1. ADVANCED MANAGEMENT ACCOUNTING

2. Definition of Management Accounting: IMA
Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy.

3. Managerial Accounting as a Career
Professional Organizations
Institute of Management Accountants (IMA)
Publishes
Management
Accounting
and research
studies.
Administers
Certified
Management
Accountant
program
Develops
Standards of
Ethical
Conduct for
Management
Accountants

4. Professional Ethics
Ethical business practices build trust and promote loyal, productive relationships with customers, employees and suppliers.
Many companies have written codes of ethics which serve as guides for employees to follow.

5. Resolution of Ethical Conflict
Professional Ethics
Competence
Confidentiality
Integrity
Objectivity
Resolution of Ethical Conflict

6. Professional Ethics Competence
Follow applicable laws, regulations and standards.
Maintain professional competence.
Competence
Prepare complete and clear reports after appropriate analysis.

7. Professional Ethics Confidentiality
Do not disclose confidential information unless legally obligated to do so.
Do not use confidential information for personal advantage.
Confidentiality
Ensure that subordinates do not disclose confidential information.

8. Professional Ethics Integrity
Avoid conflicts of interest and advise others of potential conflicts.
Do not subvert organization’s legitimate objectives.
Integrity
Recognize and communicate personal and professional limitations.

9. Professional Ethics Integrity
Avoid activities that could affect your ability to perform duties.
Refrain from activities that could discredit the profession.
Refuse gifts or favors that might influence behavior.
Integrity
Communicate unfavorable as well as favorable information.

10. Professional Ethics Objectivity
Communicate information fairly and objectively.
Objectivity
Disclose all information that might be useful to management.

11. Resolution of Ethical Conflict
Professional Ethics
Resolution of Ethical Conflict
Follow established policies of your organization.
If unresolved or if policy does not exist:
Clarify relevant concepts in a confidential discussion with an objective advisor to explore possible courses of action.
Discuss problem with immediate supervisor.

12. Resolution of Ethical Conflict
Professional Ethics
Resolution of Ethical Conflict
If immediate supervisor is involved in the unethical behavior, discuss at the next level.
If problem is not resolved, the last resort is to resign.
Generally, do not communicate ethical conflicts to outsiders.

13. Major Themes in Managerial Accounting
Behavioral
Issues
Information
and Incentives
Costs and
Benefits
Managerial
Accounting

14. Evolution and Adaptation in Managerial Accounting
Service Vs. Manufacturing
Firms
Computer-Integrated
Manufacturing
Information and
Communication
Technology
Emergence of New
Industries
Change
Global Competition
Product Life Cycles
Total Quality
Management
Focus on the Customer
Cross-Functional Teams
Time-Based Competition
Continuous Improvement
Just-in-Time Inventory

15. Managerial Accounting in Modern Production Environments
Key developments that reshaped Managerial Accounting include:
Integrated information systems
Web hosting
Just-in-time and lean production
Total Quality Management
Theory of constraints
Benchmarking and continuous improvement

16. The Goal of Good Management is to Create Value
Cost Management is applying the value criteria to every decision we make, every activity we perform, and every process we complete.
Modern accounting systems do not just evaluate good stewardship but must provide managers with the information managers need to improve value.
Management accounting systems are used to enhance both decision making and management control.
Management accounting systems do not need to be perfect, only ‘good enough’ to increase value.
We think it is fair to explain our definition of value. We limit our definition of value to the creation of current and future cashflows. This ignores value to owner stakeholders that may not create cashflows. We expand this idea later in the text to discuss and define stakeholders as groups of individuals that can influence the value of an organization. This is an opportunity for the instructor to discuss the influence of personal value or preferences on the costs of operations. For example ‘If you like your job, you will work for less’.
You may wish to use as a discussion question the following.
What kinds of value to you think are important for managers to consider because they will influence future cashflows?
Any of these activities will influence value (cashflows).
Cashflows from customers.
Cashflows paid for wages and materials.
The image of the company will influence customer loyalty, thereby increasing or decreasing revenue.
The training and working conditions of employees will influence the wages they demand, and their productivity levels.

