Management Accounting:
A Road of Discovery
Management Accounting:
A Road of Discovery
James T. Mackey
Michael F. Thomas
Presentations by:
Roderick S. Barclay
Texas A&M University - Commerce
James T. Mackey
California State University - Sacramento
© 2000 South-Western College Publishing
Chapter 10
Should we start all over?
Strategic cost management
Key Learning Objectives
1. Discuss how industry-wide
value chains and accounting
information aid firms in
identifying their core
competencies.
2. Demonstrate the use of strategic
partnering and activity-based
management performance
measures in managing suppliers.
3. Create activity-based
management measures for
customer satisfaction and
explain the role of ABC in
managing customer relations.
4. Illustrate product line
management with target
costing, simultaneous
engineering and quality
function deployment, and life
cycle costing.
Part I
Strategic Value Chain
Management
What Business Are We In?

Long-term value is

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Short-term value is

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Created by our business choices and
Strategies we apply within our line of business.
Created through the management of resources
within the long-term plan and strategic value
chain.
This is where traditional cost based accounting
management is primarily applied.
An industry-wide value chain measures the
provision of an industry’s goods or services
from ‘cradle to grave’. The value chain
identifies and defines the industry.
Pizza’s Industry-Wide Value Chain
Farmers grow
and harvest
crops
Truckers ship to
processing
plants
Plants process
Truckers ship to
and pack vegedistribution centables and grains ters and retailers
Farmers
maintain and
milk dairy cattle
Truckers ship to
processing
plants
Plants process
into cheese
products
Truckers ship to
distribution centers and retailers
Farmers
(ranchers) raise
beef cattle
Truckers ship to
processing
plants
Plants process
into meat
products
Truckers ship to
distribution centers and retailers
Pizza restaurants
Pizza restaurants Pizza restaurants serve customers
and clean up
purchase
prepare pizzas
materials
Pizza restaurants
deliver to
customers
Refuse
companies
dispose of trash
Part II
Using Accounting Data to
Identify Opportunities
Return on Investment Ratios in the Pizza
Industry
ROI = 3%-8%
Farmers grow
and harvest
crops
ROI = 5%-10% ROI = 10%-15% ROI = 5%-10%
Truckers ship to
Plants process
Truckers ship to
processing
and pack vegedistribution cenplants
tables and grains ters and retailers
Farmers
maintain and
milk dairy cattle
Truckers ship to
processing
plants
Plants process
into cheese
products
Truckers ship to
distribution centers and retailers
Farmers
(ranchers) raise
beef cattle
Truckers ship to
processing
plants
Plants process
into meat
products
Truckers ship to
distribution centers and retailers
Pizza restaurants
Pizza restaurants Pizza restaurants serve customers
Refuse
and clean up
purchase
prepare pizzas
companies
ROI = 10%-20%
materials
Pizza restaurants dispose of trash
ROI = 15%-30%
deliver to
customers
ROI = 10%-20%
Using Accounting Data

Using larger ROI as an indication of greater power
and value, we can reconfigure the business by
moving up and down the value chain.



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Different combinations of activities allow companies
to differentiate their goods or services to create more
value.
In the pizza example, the objective was to capture
the more profitable garbage disposal activity.
Different combinations of activities allow companies
to differentiate their goods or services.
A larger ROI indicates greater economic power.
By absorbing sequential activities, efficiency can be
created by combining core competencies and
reducing redundant activities.
By focusing on our value chain, we can identify
potential ways to increase value and decrease costs.
Part III
The Need for Cost Management
Analysis Using CVP analysis
CVP Analysis for Pizza Delivery,
Cleanup,and Disposal
Cost-volume-profit analysis allows us to examine the
projected costs and the benefits of moving into the cleanup and disposal business.
Sales revenues
Less: Variable costs
Contribution margin
$15
100%
$150
5
33%
50
$10
67%
$100
Less: Batch costs
Delivery
25
Return
25
Cleanup
10
Disposal
20
Total batch costs
$ 80
Net Income
$ 20
Break even point = 8 pizzas
Analysis of Pizza Business



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The target sales price per pizza is $15.
Unit costs for each pizza are the variable costs which
include labor and materials of $5.
The contribution margin per pizza is $10.
The batch costs include delivery, return, clean-up,
and disposal of $80.
Each pizza sale with clean-up loses $70!
However, by covering only the clean-up with orders
of ten pizza’s or more, the contribution margin per
batch order increases to at least $20.
The PARTY PIZZA CLEAN-UP BUSINESS is born.
Limitations on Value Chain Analysis

