Management Accounting and
Control Systems:
Assessing Performance over
the Value Chain
Chapter 7
Management Accounting
and Control System
Generates and uses information to help
decision makers assess whether an
organization is achieving its objectives
A cost management system is one of the
central performance measurement
systems at the core of a larger entity
known as a management accounting and
control system
2
“Control” In Management
Accounting And Control
A set of:
Procedures
Tools
Performance measures
Systems
Used by organizations to guide and motivate
employees to achieve organizational
objectives
3
In Control
A system is in control if it is on the path to
achieving its strategic objectives
For the process of control to have
meaning and credibility, the organization
must have the knowledge and ability to
correct situations that it identifies as out of
control
4
Five Stages Of Control





Planning
Execution
Monitoring
Evaluation
Correction
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Stages of Control: Planning
Developing an organization’s objectives
Choosing activities to accomplish the objectives
Selecting measures to determine how well the
objectives were met
6
Stages of Control: Execution and
Monitoring
 Execution
Implementing the plan
 Monitoring
The process of measuring the system’s current
level of performance
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Stages Of Control: Evaluation and Correcting
 Evaluation
When 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
 Correcting
Taking the appropriate actions to return the
system to a state of in control
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A Well-Designed MACS
Designers of management accounting and
control systems (MACS) have both
behavioral and technical considerations to
meet
The technical considerations fall into two
categories
Relevance of the information generated
Scope of the system
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Characteristics of Well-defined MACS
Accurate
Timely
Consistent
Flexible
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Scope Of The System
 Must be comprehensive and include all activities
across the entire value chain of the organization
 If the MACS measures and assesses
performance in only the actual production
process, it ignores the performance of:
Suppliers
Design activities
Postproduction activities associated with products
 Without a comprehensive set of information,
managers can only make limited decisions
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The Value Chain
 A sequence of activities that should contribute
more to the ultimate value of the product than to
its cost
 All products flow through the value chain:
Begins with research, development, and engineering
Moves through manufacturing
Continues on to customers
Customers may require service and will either
consume the product
dispose of it after it has served its intended purpose
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The Value Chain
 The value chain may be divided into cycles, which
correspond to different cost control approaches
Research,
Development
& Engineering
Cycle
Target Costing
& Value
Engineering
Manufacturing
Cycle
Kaizen Costing
Post-Sale
Service and
Disposal
Cycle
Total-LifeCycle Costing
Environmental
Costing
Benchmarking
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Total-Life-Cycle Costing (
Total-life-cycle costing (TLCC) is the name
of the process of managing all costs along
the value chain
TLCC is also known as managing costs
“from the cradle to the grave”
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Total-Life-Cycle Costing
A TLCC system provides information for
managers to understand and manage
costs through a product’s stages
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Total-Life-Cycle Costing
Deciding how to allocate resources over
the life cycle usually is an iterative process
Opportunity costs play a heightened role in
a total-life-cycle cost perspective
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Total-Life-Cycle Costing
Numerous life-cycle concepts have
emerged in various functional areas of
business
A TLCC perspective integrates the
concepts so that they can be understood
in their entirety
From the manufacturer’s perspective,
total-life-cycle product costing integrates
functional life-cycle concepts:
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Research, Development, And Engineering
(RD&E) Cycle
The RD&E Cycle has three stages:
Market research
Product design
Product development
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Cost Control in the RD&E Cycle
 By some estimates, 80% to 85% of a product’s
total life costs are committed by decisions made
in the RD&E cycle
 Decisions made in this cycle are critical:
An additional dollar spent on activities that occur
during this cycle can save at least $8 to $10 on
manufacturing and post-manufacturing activities:
Design changes
Service costs
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Manufacturing Cycle
After the RD&E cycle, the company begins
the manufacturing cycle
Usually at this stage there is not as much
room for engineering flexibility to influence
product costs and product design because
they have been set in the previous cycle
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Cost Control in the
Manufacturing Cycle
 Operations management methods help to
reduce manufacturing life-cycle product costs
 Companies have begun to use management
accounting methods such as activity-based cost
management to identify and reduce non-valueadded activities in an effort to reduce costs in
the manufacturing cycle
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Post-sale Service & Disposal Cycle
The service cycle begins once the first unit
of a product is in the hands of the customer
Disposal occurs at the end of a product’s
life and lasts until the customer retires the
final unit of a product
The costs for service and disposal are
committed in the RD&E stage
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The Service Cycle
 The service cycle typically consists of three
stages:
Rapid growth
From the first time the product is shipped to the growth
stage of its sales
Transition
From the peak of sales to the peak in the service cycle
Maturity
From the peak in the service cycle to the time of the
last shipment made to a customer
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The Disposal Cycle
 Disposal occurs at the end of a product’s life
and lasts until the customer retires the final
unit of a product
 Disposal costs often include those associated
with eliminating any harmful effects associated
with the end of a product’s useful life
 Products whose disposal could involve harmful
effects to the environment, such as nuclear
waste or toxic chemicals, often incur very high
costs
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Life-Cycle Costs
 The following table illustrates four types of
products and the percentage of life-cycle costs
incurred in each cycle
RD&E
Manufacturing
Service & Disposal
Average Years in
Life Cycle
Combat
Jets
Commercial
Aircraft
Nuclear
Missiles
Computer
Software
21%
45%
34%
20%
40%
40%
20%
60%
20%
75%*
*
25%
30
25
2 to 25
5
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Target Costing
 A method of profit planning and cost
management that focuses on products with
discrete manufacturing processes
 Its goal is to design costs out of products in the
RD&E stage of a product’s total life cycle
 It is a relevant example of:
How a well-designed MACS can be used for strategic
purposes
How critical it is for organizations to have a system in
place that considers performance measurement across
the entire value chain
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The Traditional Method
Begins with market research into customer
requirements followed by product
specification
Companies engage in product design and
engineering and obtain prices from
suppliers
After the engineers and designers have
determined product design, cost is
estimate
