ADVANCED MANAGEMENT ACCOUNTING
Definition of Management
Accounting: IMA
Management accounting is a profession
that involves partnering in management
decision making, devising planning and
performance management systems, and
providing expertise in financial reporting
and control to assist management in the
formulation and implementation of an
organization’s strategy.
Managerial Accounting as a Career
Professional Organizations
Institute of Management Accountants (IMA)
Publishes
Management
Accounting
and research
studies.
Administers
Certified
Management
Accountant
program
Develops
Standards of
Ethical
Conduct for
Management
Accountants
Professional Ethics
Ethical business practices build trust and
promote loyal, productive relationships with
customers, employees and suppliers.
Many companies have written codes of
ethics which serve as guides for employees
to follow.
Professional Ethics
Competence
Confidentiality
Integrity
Objectivity
Resolution of Ethical Conflict
Professional Ethics
Follow applicable laws,
regulations and
standards.
Maintain
professional
competence.
Competence
Prepare complete and clear
reports after appropriate
analysis.
Professional Ethics
Do not disclose confidential
information unless legally
obligated to do so.
Do not use
confidential
information for
personal
advantage.
Confidentiality
Ensure that subordinates do
not disclose confidential
information.
Professional Ethics
Avoid conflicts of interest
and advise others of
potential conflicts.
Do not subvert
organization’s
legitimate
objectives.
Integrity
Recognize and
communicate personal and
professional limitations.
Professional Ethics
Avoid activities that could
affect your ability to
perform duties.
Refrain from
activities
that could
discredit the
profession.
Integrity
Communicate
unfavorable as well as
favorable information.
Refuse gifts
or favors
that might
influence
behavior.
Professional Ethics
Communicate information
fairly and objectively.
Objectivity
Disclose all information
that might be useful to
management.
Professional Ethics
Resolution of Ethical Conflict
Follow established policies of your
organization.
If unresolved or if policy does not exist:
Clarify relevant concepts in a confidential discussion
with an objective advisor to explore possible courses
of action.
Discuss problem with immediate supervisor.
Professional Ethics
Resolution of Ethical Conflict
If immediate supervisor is involved in the
unethical behavior, discuss at the next level.
If problem is not resolved, the last resort is to
resign.
Generally, do not communicate ethical
conflicts to outsiders.
Major Themes in Managerial Accounting
Behavioral
Issues
Information
and Incentives
Costs and
Benefits
Managerial
Accounting
Evolution and Adaptation in Managerial
Accounting
Service Vs. Manufacturing
Firms
Emergence of New
Industries
Global Competition
Computer-Integrated
Manufacturing
Change
Information and
Communication
Technology
Product Life Cycles
Cross-Functional Teams
Total Quality
Management
Time-Based Competition
Continuous Improvement
Just-in-Time Inventory
Focus on the Customer
Managerial Accounting in Modern
Production Environments
• Key developments that reshaped Managerial
Accounting include:
– Integrated information systems
– Web hosting
– Just-in-time and lean production
– Total Quality Management
– Theory of constraints
– Benchmarking and continuous improvement
The Goal of Good Management is to
Create Value
• Cost Management is applying the value criteria to every
decision we make, every activity we perform, and every
process we complete.
• Modern accounting systems do not just evaluate good
stewardship but must provide managers with the
information managers need to improve value.
• Management accounting systems are used to enhance
both decision making and management control.
• Management accounting systems do not need to be
perfect, only ‘good enough’ to increase value.
New Management Trends
to Create Value
• Encourage Management Accounting
Systems Redesign, for example.
–
–
–
–
–
–
–
–
Customer focus
Quality focus
Delivery focus
Outsourcing and the virtual company
Communications
Shortening product life cycles
Team development
Deregulation in the service sector
Perubahan Lingkungan Bisnis
Menentukan hal apa saja yang tidak perlu dilakukan,
bagaimana perusahaan harus dikelola dan bagaimana
pekerjaan dilakukan
Beberapa praktek manajemen:
• JIT (Just In Time)
• Manajemen Mutu Total (TQM)
• Rekayasa Ulang
• Teori Kendala (Theory of Constrain/TOC)
JIT (Just In Time)
• Sistem Pengendalian Persediaan dan Produksi JIT:
>> Membeli BB dan memproduksi unit output sesuai
dengan permintaan aktual dari pelanggan
>> Persediaan dikurangi sampai pada tingkat
minimum (bahkan sampai titik nol)
• Dampak JIT (perush. Manufaktur):
>> Efisiensi dan mengurangi biaya (penyimpanan dan
pemesanan) serta meningkatkan efisiensi dan
efektifitas operasi.
