW accounts when larger balances are maintained, F-fixed variable NA-not available Source: Gary S.

Meyers and Associates Banks vs. money Bank-thrift yields Highest yields reported by federally based on stated rates and method of compounding for lowest minimum "deposit available. Figures in parentheses are average annual effective yields offered by 50 large banks and thrifts in the top five markets. Individual yields Sometimes investors can't tell for 2.5-year and 5-year CDs fire average annual interest earned over entire ETlife of account, not "annual effective yield," which would only show interest As if we didn't have enough industrial challenges such as inflexibility and poor product quality even our basic systems are crippling us. For example, cost accounting systems routinely allocate overhead costs, such as the accounting department, engineering, utilities, machinery and management, to direct labor.

In fact, each typical "direct-labor hour" may carry an overhead "burden," as the accountants call it, of 1,000 percent. That's why, when a manager is pushed by higher-ups to cut costs, there is but one sensible target under this accounting regimen: direct labor, which, on the books, includes that huge added burden. Here's what can happen. Suppose the manager decides to subcontract production of a labor-intensive part. He saves 100 hours of direct labor at $20 per hour ($2,000 in all).

But on the books, the direct-labor savings', plus the 1,000 percent burden (worth 10 times the labor), adds up to credited savings of $22,000. The subcontract to a smaller, low-overhead, perhaps offshore operation costs, say, $5,000. The net savings, then, is $17,000. Much applause goes to the plant manager. Unfortunately, the real story is different from the accounting one.

The factory overhead is not reduced at all by subcontracting (you can't shut, the lights out over one idle Load or Orlando Sentinel 1 Laura Berger fondly recalls the 1970s as "the good old days" of mutual funds. Differentiating between "load" funds, which charge sales fees, and "no-load" funds, which do not, was easy then. These days, with mutual fund sales exploding to record levels, the lines of distinction between load and no-load funds have become blurred. Some no-load funds have redemption fees, which are levied when the investor withdraws his money. Some load funds appear to be no-loads because they have replaced initial sales fees with "contingent deferred sales loads" similar to but usually more costly than redemption fees.

Many mutual funds charge distribution fees, technically known as 12(b)! fees but often called "hidden fees." These distribution fees are used to cover the cost of selling the fund through brokers or directly to investors. "No wonder the investor is confused," said Berger, executive director of the No-Load Mutual Fund Association in New York. She urges investors to do some research to make sense of the confusion and to avoid being overcharged. "What if you have a 2 percent 1 2(b) 1 fee, a 1.5 percent management fee and an 8.5 percent sales fee on a load fund?" Berger asked. "By the time you invest your money, you've already spent more than 10 percent on fees." Mutual fund investors cannot avoid administrative costs, such as the portfolio manager's salary, office rent, accountants, printing costs, lawyers and state and federal registrations.

Those expenses, commonly known as management fees, are paid from the fund's assets. The fund's gains or losses are reported after fees have been subtracted from the assets. Generally, funds that feature more risk, higher returns and more aggressive investment 'J? earned the first year. MMDA annual effective yield HNat'l avg. 5.50 pet of America, Houston First Deposit National Bank, Tllton, N.H.

Gill Savings, San Antonio, Tex. Savings, Ottawa, Kan. UUIana Bainn. Uniiabu, 9.42 7.25 6.96 6.72 6.70 "6-month CD annualized yield Nat'l avg. 6.43 pet (Annualized yields are for 12 months, and are i based upon rate In effect at time account is opened.

Amer Diversified Svgs, Costa Mesa, Calif. 8.45 Stockton Savings, Ft. Stockton, Tex. 7.78 Peoples Llano, Tex. 7.75 'Summit Savings, Dallas 7.73 Meridian Savings, Arlington, Tex.

7.71 1-Year annual effective yield 'Nat'l avg. 6.77 pet Amer Diversified Svgs, Costa Mesa, Calif. 8.72 1 Sunbelt Savings, Dallas 8.46 "Commodore Savings, Dallas 8.24 Peoples Uano, Tex. 8.13 Stockton Savings, Ft. Stockton, Tex.

8.13 "Average Annual Yields below show the average yield per year over the life of the CD. The total interest earned on the account Is dividsd by the number of years of the CD, and the result is the average annual yield in-percentage terms, 2.5-Year avg. annual yield Nat'l avg. 7.60 pet Average annual interest earned over entire life of account.) Amer Diversified Svgs, Costa Mesa, Calif. 6.30 Sunbelt Savings, Dallas 9.18 Commodore Savings, Dallas 9.06 Columbia Newport Beach, Calif.