17. New Management Trends to Create Value
Encourage Management Accounting Systems Redesign, for example.
Customer focus
Quality focus
Delivery focus
Outsourcing and the virtual company
Communications
Shortening product life cycles
Team development
Deregulation in the service sector
1. CUSTOMER FOCUS: Companies try to provide differentiated products that have unique value. Information on the cost and value of unique features are needed.
2. QUALITY FOCUS: Means companies provide goods and services as specified to both internal and external customers. This requires information on the costs of quality and progress towards total quality management.
3. DELIVERY FOCUS: Means delivering goods and services as promised. The performance and costs of this goal needs to be monitored.
4. OUTSOURCING AND THE VIRTUAL COMPANY: Companies need to identify their ‘core’ competencies and outsource things they do not do well to other companies. This requires activity based measurement systems based upon quality, delivery and value-chain costs.
5. COMMUNICATIONS: This refers to the dramatic improvement in communications technology. Information is much more timely and available.
6. SHORTENING PRODUCT LIFE CYCLES: Short product life cycles force companies to manage product lines from the initial design stage more often. This requires new accounting systems to provide the support for this activity.
7. TEAM DEVELOPMENT: Teams working across functional groups are needed to efficiently and effectively manage dynamic environments. Accounting information is needed to establish priorities and communicate among functional groups.
8. DEREGULATION IN THE SERVICE SECTOR: With deregulation service industries need to make cost effective decisions that reflect the value of services to customers.

18. Perubahan Lingkungan Bisnis
Menentukan hal apa saja yang tidak perlu dilakukan,
bagaimana perusahaan harus dikelola dan bagaimana
pekerjaan dilakukan
Beberapa praktek manajemen:
JIT (Just In Time)
Manajemen Mutu Total (TQM)
Rekayasa Ulang
Teori Kendala (Theory of Constrain/TOC)

19. JIT (Just In Time) Sistem Pengendalian Persediaan dan Produksi JIT:
>> Membeli BB dan memproduksi unit output sesuai dengan permintaan aktual dari pelanggan
>> Persediaan dikurangi sampai pada tingkat minimum (bahkan sampai titik nol)
Dampak JIT (perush. Manufaktur):
>> Efisiensi dan mengurangi biaya (penyimpanan dan pemesanan) serta meningkatkan efisiensi dan efektifitas operasi.
Bahan bahan baku yang diterima segera masuk ke proses produksi, bahan produksi lainnya segera digabungkan dan dikerjakan, dan produk yang telah jadi segera dikirimkan kepada pelanggan.

20. TQM (Total Quality Management)
Perbaikan terus menerus yang memiliki karakteristik :
>> Fokus pada pelayanan pelanggan
>> Pemecahan masalah secara sistematis dengan menggunakan tim yang ada di garda depan yang dibekali dengan salah satu alat manajemen
>> Penentuan tolok ukur (benchmarking) yang dilakukan dengan mempelajari organisasi terbaik yang ada untuk menjelaskan tugas tugas tertentu.

21. Total Quality Management (TQM) - a philosophy of zero defects -
Increased emphasis on product quality because goods are produced only as needed
Total Quality Management (TQM)
- a philosophy of zero defects -
Gambaran utama TQM adalah meningkatkan produktivitas
dengan mendorong penggunaan pengetahuan dalam
mengambil keputusan dan menekan perilaku defensif yang
tidak produktif.
LO 8 Identify trends in management accounting.

