Week 10.ppt


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Week 10.ppt

  1. 1. Week 10 <ul><li>Cost Management </li></ul><ul><li>and </li></ul><ul><li>Strategic Decision Making </li></ul>
  2. 2. Management Accounting Concepts <ul><li>In most management accounting models, relevance and timeliness of information is stressed before verifiability or reliability. </li></ul><ul><li>Cost/benefit decisions must also be evaluated in accumulating information. </li></ul>
  3. 3. Management Accounting Concepts <ul><li>Questions to consider when deciding how to account: </li></ul><ul><ul><li>For what type of company would a particular technique be most appropriate (e.g., what type of product, what type of manufacturing process)? </li></ul></ul><ul><ul><li>For what type of decisions would a technique best suited (e.g., short-term versus long-term decisions)? </li></ul></ul>
  4. 4. Management Accounting Concepts <ul><li>Questions to consider when choosing a technique: </li></ul><ul><ul><li>What assumptions are built into the technique? </li></ul></ul><ul><ul><li>How do these assumptions weaken the usefulness of the technique? </li></ul></ul><ul><ul><li>If so, could the technique be modified to produce more meaningful information? </li></ul></ul><ul><ul><li>Are there inter-relationships between described techniques? </li></ul></ul>
  5. 5. Management Accounting Concepts <ul><li>Questions to consider when choosing a technique: </li></ul><ul><ul><li>Should a company use just ONE management accounting system — or should techniques be used in combinations, or for different types of decisions? </li></ul></ul>
  6. 6. Management Accounting Concepts <ul><li>Management accounting techniques often combine both financial and non-financial measures. </li></ul><ul><li>Non-financial measures are more difficult to “standardize.” </li></ul><ul><ul><li>Quality; </li></ul></ul><ul><ul><li>Functionality and features; </li></ul></ul><ul><ul><li>Service. </li></ul></ul>
  7. 7. Management Accounting Concepts <ul><li>The answer to these questions depends on two factors: </li></ul><ul><ul><li>What is the company’s business strategy? </li></ul></ul><ul><ul><li>What is the level in the organization at which the measurements are being made? </li></ul></ul>
  8. 8. Management Accounting Concepts <ul><li>Business strategy: </li></ul><ul><ul><li>Focuses on what a company tries to deliver to its customers. </li></ul></ul><ul><ul><li>Referred to as the company’s value proposition . </li></ul></ul><ul><ul><li>Encompasses things such as: </li></ul></ul><ul><ul><ul><li>Cost </li></ul></ul></ul><ul><ul><ul><li>Quality </li></ul></ul></ul><ul><ul><ul><li>Functionality </li></ul></ul></ul><ul><ul><ul><li>Features </li></ul></ul></ul><ul><ul><ul><li>Service. </li></ul></ul></ul>
  9. 9. Management Accounting Concepts <ul><li>Level of the organization: </li></ul><ul><ul><li>Business unit level: </li></ul></ul><ul><ul><ul><li>Cost centre; </li></ul></ul></ul><ul><ul><ul><li>Profit centre; </li></ul></ul></ul><ul><ul><ul><li>Investment centre. </li></ul></ul></ul><ul><ul><li>Product level: </li></ul></ul><ul><ul><ul><li>Batches; </li></ul></ul></ul><ul><ul><ul><li>Unit level. </li></ul></ul></ul><ul><ul><li>Degree of (de)centralization. </li></ul></ul>
  10. 10. Strategic Management <ul><li>Strategic management can be defined as “the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives.” </li></ul><ul><li>Strategic management focuses on integrating all departments within an organization. </li></ul>
  11. 11. Strategic Management <ul><li>Before determining the objectives and measures, an organization must articulate its vision and mission statements. </li></ul><ul><ul><li>A concise statement that defines the mid- to long-term (3 to 10 year) goals of the organization. </li></ul></ul><ul><ul><li>A concise, internally-focused statement of how the organization expects to compete and deliver value to customers </li></ul></ul>
  12. 12. Strategic Management <ul><li>Before determining the objectives and measures, an organization must articulate its vision and mission statements. </li></ul><ul><ul><li>CGA-BC will be the dominant accounting profession in B.C. </li></ul></ul><ul><ul><li>The Association is branded as a “must belong-to” organization in order to be a successful professional accountant in B.C. </li></ul></ul>