9.02 Alamo Svgs of Texas, San Antonio, Tex. 9.00 5-Year avg. annual yield Nat'l Avg. 9.03 pet (Average annual interest earned over enure life of account.) Columbia Newport Beach, Calif. 10 84 Washington Savings Bank, Waldorf, Md, 10.83 Home Savings, Kansas City, Kan.

10.77 National Bank of Detroit, Detroit 10.55 Narthpark Savings, Richardson, 10.46 managerial decision-making. But slowly, as professionally trained accountants began to take control of the systems, accounting's emphasis shifted from a management tool to financial reporting. The financial reporting requirements of various regulatory bodies necessitate conventions such as allocating all overhead costs to inventory and cost of goods sold, leading to the type of distortion described above. Johnson and Kaplan attack today's system by outlining its two principal sins errors of commission and omission. A prime example of commission is the "expensing" of activities such as research, worker-skill upgrading and process improvement.

Because these investments in the future are treated, for accounting purposes, as "expenses of the period," they fall prey to the short-term cost-cutter. Another error of this sort includes hidden cross-subsidies among products that make it difficult to measure true product profitability. A third such sin is our fixation on short-term measurements, which make it almost impossible to assess long-term costs of developing a product. Bad as these problems are, the sins of omission are worse. Our emphasis, the authors argue, on financial measurements leads us to downplay or ignore less tangible nonfmancial measurements, such as product quality, customer satisfac estimated.

The fees apply to investors who withdraw from the fund. Some expire after six months; others never expire. Redemption fees were designed to discourage investors from switching funds too frequently, she said. In recent years, load funds have developed their own version of the redemption fee called the contingent deferred sales load. Such fees, which replace the load funds' initial sales fees, are more palatable to investors because they are charged as early-withdrawal penalties.

The deferred loads are a way for stockbrokers to compete more effectively with no-load funds, Berger said. "People told their brokers, i don't want to pay a sales fee for a mutual Typically, if the investor withdraws all his money from the fund within the first year of investing, he pays a 5 percent contingent deferred sales load. If he withdraws during the second year of investing, he pays 4 percent. "If you hold the fund for five years, it becomes a no-load fund," she said. What bothers Berger about funds with contingent deferred sales loads is that investors often think they are investing in a true no-load fund.

The SEC prohibits funds carrying deferred loads from promoting themselves as no-load funds. But the Associated Press list of mutual fund prices, which appears in newspapers nationwide, identifies some contingent deferred load funds as no-load funds. In trying to get that practice changed, the Io-Load Mutual Fund Association began complaining last year to the SEC and the National Association of Securities Dealers, which supplies the list to the AP. In 1980, the mutual fund industry persuaded the SEC to approve 1 2(b) 1 fees to help pay distribution costs typically used by no-load funds to advertise and by load funds to pay salespeople. Load funds typically use their job, nor of the relationship with their clients.

Executing the plan should be the next step. Of course, some self-interest is involved here. Because many planners make commissions on stocks or bonds bought through them, they want you to implement the plan 8 7 funds A Yields for May 13 A Last 07e Bank 7-day 30-day MMA 5 Moneys Money fund average 6 FX 4U Bank money market NOW SVk-yr CD funds insured banks and thrifts as of May 13, $100,000 CDs annual yield 1-month North America Santa Ana, Calif. 8.00 Vernon Vernon, Tex. 7.50 Farmers Savings FA, Davis, Calif.

7.50 3-month First City Savings, Irving, Tex. 8.50 Meridian Savings, Arlington, Tex. 8.45 Sunbelt Savings, Dallas 8.45 6-month Commodore Savings, Dallas 8.86 Sunbelt Savings, Dallas 8.68 First City Savings, Irving, Tex. 8.75 Money fund yields 10 highest 7-day compound yields for period ended May 12 Government-only money funds Avg. 5.69 pet Cardinal Gov't Securities 6.41 The Galaxy Funds Gov't Fund 6.37 Merrill Lynch USA Gov't Res.

6.31 CMA Gov't Securities 6.25 Mariner U.S. Treasury 6.22 Mariner Government Fund 6.17 Kemper Gov't Money Market 6.13 FFB U.S. Government Fund 6.11 Cash Equivalent Gov't Only 6.07 Pinnacle Government Fund 6.05 General purpose money funds Avg. 5.91 pet CMA Money Fund 6.94 Merrill Lynch Ready 6.87 Merit Money Merket Fund 6.50 Summit Cash Reserves 6.45 Counsellors Cash Reserve 6.40 Flex-fund M.M.F. k) 6.38 Transamerlca Cash Reserve 6.33 Pacific Horizon FundsM.M.P.