22. Rekayasa Ulang Proses (Process Reengineering-PR)
Meliputi desain ulang secara menyeluruh proses bisnis dalam rangka
menghilangkan aktivitas yang tidak bernilai tambah dan mengurangi
kemungkinan terjadinya kesalahan. Rekayasa ulang mengandalkan
pada spesialis dari luar perusahaan.
>> Merupakan pendekatan yang lebih radikal dibandingkan TQM
>> Sebagai ganti perbaikan sistem yang dirancang serial dan bertahap.
>> Dalam PR suatu proses bisnis diplot dalam sebuah diagram secara detail, dikritik dan kemudian dirancang ulang untuk menghilangkan langkah-langkah yang tidak diperlukan, mengurangi kemungkinan terjadinya kesalahan dan mengurangi biaya.
Proses bisnis adalah serangkaian tahapan yang harus dilakukan untuk menjalankan tugas-tugas dalam dalam suatu bisnis.

23. Teori Kendala (Theory of Contrains/ToC)
Menekankan pada pentingnya mengelola kendala yang
dihadapai oleh organisasi. Karena kendala adalah sesuatu
yang menghalangi organisasi, proses perbaikan akan efektif
kalau difokuskan pada kendala yang dihadapi
Teori kendala didasarkan pada pandangan bahwa manajemen kendala secara efektif merupakan kunci keberhasilan

24. Activity-Based-Costing (ABC)
Allocates overhead based on use of activities
Results in more accurate product costing and scrutiny of all activities in the value chain
Balanced Scorecard
Evaluates operations in an integrated fashion
Uses both financial and non-financial measures
Links performance measures to overall company objectives
LO 8 Identify trends in management accounting.

25. Review Question
Which of the following managerial accounting techniques attempts to allocate manufacturing overhead in a more meaningful manner?
Just-in-time inventory.
Total-quality management.
Balanced scorecard.
Activity-based costing.
LO 8 Identify trends in management accounting.

26. The Strategic Approach to Teaching Management Accounting Topics —An Introduction

27. Strategic Cost Management: Basic Concepts
Strategic decision making is choosing among alternative strategies with the goal of selecting a strategy, or strategies, that provides a company with reasonable assurance of long-term growth and survival
The key to achieving this goal is to gain a competitive advantage.
Strategic cost management is the use of cost data to develop and identify superior strategies that will produce a sustainable competitive advantage.

28. A Model of the Decision-Making Process

29. Competitive Advantage
Competitive advantage is the process of creating better customer value for the same or lower cost than that of competitors or creating equivalent value for lower cost than that of competitors.
Customer value is the difference between what a customer receives (customer realization) and what the customer gives up (customer sacrifice).
The total product is the complete range of tangible and intangible benefits that a customer receives from a purchased product.

30. Michael Porter: Strategic Positioning
Cost Leadership—outperform competitors by producing at the lowest cost, consistent with quality demanded by the consumer
Differentiation—creating value for the customer through product innovation, product features, customer service, etc. that the customer is willing to pay for

31. Aspects of the Two Competitive Strategies

32. Strategic Positioning
There are three general strategies that have been identified:
cost leadership
product differentiation
focusing

33. Strategic Positioning
A cost leadership strategy happens when the same or better value is provided to customers at a lower cost than a company’s competitors.
Example: A company might redesign a product so that fewer parts are needed, lowering production costs and the costs of maintaining the product after purchase.

34. Strategic Positioning (continued)
A product differentiation strategy strives to increase customer value by increasing what the customer receives (customer realization).
Example: a retailer of computers might offer on-site repair service, a feature not offered by other rivals in the local market.

35. Strategic Positioning (continued)
A focusing strategy happens when a firm selects or emphasizes a market or customer segment in which to compete.
Example: Paging Network, Inc., a paging services provider, has targeted particular kinds of customers and is in the process of weeding out the nontargeted customers.

36. Consequences of Lack of Strategic Cost-Management Information
Decision-making based on guess and intuition
Lack of clarity about direction and goals
Over time, lack of a clear and favorable perception of the firm by customers and suppliers
Incorrect decisions: choosing products, markets, or manufacturing processes that are inconsistent with the organization’s strategy
For control purposes, cannot link performance effectively to strategic goals …

37. Tools for Integrating Strategy into Management Accounting
-- The Value Chain
-- Strategy Maps & the Balanced Scorecard (BSC)

38. Balanced Scorecard (BSC)
Introducing Strategy
Strengths
Weaknesses
OpportunitiesThreats
Strategy
Map
Balanced Scorecard (BSC)

39. Value Chain
Refers to all activities associated with providing a product or service
For a manufacturing firm these include the following:
LO 8 Identify trends in management accounting.

