Management Accounting in a Dynamic Environment
Transcript of Management Accounting in a Dynamic Environment
© Pearson Education Limited 2008
MANAGEMENT ACCOUNTINGMANAGEMENT ACCOUNTING
Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. MorseCheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse
Management Accounting McWatters, Zimmerman, Morse © Pearson Education Limited 2008
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Management Accounting Management Accounting
in a dynamic environment in a dynamic environment
Chapter 14
Management Accounting McWatters, Zimmerman, Morse © Pearson Education Limited 2008
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ObjectivesObjectives
• Describe factors in a dynamic environment that influence an organization
• Describe how the organization’s strategy is related to its structure
• Explain the role of management accounting in the organizational structure and in making planning decisions
• Identify major characteristics of total quality management (TQM)
• Use quality costs for making planning decisions and control• Explain the philosophy of just-in-time (JIT) processes and
accounting adjustments for JIT• Identify when management accounting within an organization
should change
Management Accounting McWatters, Zimmerman, Morse © Pearson Education Limited 2008
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External Forces Affecting the External Forces Affecting the OrganizationOrganization
Organization
Technological Innovation
Global Competition
Customer Preferences
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Organizational Strategy and Organizational Strategy and StructureStructure
Customer value is achieved through:
Innovativeproduct and
service design
Low-cost production
and delivery
High-quality products and
services
When and organization adopts TQM it seeks to continually improve its operations and
customer service
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Organizational Strategy and Organizational Strategy and StructureStructure
Customer PreferencesTechnological Change Globalization
Strategy for Customer Value Product/Service Innovation
Quality, Low Cost
Control Decisions Responsibilities Performance Measures Compensation
Planning Decisions Product/Service Design Production and Delivery Customer Services
Organizational Value
Customer Value
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Organizational Strategy and Organizational Strategy and StructureStructure
Recent Terminology
Total quality management (TQM)
Continuous improvement Zero defects strategies
Statistical process control (SPC) Re-engineering
Six Sigma
Lean production/manufacturing/practices
Just-in-time manufacturing (JIT)
Toyota Production System (TPS) Kanban
CONWIP (constant work-in-process)
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Organizational Strategy and Organizational Strategy and StructureStructure
Increased global competition has forced many organizations to become more cost competitive
Organizations outsource parts and sub-components globally
Changes in government regulations and taxation policies can change market conditions
Organisations such as the World Trade Organization (WTO) the European Union (EU) and North America free trade Agreement
(NAFTA) help organizations compete in a global market
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Organizational Strategy and Organizational Strategy and StructureStructure
An organization’sstrengths and
weaknesses depend upon:
Balancesheet assets
Brand names, Patents
and employeesAsset structure
Ability to innovate and
change
Relations with customers and
suppliers
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Three major elements of organizational structure
Assignment of Responsibilities
Performance Measurement
Compensation
Organizational Strategy and Organizational Strategy and StructureStructure
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KnowledgeableIndividual
Assignment of Responsibility
Organizational Strategy and Organizational Strategy and StructureStructure
Manager
Control
Including Accounting Performance Measures
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Good Performance Measures
• Use accounting-based and non-accounting based measures of performance
• Should be consistent with the assignment of responsibilities
Organizational Strategy and Organizational Strategy and StructureStructure
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The reward system consists of compensation and promotions and is based on the performance
measures
Salary and Bonus
Office Space
Company Car
Organizational Strategy and Organizational Strategy and StructureStructure
Promotion Dedicated parking space
Health-club membership
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Customer Value and Organizational Customer Value and Organizational ValueValue
Organization Customer
Customer value
Inflow of Funds
To create organizational it must be able to supply customer value at a cost less than or equal to the
inflow of funds
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The Role of Management The Role of Management Accounting and ChangeAccounting and Change
The role of management accounting is to assist in control through the organizational structure
and in making planning decisions by:
Identifying the costs and benefits of different planning decisions
Providing managerial performance measures
Assigning responsibilities
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Total Quality ManagementTotal Quality Managementand Quality Measuresand Quality Measures
Quality has become a major issue in both the profit and not-for-profit sectors
Quality has multiple meanings
Quality is generally defined as meeting customer expectations which include expectations about
time to market, innovation, sustainability and cost
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Total Quality ManagementTotal Quality Managementand Quality Measuresand Quality Measures
Total Quality Management (TQM) is the movement toward improved quality and
customer satisfaction
TQM is a management philosophy that includes involved leadership, employee participation,
empowerment, teamwork, customer satisfaction and continuous improvement
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Total Quality ManagementTotal Quality Managementand Quality Measuresand Quality Measures
Involved Leadership
Employee Participation
Employee Empowerment
Employee Teamwork
Customer Satisfaction
Continual Improvement TQM
A Management Philosophy
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Total Quality ManagementTotal Quality Managementand Quality Measuresand Quality Measures
• Quality is a firm wide process
• Quality is defined by the customer
• Quality requires organizational changes
• Quality is designed into the product
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Total Quality ManagementTotal Quality Managementand Quality Measuresand Quality Measures
TQM Quality
Measures
Product Design# of new parts
# of parts
Vendor Rating# of defects
On-time delivery
ManufacturingDefect rates
ScrapRework
Cycle time
Customer Satisfaction
SurveysWarranty expense
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Total Quality ManagementTotal Quality ManagementNumerical ExampleNumerical Example
A farmer of gourmet tomatoes estimates that 10% of the 20,000kg of tomatoes picked
do not meet customer’s satisfaction
After being picked the tomatoes are placed on a conveyer belt for inspection and packaging. The inspection team identifies and removes 80% of the defective tomatoes.