Bahan bahan baku yang diterima segera masuk ke
proses produksi, bahan produksi lainnya segera
digabungkan dan dikerjakan, dan produk yang telah
jadi segera dikirimkan kepada pelanggan.
TQM (Total Quality Management)
Perbaikan terus menerus yang memiliki
karakteristik :
>> Fokus pada pelayanan pelanggan
>> Pemecahan masalah secara sistematis
dengan menggunakan tim yang ada di
garda depan yang dibekali dengan salah
satu alat manajemen
>> Penentuan tolok ukur (benchmarking)
yang dilakukan dengan mempelajari
organisasi terbaik yang ada untuk
menjelaskan tugas tugas tertentu.
Increased emphasis on product quality
because goods are produced only as
needed
Total Quality Management (TQM)
- a philosophy of zero defects Gambaran utama TQM adalah meningkatkan produktivitas
dengan mendorong penggunaan pengetahuan dalam
mengambil keputusan dan menekan perilaku defensif yang
tidak produktif.
LO 8 Identify trends in management accounting.
Rekayasa Ulang Proses
(Process Reengineering-PR)
Meliputi desain ulang secara menyeluruh proses bisnis dalam rangka
menghilangkan aktivitas yang tidak bernilai tambah dan mengurangi
kemungkinan terjadinya kesalahan. Rekayasa ulang mengandalkan
pada spesialis dari luar perusahaan.
>> Merupakan pendekatan yang lebih radikal dibandingkan TQM
>> Sebagai ganti perbaikan sistem yang dirancang serial dan
bertahap.
>> Dalam PR suatu proses bisnis diplot dalam sebuah diagram
secara detail, dikritik dan kemudian dirancang ulang untuk
menghilangkan langkah-langkah yang tidak diperlukan,
mengurangi kemungkinan terjadinya kesalahan dan
mengurangi biaya.
Proses bisnis adalah serangkaian tahapan yang harus
dilakukan untuk menjalankan tugas-tugas dalam dalam suatu
bisnis.
Teori Kendala
(Theory of Contrains/ToC)
Menekankan pada pentingnya mengelola kendala yang
dihadapai oleh organisasi. Karena kendala adalah sesuatu
yang menghalangi organisasi, proses perbaikan akan efektif
kalau difokuskan pada kendala yang dihadapi
• Teori kendala didasarkan pada
pandangan bahwa manajemen kendala
secara efektif merupakan kunci
keberhasilan
Activity-Based-Costing (ABC)
Allocates overhead based on use of activities
Results in more accurate product costing and
scrutiny of all activities in the value chain
Balanced Scorecard
Evaluates operations in an integrated fashion
Uses both financial and non-financial
measures
Links performance measures to overall
company objectives
LO 8 Identify trends in management accounting.
Review Question
Which of the following managerial accounting
techniques attempts to allocate manufacturing
overhead in a more meaningful manner?
a.Just-in-time inventory.
b.Total-quality management.
c.Balanced scorecard.
d.Activity-based costing.
LO 8 Identify trends in management accounting.
The Strategic Approach to
Teaching Management Accounting
Topics
—An Introduction
Strategic Cost Management:
Basic Concepts
Strategic decision making is choosing among
alternative strategies with the goal of selecting a
strategy, or strategies, that provides a company
with reasonable assurance of long-term growth and
survival
The key to achieving this goal is to gain a
competitive advantage.
Strategic cost management is the use of cost data
to develop and identify superior strategies that will
produce a sustainable competitive advantage.
A Model of the Decision-Making
Process
Competitive Advantage
Competitive advantage is the process of creating
better customer value for the same or lower cost
than that of competitors or creating equivalent
value for lower cost than that of competitors.