40. Industrial Value Chain
The industrial value chain is the linked set of value-creating activities from basic raw materials to the disposal of the finished product by end-use customers.
Fundamental to a value-chain framework is the recognition that there exist complex linkages and interrelationships among activities both within and external to the firm.

41. Value Chain Analysis: A Detailed Look at Strategy…
The Value Chain is a linked set of value-adding activities used by an organization to deliver its value proposition to its customers. It consists of:
“Upstream” Activities
Manufacturing/Operations
“Downstream” Activities

42. Value-Chain Analysis Develop competitive advantage by:
Identify value-chain activities
Develop competitive advantage by:
Identifying opportunities for adding value for the customer
Identifying opportunities for eliminating non- value added activities and reducing cost
Understand linkages among suppliers, the entity, and customers

43. Internal and External Linkages
There are two types of linkages that must be analyzed and understood: internal and external linkages.
Internal linkages are relationships among activities that are performed within a firm’s portion of the value chain.
External linkages describe the relationship of a firm’s value-chain activities that are performed with its suppliers and customers. There are two types: supplier linkages and customer linkages.

44. Strategy Maps & the Balanced Scorecard (BSC)
The BSC and Strategy Map are used to align the organization’s activities with achieving strategic goals, using the four perspectives:
Financial
Customer
Internal Processes
Learning and Growth

45. vision & mission Integrate systems
Exceed shareholder
expectations
Diversify income
stream
Increase sales
volume
Improve profit
margins
Financial
Diversify
customer base
Increase sales to
existing customers
Customer
Attract new
customers
Internal
Process
Target profitable
market segments
Optimize internal
processes
Develop new
products
Attract new
customers
Learning
& Growth
Develop
employee skills
Integrate
systems

46. The Balanced Scorecard (BSC): Feedback to Strategy
Map
Balanced Scorecard (BSC)

47. Activity-Based Costing (ABC), RCA, and TDABC

48. Evolution of Cost Accounting Systems
ABC
(simple &
minimal)
ABC
(multidimensional)
Traditional
Costing
Resources
Resources
Resources
Consumed by
Consumed by
Allocated to
Activities
Activities
Consumed by
Consumed by
Cost Objects
Cost Objects
outputs
channels
Cost
Objects
Users

49. ABC/M Framework What Things Cost Resource Drivers Resource Costs
Root
Causes of Costs
Work Activities
Performance
Measures
Cost Reduction
Process reengineering
Cost of quality
Continuous improvement
Waste elimination
Benchmarking
Activity Cost
Assignment
Activity
Drivers
Cost Objects
Design for manufacturing
Make versus Buy
Why Things
Cost
Better Decision
Making

50. Organizational Activities and Cost Drivers
Organizational activities are of two types: structural and executional.
Structural activities are activities that determine the underlying economic structure of the organization.
Executional activities are activities that define the processes and capabilities of an organization and thus are directly related to the ability of an organization to execute successfully.

51. Organizational Activities and Drivers
Structural Activities Structural Cost Drivers
Building plants Number of plants, scale, degree of centralization
Management structuring Management style and philosophy
Grouping employees Number and type of work units
Complexity Number of product lines, number of unique processes, number of unique parts
Vertically integrating Scope, buying power, selling power
Selecting and using process Types of process technologies, technologies experience

52. Organizational Activities and Drivers
Executional Activities Executional Cost Drivers
Using employees Degree of involvement
Providing quality Quality management approach
Providing plant layout Plant layout efficiency
Designing and producing products Product configuration
Providing capacity Capacity utilization

53. Operational Activities
Operational activities are day-to-day activities performed as a result of the structure and processes selected by the organization.
Examples:Receiving and inspecting incoming parts, moving materials, shipping products, testing new products, servicing products, and setting up equipment.

