Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Chapter 9
Management Accounting and Control
Systems for Strategic Purposes:
Assessing Performance over the Entire
Value Chain
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Chapter Objectives:
To be able to:
1.
2.
3.
4.
5.
6.
7.
Apply the concept of control.
Identify the characteristics of well-designed management accounting and control
systems (MACS).
Describe the total-life-cycle costing approach to managing product costs over the
value chain.
Explain target costing.
Explain Kaizen costing.
Identify environmental costing issues.
Apply the process of benchmarking the best practices of other organizations.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Chapter 9:
Technical aspects of MACS design
using benchmarking and best
practice.
Chapter 10:
Behavioral characteristics of MACS
design including human motivation.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Management accounting and control system:
”The larger entity of central performance
measurement systems”
Control:
”Refers to the set of procedures, tools,
performance measures and systems that
organizations use to guide and motivate all
employees to achieve organizational objectives”.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
In control/out of control:
A state of expressing whether an organization
is on the path of achieving its strategic objectives.
The process of keeping an organization in control:
1.
2.
3.
4.
5.
Department of Accounting
Planning
Execution
Monitoring
Evaluation
Correcting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Characteristics of a well-designed management
accounting and control system
(1)
(2)
(3)
(4)
Embedding the organizations ethical code of
conduct into MACS design.
Using a mix of short/ and long/term qualitative and
quantitative performance measures.
Empowering employees to be involved in decision
making and MACS design.
Developing an appropriate incentive system to
reward performance.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Characteristics of a well-designed management
accounting and control system
Technical considerations - Relevance of information
(1)
Accurate. Inaccurate information is not relevant or useful for decision
making because it is misleading. Designers have to develop a system that
leads to the most accurate information possible. For instance, more
accurate product costs can be obtained by using systems that trace costs
more directly from support activities to products.
(2)
Timely. Accurate information that is late is also of little use for decision
making. The MACS must be designed so that the results of performance
measurement are fed back to the appropriate units in the most expedient
way possible.
(3)
Consistent. Designers must structure the MACS to provide a consistent
framework that can be applied globally across the units or divisions of an
entity.
(4)
Flexible. MACS designers must allow employees to use the systems
available information in a flexible manner so they can customize its
for local decisions.
Departmentapplication
of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Characteristics of a well-designed management
accounting and control system
Technical considerations - Scope of the system
The scope of the MACS system must be comprehensive and include all activities
across the entire value chain of the organization.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Total-Life-Cycle Costing, page 1 of 3
Life-cycle concepts:
•
Research, development and engineering cycle (RD&E).
A life-cycle concept that involves market research, product design and
product development.
•
Manufacturing cycle.
Those costs incurred inside the factory associated with transforming raw
materials into a finished product.
•
Post-sale service and disposal cycle.
The portion of the life cycle that begins once the first unit of a product is
in the hands of the customer.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Total-Life-Cycle Costing, page 2 of 3
RD&E Cycle:
Stages:
Market Research, where emerging customer needs are assessed and ideas are
generated for new products.
Product Design, in which scientists and engineers develop the technical aspects
of products.
Product Development, in which the company creates features critical to
customer satisfaction and designs prototypes, production processes, and any
special tooling required.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Total-Life-Cycle Costing, page 2 of 3
Manufacturing cycle:
Stages:
Costs are incurred in the production of the product. At this stage there is not as
much room for engineering flexibility to influence product costs and product
design.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Total-Life-Cycle Costing, page 3 of 3
Post-sale and Disposal Cycle.
Stages:
(1) Rapid growth from the first time the product is shipped through the growth
stage of its sales.
(2) Transition from the peak of sales to the peak in the service cycle.
(3) Maturity from the peak in the service cycle to the time of the last shipment
made to a customer. Disposal occurs at the end of a product life and lasts until the
customer retires the final unit of a product.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Target Costing, page 1 of 4
Definition:
A method of cost planning used during the planning cycle to reduce manufacturing
costs to targeted levels.
Target costing versus traditional cost-reduction methods.
Traditional profit calculation methods:
Desired profit margin = expected selling price less estimated costs
Cost-plus method = expected profit margin + expected product cost
In neither of the methods any attempt to achieve a particular cost target is being
performed.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Target Costing, page 2 of 4
Target costing:
The difference between the target selling price and the target profit margin.
Once the target cost has been set, the company must determine target cost for
each component.
The value engineering process:
The process of examining each component of a product to determine whether its
cost can be reduced while maintaining functionality and performance.
Exhibits 9-4
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Target Costing, page 3 of 4
Listing differences of target costing compared to traditional costing
methods:
1.
2.
3.
4.
5.
Marketing research under target costing is not a single event as it often is
under the traditional approach.
Much more time is spent as the product specification and design stage in
order to minimize design changes during the manufacturing when they
are far more expensive to implement.
Target costing uses the total-life-cycle concept by making it a key goal to
minimize the cost of ownership of a product over its useful life.
Throughout the entire process, cross-functional teams made up of
individuals representing the entire value chain-both inside and outside the
organization-guide the process.
Suppliers play a critical role in making target costing work.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Target Costing, page 4 of 4
Supply Chain Management
A management system that develops cooperative, mutually beneficial, long-term
relationships between buyers and sellers.
Concerns about target costing:
- Conflicts among stakeholders
- Stress factors
- Increasing development time
- Costing and quality
How is it used?
Target costing is gaining momentum as a management method; however it is not
only a method of cost control, but also a comprehensive approach to profit
planning and cost management.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Kaizen Costing, page 1 of 2
Kaizen is the Japaneese term for making improvements to a process through
small, incremental amounts rather than through large innovations.
Definition:
A costing system that focuses on reducing costs during the manufacturing stage of
the total life cycle of a product.
Focus:
In traditional cost systems focus is to meet standard cost measurement by
avoiding unfavorable variances. Under Kaizen cost the goal is to achieve cost
reduction targets that are continually adjusted downward.
The Kaizen system is in opposition to traditional costing based on worker input to
improve performance. Traditional standard costing assumes that engineers and
managers with their technical and administrative expertise can set standards.
Exhibit 9-7
How to compute Kaizen Costs for Plants.
Exhibit 9-6
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Kaizen Costing, page 2 of 2
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.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Environmental Costing
Definition:
A costing system that computes the cost of the effects an organization has on the
environment.
Identify environmental impacts during a products life cycle and establish
management accounting guidelines of how to assign these costs to the most
appropriate products, distribution channels and customers.
Department of Accounting
Management Accounting
Chapter 9 - Management Accounting and Control Systems for Strategic Purposes
Benchmarking
Definition:
The process of studying and adapting the best practices of other organizations to
improve the firms own performance and establish a point of reference by which
other internal performance can be measured.
Options when an organization interested in a new management accounting
method should choose how to approach it:
1. Bring in outside consultants to implement a particular method. Effective but
costly.
2. Organizational members develop their own systems internally with little or no
assistance from outside consultants. Can turn out to be highly costly and time
consuming, especially if the organization fails in its first attempts.
3. Using benchmarking requiring that organizational members first understand
their current operations and approaches to conducting business and then look
to the best practices of other organizations for guidance on improving.
Stages of the Benchmarking Process: Exhibit 9-9
Department of Accounting