Customer value is the difference between what a
customer receives (customer realization) and what
the customer gives up (customer sacrifice).
The total product is the complete range of tangible
and intangible benefits that a customer receives
from a purchased product.
Michael Porter: Strategic
Positioning
 Cost Leadership—outperform
competitors by producing at the lowest
cost, consistent with quality demanded
by the consumer
 Differentiation—creating value for
the customer through product innovation,
product features, customer service, etc.
that the customer is willing to pay for
Aspects of the
Two Competitive Strategies
Aspect
Basis of competitive
advantage
Cost Leadership
Lowest cost in the
industry
Often, a limited
Product line
selection
Lowest possible cost
with high quality and
Production emphasis
essential product
features
Differentiation
Unique product or
service
Wide variety,
differentiating
features
Innovation in
differentiating
products
Marketing emphasis
Premium price and
innovative,
differentiating
features
Low price
Strategic Positioning
There are three general strategies that
have been identified:
– cost leadership
– product differentiation
– focusing
Strategic Positioning
A cost leadership strategy
happens when the same
or better value is provided
to customers at a lower
cost than a company’s
competitors.
Example: A company might redesign a product so that
fewer parts are needed, lowering production costs and the
costs of maintaining the product after purchase.
Strategic Positioning (continued)
A product differentiation strategy strives to
increase customer value by increasing what
the customer receives (customer realization).
Example: a retailer of computers might
offer on-site repair service, a
feature not offered by other rivals
in the local market.
Strategic Positioning (continued)
A focusing strategy happens when a firm
selects or emphasizes a market or customer
segment in which to compete.
Example: Paging Network, Inc., a paging
services provider, has targeted
particular kinds of customers and
is in the process of weeding out
the nontargeted customers.
Consequences of Lack of Strategic CostManagement Information
 Decision-making based on guess and intuition
 Lack of clarity about direction and goals
 Over time, lack of a clear and favorable perception of
the firm by customers and suppliers
 Incorrect decisions: choosing products, markets, or
manufacturing processes that are inconsistent with the
organization’s strategy
 For control purposes, cannot link performance
effectively to strategic goals
…
Tools for Integrating Strategy
into Management Accounting
-- The Value Chain
-- Strategy Maps & the Balanced
Scorecard (BSC)
Introducing Strategy
Strengths
Weaknesses
Strategic
Positioning
Value
Chain
Strategy
Map
Balanced
Scorecard
(BSC)
Opportunities
Threats
Value Chain
Refers to all activities associated with providing
a product or service
For a manufacturing firm these include the
following:
LO 8 Identify trends in management accounting.
Industrial Value Chain
The industrial value chain is the linked set of
value-creating activities from basic raw
materials to the disposal of the finished
product by end-use customers.
Fundamental to a value-chain framework
is the recognition that there exist complex
linkages and interrelationships among
activities both within and external to the
firm.
Value Chain Analysis:
A Detailed Look at Strategy…
The Value Chain is a linked set of valueadding activities used by an organization to
deliver its value proposition to its customers. It
consists of:
o “Upstream” Activities
o Manufacturing/Operations
o “Downstream” Activities
Value-Chain Analysis
 Identify value-chain activities
 Develop competitive advantage by:
 Identifying opportunities for adding value for
the customer
 Identifying opportunities for eliminating nonvalue added activities and reducing cost
Understand linkages among
suppliers, the entity, and customers
Internal and External Linkages
There are two types of linkages that must be
analyzed and understood: internal and external
linkages.
Internal linkages are relationships among activities
that are performed within a firm’s portion of the
value chain.
External linkages describe the relationship of a
firm’s value-chain activities that are performed with
its suppliers and customers. There are two types:
supplier linkages and customer linkages.