54. Organizational and Operational Activity Relationships
Organizational Activity
(Selecting and using process technologies)
Structural Cost Driver
(JIT: Type of process technology
Operational Driver
(Number of moves)
Operational Activity
(Moving material)

55. Internal Value Chain
Design
Service
Develop
Distribute
Produce
Market

56. Exploiting Internal Linkages
An Example:
Assume that design engineers have been told that the number of parts is a significant cost driver and that reducing the number of parts will reduce the demand for various activities downstream in the value chain. They plan to reduce the price by per-unit savings. Currently 10,000 units are produced. The data of the new design and its effects on demand are given below:
Current Expected
Activity Cost Driver Capacity Demand Demand
Material usage # of parts 200, ,000 80,000
Labor usage Labor hours 10,000 10,000 5,000
Purchasing # of orders 15,000 12,500 6,500
Warranty repair # of defects 1,

57. Exploiting Internal Linkages (continued)
Potential Savings :
Material usage (200, ,000)$3 $360,000
Labor usage (10, )$12 60,000
Purchasing [$30,000 + $.50(12, ,500)] 33,000
Warranty repair [($28,000 + $20( )] ,000
Total $487,000
======
Units 10,000
Unit savings $48.70

58. Activity-Based Customer Costing
An Example:
Suppose that the Thompson Company produces precision parts for 11 major buyers. An activity-based costing system is used to assign manufacturing costs to products. The company prices each customer's order by adding order-filling costs to manufacturing costs and then adding a 20% markup (to cover any administrative costs plus profits). Order-filling costs total $606,000 and are currently assigned in proportion to sales volume (measured by number of parts sold). Of the 11 customers, one accounts for 50% of sales, with the remaining ten accounting for the remainder of sales. Orders placed by the smaller companies are also about the same size. Data concerning Thompson’s customer activity are given on PPT 13-22:

59. Exploiting External Linkages (continued)
Large Ten Smaller Customer Customers
Units purchased 500, ,000
Orders placed
Manufacturing cost $3,000,000 $3,000,000
*Order-filling cost allocated 303, ,000
Order cost per unit $0.606 $0.606
*Order-filling capacity is purchased in blocks of 45 (225 capacity), each block costing $40,400; variable order-filling activity costs are $2,000 per order; thus, the cost is [(5 x $40,400) + ($2,000 x 202)]

60. Exploiting External Linkage (continued)
Assume that ordering costs are allocated using a new driver:
Large Customer Ten Smaller Customers
Units purchased 500, ,000
Orders placed
Manufacturing costs $3,000,000 $3,000,000
*Orders-filling costs 6, ,000
Order cost per unit $.012 $1.20
*Order-filling capacity is allocated using number of orders. The allocation
rate is $3,000 pre order ($606,000/202 orders).
Implications:
By using a new driver, we are drastically reducing the ordering-cost per unit of the high volume customer (50% of our business). This information could assist Thompson in establishing a new strategy for pricing.

61. Product Life Cycle Viewpoints
There are three basic views of the product life cycle:
Marketing viewpoint
Production viewpoint
Consumable life viewpoint

62. Marketing Viewpoint Units of sales
Introduction Growth Maturity Decline

63. Life Cycle Cost Management
Cost Commitment Curve
Life Cycle
Cost %
100 90 75 25
90 percent of life-cycle
costs are committed at this
point
Research Planning Design Testing Production Logistics

64. A Life Cycle Costing Example
Suppose that engineers are considering two new product designs for one of its power tools. Both designs reduce direct materials and direct labor content over the current model. The anticipated effects of the two designs on manufacturing, logistical, and postpurchase activities costs are listed below:
Cost Behavior
Functional-based system:
Variable conversion activity rate: $40 per direct labor hour
Material usage rate: $8 per part
ABC system:
Labor usage $10 per direct labor hour
Material usage: $8 per part
Machining: $28 per machine hour
Purchasing activity: $60 per purchase order
Setup activity: $1,00 per setup hour
Warranty activity: $200 per returned unit
Customer repair cost: $10 per hour