  13. 13. Strategic Management <ul><li>Before determining the objectives and measures, an organization must articulate its vision and mission statements. </li></ul><ul><ul><li>CGA-BC is an indispensable resource to its members and students, as well as to other stakeholders. </li></ul></ul><ul><ul><li>CGA-BC’s reputation among accounting students is that it is the best, the only choice for accounting education in B.C. </li></ul></ul>
  14. 14. Strategic Management <ul><li>Before determining the objectives and measures, an organization must articulate its vision and mission statements. </li></ul><ul><ul><li>To promote the excellence of its members and advance the accounting profession. </li></ul></ul>
  15. 15. Strategic Management <ul><li>The Vision and Mission set the general direction for the organization. </li></ul><ul><li>But these statements are far too vague to guide day-to-day actions and resource allocation decisions. </li></ul><ul><li>Companies start to make the statements operational when they define a strategy of how the vision and mission will be achieved. </li></ul>
  16. 16. Strategic Management <ul><li>Before an entity can make decisions relating to strategy formulation, it must consider the nature of the organization. </li></ul><ul><li>The spectrum runs from service-oriented to manufacturing. </li></ul><ul><li>The key success factors are often diametrically opposed. </li></ul>
  17. 17. Strategic Management <ul><li>Manufacturing organizations have the following characteristics: </li></ul><ul><ul><li>Physical and/or durable products. </li></ul></ul><ul><ul><li>Output can be inventoried. </li></ul></ul><ul><ul><li>Low customer contact. </li></ul></ul><ul><ul><li>Long response time. </li></ul></ul><ul><ul><li>Regional, national and/or international markets. </li></ul></ul><ul><ul><li>Large facilities. </li></ul></ul><ul><ul><li>Capital intensive. </li></ul></ul><ul><ul><li>Quality easily measured. </li></ul></ul>
  18. 18. Strategic Management <ul><li>Service organizations have the following characteristics: </li></ul><ul><ul><li>Intangible and/or perishable products. </li></ul></ul><ul><ul><li>Output (usually) cannot be inventoried. </li></ul></ul><ul><ul><li>High customer contact. </li></ul></ul><ul><ul><li>Short response time. </li></ul></ul><ul><ul><li>Usually local markets markets. </li></ul></ul><ul><ul><li>Usually small facilities. </li></ul></ul><ul><ul><li>Labour and/or knowledge intensive. </li></ul></ul><ul><ul><li>Quality not easily measured. </li></ul></ul>
  19. 19. Strategic Management <ul><li>Strategic management can also be seen as a system of analysis , decisions , and actions an organization undertakes in order to create and sustain competitive advantages. </li></ul><ul><li>The purpose of strategic management is to exploit and create new and different opportunities for tomorrow. </li></ul>
  20. 20. Strategic Management <ul><li>The strategic management process consists of three stages: </li></ul>Strategy Formulation (create) Strategy Implementation (do) Strategy Evaluation (monitor)
  21. 21. Strategic Management <ul><li>Strategy formulation includes: </li></ul><ul><ul><li>Developing a vision and mission. </li></ul></ul><ul><ul><li>Identifying an organization’s external opportunities and threats. </li></ul></ul><ul><ul><li>Determining internal strengths and weaknesses. </li></ul></ul><ul><ul><li>Establishing long-term objectives. </li></ul></ul><ul><ul><li>Generating alternative strategies. </li></ul></ul><ul><ul><li>Choosing particular strategies to pursue. </li></ul></ul>
  22. 22. Strategic Management <ul><li>The strategic management process is based on the belief that organizations should continually monitor internal and external events and trends so that timely changes can be made as needed. </li></ul><ul><li>To survive, an organization must be capable of identifying and adapting to change. </li></ul>
  23. 23. Strategic Management <ul><li>What are our chances of survival if we continue as we are? </li></ul><ul><li>What are the best opportunities for growth given our existing capabilities? </li></ul><ul><li>What are our competitive advantages and disadvantages? </li></ul><ul><li>Where can we invest to improve our capabilities most efficiently? </li></ul><ul><li>What changes can we realistically implement? </li></ul>
