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© Pearson Education Limited 2008 MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse Cheryl S. McWatters, Jerold L. Zimmerman,

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Presentation on theme: "© Pearson Education Limited 2008 MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse Cheryl S. McWatters, Jerold L. Zimmerman,"— Presentation transcript:

1 © Pearson Education Limited 2008 MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse

2 © Pearson Education Limited 2008 14-2 Management Accounting McWatters, Zimmerman, Morse Management Accounting in a dynamic environment Chapter 14

3 © Pearson Education Limited 2008 14-3 Management Accounting McWatters, Zimmerman, Morse Objectives Describe factors in a dynamic environment that influence an organization Describe how the organizations 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

4 © Pearson Education Limited 2008 14-4 Management Accounting McWatters, Zimmerman, Morse External Forces Affecting the Organization Organization Technological Innovation Global Competition Customer Preferences

5 © Pearson Education Limited 2008 14-5 Management Accounting McWatters, Zimmerman, Morse Organizational Strategy and Structure Customer value is achieved through: Innovative product 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

6 © Pearson Education Limited 2008 14-6 Management Accounting McWatters, Zimmerman, Morse Organizational Strategy and Structure Customer Preferences Technological 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

7 © Pearson Education Limited 2008 14-7 Management Accounting McWatters, Zimmerman, Morse Organizational Strategy and Structure Recent Terminology Total quality management (TQM) Continuous improvement Zero defects strategies Statistical process control (SPC) Re- engineering Six Sigma 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) Just-in-time manufacturing (JIT) Toyota Production System (TPS) Kanban CONWIP (constant work-in-process)

8 © Pearson Education Limited 2008 14-8 Management Accounting McWatters, Zimmerman, Morse Organizational Strategy and Structure 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

9 © Pearson Education Limited 2008 14-9 Management Accounting McWatters, Zimmerman, Morse Organizational Strategy and Structure An organizations strengths and weaknesses depend upon: Balance sheet assets Brand names, Patents and employees Brand names, Patents and employees Asset structure Ability to innovate and change Relations with customers and suppliers

10 © Pearson Education Limited 2008 14-10 Management Accounting McWatters, Zimmerman, Morse Three major elements of organizational structure Assignment of Responsibilities Performance Measurement Compensation Organizational Strategy and Structure

11 © Pearson Education Limited 2008 14-11 Management Accounting McWatters, Zimmerman, Morse Knowledgeable Individual Assignment of Responsibility Organizational Strategy and Structure Manager Control Including Accounting Performance Measures Control Including Accounting Performance Measures

12 © Pearson Education Limited 2008 14-12 Management Accounting McWatters, Zimmerman, Morse Good Performance Measures Use accounting-based and non-accounting based measures of performance Should be consistent with the assignment of responsibilities Good Performance Measures Use accounting-based and non-accounting based measures of performance Should be consistent with the assignment of responsibilities Organizational Strategy and Structure

13 © Pearson Education Limited 2008 14-13 Management Accounting McWatters, Zimmerman, Morse 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 Structure Promotion Dedicated parking space Health-club membership

14 © Pearson Education Limited 2008 14-14 Management Accounting McWatters, Zimmerman, Morse Customer Value and Organizational Value 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

15 © Pearson Education Limited 2008 14-15 Management Accounting McWatters, Zimmerman, Morse The Role of Management Accounting 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

16 © Pearson Education Limited 2008 14-16 Management Accounting McWatters, Zimmerman, Morse Total Quality Management and 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

17 © Pearson Education Limited 2008 14-17 Management Accounting McWatters, Zimmerman, Morse Total Quality Management and 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

18 © Pearson Education Limited 2008 14-18 Management Accounting McWatters, Zimmerman, Morse Total Quality Management and Quality Measures Involved Leadership Employee Participation Employee Empowerment Employee Teamwork Customer Satisfaction Continual Improvement TQM A Management Philosophy

