Management Accounting
EUROCELL ACCOUNTING REPORT
By
Name of Author
The Name of Class
Name of Professor
The Name of School
The City and State School is Located
Date
1
Management Accounting
2
Abstract
Eurocell’s profit for the half year ending 30 June 2018 indicates a decrease in the gross margin
profit by about 3%, and there is an inventory build-up within the manufacturing process. This
report proposes different management systems that can be applied to change the current state.
The report further considers different trends in management accounting that include the Program
Evaluation and Review Technique, Six Sigma, Total Quality Management, Theory of
Constraints and Just in Time. Based on the trends, the report suggests further study to determine
the cause of the problems, and the development of a suitable Revaluation Program of the
business processes.
Management Accounting
3
EUROCELL PLC MANAGEMENT REPORT
According to Hansen (2011, p. 108), in the modern world, management accounting in
organizations entails more than just reporting the score to managers. He adds that alternative
ones are mainly replacing the usual cost accounting methods, this after the downfall of Western
Manufacturing and Management Accounting Relevance Crisis to modern business. Therefore,
the role of management accounting in organizations today has moved from just reporting the
score to seeking to impact the score by applying methods and theoretical approaches that will
improve the business processes. Consequently, it is crucial for managers to understand the use
and effectiveness of modern accounting approaches to the traditional ones (Granlund 2011, pp.
3-19).
Undeniably, the majority of modern accounting methods focus on specific uses within the
industry, and each is unique to organizations in improving the business process. This report
proposes five different approaches to Eurocell’s management accounting process. The methods
are the Theory of Constraints and Throughput Accounting, Six Sigma, Total Quality
Management, Just in Time Inventory Management and the Program Evaluation and Review
Technique framework. Additionally, the paper summarizes the key attributes of these procedures
and their pros and cons with particular attention to their efficiency in different practical
situations.
Theory of Constraints and Throughput Accounting
TOC states that in the modern world, the traditional variable costs of Cost Accounting
apply with fewer rigors (Naor, Bernardes, and Coman 2013, pp. 542-54). Historically, labor was
Management Accounting
4
regarded as a variable cost. Employees would work to the management’s desire. The demand for
production determined dismissals. Today this is not the case as most legislative changes dictate
that the workforces in organizations are a fixed cost. TOC states that even though the workforce
still evaluates modern managers, such effects can lead to hasty decisions that may harm the
company rather than help improve production (Naor, Bernardes, and Coman 2013, pp. 542-54).
The main reason for TOC and TA is that organizations have unique goals that can be
influenced by management decisions. According to Haastrup, Hansen, Ebbesen, and Mouritsen
(2012), for a standardized assumption of a profit orientated firm as the maximization of the
owner’s wealth, then the ‘goal unit’ will be ‘throughput contribution’ which works as the ‘total
contribution’ marginal costing. Throughput contribution is defined in TOC as Sales, a less total
variable cost that represents the cost of raw materials. This is described in the context of
Investment and Operating Expense. Investment refers to liquidated money stored in the system
regarding inventory, continuing works, machinery, and buildings. Operating Expense is the
money used by the system on creating organizational goals, excluding the cost of raw materials
(Şimşit, Günay, and Vayvay, 2014, pp. 930-36).
Determining production and service costs allows the processes to be evaluated regarding
the number of optimization questions. Eurocell needs to work on ways of increasing throughput
(TC) and decreasing both Investments and Operating Expense. If determined, they will have a
positive impact on the company’s Net Profit, Return on Investment, Productivity and Investment.
This way, it can be declared that throughput contribution maximization is critical to the
maximization of all main performance signs. Eurocell is recommended to aim to increase TC by
improving the different aspects of the production processes.
Management Accounting
5
Just In Time (JIT)
JIT Inventory Management represents a set of ‘Lean’ manufacturing methods that stem
from the Japanese Approach to management accounting (Junior, and Godinho Filho 2010, p. 13).
Specifically, most modern JIT management systems are based on the Kanban system of
Inventory management (García-Alcaraz, and Maldonado-Macías 2016). JIT depends on the
market pull rather than the push to meet production targets and states that investment in
inventory is wasteful for companies (Bortolotti, Danese, and Romano 2013 p. 1117).