Strategy Maps &
the Balanced Scorecard (BSC)
The BSC and Strategy Map are used to
align the organization’s activities with
achieving strategic goals, using the four
perspectives:
• Financial
• Customer
• Internal Processes
• Learning and Growth
vision &
mission
Exceed shareholder
expectations
Financial
Customer
Diversify income
stream
Diversify
customer base
Increase sales
volume
Improve profit
margins
Increase sales to
existing customers
Attract new
customers
Internal
Process
Target profitable
market segments
Develop new
products
Optimize internal
processes
Attract new
customers
Learning
& Growth
Develop
employee skills
Integrate
systems
The Balanced Scorecard (BSC):
Feedback to Strategy
Strategic
Positioning
Value
Chain
Strategy
Map
Balanced
Scorecard
(BSC)
Activity-Based Costing (ABC),
RCA, and TDABC
Evolution of Cost Accounting Systems
Traditional
Costing
Resources
Allocated
to
ABC
(simple &
minimal)
Resources
Consumed
by
Resources
Consumed
by
Activities
Activities
Consumed
by
Cost Objects
ABC
(multidimensional)
Consumed
by
outputs
Cost Objects
channels
Cost
Objects
Users
ABC/M Framework
What Things
Cost
Root
Causes
of Costs
Resource
Costs
Resource
Drivers
Work Activities
Performance
Measures
Activity Cost
Assignment
Cost Objects
Why Things
Cost
Activity
Drivers
•Cost Reduction
•Process
reengineering
•Cost of quality
•Continuous
improvement
•Waste elimination
•Benchmarking
•Design for manufacturing
Better Decision
•Make versus Buy
Making
Organizational Activities and Cost
Drivers
Organizational activities are of two types:
structural and executional.
Structural activities are activities that determine
the underlying economic structure of the
organization.
Executional activities are activities that define the
processes and capabilities of an organization and
thus are directly related to the ability of an
organization to execute successfully.
Organizational Activities and Drivers
Structural Activities
Building plants
Management structuring
Grouping employees
Complexity
Vertically integrating
Selecting and using process
technologies
Structural Cost Drivers
Number of plants, scale, degree
of centralization
Management style and
philosophy
Number and type of work units
Number of product lines,
number of unique processes,
number of unique parts
Scope, buying power, selling
power
Types of process technologies,
experience
Organizational Activities and Drivers
Executional Activities
Executional Cost Drivers
Using employees
Degree of involvement
Providing quality
Quality management approach
Providing plant layout
Plant layout efficiency
Designing and producing products
Product configuration
Providing capacity
Capacity utilization
Operational Activities
Operational activities are day-to-day activities
performed as a result of the structure and
processes selected by the organization.
Examples:Receiving and inspecting incoming
parts, moving materials, shipping
products, testing new products,
servicing products, and setting up
equipment.
Organizational and Operational Activity
Relationships
Organizational Activity
(Selecting and using process technologies)
Structural Cost Driver
(JIT: Type of process technology
Operational Activity
(Moving material)
Operational Driver
(Number of moves)
Internal Value Chain
Design
Service
Develop
Distribute
Produce
Market
Exploiting Internal Linkages
An
Example:
Assume that design engineers have been told that the number of parts is a significant
cost driver and that reducing the number of parts will reduce the demand for various
activities downstream in the value chain. They plan to reduce the price by per-unit
savings. Currently 10,000 units are produced. The data of the new design and its
effects on demand are given below:
Activity
Material usage
Labor usage
Purchasing
Warranty repair
Cost Driver
# of parts
Labor hours
# of orders
# of defects
Capacity
200,000
10,000
15,000
1,000
Current
Demand
200,000
10,000
12,500
800
Expected
Demand
80,000
5,000
6,500
500
Exploiting Internal Linkages (continued)
Potential Savings :
Material usage (200,000 - 80,000)$3
$360,000
Labor usage (10,000 - 5000)$12
60,000
Purchasing [$30,000 + $.50(12,500 - 6,500)]
33,000
Warranty repair [($28,000 + $20(800 - 500)]
34,000
Total
$487,000
======
Units
10,000
Unit savings
$48.70
Activity-Based Customer Costing
An Example:
