Management Accounting and Control Systems for Strategic Purposes: Assessing Performance Over the Entire Value Chain

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Management Accounting and Control Systems for
Strategic Purposes Assessing Performance Over
the Entire Value Chain

• Chapter 9

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Introduction

• Nathaniel Young has just been appointed
  controller of a large chemical company.
• The companys management accounting control
  system is antiquated.
• Cost management reports are often not comparable.

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Introduction

• Information generated by the system is focused
  solely on the actual manufacturing process
  itself.
• Nathaniel has decided to design a management
  accounting and control system.
• After reading this chapter, you will be able to...

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Learning Objectives

• Discuss the concept of control.
• Identify the characteristics of well-designed
  management accounting and control systems (MACS).
• Describe the total-life-cycle costing approach to
  managing product costs over the value chain.

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Learning Objectives

• Explain target costing.
• Explain Kaizen costing.
• Discuss environmental costing issues.
• Understand the process of benchmarking the best
  practices of other organizations.

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Learning Objective 1

• Discuss the concept of control.

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Management Accounting and Control Systems

• What is a management accounting and control
  system?
• It is a system that generates and uses
  information to help decision makers assess
  whether an organization is achieving its
  objectives.
• A system is in control if it is on the path to
  achieving its strategic objectives.

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Management Accounting and Control Systems

• The Cycle of Control

Plan
Execute
Correct
Monitor
Evaluate
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Management Accounting and Control Systems

• Planning consists of developing an organizations
  objectives, choosing activities to accomplish the
  objectives, and selecting measures to
  determine how well the objectives were met.
• Execution is implementing the plan.
• Monitoring is the process of measuring the
  systems current level of performance.

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Management Accounting and Control Systems

• Evaluation occurs when feedback about the
  systems current level of performance is
  compared to the planned level.
• Correcting consists of taking the appropriate
  actions to return the system to an in-control
  state.

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Learning Objective 2

• Identify the characteristics of well-designed
  management accounting and control systems (MACS).

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Characteristics of Well-Designed
MACS

• A well-designed management accounting and control
  system should include behavioral and technical
  considerations.
• What are some behavioral considerations?
• Embedding the organizations ethical code of
  conduct into MACS design

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Characteristics of Well-Designed
MACS

• Using a mix of short- and long-term qualitative
  and quantitative performance measures
• Empowering employees to be involved in decision
  making and MACS design
• Developing an appropriate incentive system to
  reward performance

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Characteristics of Well-Designed
MACS

• What are some technical considerations?
• Relevance of the information generated
• Scope of the system

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Characteristics of Well-Designed
MACS

• The relevance of the information is measured by
  four characteristics

Accurate
Consistent
Timely
Flexible
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Characteristics of
Well-Designed MACS

• The scope of the system must be comprehensive and
  include all activities across the entire value
  chain.
• research, development, and engineering
• manufacturing
• customers

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Learning Objective 3

• Describe the total-life-cycle costing approach
  to managing product costs over the value chain.

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Total-Life-Cycle-Costing

• What is total-life-cycle costing?
• It is the process of managing all costs along the
  value chain.
• A TLCC system provides information for managers
  to understand and manage costs through a
  products design, development, manufacturing,
  marketing, distribution, maintenance, service,
  and disposal stages.

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Total-Life-Cycle-Costing
RDE Cycle
Manufacturing Cycle
Post Service Cycle
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Total-Life-Cycle-Costing

• What are the three stages of the research,
  development, and engineering cycle?
• Market research
• Product design
• Product development
• 80 to 85 of a products total life costs are
  committed by decisions made in the RDE cycle.

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Total-Life-Cycle-Costing

• What are committed costs?
• These are costs that a company knows it will have
  to incur at a future date.
• What are manufacturing cycle costs?
• These are the costs incurred in the production of
  the product.
• Usually at this stage there is not much room for
  engineering flexibility.

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Total-Life-Cycle-Costing

• When does the post-sale service and disposal
  cycle begin?
• It begins when the first unit produced is in the
  hands of the customer.

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Total-Life-Cycle-Costing

• What are the three stages of the service cycle?
• Rapid growth
• Transition
• Maturity

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Total-Life-Cycle-Costing
Traditional
Stages of the Accounting Total life
Cycle Focus
Post-Sale Costs
Research, Development, Manufacturing Service
and and Engineering Cycle
Disposal 100 80 60
40 20 0
Cost Committed
Costs Incurred
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Learning Objective 4

• Explain target costing.

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Target Costing

• What is target costing?
• It is a cost planning method used during the RDE
  cycle that focuses on reducing costs for products
  that require discrete manufacturing processes and
  reasonably short product life cycle.

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Target Costing
RDE Cycle
Manufacturing Cycle
Post Service Cycle
Target Costing
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Comparing Traditional Cost Reduction to Target
Costing
Traditional Cost
Target Reduction
Costing
Market Research to Determine
Customer Needs and Price Points
Customer Requirements
Product Specifications
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Comparing Traditional Cost Reduction to Target
Costing
Traditional Cost
Target Reduction
Costing
Target Selling Price Target Product Volume
Design
Target Profit
Engineering
Supplier Pricing
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Comparing Traditional Cost Reduction to Target
Costing
Traditional Cost
Target Reduction
Costing
Estimated Cost
Target Cost
Desired Profit Margin
Value Engineering
Supplier Pricing Pressure
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Comparing Traditional Cost Reduction to Target
Costing
Traditional Cost
Target Reduction
Costing
Manufacturing
Periodic Cost Reduction
Continuous Cost Reduction
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Comparing Traditional Cost Reduction to Target
Costing

• Under traditional costing, the profit margin is
  the result of the difference between the expected
  selling price and the estimated production cost.
• Pt St Ct
• The cost-plus method is another traditional
  approach.