  24. 24. Strategic Management <ul><li>A key factor is the behavioral impact of decisions taken. </li></ul><ul><li>That relates to both measurement and management. </li></ul><ul><li>The aphorism that “what gets measured, gets managed” is both a fact and a warning. </li></ul><ul><li>Be sure that an increase in the variable measured really is a “true” increase in performance. </li></ul>
  25. 25. <ul><li>A MACS should generate and use information to help decision makers assess whether an organization is achieving its objectives. </li></ul>Management Accounting and Control Systems (MACS) <ul><li>MACS should be comprehensive and include all activities across the entire value chain of the organization. </li></ul><ul><li>MACS must be able to provide feedback as to whether the firm is achieving its strategy and if not, alert it to that fact. </li></ul>
  26. 26. <ul><li>If the MACS measures and assesses performance in only the actual production process, it ignores factors such as: </li></ul>Management Accounting and Control Systems (MACS) <ul><ul><li>Suppliers; </li></ul></ul><ul><ul><li>Design activities; </li></ul></ul><ul><ul><li>Postproduction activities associated with products. </li></ul></ul>
  27. 27. <ul><li>A well-designed MACS must have relevant information and be: </li></ul>Management Accounting and Control Systems (MACS) <ul><ul><li>Accurate; </li></ul></ul><ul><ul><li>Timely </li></ul></ul><ul><ul><li>Consistent; and </li></ul></ul><ul><ul><li>Flexible. </li></ul></ul>
  28. 28. <ul><li>Accurate information is needed as inaccurate information is not useful for decision making. </li></ul>Management Accounting and Control Systems (MACS) <ul><li>Timely information is needed as: </li></ul><ul><ul><li>Accurate information that is available too late is of no use for decision making. </li></ul></ul><ul><ul><li>The results of performance measurements must be fed back to the appropriate units in the most expedient way possible. </li></ul></ul>
  29. 29. <ul><li>The language used and the technical methods of producing management accounting information must be consistent and not conflict with various parts of an organization. </li></ul>Management Accounting and Control Systems (MACS)
  30. 30. <ul><li>MACS must allow employees to use the system’s available information in a flexible manner so they can customize its application for local decisions. </li></ul>Management Accounting and Control Systems (MACS) <ul><li>If flexibility is not possible, an employee’s motivation to make the best decision may be lessened for the decision at hand, especially if different units engage in different types of activities </li></ul>
  31. 31. Management Accounting and Control Systems (MACS)
  32. 32. <ul><li>MACS must aid management with the five stages of control: </li></ul>Management Accounting and Control Systems (MACS) <ul><ul><li>Planning: </li></ul></ul><ul><ul><ul><li>Developing an organization’s objectives; </li></ul></ul></ul><ul><ul><ul><li>Choosing activities to accomplish the objectives; and </li></ul></ul></ul><ul><ul><ul><li>Selecting measures to determine how well the objectives were met. </li></ul></ul></ul>
  33. 33. <ul><li>MACS must aid management with the five stages of control: </li></ul>Management Accounting and Control Systems (MACS) <ul><ul><li>Execution: </li></ul></ul><ul><ul><ul><li>Implementing the plan(s). </li></ul></ul></ul><ul><ul><li>Monitoring: </li></ul></ul><ul><ul><ul><li>Measuring the system’s current level of performance. </li></ul></ul></ul>
  34. 34. <ul><li>MACS must aid management with the five stages of control: </li></ul>Management Accounting and Control Systems (MACS) <ul><ul><li>Evaluation: </li></ul></ul><ul><ul><ul><li>Feedback about the system’s current level of performance is compared to the planned level so that any discrepancies can be identified and corrective action prescribed. </li></ul></ul></ul><ul><ul><li>Correction: </li></ul></ul><ul><ul><ul><li>Taking the appropriate actions to return the system to a state of in control. </li></ul></ul></ul>