Suppose that the Thompson Company produces precision parts
for 11 major buyers. An activity-based costing system is used to
assign manufacturing costs to products. The company prices
each customer's order by adding order-filling costs to
manufacturing costs and then adding a 20% markup (to cover
any administrative costs plus profits). Order-filling costs total
$606,000 and are currently assigned in proportion to sales
volume (measured by number of parts sold). Of the 11
customers, one accounts for 50% of sales, with the remaining ten
accounting for the remainder of sales. Orders placed by the
smaller companies are also about the same size. Data concerning
Thompson’s customer activity are given on PPT 13-22:
Exploiting External Linkages
(continued)
Large Ten Smaller
Customer
Customers
Units purchased
500,000
500,000
Orders placed
2
200
Manufacturing cost
$3,000,000 $3,000,000
*Order-filling cost allocated 303,000
303,000
Order cost per unit
$0.606
$0.606
*Order-filling capacity is purchased in blocks of 45 (225
capacity), each block costing $40,400; variable orderfilling activity costs are $2,000 per order; thus, the cost is
[(5 x $40,400) + ($2,000 x 202)]
Exploiting External Linkage (continued)
Assume that ordering costs are allocated using a new driver:
Units purchased
Orders placed
Manufacturing costs
*Orders-filling costs
Order cost per unit
Large Customer
500,000
2
$3,000,000
6,000
$.012
Ten Smaller Customers
500,000
200
$3,000,000
600,000
$1.20
*Order-filling capacity is allocated using number of orders. The allocation
rate is $3,000 pre order ($606,000/202 orders).
Implications:
By using a new driver, we are drastically reducing the orderingcost per unit of the high volume customer (50% of our business).
This information could assist Thompson in establishing a new
strategy for pricing.
Product Life Cycle Viewpoints
There are three basic views of the product
life cycle:
– Marketing viewpoint
– Production viewpoint
– Consumable life viewpoint
Marketing Viewpoint
Units of
sales
Introduction Growth
Maturity
Decline
Life Cycle Cost Management
Cost Commitment Curve
Life Cycle
Cost %
100
90
90 percent of life-cycle
costs are committed at this
point
75
25
Research
Planning
Design
Testing
Production Logistics
A Life Cycle Costing Example
Suppose that engineers are considering two new product designs for one of its
power tools. Both designs reduce direct materials and direct labor content
over the current model. The anticipated effects of the two designs on
manufacturing, logistical, and postpurchase activities costs are listed below:
Cost Behavior
Functional-based system:
Variable conversion activity rate:
Material usage rate:
ABC system:
Labor usage
Material usage:
Machining:
Purchasing activity:
Setup activity:
Warranty activity:
Customer repair cost:
$40 per direct labor hour
$8 per part
$10 per direct labor hour
$8 per part
$28 per machine hour
$60 per purchase order
$1,00 per setup hour
$200 per returned unit
$10 per hour
Life Cycle Costing (continued)
Traditional Costing (Overhead allocated by direct labor hours)
Direct materials
Conversion costb
Total manufacturing cost
Units produced
Unit cost
a$8
Design A
$ 800,000
2,000,000
$2,800,000
 10,000
$
280
========
Design B
$ 480,000
3,200,000
$ 3,680,000
 10,000
$
368
========
x 100,000 parts; $8 x 60,000 parts
b$40 x 50,000 direct labor hours; $40 x 80,000 direct labor hours
Life Cycle Costing (continued)
ABC Costing (Overhead allocated by direct labor hours)
Direct materials
Direct labora
Machiningb
Purchasingc
Setupsd
Warrantye
Total product costs
Units productd
Unit cost
Postpurchase costs
a$5
Design A
$ 800,000
500,000
700,000
18,000
200,000
80,000
$2,298,000
 10,000
$
230
$ 80,000
========
Design B
$ 480,000
800,000
560,000
12,000
100,000
15,000
$1,967,000
 10,000
$
197
$ 15,000
========
Classification
Manufacturing
Manufacturing
Manufacturing
Upstream
Manufacturing
Downstream
d$1,000 x 200 setups; $1,000 x 100 setups
x 50 ,000 hours ; $5 x 40,000 hours
b$10 x 25,000 parts; $10 x 20,000 parts
e$200 x 400 defects; $200x 1,000 defects
c$60 x 300 design hours; $60 x 2000 design hours
Target Costing - Example
Assume that a company is considering the
production of a new trencher. Current product
specifications and the targeted market share
call for a sales price of $250,000. The required
profit is $50,000 per unit.
