Management Accounting in a Dynamic Environment

© Pearson Education Limited 2008

MANAGEMENT ACCOUNTINGMANAGEMENT ACCOUNTING

Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. MorseCheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse

Management Accounting McWatters, Zimmerman, Morse © Pearson Education Limited 2008

14-2

Management Accounting Management Accounting

in a dynamic environment in a dynamic environment

Chapter 14


14-3

ObjectivesObjectives

• Describe factors in a dynamic environment that influence an organization

• Describe how the organization’s strategy is related to its structure

• Explain the role of management accounting in the organizational structure and in making planning decisions

• Identify major characteristics of total quality management (TQM)

• Use quality costs for making planning decisions and control• Explain the philosophy of just-in-time (JIT) processes and

accounting adjustments for JIT• Identify when management accounting within an organization

should change


14-4

External Forces Affecting the External Forces Affecting the OrganizationOrganization

Organization

Technological Innovation

Global Competition

Customer Preferences


14-5

Organizational Strategy and Organizational Strategy and StructureStructure

Customer value is achieved through:

Innovativeproduct and

service design

Low-cost production

and delivery

High-quality products and

services

When and organization adopts TQM it seeks to continually improve its operations and

customer service


14-6


Customer PreferencesTechnological Change Globalization

Strategy for Customer Value Product/Service Innovation

Quality, Low Cost

Control Decisions Responsibilities Performance Measures Compensation

Planning Decisions Product/Service Design Production and Delivery Customer Services

Organizational Value

Customer Value


14-7


Recent Terminology

Total quality management (TQM)

Continuous improvement Zero defects strategies

Statistical process control (SPC) Re-engineering

Six Sigma

Lean production/manufacturing/practices

Just-in-time manufacturing (JIT)

Toyota Production System (TPS) Kanban

CONWIP (constant work-in-process)


14-8


Increased global competition has forced many organizations to become more cost competitive

Organizations outsource parts and sub-components globally

Changes in government regulations and taxation policies can change market conditions

Organisations such as the World Trade Organization (WTO) the European Union (EU) and North America free trade Agreement

(NAFTA) help organizations compete in a global market


14-9


An organization’sstrengths and

weaknesses depend upon:

Balancesheet assets

Brand names, Patents

and employeesAsset structure

Ability to innovate and

change

Relations with customers and

suppliers


14-10

Three major elements of organizational structure

Assignment of Responsibilities

Performance Measurement

Compensation



14-11

KnowledgeableIndividual

Assignment of Responsibility


Manager

Control

Including Accounting Performance Measures


14-12

Good Performance Measures

• Use accounting-based and non-accounting based measures of performance

• Should be consistent with the assignment of responsibilities



14-13

The reward system consists of compensation and promotions and is based on the performance

measures

Salary and Bonus

Office Space

Company Car


Promotion Dedicated parking space

Health-club membership


14-14

Customer Value and Organizational Customer Value and Organizational ValueValue

Organization Customer

Customer value

Inflow of Funds

To create organizational it must be able to supply customer value at a cost less than or equal to the

inflow of funds


14-15

The Role of Management The Role of Management Accounting and ChangeAccounting and Change

The role of management accounting is to assist in control through the organizational structure

and in making planning decisions by:

Identifying the costs and benefits of different planning decisions

Providing managerial performance measures

Assigning responsibilities


14-16

Total Quality ManagementTotal Quality Managementand Quality Measuresand Quality Measures

Quality has become a major issue in both the profit and not-for-profit sectors

Quality has multiple meanings

Quality is generally defined as meeting customer expectations which include expectations about

time to market, innovation, sustainability and cost


14-17


Total Quality Management (TQM) is the movement toward improved quality and

customer satisfaction

TQM is a management philosophy that includes involved leadership, employee participation,

empowerment, teamwork, customer satisfaction and continuous improvement


14-18


Involved Leadership

Employee Participation

Employee Empowerment

Employee Teamwork

Customer Satisfaction

Continual Improvement TQM

A Management Philosophy


14-19


• Quality is a firm wide process

• Quality is defined by the customer

• Quality requires organizational changes

• Quality is designed into the product


14-20


TQM Quality

Measures

Product Design# of new parts

# of parts

Vendor Rating# of defects

On-time delivery

ManufacturingDefect rates

ScrapRework

Cycle time

Customer Satisfaction

SurveysWarranty expense


14-21

Total Quality ManagementTotal Quality ManagementNumerical ExampleNumerical Example

A farmer of gourmet tomatoes estimates that 10% of the 20,000kg of tomatoes picked

do not meet customer’s satisfaction

After being picked the tomatoes are placed on a conveyer belt for inspection and packaging. The inspection team identifies and removes 80% of the defective tomatoes.