  35. 35. MACS: The Value Chain <ul><li>A sequence of activities that contribute more to the ultimate value of the product than to its cost. </li></ul><ul><li>All products flow through the value chain: </li></ul><ul><ul><li>Begins with research, development, and engineering. </li></ul></ul><ul><ul><li>Moves through manufacturing. </li></ul></ul><ul><ul><li>Continues on to customers. </li></ul></ul>
  36. 36. MACS: The Value Chain <ul><li>Customers may require service and will either: </li></ul><ul><ul><li>consume the product; or </li></ul></ul><ul><ul><li>dispose of it after it has served its intended purpose. </li></ul></ul><ul><li>The value chain may be divided into cycles, which correspond to different cost control approaches. </li></ul>
  37. 37. MACS: The Value Chain Target Costing & Value Engineering Kaizen Costing Total-Life-Cycle Costing Environmental Costing Benchmarking Post-Sale Service and Disposal Cycle Manufacturing Cycle Research, Development & Engineering Cycle
  38. 38. MACS: Target costing <ul><li>Target costing is a method of profit planning and cost management that focuses on products with discrete manufacturing processes. </li></ul><ul><li>Its goal is to “design” costs out of products in the RD&E stage of a product’s total life cycle rather than trying to reduce costs during the manufacturing stage. </li></ul>
  39. 39. MACS: Target costing <ul><li>Thus, target costing tries to minimize design changes during the manufacturing process when it is far more expensive to implement changes. </li></ul><ul><li>To achieve this goal, the total-life-cycle concept is used. </li></ul><ul><ul><li>Minimize the cost of ownership of a product over its useful life, where costs include the initial purchase price and the costs of operating, maintaining, and disposing of the product. </li></ul></ul>
  40. 40. MACS: Target costing <ul><li>Target costing is an iterative process. </li></ul><ul><ul><li>It begins with market research into customer requirements followed by product specification. </li></ul></ul><ul><ul><li>While customer input is obtained early in the marketing research process, it is also collected continually </li></ul></ul><ul><ul><li>Companies then engage in product design and engineering, and obtain prices from suppliers — but product cost is not the focus. </li></ul></ul>
  41. 41. MACS: Target costing <ul><li>Target costing is an iterative process. </li></ul><ul><ul><li>Only after the engineers and designers have determined product design is cost estimated. </li></ul></ul><ul><ul><li>If the estimated cost is deemed “too high,” then it may be necessary to modify the product design. </li></ul></ul>
  42. 42. MACS: Target costing <ul><li>Target costing is an iterative process. </li></ul><ul><ul><li>Thus, the value engineering process includes examination of each component of a product to determine whether it is possible to reduce costs while maintaining functionality and performance. </li></ul></ul><ul><ul><li>Product design may change, materials used in production may need replacing, or manufacturing processes may require redesign. </li></ul></ul>
  43. 43. MACS: Target costing <ul><li>Target costing makes use of cross-functional teams representing the entire value chain to guide the process. </li></ul><ul><li>Suppliers play a critical role in making target costing work. </li></ul><ul><li>If there is a need to reduce the cost of specific components, suppliers will be asked to find ways to reduce costs . </li></ul>
  44. 44. MACS: Target costing <ul><li>After determining the target cost, the firm would then determine a: </li></ul><ul><ul><li>target selling price and </li></ul></ul><ul><ul><li>target product volume. </li></ul></ul>
  45. 45. MACS: Target costing <ul><li>However, target costing is not without problems. </li></ul><ul><ul><li>The focus on meeting the target cost diverts attention away from the other company goals. </li></ul></ul><ul><ul><li>Employees (especially design engineers) working under target costing goals often experience burnout due to the pressure to meet the targeted cost . </li></ul></ul>
  46. 46. MACS: Target costing <ul><li>However, target costing is not without problems. </li></ul><ul><ul><li>Excessive pressure on subcontractors and suppliers to conform to a schedule and reduce costs can lead to alienation and/or failure of the subcontractor. </li></ul></ul>