The target cost is computed as follows:
Target cost = $250,000 - $50,000
= $200,000
Target-Costing Model
MARKET SHARE
OBJECTIVE
TARGET PRICE
TARGET PROFIT
TARGET COST
No
PRODUCT AND
PROCESS DESIGN
TARGET COST
MET?
Yes
PRODUCE
PRODUCT
PRODUCT
FUNCTIONALITY
Resource Consumption Accounting
(RCA)
Resource consumption accounting (RCA) is an
adaption of ABC that emphasizes resource
consumption by greatly increasing the number of
resource cost pools, which allows more direct
tracing of resource costs to cost objects than an
ABC system with fewer cost centers.
RCA is particularly appropriate for large organizations
with repetitive operations and high-level
information systems such as those provided by
SAP, Oracle, and SAS.
Time-Driven ABC (TDABC)
When a substantial amount of the cost of a
company’s activities are in a highly repetitive
process (much like in the RCA example above),
the cost assignment can be based on the
average time required for each activity.
Time-Driven Activity-Based Costing assigns
resource costs directly to cost objects using the
cost per time unit of supplying the resource,
rather than first assigning costs to activities and
then from activities to cost objects.
TDABC Example
TDABC computes the cost per minute of the resources
performing the work activity.
Assume 2 clerical workers paid $45,000 annually perform a
certain activity that is expected to require 17 minutes.
TDABC calculates the total cost as $45,000 x 2 = $90,000;
TDABC then calculates the total time available for the activity
as 180,000 minutes (assuming 30 hours per week with two
weeks vacation: 2 workers x 50 weeks x 30 hours x 60 minutes
per hour = 180,000 minutes per year).
The TDAC rate for the activity is $0.50 per minute ($90,000 /
180,000).The cost of a unit of activity is $0.50 x 17 min = $8.50;
if the activity required 20 min, then the allocation would be $.50
x 20 = $10.
Customer Profitability
Analysis
Customer Profitability Analysis
• Customer Relationship Management
(CRM):
• Customer Lifetime Value (CLV)
• Customer Equity
Customer
Profitability
Analysis:
The Whale
Curve: 80%
from the top 20%
(or more!)
The Whale Curve
Cumulative Profits
300 %
100 %
50 %
20%
Most Profitable
100 %
Least Profitable
What Makes for a Profitable Customer?
Profitable and unprofitable customers are distinguished
by the demands they place on the organization
 Less profitable customers  More profitable customers







Small order quantities
Special products ordered
Heavy discounting
Unpredictable demands
Delivery times change
High technical support
Slow payment (imputed
interest)







Large order sizes
Standard products ordered
Little discounting
Predictable demands
Delivery times standard
Low technical support
On-time payment (imputed
interest)
These demands can be estimated
by activity costs and activity cost drivers
Migrating Customers to Higher Profitability –
A Strategic Analysis
Very
Types of Customers
Profitable
High
(Creamy)
Product Mix
Margin
Low
(Low Fat)
Low
High
Cost-to-Serve
76
Very
unprofitable
Customer Relationship Management (CRM)
Requires Strategic Cost Management Data
Who is more important to pursue with
the scarce resources of our marketing
budget?
 Our most profitable customers? Our
valuable customers?
 What is the difference?
 The “customer lifetime value” (CLV)
measure is intended to answer this
question.
most
You are a pharmaceutical supplier:
which customer is more important?
Dentist A
Dentist B
Sales = $750,000
Sales = $375,000
profits = $100,000
profits = $40,000
Age 61
Age 25
Which is more profitable?
Which is more valuable?
Customer Lifetime Value (CLV)
What is it?
The projected economic value of customer
relationships during the whole period of the
relationship between the customer and company.
The Measure
The net present value (NPV) of all future profits
from that customer; it is a projection, from when
the customer is acquired or from the current date.
Customer Equity
What is it?
The economic value of ALL customer
relationships.
The Measure
The sum of the CLVs for all customers.