6.33 Trinity Liquid Assets Trust 6.32 Vanguard M.M.R. Prime 6.31 Tax-free money funds Avg. 4.77 pet Lexington Tax Free M.F., Inc. 6.74 Benhem Nat'l T-F M.F. (k) 5.65 Strong Tax-Free M.M.F.

6.62 T. Rowe Price T-E M.F. 6.42 Franklin CA Tax-Exempt M.F. 6.40 USAA Tax-Exempt M.M.F. 5 34 SAFECO Tax-Free M.M.F.

6.26 Benham CA Tax-Free Trust 6.28 California Tax-Free M.M.F. 5.24 Rothschild L.F.1 Exempt Fund 5.20 ness Systems. John Lindroth was named senior vice president-sales, and Robert F. Neuschel was named director-telemarketing operations, for General Binding North-brook. Oak Brook-based Ceco Corp.

made the following appointments in its concrete construction division: Gordon E. Madison, senior vice president-central and western operations; Robert W. Whitsitt, vice president-general manager of Southern California operations; William F. Slattery, vice president-general manager of eastern operations; Ray F. Shields, vice president-general manager of central operations.

Florian J. Barbi was named sen-ior vice president of First State Bank of Chicago. James McCullough was named vice president for Illinois Regional Bank, Clarendon Hills. Kathleen Muedder was elected a vice president in the U.S. branch of Zurich Insurance a unit of Zurich-American Insurance Group, Schaumburg.

Steven R. Fields was promoted to vice president-operations for the flavor and fragrance division of Ingredient Technology Dcs Plaines. Square Palatine, made the following appointments: Carl E. Ashley, vice president-distribution equipment business; Richard M. O'Neal, vice president-power equipment business; Thomas II.

Brown, ptesident-power equipment division; Scott C. Harris, regional vice president-southern region; Peter J. Tarantino, vice President-general manager-Asian acific. initial sales fees, which range from 3 to 8.5 percent, to pay their distribution costs through a network of brokerages. Those costs include sales commissions to stockbrokers.

To market themselves directly to investors, no-load funds rely on advertisements in business publications, direct mail and toll-free telephone numbers. The 12(b)! fees, which can be as high as 2 help pay for such expenses. i Erick Kanter, vice president of the Investment Company Institute, a mutual fund trade association in Washington, D.C., said that some load funds are using 12(b)l fees to help pay distribution costs even though their initial fees are supposed to serve that purpose. In other cases, traditional load funds will drop their initial fee of, say, 6 percent and replace it with a 12(b)! fee of 1 percent and a contingent deferred sales load of 5 percent. "It's a spread load instead of an up-front load," Kanter said.

The institute has proposed that any fund charging more than one-quarter of 1 percent a year in 12(b)! fees not be called no-load, he said. Berger estimated that about 600 of the nation's 2,000 mutual funds have adopted 12(b)! fees. Of that 600, about 200 do not charge the fees but could do so any time. Kanter said finding pure no-load and load funds is becoming a thing of the past: "It's not truly load or truly no-load anymore." He noted that some former no-load products, including Fidelity's popular Magellan fund, have started charging initial sales fees of about 3 percent. Such funds, called low-load, still market directly to investors rather than through stockbrokers.

"There are all these variations-no-loads with low-loads, load funds with contingent deferred sales loads and 1 2(b) 1 plans," Kanter said. "There are very few products where people don't have to pay some kind of a fee." with them. Planners who don't take commissions usually will work with your broker, accountant or lawyer to implement the plan. But you'll pay substantial fees for it, and such planners charge quite a bit in the first place. xt Sources: 100 Highest Yields, North Palm Beach, 33408, 600-327-7717, and Donoghue's Monayletter, Hoillaton, Mass.

01746, 800-343-5413. (kj Manager absorbing portion of fund expenses. 3 I PEOPLE strategies have higher management fees, Berger said. For instance, choosing a portfolio of stocks, a task that involves brokerage commissions and intensive research, is more expensive than buying certificates of deposit. Some money market funds, which contain U.S.

Treasury bills and bank investments, charge as little as one-eighth of 1 percent for a management fee. Some income-producing mutual funds, which feature bonds and other debt investments, charge one-quarter to one-half of 1 percent. Growth-oriented mutual funds, which specialize in blue-chip stocks of financially stable U.S. corporations, charge one-half to three-quarters of 1 percent. The more-risky growth mutual funds, which buy stocks of small, unknown companies, charge more, maybe as much as 1.5 percent.