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Truly comparable activities may be difficult to identify.
Information may be difficult to obtain.
ROI approximates profitability and power (accounting
profitability is not necessarily economic value).
We need better measures that correlate better with
firm value.
Successful differentiation and cost management will
require detailed cost analysis.
Part IV
Using value Chains to Manage
Multree Homes
Where We Are on the Industry-Wide
Value Chain
Industry goods and
services (Exhibit 2-3)
Sell houses
Multree Homes value chain
(Exhibit 2-5)

Customer order-taking
1.1
Sales
1.2 Credit check (Finance)
1.3
Accounts receivable
Build houses

Materials acquisition (inbound)
2.1
2.2
2.3
2.4
Scheduling
Purchasing
Receiving, inspection, storage
Delivery to factory
Continued Value Chain
Build Houses

Manufacturing
3.1 Lumber sawing
3.2 Wall assembly (framing)
3.3 Rough wiring
3.4 Rough plumbing
3.5 Wall finishing (all
inclusive)
3.6 Roof construction
3.7 Finish carpentry
3.8 Top-off plumbing
3.9 Finish electric
3.10 Carpeting
3.11 Inspection
Concluded Value Chain
Build Houses

Shipping (outbound logistics)
4.1 Packing
4.2 Shipping
4.3 Set up for dealer, customer
Sell houses

Close sales
5.1 Customer inspection
5.2 Bill customer
5.3 Collect and deposit cash
Customer service
(warranty)

After sale customer services
6.1 Provide warranty work
6.2 Survey customer
satisfaction
6.3 New product and service
advertising
Value Chain Discussion



A process is the set of activities required to
provide goods and services.
Exhibit 10-4 list the 6 processes that Multree
needs to manage.
For example, customer order-taking has three
activities — sales, credit checks, and accounts
receivable.

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Each activity becomes the cost objective for
management accounting.
Activities are significant costs.
Activities are assigned cost drivers.
Often activities or processes can be
outsourced.
Core Competencies

Core competencies are activities or processes where
companies excel.

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They are the process that individual companies do better
than their competitors.
Multree has identified six processes in Exhibit 10-4 illustrated
previously.
Multree’s core competency is the management of
activities in the Organization value chain.
Superior cost and earnings performance measures
are ways to identify the relative advantage of core
competencies. Multree’s advantage against a general
contractor is in production costs — see Exhibit 10-6,
p. 358.
Core Competencies in Well-Known
Companies
Company
Core competencies
Products or services
AT&T
Technological leadership
through Bell Labs
Telecommunications products
Honda
Small engine production
Motorcycles, snowmobiles,
lawnmowers, snow blowers,
chain saws
IBM
Research and development
Experienced sales force
Mainframe computers and
software
Microsoft/
Apple
Imagination
New ways to use information
technology
Proctor &
Gamble
Research and development
Marketing and distribution
Ivory, Tide , Folgers, Crisco,
Pampers
Xerox
Information processing
Developed icons, pull-down
menus, mouse
Part V
Value Chain Approach to
Vendor Management
Vendors

Vendors costs are usually a major product
cost.

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Improving costs is dependent on improving vendor
efficiencies.
I.E., if 70% of a company’s unit costs are paid to
vendors, a 50% improvement in internal processes
would only reduce costs by 15%.
Therefore, vendor management is a
significant management consideration.
Decisions Regarding Vendors and Value
Chains

Strategic partnering with selected vendors
can result in significant competitive
advantage.

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By working with a small number of vendors,
Multree has more influence over them.
Long-term relationships allow differentiated
products to be developed to eliminate redundant
activities and complement core activities.
Let’s Look at Multree

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Multree builds a standard 26-foot roof.
They bid for the standard 10-foot bundles of plywood
on the open market to obtain the best price.
Each span requires three sheets.
Four feet must be cut off every third sheet and
thrown away.
Using three sheets leaves two seams that must be
sealed and forms weak points for leaks.
Multree’s Solution