How Used
Provides a measure of the value of the company
from the perspective of customer profitability.
The Management & Control of
Quality (including Six-Sigma
and Lean)
Relationship between TQM & Financial Performance
A Strategic Model for Managing Quality
Lean Manufacturing
•
•
•
•
At the heart of lean manufacturing is the Toyota
Production System (TPS):
a long-term focus on relationships with suppliers
and coordination with these suppliers;
an emphasis on balanced, continuous flow
manufacturing with stable production levels;
continuous improvement in product design and
manufacturing processes with the objective of
eliminating waste ; and
flexible manufacturing systems in which different
vehicles are produced on the same assembly line
and employees are trained for a variety of tasks
Accounting for Lean
There are three reasons why the improvements in financial
results typically appear later than the operating
improvements from implementing lean.
• Customers will benefit from the improved manufacturing
flexibility by ordering in smaller, more diverse quantities.
• Improvements in productivity will create excess capacity;
as equipment and facilities are used more efficiently, some
will become idle.
• The decrease in inventory that results from lean means
that, using full cost accounting, the fixed costs incurred in
prior periods flow through the income statement when
inventory is decreasing.
Accounting for Lean
Lean accounting uses value streams to measure
the financial benefits of a firm’s progress in
implementing lean manufacturing.
Each value stream is a group of related products
or services.
Accounting for value streams significantly reduces
the need for cost allocations (since the products
are aggregated into value streams) which can
help the firm to better understand the profitability
of its process improvements and product groups.
Lean Accounting – Value Streams
Rimmer Company
Value Stream Income Statement
Digital Cameras
Sales
Operating Costs
Materials
Labor
Equipment related costs
Occupancy costs
Total Operating Costs
Less Other Value Stream Costs
Manufacturing
Selling and Administration
$
$
25,200
168,000
92,400
11,200
585,000
$
$
-
120,000
10,000
130,000
240,000
10,000
158,200
(10,000)
$
148,200
Total
540,000
$
1,125,000
154,000
$
450,800
12,800
88,000
48,400
4,800
296,800
Value Stream Profit before inventory change
Less: Cost of decrease in inventory
Value Stream Profit
Video Cameras
$
250,000
380,000
136,000
(20,000)
294,200
(30,000)
116,000
$
Less Nontraceable Costs
Manufacturing
Selling and Administration
155,000
54,000
Total Nontraceable Fixed Costs
Operating Income
264,200
209,000
$
55,200
Operational and
Management-level
Performance Measurement
Performance Measurement
• Motivation and Evaluation
– Incentives: right decisions
• Align performance measurement with strategy
– Incentives: working hard
• Compensation and bonus plans
– Equity/fairness
• Controllability
• Cost allocations
• Operational-level and Management-level
Operational Performance Measurement
with a Flexible Budget
Schmidt Machinery Company
Analysis of Operations
For the period ended October 31, 20X6
2010
2010
Data Item for
Analysis
Units Sold
Sales
Variable Expenses
Contribution Margin
Fixed Expenses
Operating Income
Actual
Flexible
Budget
Variance
780
0
$639,600
350,950
$288,650
$160,650
$128,000
$15,600
50
$15,650
$10,650
$5,000
Flexible
Budget
F
F
F
U
F
Sales
Volume
(Activity)
Variance
Master
(Static)
Budget
780
220
U
1000
$624,000
351,000
$273,000
$150,000
$123,000
$176,000
99,000
$77,000
$0
$77,000
U
F
U
$800,000
450,000
$350,000
$150,000
$200,000
U
Management Performance
Measurement
Cost Centers
• Engineered Cost (cost driver: volume based)
•Flexible Budget
• Discretionary Cost (cost driver?)