How many defective tomatoes reach the customer
20% of the defective tomatoes are not detected(0.20 x 0.10) = 2% reach the customer
(0.2 x 20,000kg)= 400kg reach the customer
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Total Quality Management and Total Quality Management and Quality MeasuresQuality Measures
Quality Costs
Prevention Costs
Appraisal Costs
Internal Failure Costs
External Failure Costs
Costs incurred to eliminate
defective units before they are
shipped
Costs incurred when a defect is
discovered before being sent to the customer
Costs incurred when a
customer receives a defective product
Costs incurred to eliminate
defective units before they
are produced
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Just-in-Time (JIT) ProcessesJust-in-Time (JIT) Processes
JIT is an operating philosophy that emphasizes providing products on demand
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Warehousing of raw materials, work-in-process, and finished goods inventory
Just-in-Time (JIT) ProcessesJust-in-Time (JIT) ProcessesTraditional systems
JIT system
ProcessOne
ProcessTwo
ProcessThree
ProcessThree
ProcessTwo
ProcessOne
Raw Materials
Raw Materials
Customer
Order
Customer
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Process time+ Time waiting to be moved or worked on+ Time spent in transit+ Inspection time
Throughput time
The goal is to drive waiting, transit, and inspection time to zero because these are non-value-added time
JIT seeks to minimize the throughput time, which is the total time from the receipt of the order to the time of delivery to the customer
Just-in-Time (JIT) ProcessesJust-in-Time (JIT) Processes
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Just-in-Time (JIT) ProcessesJust-in-Time (JIT) ProcessesLower capital costs of
holding inventoryPlant and warehouse
space and cost savings
Reduced overhead costs for material movers and expediters
Reduced risk of obsolescence
Faster response to customers
and reduced delivery
times
Benefitsof reducingthroughput
time
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Change performance
measurement and reward systems
Balance flow rates
Reducesetup times Plant
layout
Increase quality
To reduce throughput time, changes must be made in several
areas
Just-in-Time (JIT) ProcessesJust-in-Time (JIT) Processes
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Just-in-Time (JIT) Processes Just-in-Time (JIT) Processes Numerical ExampleNumerical Example
This will lower its costs of holding work-in-process inventory. The average value of work-in-process inventory is £500,000 and the capital cost of holing inventory is 12% per
year. What is the impact on holding costs if the JIT throughput time is as anticipated
Annual cost of holding inventory £500,000 x 0.12 = £60,000Holding cost under JIT £500,000 x 0.12 x 0.60 = £36,000
The annual cost decreases by 40% (£24,000)
Macve Motors is adopting a JIT system. The current throughput time is 10 days. With a JIT system the
throughput time should fall to 6 days
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Areas that are impacted by JIT
include
Greater customersatisfaction
Materials requirement planning (MRP)
Fewer suppliers
Lower productcost
Automation allows for less setup
time
Reduced WIPaccounting
Internet B2Btransactions
(EDI)
Differentperformance
measures
Just-in-Time (JIT) ProcessesJust-in-Time (JIT) Processes
Changes to organizational
strategySimpler accounting
Changes to role of management
accounting
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When Should Management When Should Management Accounting Be Changed?Accounting Be Changed?
• A single, ideal management accounting system that is optimum for all organizations does not exist
• Each organization has different circumstances that lead to different management accounting systems
• Organizations are in a continual state of flux thus management accounting must continually adapt
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When Should Management When Should Management Accounting Be Changed?Accounting Be Changed?
Warning signs that the management accounting system is not working well and needs to be
changed• Dysfunctional behaviour on the part of managers
due to inappropriate performance measures• Poor planning decisions• Inability to win bids to provide goods that are the
company’s speciality
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When Should Management When Should Management Accounting Be Changed?Accounting Be Changed?
Each organization must continually evaluate and improve the management
accounting system to meet the challenges of a dynamic environment
and an adaptive organization
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Management Accounting Management Accounting
in a Dynamic Environment in a Dynamic Environment
End of Chapter 14