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By strategic partnering with the plywood mill,
Multree can eliminate redundant activities
between it and the mill.
Multree pays for an additional setup on the
plywood saw to cut 13-foot sheets.
Exhibit 10-7a, p.362 and 7b, p. 363,
summarize the costs before and after the
process redesign.
Multree reduces it’s cost per roof by 35% or
$141.38.
Let’s Analyze Multree’s Solution
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Multree’s core competency is manufacturing.
By strategic partnering it’s non-core activities in
purchasing, shipping, and preparation, Multree can
eliminate some less efficient activities and reduce
unit costs.
Value-chain thinking leads to a shift in value creation
focus from separate cost centers to maximizing the
efficiency of the entire value chain.
The virtual company they formed can maximize its
competitiveness by combining the core competencies
of several organizations.
Part VI
Value Based Vendor
Performance Measures
The Vendor Performance Index (VPI)

VPI measures the cost of purchasing goods
from a vendor.

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The costs to work with a vendor are not limited to
the invoice costs that are measured by GAAP.
Rather, the non-value added activities caused by
the vendor’s produce and performance need to be
considered.
VPI = Purchase Cost + Non-Value Added Costs
Purchase Cost
VPI Calculations
Labor
hours
10
Nonvalue added activities
Inspection
Labor cost
at $10/hr
$100
Processing paperwork
2
20
Returning bad materials
3
30
Waiting for late deliveries
5
50
20
$200
Totals
Materials purchase cost
VPI =
VPI =
VPI =
$1,000
Materials
purchase
cost
+
Nonvalue
added
costs
Materials purchase cost
$1,000
+
$200
$1,000
1.2
VPI Components

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On-Time Delivery — measures of delivery are
useful when VPI is unavailable. On-time
measures are easy, cheap, and meaningful to
the shop floor.
Complete Order Filling — is an example of a
quality of service measure.
On-Time Deliveries
Late Deliveries by Suppliers
# of Late
Deliverie
s
4
3
Adam s Supplie s
2
M urry Ele ctric
1
Woods Lum be r
0
(5)
(4)
(3)
(2)
(1)
0
1
2
W oods Lumber
Days (Late)/Early
Murry Elec tric
A dams Supplies
Part VII
Managing Value Chain
Relationships with Customers
A ttrib u te s
Warranty service
Construction/installation support
Complete order f illing
On-time delivery
A bility to customize f loor plans
V ariety in types of homes
Ratings
Customer Ratings
C u s to m e r ra tin g s
10
9
8
7
6
5
4
3
2
1
0
Impo rta nc e
P e rfo rma nc e
Exhibit 10-10 Analysis

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The snake chart allows companies to monitor their
product as viewed by the customer.
Customers identify and rank these attributes on a 1
(lease important) to 10 (most important) scale for their
importance and the perceived quality Multree provides.
To improve value
 Multree needs to improve where it is under
performing (warranty service) — a 9 in importance
and a 4 in performance.
 They also may need to consider reducing the variety
of homes (2 in importance vs. an 8 in performance).
These are non-financial measures and do not score on
value. Further cost analysis is needed before decisions
are made.
Activity Analysis of Customer Delivery
Costs

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First, review and analyze Exhibit 10-11, p. 370.
A firm can develop competitive advantage by
matching their core competency to their customers.
Activity analysis of customer delivery activities allows
companies to focus on customers with which they
have a core competency advantage.
Different support resources have unique cost drivers.
Customers consume resources differently.
Part VIII
Product Line Strategic Cost
Management
Target Costing
TARGET COST = REVENUE – DESIRED PROFIT


First, calculate the value of products to
customers, then subtract the desired profit.
Customers set the cost standard that the
company must reach.
Simultaneous Engineering Using QFD
Analysis

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There is a high cost of independent, functional
specializations like design, manufacturing and sales.
 Significant costs are locked in at the design stage.
 These costs cannot be changed significantly after
production begins.
Concurrent or simultaneous design means the design
team needs to include members of, and cost data
from, each activity in the life-cycle of the product.
Quality function deployment (QFD) starts with
characteristics that the customer desires.
ABC Quality Function Deployment (QFD)
Analysis
Picture Window Activities
Purchase glass
Original
ABC
analysis
Revised
ABC
analysis
$500
$600
50
50
100
100
Package glass for shipping
25
25
Special installation labor
75
100
0
25
250
0
$1,000
$900
$900
$900
($100)
None
Purchase framing materials
Cut frame lumber
Extra sealing materials
Warranty work
Budgeted cost
Target costing allowance
Drift
Note: The chalet home is a purchased kit (package) assembled
at the site.