•Master Budget
• “Profit Center” – one step from outsourcing…
Management Performance
Measurement
• Profit Centers:
• Variable costing income statements
• Issue of transfer pricing
• Role and importance of nonfinancial
performance indicators
• Investment Centers:
• ROI vs. RI vs. EVA®
•Measurement issues
• Issue of transfer pricing
• Role and importance of non-financial
performance indicators
Management –Level
Performance Measurement:
When to Use Profit or Cost Center
Customer
Plant
Warehouse
Using Software in the
Strategic Cost Management
Using Software in the
Strategic Cost Management
1. Excel:
Goal Seek
Solver
2. ABC:
OROS (SAS), SAP, …
Excel
3. Simulation:
Crystal Ball, @Risk,
Excel(Formulas/Functions)
ABC Software: OROS Quick
(from SAS)
• Comprehensive: resources through
objects
• Allow a couple of classes
• Short Tutorial, 13 pages, couple of
hours
• Blue Ridge Manufacturing Case
Introduction to Management Accounting
 Strategic Positioning
 Ethics
Implementing
Strategy
Product
Costing
Cost Behavior
(Planning and
Operational
Control)
 The Value
Chain
 Volume
Based
(Job
Costing)
 Cost Estimation
 The
Balanced
Scorecard
 Management
Control
 CVP Analysis
 Master Budget
 Activity based
Costing
 Decision
Making
 Flexible Budgets
Product Life
Cycle
 Target
Costing
 Life
Cycle
Costing
Cost Accounting
 Strategic Positioning
 Ethics
Implementing
Strategy
 The Value
Chain
 The
Balanced
Scorecard
Product
Costing

Cost Behavior
(Planning and
Operational
Control)
Job Costing
Product Life
Cycle
 Cost Estimation
 Target
Costing
 CVP Analysis
(ABC)
 Life Cycle
Costing
 ABC Costing
 Process Cost
 Joint Costs
 Standard
Costing
 Master Budget
(ABC)
 Decision
Making (ABC)

Managing
Constraints
Advanced Management Accounting
 Strategic Positioning
 Ethics
Implementing
Strategy
Cost Behavior
(ABC-based)
 The Value Chain
 Cost Estimation
(Regression)
 The Balanced
Scorecard (BSC)
 Management Control (TP)
 Executive Compensation
 Business Valuation
Product Life
Cycle
 Target
Costing
 CVP Analysis
 Master Budget
 Decision
Making (LP)
 Life
Cycle
Costing
Comparison of JIT Approaches with
Traditional Manufacturing and Purchasing
JIT
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Pull-through system
Insignificant inventories
Small supplier base
Long-term supplier contracts
Cellular structure
Multiskilled labor
Decentralized services
High employee involvement
Facilitating management style
Total quality control
Buyers’ market
Value-chain focus
Traditional
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Push-through system
Significant inventories
Large supplier base
Short-term supplier contracts
Departmental structure
Specialized labor
Centralized services
Low employee involvement
Supervisory management style
Acceptable quality level
Sellers’ market
Value-added focus
Example Backflushing
1.
2.
3.
4.
5.
6.
7.
8.
To illustrate backflush costing and compare it with the
traditional approach, assume that a JIT company had the
following transactions during June:
Raw materials were purchased on account for $160,000.
All materials received were placed into production.
Actual direct labor costs, $25,000.
Actual overhead costs, $225,000.
Conversion costs applied, $235,000.
All work was completed for the month.
All completed work was sold.
The difference between actual and applied costs is
computed
Traditional Journal Entries
1. Materials
Accounts Payable
160,000
2. Work in Process
Materials
160,000
3. Work in Process
Payroll
25,000
4. Overhead Control
Accounts Payable
160,000
160,000
25,000
225,000
225,000
Traditional Journal Entries
5. Work in Process
Overhead Control
210,000
6. Finished Goods
Work in Process
395,000
7. Cost of Goods Sold
Finished Goods
395,000
8. Cost of Goods Sold
Overhead Control
210,000
395,000
395,000
15,000
15,000
Backflush Journal Entries
1. Raw Materials and in Process 160,000
Accounts Payable
160,000
2. No entry
3. Combined with overhead: See next entry.
4. Conversion Cost Control
Payroll
Accounts Payable
250,000
25,000
225,000
Backflush Journal Entries
5. No entry
6. Finished Goods
Raw Materials and in Process
Conversion Cost Control
395,000
160,000
235,000
7. Cost of Goods Sold
Finished Goods
395,000
395,000
8. Cost of Goods Sold
15,000
Conversion Cost Control
15,000
End of Week