1. Management Accounting and Control Systems for Strategic Purposes: Assessing Performance Over the Entire Value Chain
Chapter 9

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

3. 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...

4. 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.

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

6. Discuss the concept of control.
Learning Objective 1
Discuss the concept of control.

7. 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.

8. Management Accounting and Control Systems
The Cycle of Control
Plan
Execute
Correct
Monitor
Evaluate

9. Management Accounting and Control Systems
Planning consists of developing an organization’s 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 system’s current level of performance.

10. Management Accounting and Control Systems
Evaluation occurs when feedback about the system’s 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.

11. Learning Objective 2
Identify the characteristics of well-designed management accounting and control systems (MACS).

12. 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 organization’s ethical code of conduct into MACS design

13. 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

14. Characteristics of Well-Designed MACS
What are some technical considerations?
Relevance of the information generated
Scope of the system

15. Characteristics of Well-Designed MACS
The relevance of the information is measured by four characteristics:
Accurate
Consistent
Timely
Flexible

16. 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

17. Learning Objective 3
Describe the total-life-cycle costing approach to managing product costs over the value chain.

18. 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 product’s design, development, manufacturing, marketing, distribution, maintenance, service, and disposal stages.

19. Total-Life-Cycle-Costing
RD&E
Cycle
Manufacturing
Cycle
Post Service
Cycle

20. 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 product’s total life costs are committed by decisions made in the RD&E cycle.

21. 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.

22. 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.

23. Total-Life-Cycle-Costing
What are the three stages of the service cycle?
Rapid growth
Transition
Maturity

24. 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

25. Explain target costing.
Learning Objective 4
Explain target costing.

26. Target Costing What is target costing?
It is a cost planning method used during the RD&E cycle that focuses on reducing costs for products that require discrete manufacturing processes and reasonably short product life cycle.

27. Target Costing RD&E Cycle Manufacturing Cycle Post Service Cycle

28. Comparing Traditional Cost Reduction to Target Costing
Traditional Cost Target
Reduction Costing
Market Research to Determine
Customer
Requirements
Customer
Needs and
Price Points
Product Specifications

29. Comparing Traditional Cost Reduction to Target Costing
Traditional Cost Target
Reduction Costing
Design
Target Selling Price
Target Product
Volume
Engineering
Target Profit
Supplier Pricing

30. Comparing Traditional Cost Reduction to Target Costing
Traditional Cost Target
Reduction Costing
Estimated Cost
Target Cost
Desired
Profit
Margin
Value
Engineering
Supplier
Pricing
Pressure

31. Comparing Traditional Cost Reduction to Target Costing
Traditional Cost Target
Reduction Costing
Manufacturing
Periodic Cost
Reduction
Continuous Cost
Reduction

32. 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.

33. 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

34. 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

35. 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.

36. Explain Kaizen costing.
Learning Objective 5
Explain Kaizen costing.

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

38. 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.

39. Kaizen Costing Manufacturing Cycle RD&E Cycle Post Service Cycle

40. 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

41. 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

42. 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

43. 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.

44. Discuss environmental costing issues.
Learning Objective 6
Discuss environmental costing issues.

45. 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

46. 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

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

48. Learning Objective 7
Understand the process of benchmarking the best practices of other organizations.

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

50. 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

51. 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

52. The Benchmarking Process
Stage 2 (cont’d.)
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

53. 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

54. 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)

55. The Benchmarking Process
Stage 4 (cont’d.)
Information Gathering and Sharing Methods
Factors to Consider
Method of Information Collection:
Unilateral
Cooperative:
Database
Indirect/third party
Group

56. The Benchmarking Process
Stage 4 (cont’d.)
Information Gathering and Sharing Methods
Factors to Consider
Determine performance measures
Determine the benchmarking performance gap
in relation to performance measures

57. The Benchmarking Process
Stage 5
Taking Action to Meet or Exceed the
Benchmark
Factors to Consider
Comparisons of performance measures
are made

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

59. 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

60. End of Chapter 9