JIT has been widely embraced in different production companies that have adopted
‘Lean’ technology. Eurocell should too and move to jointly invest with its suppliers in
productive partnerships and analyze its supply chain to prevent a total collapse of the production
system. This is important since the process has no room for errors. If demand is poorly predicted
and is higher than the actual, then the company stands to run out of raw materials used for
production prompting a possible loss of customers. If lower than predicted the company would
lack the ability to maintain its inventory. Suffices to say, JIT demands critical external and
internal analysis of processes before implementation.
Six Sigma
Constantly improving service delivery is an important capacity for Eurocell, whether it’s
by increasing effectiveness, or fixing problems in service delivery. An approach that Eurocell
can use to better service delivery is Lean Six Sigma. It entails a mix of “Lean” and “Six Sigma”
which are two different management approaches. Six Sigma was developed in 1986 by Motorola
as a quality-control program that stresses on improving cycle-time and reducing manufacturing
Management Accounting
6
defects below 3.4 per million (Barone, and Franco 2012 pp. 1-21). Today, it has transformed into
a largely business-oriented management theorem that focuses on meeting customer needs,
enhancing their retention, and improving and sustaining business products and services (Barone,
and Franco 2012 pp. 1-21).
Lean Six Sigma entails ways of improving service delivery using a controlled, projectbased system. It applies an orderly five step abbreviated as DMAIC standing for Define
(developing client value definition and problem statement); Measure (process mapping and data
collection); Analyze (identify problems and significant waste); Improve (determine ways of
eradicating waste and adding value); and Control (create implementation and chain
reaction). Although the steps are crucial to the approach, Eurocell can apply different tools to
realize them, indicating considerable flexibility in its approach. See diagram below.
Management Accounting
7
Six Sigma represents a theory that aims at statistical improvements to a business process
(Barone, and Franco 2012 pp. 1-21). It promotes qualitative success measurements over
qualitative markers. In this way, some of the major users of Six Sigma include financial analysts
and project managers who mostly use statistics to achieve improved business functionality. As a
statistical benchmark, Six Sigma tries to explain different business designs. Furthermore, as a
training and certification program, Six Sigma teaches the main concepts of how users can
acquire its belt levels. Finally, as a philosophy, it endorses the notion that all business processes
are measurable.
Six Sigma represents a quality management approach used to help companies’ better
present processes, products or services by identifying and removing flaws (Cima et al. 2011, p.
Management Accounting
8
83). The objective is to streamline quality control in manufacturing and business processes to
reduce variance levels to zero. It is specially designed to help big companies with quality
management. Eurocell should apply Six Sigma to detect and discard any flaws that are causing
quality variations by outlining an order of procedures around a specific target. This will help the
company gather useful data and statistics to help objectively detect errors and flaws that will
affect quality. Importantly, by using six sigma, Eurocell’s business goals will be achieved
allowing the company to define its objectives around specific industry needs.
Total Quality Management (TQM)
Total Quality Management refers to the constant process of identifying and decreasing or
removing manufacturing errors, organizing supply chain management, boosting customer
satisfaction, and guarantying that employees receive continuous training (Hoang, Igel, and
Laosirihongthong 2010, p. 931). It aims to hold all everyone involved in the production process
responsible for the general quality of the final product or service. TQM is always structured to
different organizational management. Eurocell should apply TQM to boost the variety of its
outputs, goods, and services, through the constant advancement of its internal practices.
Hoang et al (p. 931) contend that TQM is customer-focused and strives for constant
advancement of business operations. It aims to ensure that each staff member works towards
common organizational goals of improving product and service quality, and enhancing placed
production procedures. Special attention is paid on factual decision making, by applying
performance metrics to study organization progress. Further, the approach encourages high
organizational communication levels, to maintain employee involvement and morale.
Management Accounting
9
TQM has its roots from the manufacturing sector thus placing Eurocell exactly in the
right place. The company can confidently apply its principles with focus on long-term
organization change over short-term goals. If properly applied, TQM will give Eurocell a
cohesive vision for systemic change. Eurocell can apply the approach to all of its departments to
help ensure all staff are working to achieve company objectives, thus improving the operation of
each department.