"A 2 percent management fee is horrendous," said Sheldon Jacobs, editor of The No-Load Fund Investor, a newsletter based in Hastings-on-Hudson, N.Y. "I like to see them at 1 percent or less." Jacobs and Berger suggested that investors study mutual fund prospectuses, which describe the funds' finances, investments and fees. Such documents, which the Securities and Exchange Commission requires be given to investors, also indicate each fund's expense ratio. Expense ratios, derived by dividing the fund's expenses by its assets, range from 1 to 5.5 percent. But they do not tell all, nor are they comparable with each other, Berger warned, because they do not always include all expenses.

Jacobs recommended avoiding an expense ratio higher than 1.85 percent. The creation of some fees was inspired by intense competition in the mutual fund industry, Berger said. About a dozen no-load funds carry redemption fees ranging from 0.5 percent to 2 percent, she how much they are spending. When they do run the totals, they always find unaccounted for money. With his average client's income in the $100,000 range, that amount often runs from $10,000 to $20,000.

Cavill considers it his job to help "his clients find the money that's slipping between the cracks and show them how to spend or invest it more reasonably. The second step is to determine your financial goals. According to the the financial planners association, these may include providing for your children's education, supporting elderly parents or relieving financial pressures to maintain your lifestyle and provide for retirement. Goals defined, the financial planner then will identify the problems of realizing them. Shortcomings can include having too much or too little insurance, an unnecessarily onerous tax burden or poorly invested savings.

As step four, the financial planner delivers your written plan. If you've chosen a good financial planner, this blueprint for the future should be all-encompassing. According to the association, it should include retirement, insurance and estate planning; investment recommendations; and current and projected cash flow, net worth and income taxes. Most planners stress that delivering the plan is not the end of Jhpir A step-by-step guide to using a financial planner a Peter Morris was named chairman, Edmond V. Russ was elected president and chief executive officer and James Whiteley was Appointed chief financial officer of Merchant Network Inc.

XLDatacomp Hinsdale, made the following appointments: Thomas M. Owens, chairman and chief executive; Robert J. Passaneau, president; Michael J. jLaForte, executive vi.ee president; nd- Dennis B. Burke, vice president-manager of the eastern region.

rGil Barner was appointed presi-i dent-chief operating officer of lytechnic Data Corp. L. Ronald Johnson was elected president of the Illinois Travel Tourism Council, Springfield. Richard H. Gromer was elected vice chairman of the Food Marketing Institute.

J. Duncan Mclntyre was elected corporate vice president, and Thomas M. McNally was "promoted to divisional vice president-Pacific, Asia and Africa in the international division, for Abbott Laboratories. E. Neal Trogdon was elected to the board of the Illinois Bankers 'T Ccntel Corp.

made the following appointments: James A. Lovell executive vice president-director; Karl Berolzheimer, senior vice president-general counsel; David A. Bohmer, president-Centel Cable Television Eugene II. Ir-minger, senior vice president-finance; A. Allan Kurtze, senior vice president-planning; William J.

Laggett, senior vice president-president of Centcl Services; Sam- juel E. Leftwich, president-Central Telephone J. Stephen Van-derwoude, president-Centel Busi- 12-month yield trend accounts Reuters More and more people are turning to professional planners to sort out their finances, but not all of them know what to expect So, it's worth looking at the planning process, a program prescribed by the International Association for Financial Planning. If you intend to hire a planner, you'll find the first step involves a serious commitment of your time. "1 tell my clients this is a lot of work," said Ronald Cavill, a financial planner from Rockville, Md.

Like most planners, Cavill asks clients to gather a slew of papers old tax forms, copies of wills, divorce settlements, employee benefit contracts, life insurance policies and real estate contracts for the initial meeting. In addition, you will be asked to provide complete data on family income, savings, debts and a sample budget. Organizing this financial detail increases the client's ability to plot a. financial future, Cavill said. "If we don't do anything else, you'd still be further ahead of the game.

Only by collecting all of your financial information in one place and by trying to commit a family budget to paper, can you develop a picture of where you stand financially," he said. One additional step, Cavill noted, will put you ahead of most financial lanncrs clients: Add your figures, le said that his clicntsyarcly total OtN week Current week rate Index 6-mo. 1-yr. 2'-yr. 5-yr.

'Actual interest rates for 2Vi-year and 5-year accounts are higher than srK)wn because of compounding Chicago Tribune Graphic; Sources'. Donoghue's Report, Bank Rate Monitor.

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