Chapter7 Management Accounting and Control systems: assessing Performance over the Value Chain
After reading this chapter, you will be able to:
1) Apply the concept of control.
2) Identify the characteristics of well‐designed management accounting and control systems.
3) Describe the total‐life‐cycle costing approach to managing product costs over the value‐chain.
4) Explain target costing
5)Compute target costs
6)Explain Kaizen costing
7)Identify environmental costing issues
8)Apply the process of benchmarking to the best practices of other organizations.
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Short case: Chemco International
Kayleeyoung:a controller who have graduated
from MBA school and after that ,she came into this company.
This company has a problem concerned with management control systems in manufacturing and divisions.
1) poor cost reports and no comparative reports between post and exante of business activities,
2)this system only provide actual manufacturing process itself
and do not provide any insight into pre and postmanufacturing
costs,such as the cost of developing products or disposing of toxic waste.
She want to know all costs related to the life cycle of his products.
She want to study how target costing and Kaizen costing can be applied into her company.
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1 What are Management Accounting
and Control systems?
In this chapter,we try to know the Management Accounting and Control systems from the viewpoint of system designs. Also,the behavioral concerns are discussed in the chapter 8th.
The techinical characterisitcs of a well‐designed MACS include the scope of the system and the relevance of the information generated.
Major shortcoming about this system is that pre‐ or postproduction costs associated with products or services are ignored.
Especially we try to know the total‐life‐cycle costs of a product or service and ways to reduce those costs.
So,we firstly show the three key words;Target
costing,Kaizen costing and Environmental costing.
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1)The meaning of “Control”
The term “Control” in management accounting and control refers to the set of procedures,tools
,performance measures,and that organizations use to guide and motivate all employees to achieve organizational objectives.
A system is “in Control” if it is on the path to achieving its strategic objectives and deemed “out of control “otherwise.
The process of keeping an organization in control consists of five stages as shown in Exhibit 7‐1.
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1.Planning 2. Execution, 3.Monitaring, 4. Evaluation, 5.Correcting Plan
Correct
Execute
Monitor
Evaluate
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２.Characteristics of well‐designing MACS
1)Behavioral considerations
(1) Embedding the organization’s ethical
code of conduct into MACS design.
(2)Using a mix of short-term and long-term qualitaive and
quatitative performance measures.
(3) Empowering employees to be involved in decsion making
and MACS designs.
(4)Developing an appropriate incentive systems
2)Technical considerations
(1)the relevance of the information generated
Accurate, timely, consistent and flexible
(2) the scope of the system
Value chain concepts are important
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3) The Value chain
The value chain is defined as a sequence of activites that should contrbute more to the ultimate value of the product than to its cost.
4)Total‐life‐cycle costing
Total‐life‐cycle costing (TLCC) is the name we give to the process of managing all costs along the value chain as shown in exhibit 7‐2.A TLCC system provides information for managers to understand and manage costs through a product’s design,development,manufacturing,marketing,distribution,me
itenance,service,and disposal stages.
5)Research development and Engineering Cycle
The reserch development and engineering cycles has three stages. 1:Market research, 2:Product design, 3:Product development 7
Research,development,
And engineering cycle
Manufacturing
cycle
Target costing and
Value engineering
Kaizen costing
Psot sale service
Qand disposal
cycle
Total-life-cycle costing, environmental costing ,benchmarking
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6) Manafacturing cycles:
After the RD&E cycle,the company begins the manufacturing cycle,in which costs are incurred in the production of the product.
Look at the exhibit 7‐3,there are two curves,one to be convex to
upperside is called as “Cost Committed curve”,and the second one to be dotted is called as “Costs incurred”. The real important point the author indicate is “must see the cost committed curve” for controlling the cost to be actual”.
7)Postsale Service and Disposal cycle
The actual service cycle begins once the first unit of a product is in the hands of the customer. Thus,this cycle overlaps with the manufacturing.
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Stage of life cycle
cycle
Type of product
Combat jet commercial aircraft nuclear missiles computer soft
RD&E
21% 20% 20%
75%
manufacturing
45% 40% 60%
75%
Service and disposal
34% 40%
Average length of Life cycle
30years 25years 2 to 25 years 5 years
20% 25%
3 Target Costing
target costing is a method of profit planning and cost management that was developed in Japan in the 1960s.
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4 Comparing traditional cost reduction to target costing
Traditional cost reduction: Japanese target costings:
Market research to determine Market research to deter‐
customer requirements mine customer needs & price
production specification Product specification & D
Engineering Target selling prices(Stc) with
(and target product volume)
Supplier pricing Target profits(Ptc)
Estimated costs(Ct) =
Expected selling price(St) – Estimated cost(Ct) Target costs(Ctc) Manufacturing Manufacturing
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In both traditional methos,product designers do not attempt to achieve a particular cost target. In target costing, both the sequence of steps and the way of thinking about determining product costs differ significantly from traditional costing.
After these initial steps,the target costing process become even more distincitive. In the next step, price‐led costing is used.
Two other differences characterise the target costing process.
1)Cross functional produc teams
2)Supply chain management or suppler relationships
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5 KaizenCosting
Exhibit 7‐15 comparison of standard costing and kaizen costing
Standard costing concepts
Kaizen costing concepts
Cost control system concept
Assumes stability in current manufactring
processse
Goal is to meet cost performance standards
Standard cositing techniques
Cost reduction system concept
Assume contunuous improvement in MFC
Gola is to achieve cost reduction standards
Standard are set annually or semiannually
Cost reduction targets are set and applied monthly,and continuous improvement methods are applied all year long to meet targets.
Cost variance analysis involves target Kaizen costs versus actual cost reduction amounts.
Investigation occurs when target cost resduction(KAIZEN) amounts are not attained.
Who has the best knowledge to reduce costs?
Cost variance analysis nvolves comparing actual to standard costs
Cost variance investigation occurs when standards are not met.
Who has the best knowledge to reduce costs?
Kaizen costing techniques
Managers and engineers develop standards as workers are closest to the process and thus they have the technical expertise.
know best.
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6 Environmental Costing
Environmental costing involves selecting suppliers whose philosohpy and practice in dealing with the environment match those of buyers,disposing of waste products during the production process,and incorporating postsale service and disposal isuuses into cost management systems and overall MACS design.
.
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7.Benchmarking
To find out the new methodology of MCS from what kind of approaching.
Benchmarking is a way for organization to gather information regarding the best practices of others. It is often highly cost effective ,as organizations can save time and money by avoiding the mistakes that other companies have made or by not reinvesting a process or method that other companies have already developed and tested. Thus,selecting appropriate benchmarking partners is a critical aspect of the process.
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Summary
• The concept of control refers to the set of procedures,tools ,performance measures,and systems that organizations use to guide and motivate all employees to achieve organization objectives.
• In today’s business environment,managing cost and other performance variables over the entire value chain has become of paramount importance to competing.
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