65. Life Cycle Costing (continued)
Traditional Costing (Overhead allocated by direct labor hours)
Design A Design B
Direct materials $ 800,000 $ ,000
Conversion costb 2,000, ,200,000
Total manufacturing cost $2,800,000 $ 3,680,000
Units produced  10,  10,000
Unit cost $ $ ======== ========
a$8 x 100,000 parts; $8 x 60,000 parts
b$40 x 50,000 direct labor hours; $40 x 80,000 direct labor hours

66. Life Cycle Costing (continued)
ABC Costing (Overhead allocated by direct labor hours)
Design A Design B Classification
Direct materials $ 800,000 $ 480,000 Manufacturing
Direct labora 500, ,000 Manufacturing
Machiningb 700, ,000 Manufacturing
Purchasingc 18,000 12,000 Upstream
Setupsd 200, ,000 Manufacturing
Warrantye , ,000 Downstream
Total product costs $2,298,000 $1,967,000
Units productd  10,  10,000
Unit cost $ $
Postpurchase costs $ ,000 $ ,000 ======== ========
a$5 x 50 ,000 hours ; $5 x 40,000 hours d$1,000 x 200 setups; $1,000 x 100 setups
b$10 x 25,000 parts; $10 x 20,000 parts e$200 x 400 defects; $200x 1,000 defects
c$60 x 300 design hours; $60 x 2000 design hours

67. Target Costing - Example
Assume that a company is considering the production of a new trencher. Current product specifications and the targeted market share call for a sales price of $250,000. The required profit is $50,000 per unit.
The target cost is computed as follows:
Target cost = $250,000 - $50,000
= $200,000

68. PRODUCT FUNCTIONALITY PRODUCT AND PROCESS DESIGN
Target-Costing Model
PRODUCT FUNCTIONALITY
MARKET SHARE
OBJECTIVE
TARGET PRICE
TARGET PROFIT
TARGET COST
PRODUCT AND PROCESS DESIGN No
TARGET COST MET?
Yes
PRODUCE PRODUCT

69. Resource Consumption Accounting (RCA)
Resource consumption accounting (RCA) is an adaption of ABC that emphasizes resource consumption by greatly increasing the number of resource cost pools, which allows more direct tracing of resource costs to cost objects than an ABC system with fewer cost centers.
RCA is particularly appropriate for large organizations with repetitive operations and high-level information systems such as those provided by SAP, Oracle, and SAS.

70. Time-Driven ABC (TDABC)
When a substantial amount of the cost of a company’s activities are in a highly repetitive process (much like in the RCA example above), the cost assignment can be based on the average time required for each activity. Time-Driven Activity-Based Costing assigns resource costs directly to cost objects using the cost per time unit of supplying the resource, rather than first assigning costs to activities and then from activities to cost objects.

71. TDABC Example
TDABC computes the cost per minute of the resources performing the work activity. Assume 2 clerical workers paid $45,000 annually perform a certain activity that is expected to require 17 minutes. TDABC calculates the total cost as $45,000 x 2 = $90,000; TDABC then calculates the total time available for the activity as 180,000 minutes (assuming 30 hours per week with two weeks vacation: 2 workers x 50 weeks x 30 hours x 60 minutes per hour = 180,000 minutes per year). The TDAC rate for the activity is $0.50 per minute ($90,000 / 180,000).The cost of a unit of activity is $0.50 x 17 min = $8.50; if the activity required 20 min, then the allocation would be $.50 x 20 = $10.

