Recent Developments in Management Accounting PDF

RECENT DEVELOPMENTS IN MANAGEMENT ACCOUNTING, CONTEMPORARY ISSUES AND THE IMPACT OF TECHNOLOGY ON MANAGEMENT ACCOUNTING 1 Lecture Outline: The scope of MA The gap between theory and practice MA change The impact of technology on MA Modern production syste...

RECENT DEVELOPMENTS IN MANAGEMENT ACCOUNTING, CONTEMPORARY ISSUES AND THE IMPACT OF TECHNOLOGY ON MANAGEMENT ACCOUNTING 1 Lecture Outline: The scope of MA The gap between theory and practice MA change The impact of technology on MA Modern production system Inventory management ABM, TQM, and value change analysis 2  Reasons for Carrying Inventory 1. To balance ordering or setup costs and carrying costs 2. Demand uncertainty 3. Machine failure 4. Defective parts 5. Unavailable parts 6. Late delivery of parts 7. Unreliable production processes 8. To take advantage of discounts 9. To hedge against future price increases 3  Inventory Management Costs related to holding & managing inventories Three types of inventory costs can be readily identified with inventory: (1) The cost of acquiring inventory. (2) The cost of holding inventory. (3) The cost of not having inventory on hand when needed. 4  Inventory Management Economic Order Quantity (EOQ) TC = PD/Q + CQ/2 TC = The total ordering (or setup) and carrying cost P = The cost of placing and receiving an order (or the cost of setting up a production run) Q = The number of units ordered each time an order is placed (or the lot size for production) D = The known annual demand C = The cost of carrying one unit of stock for one year 5 An EOQ Illustration EOQ =  2DP/C D = 25,000 units P = $40 per order Q = 500 units C = $2 per unit EOQ =  (2 x 25,000 x $40) / $2 EOQ =  1,000,000 EOQ = 1,000 units 6  Traditional Production Systems Often described as “push systems.” Keep large inventories on hand Problems: Storage cost Hide quality Bottlenecks and obsolete products Solution: Lean Productions System 7 Lean Production System Philosophy and a business strategy Primary goal is to eliminate waste and cost Focus of JIT: Purchase raw materials just in time for production Finish goods just in time for delivery 8 Drawbacks to Lean Production System Vulnerable when problems strike suppliers or distributors Examples Delays in delivery Personnel problems – union strikes Shortage of parts due to recalled products Weather related issues 9 Just-in Time (JIT) Common characteristics Production occurs in self-contained cells Broad employee roles Small batches produced just in time – “demand-pull system” Shortened setup times Shortened manufacturing cycle times Emphasis on quality Supply-chain management 10  Just-in Time (JIT) Receive customer Complete products orders. just in time to ship customers. Schedule production. Receive materials Complete parts just in time for just in time for production. assembly into products. 11 Just-in Time (JIT) Improved Reduced plant layout inventory Zero production Reduced defects Flexible setup time workforce JIT purchasing Fewer, but more ultra reliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries. 12 Benefits of Just-in Time (JIT) System Reduced Freed-up funds inventory costs Higher quality Greater customer products satisfaction Increased More rapid response throughput to customer orders 13 Accounting System Changes in Response to JIT For control purposes, performance measures should coincide with the goals of JIT Reducing throughput time is a primary performance measurement for JIT organisation. Team effort is important in JIT environments, so performance measures should reflect cooperative goals. 14 Accounting System Changes in Response to JIT Significantly reduced the number of accounting transactions. There is less need to worry about valuing partially completed products (WIP). 15 Material Requirements Planning (MRP) The oldest manufacturing control system. MRP – is an operation management tool that uses a computer to help manage materials & inventories. Components: Bills of materials (BOM) Master production schedule (MPS) Material requirement planning system (MRPS) Nowadays MRP/MRPII is embedded in ERP. 16 Material Requirements Planning (MRP) Objectives of MRP: To ensure – right materials, in right quantities and at right time are on hand Strength of MRP – ability to determine precisely the feasibility of a schedule within capacity constraints 17 Master Production Schedule (MPS) MPS: Specifies what is to be made and when Must be in accordance with a production plan (sets the overall level of output in broad terms) Tells what is required to satisfy demand and meet the production plan 18 Management Accounting Changes / Innovations Activity-based management Just in Time Total Quality Management 19 Activity-Based Management (ABM) ABM focuses on the activities incurred during the production or performance process => improved the value received by a customer & profit. ABM focuses on accountability for activities rather than costs & emphasis the maximization of system-wide performance instead of individual performance => global approach to control. In ABM – both financial & non-financial measures of performance are important 20 Activity-Based Management (ABM) - Concept Activity analysis Continuous Cost driver analysis improvement Activity-based Operational control costing Performance evaluation Business process reengineering 21 Activity-Based Management (ABM) Activity analysis – primary component of ABM. Activity analysis => process of studying the activities Activity => repetitive action performed in fulfillment of business functions Activity : Value-added (VA) Non-value-added (NVA) 22 Activity-Based Management (ABM) VA – increases significantly the value of the product/services to the customers. VA are those: Necessary or required to meet customer requirements or expectations; That enhance purchased materials of a product; That are critical steps and cannot be eliminated in a business process; That are performed to resolve or eliminate quality problems. 23 Activity-Based Management (ABM) NVA – consumes time, resources, or space, but adds little in satisfying customer needs. If eliminated, customer value or satisfaction remains unchanged. NVA are those that: Can be eliminated without affecting the form, fit, or function of the product/service; Begin with prefix “re” (such as rework or returned goods); Result in waste and add little or no value to the product/service; Are performed due to a request of an unhappy or dissatisfied customers; If given the option, you would prefer to do less of. 24 Activity-Based Management (ABM) VA NVA Designing products X Setting up X Waiting X Moving X Processing X Reworking X Repairing X Storing X Inspecting X Delivering product X 25  Activity-Based Management (ABM) ABC/ABM helps manager understand the relationship between the firm’s strategy & the activities & resources needed to put strategy into place. Cost leadership (business strategy) => ABC/ABM is critical to this strategy. Identify value-enhancement opportunities Develop customer strategy Support a technology leadership strategy Establish a pricing strategy 26 Total Quality Management (TQM) TQM => All business functions are involved in a process of continuous quality improvement Goals of TQM => Customer satisfaction TQM minimizes costs by maximizing quality. TQM focuses on continuous improvement and satisfying customers. 27  Total Quality Management (TQM) Key success factors Continuous Cost, quality, improvement innovation Customer satisfaction Total value Employee chain analysis empowerment Top priority 28 Four Types of Quality Costs 1. Prevention costs – avoid poor quality goods or services Employee training Improved materials Preventive maintenance 2. Appraisal costs – detect poor quality goods or services Inspection throughout production Inspection of the final product Product testing 29 Four Types of Quality Costs 3. Internal failure costs – avoid poor quality goods or services before delivery to customers Production loss caused by downtime Rejected product units 4. External failure costs – incurred after defective product is delivered Lost profits from lost customers Warranty costs Service costs at customer sites Sales returns due to quality problems 30