Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Chapter 6
Management
Accounting
Information
for Activity and
Process Decisions
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Chapter 6 Objectives:
To be able to:
1.
2.
3.
4.
5.
6.
7.
8.
explain why sunk costs are not relevant costs
analyze make-or-buy decisions
demonstrate the influence of qualitative factors in making decisions
compare the different types of facilities layouts
explain the theory of constraints
demonstrate the value of just-in-time manufacturing systems
describe the concept of the cost of quality
calculate the cost savings resulting from reductions in inventories,
reduction in production cycle time, production yield improvements, and
reductions in rework and defect rates
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Sunk costs
Relevant costs/revenues
=
Those factors that are affected by a decision
Sunk costs
=
The costs of resources that already have been
comitted and cannot be changed by any current
action or decision; contrast with incremental
costs.
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Sunk costs
Bonner Company, exhibit 6-2 page 221
Sept 1, 2000
Buys a new drilling machine for $180,000. Pays $50,000 cash +
bank loan financing the remaining $150,000. Monthly payment $5,200
for 36 months.
Sept 27, 2000
A technologically better drilling machine becomes available. Price ?
Scrap value old machine $50,000. Old machine taken as down
payment. Monthly payments $6,000 for 35 months.
Efficiency savings:
Direct labor
Maintenance
Materials scrap
$4,400 per month
$ 800 per month
$1,000 per month
Managers must be able to identify the costs and revenues relevant for the evaluation of
alternatives. Equally important, they must recognize that some costs and revenues are not
relevant in such evaluations.
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Sunk costs
Throwing Good Money after Bad
How does this well known expression correspond with the sunk cost theory?
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Make-or-Buy Decisions
Definition:
A decision in which managers must decide whether their companies should manufacture some
parts and components for their products in-house or subcontract whith another company to
supply these parts and components.
Outsourcing
=
The process of buying resources from an outside supplier
instead of manufacturing them inhouse
Avoidable costs
=
Those costs eliminated when a part, product, product line, or
business segment is discontinued
Exhibit 6-3, page 223
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Make-or-Buy Decisions
Qualitative Factors:
•
•
•
•
Suppliers lowballing the price to get a foot in the door?
Reliability of supplier (quality, delivery, capacity etc.)? Solution ”certified
suppliers?
Do you eliminate own capabilities for good?
Are you handing over strategic knowledge to the vendor with the risc of the
vendor becoming a competitor?
Exercise
Perform a general SWOT with the students in class establishing general Strengths,
Weaknesses, Opportunities and Threats.
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Facility Layout Systems
1.
2.
3.
Process layouts.
A production design in which all similar equipment or functions are grouped together.
Typically used when production takes place in smaller batches or unique products.
Product layouts
A production design in which equipment is organized to accommodate the production
of a specific product. Typically used in high volume productions.
Cellular manufacturing
Refers to the organization of a plant into a number of cells so that within each cell all
machines required to manufacture a group of similar products are arranged in close
proximity to each other.
Objective:
Department of Accounting
To streamline operations and thus increase the operating
income of the system.
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Facility Layout Systems
Theory of constrains:
A management approach that maximizes the volume of
production through a bottleneck process. A bottleneck is
defined as any condition that impedes or constrains the
efficient flow of a process.
Measured by:
Throughput contribution:
The difference between revenues and direct materials for
the quantity of products sold.
Investment:
The montetary value of the assets that the organization
gives up to acquire an asset.
Operating costs:
Costs, other than direct materials costs, that are needed to
produce a product or service.
Comparison of TOC versus ABC
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Inventory Costs and Processing Time
Building inventories create costs such as:
• Moving, storing and handling
• Damaged or obsolete products
• Potential cost of reworking
• Ties up financial resources
• Increases cycle-time
Definitions:
Cycle time
The time required to produce a product from start to finish.
Processing time
Time expended to complete a processing activity.
Manufacturing cycle
efficiency
Ameasure used to assess the efficiency of a manufacturing
process. Evaluates how much of the total cycle time was spend
in inventory.
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Inventory Costs and Processing Time
San Rafael Electric Corporation, Exhibit 6-6, 6-7, 6-8, 6-9, 6-10
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Cost of Nonconformance and Quality Issues
Definition:
The cost incurred when the quality of products and services does not
conform to quality standards.
Major factors:
- satisfying customer expectations regarding the attributes and
performance of the product, such as functionality and features.
- ensuring that the technical aspects of the products design and
performance, such as whether it performs to the standard expected,
conform to the manufacturers standards.
ISO9000 Standards Exhibit 6-11
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Cost of Nonconformance and Quality Issues
Costs of quality control
Definition:
Those costs incurred on quality-related processes; include prevention,
appraisal, internal failure and external failure.
Prevention costs
Those costs incurred to ensure that companies produce products
according to quality standards.
Appraisal costs
Those costs related to inspecting products to ensure that they meet both
internal and external customer requirements.
Internal failure costs
The costs incurred when the manufacturing process detects a defective component
or product before it is shipped to an external customer.
External failure costs Those costs incurred when customers discover a defect.
Examples
Department of Accounting
Exhibit 6-13
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Just-in-Time Manufacturing
Definition:
A production process method in which products are manufactured only as
needed.
Produce and deliver WHAT is requested, WHEN it is requested and ON TIME.
Exercise
Perform a general SWOT with the students in class establishing general
Strengths, Weaknesses, Opportunities and Threats
Important measures
Benchmarking of manufacturing cycle effectiveness:
• Defect rates
• Cycle times
• Percent of time that deliveries are on time
• Order accuracy
• Actual production as a percent of planned production
• Actual machine time available compared with planned machine time
available.
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Just-in-Time Manufacturing
Tobor Toy Company - Selling an advanced, pricey mechanical toy robot with a 30% market share.
Problems:
Large drop in sales and market share. Investigations at customer level shows that a significant decrease in the quality of the
product and general delays in getting it to the customer are the primary causes.
Problems originate from:
•
A disorganized, sloppy production system in which piles of both work-in-process and raw materials inventories
were scattered over the shop floor.
•
A lenghty and complex flow of production.
•
High inventory levels of work-in-process.
•
High rates of rework.
•
The use of outdated machinery.
•
Lack of commitment, focus and training among workers.
Solutions:
•
•
•
Implementing a new production process - Just In Time.
Establish intensive worker training
Investing $300,000 in the above.
Department of Accounting
Management Accounting
Chapter 6 - Management Accounting Information for Activity and Process Decisions
Just-in-Time Manufacturing
Tobor Toy Company - Selling an advanced, pricey mechanical toy robot with a 30% market share.
Improvements:
• Major rework rate reduced from 5.8% to 3.3%
• Minor rework rate reduced from 13.6% to 7.0%
• Average production time reduced from 16.4 days to 7.2 days
• Investment in implementation ($300.000) with a payback time of approximately 5 months.
Department of Accounting