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128 views19 pagesMAS Chapter 2
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Jeciel Mae M. CalubaCopyright
© © All Rights Reserved
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/ 19
CHAPTER
MANAGEMENT
ACCOUNTING AND THE
BUSINESS ENVIRONMENT
-- _EXPECTE!
bo (D LEARNING OUTCOMES, Cu
After studying this chapter, you should be able to...
Understand the expanding rolé of management accounting.
4.
2. Be familiar with the major contemporary management
techniques such as
& may Just-in-time
~ a. Just-in-time
Total Quality Management
Process Reengineering
Benchmarking
Mass Customization
Balanced Scorecard
Activity-based Costing and Management
Theory of Constraints
Life Cycle Costing
Target Costing
Computer-aided Design and Manufacturing
Automation
|. E-commerce
. The Value Chain
3. Understand the changing world of the management accountant.
4. Identify the current focus of management accounting.
BRr-AT OTe >ea0TD
4 SOOSO CHAPTER 2
? AND
MANAGEMENT ACCOUNTING
THE BUSINESS ENVIRONMENT
Expanding Role of Management Accounting
The business environment in recent years has been characterized by increasing
competition and relentless drive for continuous improvement. =
(1) an increase in global competition; (2) advances in manufactui
technologies; (3) advances in information technologies, the Internet, and e-
commerce; (4) a greater focus on the customer; (5) new forms of management
organization; and (6)-changes in the social, political, and cultural environment of
business. As businesses turned global and. product lines expanded, operations
have become more complex, forward-looking companies saw a tremendous need
for management oriented data that was separate from fea Sega.
Corporate executives are now using cost data to chart successful futures for their
companies. Adapting management accounting system. to better meet
management’s needs for information is crucial to an organization’s survival when
competing in global markets. Global competitors now have relatively free access
to markets around the world. As a result, domestic markets on virtually every
country face greater challenges from foreign competition, With increased
reliance on global markets, companies need not only respond quickly to changing
market. conditions but also tailor products to different consumer tastes and
demands and this has to be done at a level that assures profit and gives
satisfactory returns to shareholders.
, : \
In today’s automated environment management accountants use _ their
Larosa control systems to support and reinforce manufacturing and other
perating strategies. It is in this light that one learns to appreciate the role of @
management accountant which is i ji F
informing role. more of an influencing role rather than just an
The change in the business environmer
organization have to transform thems
profound effect in the
importance are the chat
nt in at least the last two decades where
n elves to become more competitive, have
Fiactice of Management accounting. Of particular
‘ges in business, especially the increase in global ___Management Accounting and the Business Environment 61
competition and the changes in management techniques, that have created the
néed for a new, strategic approach to management and to cost management.
* While many of the major improvement tools used by managers overlap, they can
be classified into major programs or approaches also referred to as
Contemporary Management Techniques which includes:
a. Just-In-Time (JIT)
Just-in-Time (JIT) is the philosophy that activities.are.undertaken.only
jdemanded. IIT is a production system also known as pull-
it-through approach, in which materials are purchased and units are
produced only as needed to meet aciual customer demand. In a JIT
system, inventories are reduced to the minimum and in some cases, zero.
The four characteristics of JIT are
Elimination of all activities that do not add value to the product
or service
Commitment to a high level of quality
Commitment to continuous improvement in the efficiency of an
activity
4. Emphasis on simplifications and increased visibility to identify
activities that do not add value
v
w
The main benefits of JIT are as follows:
1. Working capital position is improved by recovery of funds that
were tied up in inventories.
2. Throughput time is reduced, resulting in greater potential
production and quicker response to customers.
3. Areas previously used to store inventories are released and are
made available for other more productive uses,
© 4, Lesser waste and more customer satisfaction are achieved
because of reduction in defect rates.