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Comparing Traditional Cost Reduction to Target
Costing

• Under the cost-plus method the selling price is
  the sum of the expected product cost and the
  expected profit margin.
• Scp Ccp Pcp

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Comparing Traditional Cost Reduction to Target
Costing

• Under target costing, the target profit margin
  results from a long-run profit analysis often
  based on return on sales.
• The target cost is the difference between the
  target selling price and the target profit
  margin.
• Ctc Stc Ptc

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Concerns About Target Costing

• What are some potential problems in implementing
  target costing?
• Conflict can arise between parties involved in
  the process.
• Employees may experience burnout due to pressure.
• Development time may increase.

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Learning Objective 5

• Explain Kaizen costing.

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Kaizen

• What is Kaizen?
• It is a Japanese term for making improvements to
  a process through small, incremental amounts
  rather than through large innovations.

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Kaizen Costing

• What is Kaizen Costing?
• It is a planning method used during the
  manufacturing cycle with an emphasis on reducing
  variable costs in one period below the costs in a
  base period.
• The target-reduction rate is the ratio of the
  target reduction amount to the cost base.

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Kaizen Costing
Manufacturing Cycle
RDE Cycle
Post Service Cycle
Kaizen Costing
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Comparing Traditional Cost Reduction to Kaizen
Costing
Standard Costing 1. Cost-control system
concept 2. Assumes stability in current
manufacturing process 3. Goal is to meet
cost performance standards
Kaizen Costing 1. Cost-reduction system
concept 2. Assumes continuous
improvements in manufacturing 3. Goal is to
achieve cost reduction standards
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Comparing Traditional Cost Reduction to Kaizen
Costing
Standard Costing Techniques 1. Standards are set
annually or semi- annually 2. Variance
analysis involves comparing actual to
standard costs 3. Investigation occurs
when standards are not met
Kaizen Costing Techniques 1. Cost reduction
targets are set and applied monthly 2.
Variance analysis involves target Kaizen
costs versus actual cost reduction
amounts 3. Investigation occurs when target
reductions are not attained
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Comparing Traditional Cost Reduction to Kaizen
Costing
Who has the best knowledge to reduce costs?
Standard Costing Managers and engineers
develop standards
Kaizen Costing Workers are closest to the process
and thus know best
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Concerns About Kaizen Costing

• What is a concern about Kaizen Costing?
• The system places enormous pressure on employees
  to reduce every conceivable cost.
• What is a cost-sustaining period?
• It is a period that allows employees to learn new
  procedures before Kaizen targets are imposed.

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Learning Objective 6

• Discuss environmental costing issues.

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Environmental Costing

• Perhaps the best way to control and reduce
  environmental costs is to use activity-based
  costing.
• Environmental costs fall into two categories
• Explicit
• Implicit

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Environmental Costing

• What are some examples of explicit costs?
• direct costs to modify technology and processes
• costs of cleanup and disposal
• costs of permits to operate a facility
• fines levied by government agencies
• litigation fees

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Environmental Costing

• What are some examples of implicit costs?
• administration and legal counsel
• employee education and awareness
• loss of goodwill if environmental disasters occur

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Learning Objective 7

• Understand the process of benchmarking
  the best practices of other
  organizations.

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Benchmarking

• What is benchmarking?
• It is an organizations search for implementation
  of the best way of doing something as practiced
  by another organization.
• The benchmarking process consists of five stages.

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The Benchmarking Process

• Stage 1

Internal Study and Preliminarily Competitive
Analyses Factors to Consider Preliminary internal
and external competitive analysis Determine
key areas for study Determine scope and
significance of the study
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The Benchmarking Process

• Stage 2

Developing Long-Term Commitment to the
Benchmarking Project and Coalescing the
Benchmarking Teams Factors to Consider Develop
Long-Term Commitment to the Benchmarking
Project Gain senior management support Develop a
clear set of objectives Empower employees to
make change
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The Benchmarking Process

• Stage 2 (contd.)

Developing Long-Term Commitment to the
Benchmarking Project and Coalescing the
Benchmarking Teams Factors to Consider Coalescing
the Benchmarking Team Use an experienced
coordinator Train employees
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The Benchmarking Process

• Stage 3

Identify Benchmarking Partners Factors to
Consider Size of partners Number of
partners Relative position of the partners within
and across industries Degree of trust among
partners
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The Benchmarking Process

• Stage 4

Information Gathering and Sharing Methods Factors
to Consider Type of benchmarking
information Product Functional
(process) Strategic (includes management
accounting methods)
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The Benchmarking Process

• Stage 4 (contd.)

Information Gathering and Sharing Methods Factors
to Consider Method of Information
Collection Unilateral Cooperative Database
Indirect/third party Group
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The Benchmarking Process

• Stage 4 (contd.)

Information Gathering and Sharing Methods Factors
to Consider Determine performance
measures Determine the benchmarking performance
gap in relation to performance measures
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The Benchmarking Process

• Stage 5

Taking Action to Meet or Exceed
the Benchmark Factors to Consider Comparisons of
performance measures are made
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Conclusion

• Nathaniel Young wanted to change his antiquated
  MACS to one that would generate relevant
  information over the entire value chain in his
  organization.

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Conclusion

• Organizations interested in a new management
  accounting method usually choose one of these
  ways
• Bringing in an outside consultant
• Developing the system internally
• Benchmarking

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End of Chapter 9