72. Customer Profitability Analysis

73. Customer Profitability Analysis
Customer Relationship Management (CRM):
Customer Lifetime Value (CLV)
Customer Equity

74. Customer Profitability Analysis:
The Whale Curve

75. What Makes for a Profitable Customer?
Profitable and unprofitable customers are distinguished
by the demands they place on the organization
Less profitable customers
Small order quantities
Special products ordered
Heavy discounting
Unpredictable demands
Delivery times change
High technical support
Slow payment (imputed
interest)
More profitable customers
Large order sizes
Standard products ordered
Little discounting
Predictable demands
Delivery times standard
Low technical support
On-time payment (imputed interest)
These demands can be estimated
by activity costs and activity cost drivers 52

76. Migrating Customers to Higher Profitability – A Strategic Analysis
Very
Profitable
Types of Customers
High
(Creamy)
Profitable
Product Mix
Margin
Unprofitable
Low
(Low Fat)
Very
unprofitable
Low
High
Cost-to-Serve 76

77. Customer Relationship Management (CRM) Requires Strategic Cost Management Data
Who is more important to pursue with the scarce resources of our marketing budget?
Our most profitable customers? Our most
valuable customers?
What is the difference?
The “customer lifetime value” (CLV) measure is intended to answer this question.

78. You are a pharmaceutical supplier: which customer is more important?
Dentist A
Sales = $750,000
profits = $100,000
Age 61
Dentist B
Sales = $375,000
profits = $40,000
Age 25
Which is more profitable?
Which is more valuable?

79. Customer Lifetime Value (CLV)
What is it?
The projected economic value of customer relationships during the whole period of the relationship between the customer and company.
The Measure
The net present value (NPV) of all future profits from that customer; it is a projection, from when the customer is acquired or from the current date.

80. Customer Equity What is it?
The economic value of ALL customer relationships.
The Measure
The sum of the CLVs for all customers.
How Used
Provides a measure of the value of the company from the perspective of customer profitability.

81. The Management & Control of Quality (including Six-Sigma and Lean)

82. Relationship between TQM & Financial Performance

83. A Strategic Model for Managing Quality

84. Lean Manufacturing
At the heart of lean manufacturing is the Toyota Production System (TPS):
a long-term focus on relationships with suppliers and coordination with these suppliers;
an emphasis on balanced, continuous flow manufacturing with stable production levels;
continuous improvement in product design and manufacturing processes with the objective of eliminating waste ; and
flexible manufacturing systems in which different vehicles are produced on the same assembly line and employees are trained for a variety of tasks

85. Accounting for Lean
There are three reasons why the improvements in financial results typically appear later than the operating improvements from implementing lean.
Customers will benefit from the improved manufacturing flexibility by ordering in smaller, more diverse quantities.
Improvements in productivity will create excess capacity; as equipment and facilities are used more efficiently, some will become idle.
The decrease in inventory that results from lean means that, using full cost accounting, the fixed costs incurred in prior periods flow through the income statement when inventory is decreasing.

86. Accounting for Lean
Lean accounting uses value streams to measure the financial benefits of a firm’s progress in implementing lean manufacturing.
Each value stream is a group of related products or services.
Accounting for value streams significantly reduces the need for cost allocations (since the products are aggregated into value streams) which can help the firm to better understand the profitability of its process improvements and product groups.

87. Lean Accounting – Value Streams

88. Operational and Management-level Performance Measurement

89. Performance Measurement
Motivation and Evaluation
Incentives: right decisions
Align performance measurement with strategy
Incentives: working hard
Compensation and bonus plans
Equity/fairness
Controllability
Cost allocations
Operational-level and Management-level

90. Operational Performance Measurement with a Flexible Budget
2010
2010

91. Management Performance Measurement
Cost Centers
Engineered Cost (cost driver: volume based)
Flexible Budget
Discretionary Cost (cost driver?)
Master Budget
“Profit Center” – one step from outsourcing…

92. Management Performance Measurement
Profit Centers:
Variable costing income statements
Issue of transfer pricing
Role and importance of nonfinancial performance indicators
Investment Centers:
ROI vs. RI vs. EVA®
Measurement issues
Role and importance of non-financial performance indicators

93. Performance Measurement: When to Use Profit or Cost Center
Management –Level
Performance Measurement: When to Use Profit or Cost Center
Customer
Plant
Warehouse