A more detailed discussion of the JIT system is found in Chapter 26.
b. Total Quality Management
To survive in an increasingly competitive environment, firms realize that
they must produce high-quality products. As a result,
~ number of companies have instituted soral quality manage
to ensure that their products are of the highest quality and
processes are efficient.
an inereasing
ment programs
that production 62
Chapter 2
Total quality management (TQM) is a technique in which management
Currently, there is no generally agreed upon “perfect” way to institute a
TQM program. But most companies with TQM develop a company that
stresses listening to the needs of customers, making products right the
first time, reducing defective products that must be reworked, and
encouraging workers to continuously improve their production process,
That is why some TQM programs are referred to as continuous quality
improvement programs.
TQM affects product costing by reducing the need to track the cost of
scrap and rework related to each job. If TQM is able to reduce these
costs to a very low level, the benefit of tracking the costs is unlikely to
exceed the cost to the accounting system.
Total Quality Management (TQM) is a formal effort to improve quality
throughout an organization’s value chain. The two major characteristics
of TQM are
(1) a focus on serving customers, and “
(2). systematic problem-solving using teams made up of front-line
workers.
This approach is discussed in more detail in Chapter 26.
¢. Process Reengineering
Reengineering is a process for creating. competitive advantage in which
a firm reorganizes its operating and management functions, often with
the result that jobs are modified, combined, or eliminated. It has been
defined as the “fundamental rethinking and radical redesign of business
Processes to achieve dramatic improvements in critical. contemporary
measures of performance, such as Cost, quality, service, aid speed.
Process i i
TOM. ufcensincering, a more radical approach to improvement than
questioned. and then com;
unnecessary steps, pletely redesigned in order to eliminate
to reduce opportunities for errors and to reduce costs. Management Accounting and the Business Environment __ 63
A business process is any series of steps that are followed-in-order.t0,
carry out some task in a business, ~
* The [fii] OBJSSHNE of this approach is the simplification and elimination
of wasted effort and the central idea is that all activities that do not a
value to product or service should be eliminated. In its most simplified
version, the steps used in process reengineering are
if
2a
3.
A business process is diagrammed in detail.
Every step in the business process must be analyzed and
justified.
The process is redesigned to include only: those steps that make
the product or service more valuable.
. This process can yield the following anticipated results:
2.
3.
4.
Process is simplified
Process is completed in less time
Costs are reduced, and
Opportunities for errors are reduced.
eres Sie gi
fear loss of jobs which may lead to lost morale and {aiuto mora. he,
bottom line (i.¢., profits). For the process to prosper and succeed,
employees must be convinced that the end result of the improvement will
be more secure, rather than less secure jobs. They can be made to
understand that improving the processes, the company can generate more
business, produce a better product at lower cost and. will have the
competitive strength to prosper.
j
j
j
Process reengineering has, one ic_recurrent problem, ‘that is -
| ere As with other Improvement payee projects, employees
d. Benchmarking
Benchmarking is a process.by.which.a.fism,
determines jts critical suecess factors
dies tl i (or oth i ithi
st he, best. practices of other : firms er units within a
firm) for achieving these critical Success factors, and
then implements improvements in the firm’:
t S processes to
or beat the performance of those competitors, : maton e
Chapter 2.
Today benchmarking efforts are facilitated by cooperative networks of
noncompeting firms that exchange benchmarking information.
ow ee
and
Many manufacturing and service firms increasingly find that Customers
expect products and services to be developed for each customer’s unique
needs. And many firms have been successful with a strategy that targets
customer's unique needs.
Mass Customization
Mass customization is a management technique in which
‘oducti S i to handle the increased variety that
results from delivering customized products and services to customers.
The growth of mass customization is in effect another indication of the
increased attention given to satisfying the customer.
Balanced Scorecard
The balanced scorecard is an agcountingeteport, that includes. thesfirmis.
critical. success factors.in.four areas ve
(a) financial performance, Muekie é 4
(b) customer satisfaction,
(c) internal business process, and guans -
(d) innovation and learning.
