Chapter 2: Management Accounting and the Business Environment

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Management Accounting Chapter 2: Management Accounting and The Business Environment 5.

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Increase in global competition Advances in manufacturing technologies Advances in information technologies, the internet, and e -commerce A greater focus on customer  New forms of management organization Changes in the social, political and cultural environment of business

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Corporate executives are now using cost data to chart successful futures for their companies. In today’s automated environment manage ment accountants use their management control system to support and reinforce manufacturing and other operating strategies.

CONTEMPORARY MANAGEMENT TECHNIQUES 1. Just-In-Time (JIT) The philosophy that activities are undertaken only as needed or  demanded. A production system also known as pull-it-through approach  Materials are purchased and units are produced only as needed to  meet actual customer demand. In JIT system, inventories are reduced to the minimum and in some  cases, zero. 4 Characteristics of JIT  Elimination of all activities that do not add value to the product 1. or service Commitment to a high level of quality 2. Commitment to continuous improvement in the efficiency of an 3. activity Emphasis on simplification and increase visibility to identify 4. activities that do not add value. Main Benefits of JIT  Working capital position is improved by recovery of funds that 1. were tied up in inventories 2. Throughput time is reduced, resulting in greater potential  production and quicker response to customers Areas previously used to store inventories are released and are 3. made available for other more productive uses. 4. Lesser waste and more customer satisfaction are achieved  because of reduction in defect rates. 2. Total Quality Management (TQM) Instituted by many companies to ensure that their products are of the  highest quality and that production processes are efficient. A technique in which management develops policies and practices to  ensure that the firm’s products and services exceed customers’ expectations. Currently, Currently, there is no generally agreed upon “perfect” way to institute  TQM program. listening to the needs of customers o making products right the first time o reducing defective products that must be reworked o encouraging workers to continuously improve their o  production process. Some TQM programs are referred as Continuous Quality  Improvement Programs. It affects product costing by reducing the need to track the cost of  scrap and rework related to each job. It is a formal effort to improve quality throughput an organization’s  value chain. 2 Major Characteristics of TQM  Focus on serving customers o Systematic problem-solving using teams made up of o front-line workers 3.

Process Reengineering Reengineering  is a process for creating competitive advantage in which a firm recognized its operating and management functions, often with the result that jobs are modified, combined, or eliminated. Defined as the “fundamental rethinking and radical o redesign of business processes to achieve dramatic improvements in critical, contemporary measures of  performance, such as cost, quality service and speed.” Process Reengineering, a more radical approach to improvement  than TQM. An approach where a business process is diagrammed in o detail, questioned and then completely redesigned in order to eliminate unnecessary steps, to reduce opportunities for errors and to reduce costs. Employee Resistance  is one basic recurrent problem o Business Process  is any series steps that are followed in order to carry  out some task in a business. Main Objective: simplification and elimination of wasted effort and  the central idea is that all activities that do not ass value to product or service should be eliminated. Steps Used in Process Reengineering  A business process is diagrammed in detail o Every step in the business process must be analyzed and o  justified The process is redesigned to include only those steps that o the product or service more valuable This process can yield the following anticipated results:  Process is simplified o Process is completed in less time o Costs are reduce o Opportunities for errors are reduced o Benchmarking A process by which a firm:  Determines its critical success factors o Studies the best practices of other firms for achieving o these critical success factors Then implements improvements in the firm’s processes o to match or beat the performance of t hose competitors.

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Today, benchmarking efforts are facilitated by cooperative networks of noncompeting firms that exchange benchmarking information Mass Customization Is a management technique in which marketing and production   processes are designed to handle the increased variety that results from delivering customized products and services to customers. Growth of mass customization is in effect another indication of the  increase attention given to satisfying the custo mer. Balance Scorecard An accounting report that includes the firm’s critical success factors in  4 areas: Financial performance o Customer satisfaction o Internal business process o Innovation and learning o Activity-based Costing and Management Activity Analysis  is used to develop a detailed description of the  specific activities performed in the operation of t he firm. Provides the basis for activity-based costing and activityo  based management. Activity-based Costing (ABC)   is used to improve the accuracy of  cost analysis by improving the tracing of costs to products or to individual customers. Activity-based Management (ABM) uses activity analysis to  improve operational control and management control. ABC and ABM are key strategic tools for many firms, especially  those with complex operations, or great diversity of products. Theory of Constraints (TOC) A sequential process of identifying and removing constraints in a  system. Emphasizes the importance of managing the organization’s  constraints or barriers that hinder or impede progress toward an objective. Basis Sequential Steps in Applying TOC  a. Analyze all the factors of production required in the production chain. Identify the weakest link, which is the constraint b. Focus improvement efforts on strengthening the weakest link  c. d. If improvement efforts are successful, eventually the weakest link will improve to the point where it is no longer the weakest link. At this point, a new weakest link must be identified and e. improvement efforts must be shifted over that link. It is a perfect complement to TQM and Process reengineering  It focuses improvements efforts where they are likely to be most  effective. Life Cycle Costing a management technique to identify and monitor t he costs of a product  throughout its lifecycle. Consists of all steps from product design and purchase of raw material  to delivery of and service of the finished pr oduct. Steps  Research and development a. Product design, including prototyping, target costing and testi ng b. c. Manufacturing, inspecting, packaging and warehousing Marketing, promotion and distribution d. Sales and service e. Management accountants now strategically manage the product’s full  life cycle of costs, including upstream and downstream costs as well as manufacturing costs. Target Costing Involves the determination of the designed cost for a product or the   basis of a given competitive price so that the product will earn a desired profit. The basic relationship that is observed i n this approach is  Target Cost = Market Market determined Price - desired profit Entity using this must often adopt strict cost-reduction measures to  meet the market price and remain profitable. Common strategic approach used by intensely competitive industries  where even small price differences attract consumers to the lower priced product. Computer-Aided Design and Manufacturing Many companies used this to respond to changing consumer tastes  more quickly. These innovations allow companies to significantly reduce the time  necessary to bring their products from the design process to the distribution stage. CAD is the use of computers in product development, analysis, and  design modification to improve the quality and performance of the  product. CAM is the use of computers to plan, implement, and control   production. Automation Involves and requires a relatively large investment in computers,  computer programming, machines and equipment. 2 Integrated Approaches  a. Flexible Manufacturing System (FMS) i. A computerized network of automated equipment that produces one or more groups of parts or variations of a product in a flexible manner. ii. It uses robots and computer-controlled materialshandling system to link several stand-alone, computer-controlled machines in switching from one production run to another. b. Computer Integrated Manufacturing (CIM) i. Is a manufacturing system that totally integrates all office and factory functions within a company via a computer-based information network to allow hour-by-hour manufacturing management. Major Characteristics of Modern manufacturing companies  adopting FMS and CIM Production of high-quality products and services o Low inventories o High degrees of automation o Quick cycle time o Increased flexibility and o Advanced information technology o