  47. 47. MACS: Target costing <ul><li>However, target costing is not without problems. </li></ul><ul><ul><li>Design engineers may become upset when other parts of the organization are not cost conscious. </li></ul></ul><ul><ul><li>The engineers become frustrated when they exert much effort to squeeze pennies out of the cost of a product while other parts of the organization (administration, marketing, distribution) are thought to be wasting dollars. </li></ul></ul>
  48. 48. MACS: Target costing <ul><li>However, target costing is not without problems. </li></ul><ul><ul><li>Development time may increase because of repeated value engineering cycles to reduce costs. </li></ul></ul><ul><ul><li>Because of all the repeated cycles, the product may be late to market. </li></ul></ul><ul><ul><li>For some products, being six months late may be far more “costly” than having small cost overruns. </li></ul></ul>
  49. 49. MACS: Kaizen costing <ul><li>Kaizen costing is similar to target costing in its cost-reduction mission. </li></ul><ul><li>However, it focuses on reducing costs during the manufacturing stage of the total life cycle of a product. </li></ul><ul><li>The goal of kaizen costing is for current period actual production costs to be less than the prior period’s costs. </li></ul>
  50. 50. MACS: Kaizen costing <ul><li>Kaizen costing is similar to target costing in its cost-reduction mission. </li></ul><ul><li>Kaizen costing can be used on products already in the manufacturing process, where it is difficult, costly and time-consuming to make large changes to the production process. </li></ul><ul><li>However, if the cost of disruptions to production are greater than the savings due to kaizen costing, then it will not be applied. </li></ul>
  51. 51. MACS: Kaizen costing <ul><li>SRL Inc. budgets a target profit of $8,000,000 (a 10% return on assets). </li></ul><ul><li>Last year’s actual production costs of $25,000,000 are used as the starting point (the cost base). </li></ul><ul><li>The targeted cost reduction is the amount the cost base must be reduced if SRL Inc. is to reach the profit target. </li></ul><ul><li>Note this also depends on targeted sales revenues. </li></ul>
  52. 52. MACS: Kaizen costing <ul><li>Assume targeted sales revenues are $32,000,000. </li></ul><ul><li>Given that we have targeted a profit of $8,000,000, then targeted costs have to be $24,000,000 — a reduction of $1,000,000 from last year. </li></ul><ul><li>Now we can determine the targeted reduction rate — which is the ratio of the target reduction amount to the cost base — $1,000,000/$25,000,000 = 4% </li></ul>
  53. 53. MACS: Kaizen costing <ul><li>This rate is applied over time to all variable costs, resulting in specific target reduction amounts for materials, parts, direct and indirect labor, and other variable costs. </li></ul><ul><li>Management will then compare actual reduction amounts across all variable costs to the pre-established targeted reduction amounts to determine variances. </li></ul>
  54. 54. MACS: Kaizen costing <ul><li>One drawback to Kaizen costing is that the system places enormous pressure on employees to reduce every conceivable cost. </li></ul><ul><li>Also, Kaizen costing leads to incremental rather than radical process improvements. </li></ul><ul><li>This can cause management to focus on the details rather than improving the overall system. </li></ul>
  55. 55. MACS: Benchmarking <ul><li>Selecting appropriate benchmarking partners is a critical aspect of the process. </li></ul><ul><li>Benchmarking typically consists of five stages. </li></ul>
  56. 56. MACS: Benchmarking Stage 1 <ul><li>Decide which key areas to benchmark for study. These areas can be: </li></ul><ul><ul><li>production related; or </li></ul></ul><ul><ul><li>process related (and include support processes). </li></ul></ul><ul><li>Measure current performance on the key areas by initiating preliminary: </li></ul><ul><ul><li>internal competitive analyses; and </li></ul></ul><ul><ul><li>external competitive analyses. </li></ul></ul>