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Target Costing Method (
 Although the initial steps appear similar to
traditional costing, there are some notable
differences:
Marketing research is customer-driven
Costs are managed using concurrent design and
engineering
The total-life-cycle concept is used by making it a key
goal to minimize the cost of ownership of a product
over its useful life
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The Target Costing Method
 Price-lead costing – used to determine a target
selling price and target product volume based on
the company’s perceived value of the product to
the customer
 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
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The Target Costing Method
 Once the target cost has been set, the company
must determine target costs for each component
 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
 Several iterations usually are needed before it is
possible to determine the final target cost
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The Target Costing Method
Two other differences characterize the
process:
Cross-functional product teams
make up of individuals representing the
entire value chain guide the process
throughout
Suppliers play a critical role in making
target costing work
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Cost Analysis - example
Cost analysis requires 5 sub-activities:
1. Develop a list of product components and
functions
2. Do a functional cost breakdown
3. Determine a relative ranking of customer
requirements
4. Relate features to functions
5. Develop relative functional rankings
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Conduct Value Engineering - example
Value engineering – organized effort
directed at the various components for the
purpose of achieving these functions at
the lowest overall cost without reductions
in required performance, reliability,
maintainability, quality, safety, recyclability,
and usability
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Conduct Value Engineering - example
Two sub-activities:
 Identify components for cost reduction by
computing a value index (ratio of the value to
the customer and the percentage of total cost
devoted to each component)
Generate cost reduction ideas
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Concerns About Target Costing
 Some studies of target costing in Japan indicate
that there are potential problems in
implementing the system
 Companies may manage many of these factors
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Examples of Problems with Target
Costing
 Lack of understanding of the target
costing concept
 Poor implementation of the teamwork
concept
 Employee burnout
 Overly-long development time
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Kaizen Costing
Also focused on cost-reduction
Focuses on reducing costs during the
manufacturing stage of the total life cycle
of a product
Kaizen is the Japanese term for making
improvements to a process through small,
incremental amounts rather than through
large innovations
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Kaizen Costing (2 of 2)
Kaizen costing’s goal is to ensure that
actual production costs are less than the
prior year cost
Kaizen’s goals are tied to the profitplanning system
If the cost of disruptions to production are
greater than the savings due to kaizen
costing, then it will not be applied
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Example From Auto Plant
An annual budgeted profit target is
allocated to each plant
Each automobile has a predetermined
cost base, which is equal to the actual cost
of that automobile in the previous year
All cost reductions use this cost base as
their starting point
The targeted cost reduction is the amount
the cost base must be reduced to reach
the profit target
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Example From Auto Plant
 The target reduction rate is the ratio of the target
reduction amount to the cost base
 This rate is applied over time to all variable costs
 Then management makes comparisons of
actual reduction amounts across all variable
costs to the pre-established targeted reduction
amounts
 If differences exist, variances for the plant are
determined
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Concerns About Kaizen Costing
The system places enormous pressure on
employees to reduce every conceivable
cost
Kaizen costing leads to incremental rather
than radical process improvements
This can cause myopia as management tends
to focus on the details rather than the overall
system
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Environmental Costing
Environmental remediation, compliance,
and management have become critical
aspects of many businesses
All parts of the value chain, and their costs,
are affected by environmental issues
These issues are being incorporated into
cost management systems and overall
MACS design
42
Controlling Environmental Costs
Only when managers and employees
become aware of how the activities in which
they engage create environmental costs will
they be able to control and reduce them
The activities that cause environmental costs
have to be identified
The costs associated with the activities have to
be determined
These costs must be assigned to the most
appropriate products, distribution channels, and
customers
43
Types of Environmental Costs
Environmental costs fall into two
categories:
Explicit costs
Implicit costs
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Benchmarking
 A way for organizations to gather information
regarding the best practices of others
 Often highly cost effective
 Selecting appropriate benchmarking partners is
a critical aspect of the process
 The process typically consists of five stages
45
Stage 1
 Internal study and preliminary competitive
analyses
The organization decides which key areas to
benchmark for study
 The company determines how it currently
performs on these dimensions by initiating
Preliminary internal competitive analysis
Preliminary external competitive analyses
Both types of analyses will determine the
scope and significance of the study for each
area
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Stage 2 (1 of 2)
 Developing long-term commitment to the
benchmarking project and coalescing the
benchmarking team
the level of commitment to benchmarking must
be long term Long-term commitment requires
Obtaining the support of senior management
to give the benchmarking team the authority
to spearhead the changes
Developing a clear set of objectives to guide
the benchmarking effort
Empowering employees to make change
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Stage 2
The benchmarking team should include
individuals from all functional areas in the
organization
An experienced coordinator is usually
necessary to organize the team and develop
training in benchmarking methods
Lack of training often will lead to the failure
of the implementation
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Stage 3 (
 Identifying benchmarking partners—willing
participants who know the process
 Some critical factors are as follows:
 Size of the partners
 Number of partners
 Relative position within and across industries
 Degree of trust among partners
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Stage 4
Information gathering and sharing methods
Two related dimensions emerge from the
literature:
Type of information that benchmarking
organizations collect
Methods of information collection
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Stage 5
 Taking action to meet or exceed the benchmark
The organization takes action and begins to change
After implementing the change, the organization
makes comparisons to the specific performance
measures selected
The decision may be to perform better than the
benchmark to be more competitive
The implementation stage is perhaps the most difficult
stage of the benchmarking process, as the buy-in of
members is critical for success
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