MANAGEMENT ACCOUNTING Cheryl S. McWatters, Jerold L. Zimmerman, Dale C. Morse

Management Accounting in a dynamic environment Chapter 14 Management Accounting McWatters, Zimmerman, Morse

Objectives 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 Management Accounting McWatters, Zimmerman, Morse

External Forces Affecting the Organization Technological Innovation Global Competition Organization Customer Preferences Management Accounting McWatters, Zimmerman, Morse

Organizational Strategy and Structure Customer value is achieved through: Innovative product and service design High-quality products and services Low-cost production and delivery When and organization adopts TQM it seeks to continually improve its operations and customer service Management Accounting McWatters, Zimmerman, Morse

Organizational Strategy and Structure Technological Change Customer Preferences 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 Customer Value Organizational Value Management Accounting McWatters, Zimmerman, Morse

Organizational Strategy and Structure Recent Terminology Total quality management (TQM) Continuous improvement Zero defects strategies Statistical process control (SPC) Re-engineering Six Sigma Just-in-time manufacturing (JIT) Toyota Production System (TPS) Kanban CONWIP (constant work-in-process) Lean production/manufacturing/practices Management Accounting McWatters, Zimmerman, Morse

Organizational Strategy and Structure 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 Management Accounting McWatters, Zimmerman, Morse

Organizational Strategy and Structure Ability to innovate and change Relations with customers and suppliers An organization’s strengths and weaknesses depend upon: Brand names, Patents and employees Balance sheet assets Asset structure Management Accounting McWatters, Zimmerman, Morse

Organizational Strategy and Structure Three major elements of organizational structure Assignment of Responsibilities Performance Measurement Compensation Management Accounting McWatters, Zimmerman, Morse

Organizational Strategy and Structure Manager Assignment of Responsibility Knowledgeable Individual Control Including Accounting Performance Measures Management Accounting McWatters, Zimmerman, Morse

Organizational Strategy and Structure Good Performance Measures Use accounting-based and non-accounting based measures of performance Should be consistent with the assignment of responsibilities Management Accounting McWatters, Zimmerman, Morse

Organizational Strategy and Structure The reward system consists of compensation and promotions and is based on the performance measures Promotion Dedicated parking space Company Car Salary and Bonus Office Space Health-club membership Management Accounting McWatters, Zimmerman, Morse

Customer Value and Organizational 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 Management Accounting McWatters, Zimmerman, Morse

The Role of Management Accounting and Change The role of management accounting is to assist in control through the organizational structure and in making planning decisions by: Assigning responsibilities Providing managerial performance measures Identifying the costs and benefits of different planning decisions Management Accounting McWatters, Zimmerman, Morse

Total Quality Management and 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 Management Accounting McWatters, Zimmerman, Morse

Total Quality Management and Quality Measures 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 Management Accounting McWatters, Zimmerman, Morse

Total Quality Management and Quality Measures Involved Leadership Employee Participation Employee Empowerment Employee Teamwork Customer Satisfaction Continual Improvement A Management Philosophy TQM Management Accounting McWatters, Zimmerman, Morse

Total Quality Management and Quality Measures Quality is a firm wide process Quality is defined by the customer Quality requires organizational changes Quality is designed into the product Management Accounting McWatters, Zimmerman, Morse

Total Quality Management and Quality Measures Product Design # of new parts # of parts Vendor Rating # of defects On-time delivery Manufacturing Defect rates Scrap Rework Cycle time Customer Satisfaction Surveys Warranty expense TQM Quality Measures Management Accounting McWatters, Zimmerman, Morse

Total Quality Management Numerical 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 Management Accounting McWatters, Zimmerman, Morse

Total Quality Management and Quality Measures Quality Costs Costs incurred to eliminate defective units before they are produced Costs incurred to eliminate defective units before they are shipped Prevention Costs Appraisal Costs Costs incurred when a customer receives a defective product Costs incurred when a defect is discovered before being sent to the customer Internal Failure Costs External Failure Costs Management Accounting McWatters, Zimmerman, Morse

Just-in-Time (JIT) Processes JIT is an operating philosophy that emphasizes providing products on demand Management Accounting McWatters, Zimmerman, Morse

Just-in-Time (JIT) Processes Traditional systems Warehousing of raw materials, work-in-process, and finished goods inventory Customer Raw Materials Process One Process Two Process Three JIT system Process One Process Two Process Three Raw Materials Customer Order Management Accounting McWatters, Zimmerman, Morse

Just-in-Time (JIT) Processes 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 The goal is to drive waiting, transit, and inspection time to zero because these are non-value-added time Management Accounting McWatters, Zimmerman, Morse

Just-in-Time (JIT) Processes Plant and warehouse space and cost savings Lower capital costs of holding inventory Benefits of reducing throughput time Reduced risk of obsolescence Faster response to customers and reduced delivery times Reduced overhead costs for material movers and expediters Management Accounting McWatters, Zimmerman, Morse

Just-in-Time (JIT) Processes Reduce setup times Plant layout To reduce throughput time, changes must be made in several areas Increase quality Balance flow rates Change performance measurement and reward systems Management Accounting McWatters, Zimmerman, Morse

Just-in-Time (JIT) Processes Numerical Example 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 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 = £60,000 Holding cost under JIT £500,000 x 0.12 x 0.60 = £36,000 The annual cost decreases by 40% (£24,000) Management Accounting McWatters, Zimmerman, Morse

Just-in-Time (JIT) Processes Greater customer satisfaction Reduced WIP accounting Different performance measures Lower product cost Internet B2B transactions (EDI) Areas that are impacted by JIT include Changes to organizational strategy Automation allows for less setup time Fewer suppliers Simpler accounting Changes to role of management accounting Materials requirement planning (MRP) Management Accounting McWatters, Zimmerman, Morse

When Should Management 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 Management Accounting McWatters, Zimmerman, Morse

When Should Management Accounting Be Changed? 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 Management Accounting McWatters, Zimmerman, Morse

When Should Management Accounting Be Changed? Each organization must continually evaluate and improve the management accounting system to meet the challenges of a dynamic environment and an adaptive organization Management Accounting McWatters, Zimmerman, Morse

Management Accounting in a Dynamic Environment End of Chapter 14 Management Accounting McWatters, Zimmerman, Morse