The concept of balance captions the intent of broad coverage, financial
and nonfinancial of all the factors that contribute to the success of the
firm in achieving its strategic goals. The use of the balanced scorecard is
thus a critical ingredient of the overall approach that firms take to
become and remain competitive,
This is discussed in more detail in Chapters,
Oe scans
ose Management Accounting and the Business Environment__5
g. Activity-based Costing and Management
Activity analysis is
iit i ~ Many firms have foun
at they can improve planning, product costing, operational control, and
management control by using activity analysis to develop a detailed
description of the specific activities performed in the firm’s operations.
The activity analysis provides the basis for ,activity-based costing and
activity-based management. Activity-based costing (ABC) is
i is by improving the tracing of costs
to products or to individual customers. Activity-based management
(ABM) ivi fete ‘
|. ABC and ABM are key strategic tools for many
firms, especially those with complex operations, or great diversity of
products.
h. Theory of Constraints (TOC)
The Theory of Constraints is a sequential process of identifying and
removing constraints in a system.
The Theory of Constraints emphasizes.the.importance.of.managing the
toward anobjective. Since the constraint is whatever is holding back the
organization, improvement efforts usually must be ,focused. on the
-constraint to be really effective.
The basic sequential steps followed in applying TOC are
1. Analyze all the factors of production (materials, labor, facilities,
methods, etc.) required in the production chain.
2. Identify the weakest link, which is the constraint,
3. Focus improvement efforts on strengthening the weakest link.
4. If improvement efforts are successful, eventually the weakest
tink will improve to the point where it is no longer the weakest
ink. :
"At this point, a new weakest link (new i
ye ti fs constraint
identified and improvement efforts must be shifted oy tha ine 66 Chapter2
The Theory of Constraints approach is a perfect complement to Total
Quality Management and Process Reengineering - it" focuses
° improvement efforts where they are likely to. be most effective.
~ ala “—e ~
i, Life Cycle Costing
\ Life-cycle costing is a management technique to ‘identifi and-monitor the
costs.of.a.product throughout its lifecycle. It consists of all steps from
_. product design and purchase of raw material to delivery of and service of
the finished product. The steps include é
(1) research and development
» --“(2) product design, including prototyping, target costing and testing
(3) manufacturing, inspecting, packaging and warehousing
(4) marketing, promotion and distribution
(5) sales and service.
Cost management traditionally has focused only on costs incurred up to
the third step manufacturing. Management accountants now strategically
manage the product’s full life cycle of costs, including upstream and
downstream costs as well as manufacturing costs.
» j. Target Costing sini
Target costing involves the determination of the. sesitad COSt fOFmda,
‘product.or the basis of a given competitive price so that the product will
earn a desired profit. The basic relationship that is observed in this
approach is
Target cost = Market determined price — Desired profit
The entity using target costing must often adopt strict cost-reduction
measures to meet the market price and remain profitable. This is
common strategic approach used by intensely competitive industries
where even small price differences attract consumers to the lower-priced
product.
k, Computer-Aided Design and Manufacturing
More companies are using computer-aided design (CAD) and computer-
aided manufacturing (CAM) to respond to changing consumer tastes
more quickly. These innovations allow companies to significantly somputers, computer psogrammlng-=machinesn Aid. SoMa,
firms add automation gradually, one process at a time. To improve
Management Accounting and the Business Environment _ 67
reduce the time necessary to bring their products from the design process
to the distribution stage.
*
Computer-aided design (CAD) is the wse_of computers in prod
development, analysis, and design modification to improve the qual
and performance of the product. Computer-aided manufacturing
(CAM) is the use of computers to_plan, implement, and_control
production.
—
Automation
Automation involyes_and_requires_a_relaively--large--investment-ine
i Mai
ny
efficiency and effectiveness continuously, firms must integrate people
and equipment into the smoothly operating teams that have become a
vital part of manufacturing strategy. Flexible manufacturing: systems
(FMS) and computer-integrated manufacturing (CIM) are two integration
approaches. . :
A flexible manufacturing system (FMS) is a computerized network.of ..
automated_.