  57. 57. MACS: Benchmarking Stage 2 <ul><li>Develop a long-term commitment to the benchmarking project since: </li></ul><ul><ul><li>Significant organizational change can take several years; </li></ul></ul><ul><ul><li>Benchmarking requires the support of senior management — specifically, the authority to make changes; and </li></ul></ul><ul><ul><li>Benchmarking must include individuals from all functional areas in the organization. </li></ul></ul>
  58. 58. MACS: Benchmarking Stage 3 <ul><li>Identify benchmarking partners — willing participants who know the process. </li></ul><ul><li>Recognize critical factors, such as: </li></ul><ul><ul><li>The number of partners; </li></ul></ul><ul><ul><li>The size of the partners; </li></ul></ul><ul><ul><li>The degree of trust among partners; and </li></ul></ul><ul><ul><li>The relative position of the partners within and across industries. </li></ul></ul>
  59. 59. MACS: Benchmarking Stage 3 <ul><li>The number of partners: </li></ul><ul><ul><li>It makes sense for an organization to consider a wide array of benchmarking partners. </li></ul></ul><ul><ul><li>On the other hand, as the number of partners increases, so do issues of coordination, timeliness, and concern over proprietary information disclosure. </li></ul></ul>
  60. 60. MACS: Benchmarking Stage 3 <ul><li>The number of partners: </li></ul><ul><ul><li>Today’s changing business environment is likely to encourage firms to have a larger number of participants. </li></ul></ul><ul><ul><li>Increased competition and technological progress in information processing increases benchmarking benefits relative to costs. </li></ul></ul>
  61. 61. MACS: Benchmarking Stage 3 <ul><li>The size of partners: </li></ul><ul><ul><li>Will depend on the specific activity or method being benchmarked. </li></ul></ul><ul><ul><li>For example, if an organization wants to understand how a huge organization with several divisions coordinates its suppliers, then it would probably seek an organization of similar size. </li></ul></ul><ul><ul><li>Notwithstanding, size is not always an important factor. </li></ul></ul>
  62. 62. MACS: Benchmarking Stage 3 <ul><li>The degree of trust among partners: </li></ul><ul><ul><li>Developing trust among partners is critical to obtaining truthful and timely information. </li></ul></ul><ul><ul><li>Most organizations operate on a quid pro quo basis, with the understanding that both organizations will obtain information they can use. </li></ul></ul>
  63. 63. MACS: Benchmarking Stage 3 <ul><li>The relative position of the partners: </li></ul><ul><ul><li>Newcomers and those whose performance has declined are more likely to seek a wider variety of benchmarking partners than those who are established industry leaders. </li></ul></ul><ul><ul><li>Those who are industry leaders may benchmark because of their commitment to continuous improvement. </li></ul></ul>
  64. 64. MACS: Benchmarking Stage 4 <ul><li>Information gathering and sharing issues relate to the type of information that benchmarking organizations collect and the methods of information collection. </li></ul>
  65. 65. MACS: Benchmarking Stage 4 <ul><li>The type of information that benchmarking organizations collect depends on the area being “benchmarked.” </li></ul><ul><li>There are three broad classes of information on which firms can focus: </li></ul><ul><ul><li>product, </li></ul></ul><ul><ul><li>functional (process), </li></ul></ul><ul><ul><li>and strategic benchmarking. </li></ul></ul>
  66. 66. MACS: Benchmarking Stage 4 <ul><li>The methods of information collection also must be considered. </li></ul><ul><li>There are two methods of information collection for benchmarking: </li></ul><ul><ul><li>unilateral and </li></ul></ul><ul><ul><li>cooperative. </li></ul></ul>
  67. 67. MACS: Benchmarking Stage 5 <ul><li>Take action to meet or exceed the benchmark. </li></ul><ul><ul><li>The organization takes action and begins to change. </li></ul></ul><ul><ul><li>After implementing change, the organization makes comparisons to the specific performance measures selected. </li></ul></ul>
  68. 68. MACS: Benchmarking Stage 5 <ul><li>Take action to meet or exceed the benchmark. </li></ul><ul><ul><li>The decision may be to perform better than the benchmark to be more competitive. </li></ul></ul><ul><ul><li>The implementation stage is perhaps the most difficult stage of the benchmarking process, as the buy-in of members is critical for success. </li></ul></ul>