How many defective tomatoes reach the customer

20% of the defective tomatoes are not detected(0.20 x 0.10) = 2% reach the customer

(0.2 x 20,000kg)= 400kg reach the customer


14-22

Total Quality Management and Total Quality Management and Quality MeasuresQuality Measures

Quality Costs

Prevention Costs

Appraisal Costs

Internal Failure Costs

External Failure Costs

Costs incurred to eliminate

defective units before they are

shipped

Costs incurred when a defect is

discovered before being sent to the customer

Costs incurred when a

customer receives a defective product

Costs incurred to eliminate

defective units before they

are produced


14-23

Just-in-Time (JIT) ProcessesJust-in-Time (JIT) Processes

JIT is an operating philosophy that emphasizes providing products on demand


14-24

Warehousing of raw materials, work-in-process, and finished goods inventory

Just-in-Time (JIT) ProcessesJust-in-Time (JIT) ProcessesTraditional systems

JIT system

ProcessOne

ProcessTwo

ProcessThree

ProcessThree

ProcessTwo

ProcessOne

Raw Materials

Raw Materials

Customer

Order

Customer


14-25

Process time+ Time waiting to be moved or worked on+ Time spent in transit+ Inspection time

Throughput time

The goal is to drive waiting, transit, and inspection time to zero because these are non-value-added time

JIT seeks to minimize the throughput time, which is the total time from the receipt of the order to the time of delivery to the customer



14-26

Just-in-Time (JIT) ProcessesJust-in-Time (JIT) ProcessesLower capital costs of

holding inventoryPlant and warehouse

space and cost savings

Reduced overhead costs for material movers and expediters

Reduced risk of obsolescence

Faster response to customers

and reduced delivery

times

Benefitsof reducingthroughput

time


14-27

Change performance

measurement and reward systems

Balance flow rates

Reducesetup times Plant

layout

Increase quality

To reduce throughput time, changes must be made in several

areas



14-28

Just-in-Time (JIT) Processes Just-in-Time (JIT) Processes Numerical ExampleNumerical Example

This will lower its costs of holding work-in-process inventory. The average value of work-in-process inventory is £500,000 and the capital cost of holing inventory is 12% per

year. What is the impact on holding costs if the JIT throughput time is as anticipated

Annual cost of holding inventory £500,000 x 0.12 = £60,000Holding cost under JIT £500,000 x 0.12 x 0.60 = £36,000

The annual cost decreases by 40% (£24,000)

Macve Motors is adopting a JIT system. The current throughput time is 10 days. With a JIT system the

throughput time should fall to 6 days


14-29

Areas that are impacted by JIT

include

Greater customersatisfaction

Materials requirement planning (MRP)

Fewer suppliers

Lower productcost

Automation allows for less setup

time

Reduced WIPaccounting

Internet B2Btransactions

(EDI)

Differentperformance

measures


Changes to organizational

strategySimpler accounting

Changes to role of management

accounting


14-30

When Should Management When Should Management Accounting Be Changed?Accounting Be Changed?

• A single, ideal management accounting system that is optimum for all organizations does not exist

• Each organization has different circumstances that lead to different management accounting systems

• Organizations are in a continual state of flux thus management accounting must continually adapt


14-31


Warning signs that the management accounting system is not working well and needs to be

changed• Dysfunctional behaviour on the part of managers

due to inappropriate performance measures• Poor planning decisions• Inability to win bids to provide goods that are the

company’s speciality


14-32


Each organization must continually evaluate and improve the management

accounting system to meet the challenges of a dynamic environment

and an adaptive organization


14-33

Management Accounting Management Accounting

in a Dynamic Environment in a Dynamic Environment

End of Chapter 14

Documents

Management Accounting in a Dynamic Environment