19 © Pearson Education Limited 2008 14-19 Management Accounting McWatters, Zimmerman, Morse Total Quality Management and Quality Measures Quality is a firm wide process Quality is defined by the customer Quality requires organizational changes Quality is designed into the product Quality is a firm wide process Quality is defined by the customer Quality requires organizational changes Quality is designed into the product

20 © Pearson Education Limited 2008 14-20 Management Accounting McWatters, Zimmerman, Morse Total Quality Management and Quality Measures TQM Quality Measures Product Design # of new parts # of parts Product Design # of new parts # of parts Vendor Rating # of defects On-time delivery Vendor Rating # of defects On-time delivery Manufacturing Defect rates Scrap Rework Cycle time Manufacturing Defect rates Scrap Rework Cycle time Customer Satisfaction Surveys Warranty expense Customer Satisfaction Surveys Warranty expense

21 © Pearson Education Limited 2008 14-21 Management Accounting McWatters, Zimmerman, Morse Total Quality Management Numerical Example A farmer of gourmet tomatoes estimates that 10% of the 20,000kg of tomatoes picked do not meet customers 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 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

22 © Pearson Education Limited 2008 14-22 Management Accounting McWatters, Zimmerman, Morse Total Quality Management and Quality 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

23 © Pearson Education Limited 2008 14-23 Management Accounting McWatters, Zimmerman, Morse Just-in-Time (JIT) Processes JIT is an operating philosophy that emphasizes providing products on demand

24 © Pearson Education Limited 2008 14-24 Management Accounting McWatters, Zimmerman, Morse Warehousing of raw materials, work-in-process, and finished goods inventory Just-in-Time (JIT) Processes Traditional systems JIT system Process One Process Two Process Three Process Three Process Two Process One Raw Materials Raw Materials Customer Order Customer

25 © Pearson Education Limited 2008 14-25 Management Accounting McWatters, Zimmerman, Morse 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) Processes

26 © Pearson Education Limited 2008 14-26 Management Accounting McWatters, Zimmerman, Morse Just-in-Time (JIT) Processes Lower capital costs of holding inventory Plant 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 Benefits of reducing throughput time

27 © Pearson Education Limited 2008 14-27 Management Accounting McWatters, Zimmerman, Morse Change performance measurement and reward systems Change performance measurement and reward systems Balance flow rates Balance flow rates Reduce setup times Plant layout Plant layout Increase quality To reduce throughput time, changes must be made in several areas Just-in-Time (JIT) Processes

28 © Pearson Education Limited 2008 14-28 Management Accounting McWatters, Zimmerman, Morse Just-in-Time (JIT) Processes Numerical 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 = £60,000 Holding cost under JIT £500,000 x 0.12 x 0.60 = £36,000 The annual cost decreases by 40% (£24,000) Annual cost of holding inventory £500,000 x 0.12 = £60,000 Holding 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

29 © Pearson Education Limited 2008 14-29 Management Accounting McWatters, Zimmerman, Morse Areas that are impacted by JIT include Greater customer satisfaction Greater customer satisfaction Materials requirement planning (MRP) Materials requirement planning (MRP) Fewer suppliers Fewer suppliers Lower product cost Lower product cost Automation allows for less setup time Reduced WIP accounting Internet B2B transactions (EDI) Different performance measures Just-in-Time (JIT) Processes Changes to organizational strategy Simpler accounting Changes to role of management accounting

30 © Pearson Education Limited 2008 14-30 Management Accounting McWatters, Zimmerman, Morse When Should Management 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

31 © Pearson Education Limited 2008 14-31 Management Accounting McWatters, Zimmerman, Morse When Should Management 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 companys speciality

32 © Pearson Education Limited 2008 14-32 Management Accounting McWatters, Zimmerman, Morse When Should Management 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

33 © Pearson Education Limited 2008 14-33 Management Accounting McWatters, Zimmerman, Morse Management Accounting in a Dynamic Environment End of Chapter 14


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