Program Evaluation and Review Technique (PERT)
PERT refers to a model of composite procedures that happen to facilitate a specific result
(Aziz pp. 81-83). The PERT model deals with time in different ways providing both optimistic
and pessimistic times for the resolution of a process. PERT allows managers the liberty of
viewing projects, tasks or processes in ways that can help in maximizing the effectiveness of
such activities regarding some variables.
Hazir (2015 p. 808) argues that PERT application entails important investments in time
and proficiency and therefore can affect activity costs, which must be compared with the benefits
such analysis brings to the process redesign. Eurocell should use PERT to apply ‘Lean’
production methods as it facilitates the mapping of existing processes to identify ‘slackness’ in
the system. Also, the company should be keen on PERT’s complexity as it can be unfavorable
regarding the time consumed and the risk of errors in the model having incidental effects to any
new or redesigned process.
Conclusions
Management Accounting
10
In conclusion, all the five managerial trends discussed in the paper are perfect for
managers in decision making. They allow managers the liberty of continually monitoring results,
therefore, making significant production or services changes when needed to improve company
performance. Eurocell’s problems indicate both dwindling profits and returns on investment and
poor inventory management. Subsequently, it is crucial to determine their causes before any
change in management decisions are made. For instance, if a fall in demand causes the decrease
in profits, a JIT change and business attendant redesign along ‘Lean’ philosophy may be hugely
important as it allows tight inventory control thus enabling an effective response to market
demand. Profits would be expected to recover by removing overproduction and inventory as
wastes to the business.
Management Accounting
11
References
Aziz, R.F., 2014. RPERT: Repetitive-projects evaluation and review technique. Alexandria
Engineering Journal, 53(1), pp.81-93.
Barone, S. and Franco, E.L., 2012. Six Sigma methodology. Statistical and Managerial
Techniques for Six Sigma Methodology: Theory and Application, pp.1-21.
Bortolotti, T., Danese, P. and Romano, P., 2013. Assessing the impact of just-in-time on
operational performance at varying degrees of repetitiveness. International Journal of
Production Research, 51(4), pp.1117-1130.
Cima, R.R., Brown, M.J., Hebl, J.R., Moore, R., Rogers, J.C., Kollengode, A., Amstutz, G.J.,
Weisbrod, C.A., Narr, B.J., Deschamps, C. and Team, S.P.I., 2011. Use of lean and six
sigma methodology to improve operating room efficiency in a high-volume tertiary-care
academic medical center. Journal of the American College of Surgeons, 213(1), pp.83-92.
García-Alcaraz, J.L. and Maldonado-Macías, A.A., 2016. Just-in-time elements and benefits.
Springer.
Granlund, M., 2011. Extending AIS research to management accounting and control issues: A
research note. International Journal of Accounting Information Systems, 12(1), pp.3-19.
Hansen, A., 2011. Relating performative and ostensive management accounting research:
reflections on case study methodology. Qualitative Research in Accounting &
Management, 8(2), pp.108-138.
Management Accounting
12
Haastrup, M., Hansen, M.R., Ebbesen, M.K., and Mouritsen, O.Ø., 2012. Modeling and
parameter identification of deflections in the planetary stage of wind turbine gearbox.
Hazır, Ö., 2015. A review of analytical models, approaches and decision support tools in project
monitoring and control. International Journal of Project Management, 33(4), pp.808815.
Hoang, D.T., Igel, B., and Laosirihongthong, T., 2010. Total quality management (TQM)
strategy and organizational characteristics: Evidence from a recent WTO member. Total
quality management, 21(9), pp.931-951.
Junior, M.L. and Godinho Filho, M., 2010. Variations of the kanban system: Literature review
and classification. International Journal of Production Economics, 125(1), pp.13-21.
Naor, M., Bernardes, E.S. and Coman, A., 2013. Theory of constraints: is it a theory and a good
one?. International Journal of Production Research, 51(2), pp.542-554.
Schulze, M., Seuring, S. and Ewering, C., 2012. Applying activity-based costing in a supply
chain environment. International Journal of Production Economics, 135(2), pp.716-725.
Şimşit, Z.T., Günay, N.S. and Vayvay, Ö., 2014. Theory of constraints: A literature
review. Procedia-Social and Behavioral Sciences, 150, pp.930-936.