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E-Commerce The Value Chain An analysis tool that firms use to identify the specific steps required to   provide a product or service to the customer. Key Idea: firm studies each step in its operation to determine how  each activity contributes to the firm’s co mpetitiveness and profits. Analyzing the firm’s value chain helps management discover:  Which steps or activities are not competitive o Where costs can be reduced o Which activity should be outsourced o How to increase value for the customer as one or more of o the steps of the value chain If properly implemented, it can:  Enhance quality o Reduce cost o Increase output o Eliminate delays in responding to customers o

4 THEMES COMMON TO MANY COMPANIES 1. Customer focus theme 2. Value-chain and supply chain analysis 3. Key success factors 4. Continuous improvement and benchmarking FOCUS ON THE CUSTOMER It means that the management accounting system should produce  information about both realization and sacrifice. It should able to measure various attributes of customer value o To succeed in this era, customer value is key focus that businesses of all  types must be concerned with. Cost Information plays an important part in the process called  Strategic cost   Management . 2 General Strategies  a. Cost leadership  b. Superior product through differentiation Successful pursuit of cost leadership and/or differentiation strategies  requires an understanding of a firm’s value chain (internal) and supply chain (External.) VALUE CHAIN AND SUPPLY CHAIN ANALYSIS Value Chain  refers to the sequence of business functions in which  usefulness is added to the products or ser vices of a company. Value refers to the increase in the usefulness of the product or service and  as a results its value to the customer. Internal Value Chain is the set of activities required to design, develop,   produce, market and deliver products or services to customers. To determine product profitability for internal decision-making purposes,  some companies deduct only manufacturing costs from product re venues. Selling, General, and Administrative (upstream and downstream costs)  Can represent half or more of the total costs of an organization. o If this is omitted in profitability analysis, then the product is o UNDERCOSTED and management may unwittingly develop and maintain products that in the long rum result in losses rather than profits for the company. Industrial Value Chain is the linked set of value-creating activities from   basic raw materials to the disposal of the final product by end-use customers. Fundamental  to a value-chain framework is the recognition of existing  complex linkages and interrelationships among activities both within and external to the firm. 2 types of linkages  a. Internal Linkages  –   are relationships among activities that are  performed within a firm’s portion of the industrial value chain (the internal value chain). b. External Linkages  –   are activity relationships between the firm and firm’s suppliers and customers. KEY SUCCESS FACTORS Cross Functional Teams  Crucial in managing the time to market. o Bring together production and operations managers, marketing o managers, purchasing and material-handling specialists, design engineers, quality management personnel, and managerial accountants to focus their varied expertise and experience on virtually all management issues. Managing the value chain means that a management accountant o must understand many functions of the business, from manufacturing to marketing to distribution to customer service. Computer Integrated Manufacturing  This process is fully automated, with computers controlling the o entire production process. In CIM systems, the types of costs incurred by the manufacturer o are quite different from those in traditional manufacturing environments. Product Life Cycles and Diversity  Time-Based Competition  In a global competitive environment, TIME has become very o significant element in strategies for success. Time to Market becomes a critical objective for many o companies. Response time, Lead time, on time and Downtime are among o the many time-based phrases that crop up in conversations of today’s managers. Global Competition  Caused by: o a. Reductions in tariffs, quotas and other barriers to free trade  b. Improvements in global transportation systems and information technology c. Increasing sophistication in international markets. Information and Communication Technology Management  Cost Management System  Cost Management is widely used today, no uniform definition o however exists. It often carried out as an important part of general  management strategies and their implementation.

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Continuous Improvement and Competitive Strategy Continuous Improvements   is the constant effort to eliminate o waste, reduce response time, simplify the design of both  products and processes, and improve quality and customer service. Managerial accountants contribute to this program.  involves determination and Competitive Strategy o implementation of a set of policies, procedures and approaches to business that produces long-term success.