94. Using Software in the Strategic Cost Management

95. Using Software in the Strategic Cost Management
Excel:
Goal Seek
Solver
ABC:
OROS (SAS), SAP, …
Excel
Simulation:
Crystal Excel(Formulas/Functions)

96. ABC Software: OROS Quick (from SAS)
Comprehensive: resources through objects
Allow a couple of classes
Short Tutorial, 13 pages, couple of hours
Blue Ridge Manufacturing Case

97. Introduction to Management Accounting
Strategic Positioning
Ethics
Implementing
Strategy
Product
Costing
Cost Behavior
(Planning and
Operational
Control)
Product Life
Cycle
The Value
Chain
The
Balanced
Scorecard
Volume
Based
(Job
Costing)
Activity -
based
Cost Estimation
CVP Analysis
Master Budget
Decision
Making
Flexible Budget s
Target
Life
Management
Control

98. Strategic Positioning
Cost Accounting
Strategic Positioning
Ethics
Implementing
Strategy
Product
Costing
Cost Behavior
(Planning and
Operational
Control)
Product Life
Cycle
The Value
Chain
The
Balanced
Scorecard
Job Costing
ABC Costing
Process Cost
Joint Costs
Standard
Cost Estimation
CVP Analysis
(ABC)
Master Budget
Decision
Making (ABC)
Target
Life Cycle
Managing Constraints

99. Advanced Management Accounting
Strategic Positioning
Ethics
Implementing
Strategy
Cost Behavior
(ABC -
based)
Product Life
Cycle
The Value Chain
The Balanced
Scorecard (BSC)
Cost Es
timation
(Regression)
CVP Analysis
Master Budget
Decision
Making (LP)
Target
Costing
Life
Management Control (TP)
Executive Compensation
Business Valuation

100. Comparison of JIT Approaches with Traditional Manufacturing and Purchasing
JIT Traditional
1. Pull-through system 1. Push-through system
2. Insignificant inventories 2. Significant inventories
3. Small supplier base 3. Large supplier base
4. Long-term supplier contracts 4. Short-term supplier contracts
5. Cellular structure 5. Departmental structure
6. Multiskilled labor 6. Specialized labor
7. Decentralized services 7. Centralized services
8. High employee involvement 8. Low employee involvement
9. Facilitating management style 9. Supervisory management style
10. Total quality control 10. Acceptable quality level
11. Buyers’ market 11. Sellers’ market
12. Value-chain focus 12. Value-added focus

101. Example Backflushing
To illustrate backflush costing and compare it with the traditional approach, assume that a JIT company had the following transactions during June:
1. Raw materials were purchased on account for $160,000.
2. All materials received were placed into production.
3. Actual direct labor costs, $25,000.
4. Actual overhead costs, $225,000.
5. Conversion costs applied, $235,000.
6. All work was completed for the month.
7. All completed work was sold.
The difference between actual and applied costs is
computed

102. Traditional Journal Entries
1. Materials 160,000
Accounts Payable 160,000
2. Work in Process 160,000
Materials 160,000
3. Work in Process 25,000
Payroll 25,000
4. Overhead Control 225,000
Accounts Payable 225,000

103. Traditional Journal Entries
5. Work in Process 210,000
Overhead Control 210,000
6. Finished Goods 395,000
Work in Process 395,000
7. Cost of Goods Sold 395,000
Finished Goods 395,000
8. Cost of Goods Sold 15,000
Overhead Control 15,000

104. Backflush Journal Entries
1. Raw Materials and in Process 160,000
Accounts Payable 160,000
2. No entry
3. Combined with overhead: See next entry.
4. Conversion Cost Control ,000
Payroll 25,000
Accounts Payable 225,000

105. Backflush Journal Entries
5. No entry
6. Finished Goods 395,000
Raw Materials and in Process ,000
Conversion Cost Control ,000
7. Cost of Goods Sold 395,000
Finished Goods 395,000
8. Cost of Goods Sold 15,000
Conversion Cost Control 15,000

106. End of Week