 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University Management Accounting and Control Systems: Assessing Performance over the Value Chain Chapter 7

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-2 Management Accounting and Control System Generates and uses information to help decision makers assess whether an organization is achieving its objectives A cost management system is one of the central performance measurement systems at the core of a larger entity known as a management accounting and control system

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-3 “Control” In Management Accounting And Control A set of:  Procedures  Tools  Performance measures  Systems Used by organizations to guide and motivate employees to achieve organizational objectives

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-4 In Control A system is in control if it is on the path to achieving its strategic objectives It is deemed out of control otherwise For the process of control to have meaning and credibility, the organization must have the knowledge and ability to correct situations that it identifies as out of control

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-5 Five Stages Of Control (1 of 2) Planning  Developing an organization’s objectives  Choosing activities to accomplish the objectives  Selecting measures to determine how well the objectives were met Execution  Implementing the plan

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-6 Five Stages Of Control (2 of 2) Monitoring  The process of measuring the system’s current level of performance Evaluation  When feedback about the system’s current level of performance is compared to the planned level so that any discrepancies can be identified and corrective action prescribed Correcting  Taking the appropriate actions to return the system to a state of in control

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-7 A Well-Designed MACS Designers of management accounting and control systems (MACS) have both behavioral and technical considerations to meet  Behavioral aspects covered in a later chapter The technical considerations fall into two categories  Relevance of the information generated  Scope of the system

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-8 Characteristics of Relevant Information (1 of 2) Accurate  Inaccurate information is not useful for decision making because it is misleading Timely  Accurate information that is available too late is of no 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

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-9 Relevant Information (2 of 2) Consistent  The language used and the technical methods of producing management accounting information do not conflict within various parts of an organization Flexible  MACS designers must allow employees to use the system’s available information in a flexible manner so they can customize its application for local decisions  If flexibility is not possible, an employee’s motivation to make the best decision may be lessened for the decision at hand, especially if different units engage in different types of activities

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-10 Scope Of The System Must be comprehensive and include all activities across the entire value chain of the organization If the MACS measures and assesses performance in only the actual production process, it ignores the performance of:  Suppliers  Design activities  Postproduction activities associated with products Without a comprehensive set of information, managers can only make limited decisions

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-11 The Value Chain (1 of 2) A sequence of activities that should contribute more to the ultimate value of the product than to its cost All products flow through the value chain:  Begins with research, development, and engineering  Moves through manufacturing  Continues on to customers  Customers may require service and will either consume the product dispose of it after it has served its intended purpose

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-12 The Value Chain (2 of 2) The value chain may be divided into cycles, which correspond to different cost control approaches Research, Development & Engineering Cycle Manufacturing Cycle Post-Sale Service and Disposal Cycle Target Costing & Value Engineering Kaizen Costing Total-Life- Cycle Costing Environmental Costing Benchmarking

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-13 Total-Life-Cycle Costing (1 of 4) Total-life-cycle costing (TLCC) is the name of the process of managing all costs along the value chain TLCC is also known as managing costs “from the cradle to the grave”

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-14 Total-Life-Cycle Costing (2 of 4) A TLCC system provides information for managers to understand and manage costs through a product’s stages of: Distribution Maintenance Service Disposal Design Development Manufacturing Marketing

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-15 Total-Life-Cycle Costing (3 of 4) Deciding how to allocate resources over the life cycle usually is an iterative process  Initially a company may decide to spend more on design to reduce the costs of upstream costs, such as manufacturing, and service-related costs  At a later time, the company may determine how to reduce those initial design costs of new products Opportunity costs play a heightened role in a total-life-cycle cost perspective  It is possible to develop only a limited number of products over a particular time period

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-16 Total-Life-Cycle Costing (4 of 4) Numerous life-cycle concepts have emerged in various functional areas of business A TLCC perspective integrates the concepts so that they can be understood in their entirety From the manufacturer’s perspective, total-life- cycle product costing integrates these functional life-cycle concepts:  Research, development, and engineering  Manufacturing  Post-sale service and disposal

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-17 Research, Development, And Engineering (RD&E) Cycle The RD&E Cycle has three stages: Market research  Emerging customer needs are assessed and ideas are generated for new products Product design  Scientists and engineers develop the technical aspects of products Product development  The company creates features critical to customer satisfaction and designs prototypes, production processes, and any special tooling required

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-18 Cost Control in the RD&E Cycle By some estimates, 80% to 85% of a product’s total life costs are committed by decisions made in the RD&E cycle  Committed costs are those that a company knows it will have to incur at a future date Decisions made in this cycle are critical  An additional dollar spent on activities that occur during this cycle can save at least $8 to $10 on manufacturing and post-manufacturing activities: Design changes Service costs

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-19 Manufacturing Cycle After the RD&E cycle, the company begins the manufacturing cycle  Costs are incurred in the production of the product  This is where product costing traditionally plays its biggest role Usually at this stage there is not as much room for engineering flexibility to influence product costs and product design because they have been set in the previous cycle

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-20 Cost Control in the Manufacturing Cycle Operations management methods help to reduce manufacturing life-cycle product costs  Facilities layout  Just-in-time manufacturing Companies have begun to use management accounting methods such as activity-based cost management to identify and reduce non-value- added activities in an effort to reduce costs in the manufacturing cycle

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-21 Post-sale Service & Disposal Cycle This cycle overlaps the manufacturing cycle The service cycle begins once the first unit of a product is in the hands of the customer Disposal occurs at the end of a product’s life and lasts until the customer retires the final unit of a product The costs for service and disposal are committed in the RD&E stage

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-22 The Service Cycle The service cycle typically consists of three stages:  Rapid growth From the first time the product is shipped to the growth stage of its sales  Transition From the peak of sales to the peak in the service cycle  Maturity From the peak in the service cycle to the time of the last shipment made to a customer

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-23 The Disposal Cycle Disposal occurs at the end of a product’s life and lasts until the customer retires the final unit of a product Disposal costs often include those associated with eliminating any harmful effects associated with the end of a product’s useful life Products whose disposal could involve harmful effects to the environment, such as nuclear waste or toxic chemicals, often incur very high costs

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-24 Life-Cycle Costs The following table illustrates four types of products and the percentage of life-cycle costs incurred in each cycle Combat Jets Commercial Aircraft Nuclear Missiles Computer Software RD&E Manufacturing Service & Disposal Average Years in Life Cycle 21% 45% 34% 30 20% 40% 25 20% 60% 20% 2 to 25 75%* * 25% 5 * For computer software, RD&E and manufacturing are often tied directly together

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-25 Target Costing A method of profit planning and cost management that focuses on products with discrete manufacturing processes Its goal is to design costs out of products in the RD&E stage of a product’s total life cycle  Rather than trying to reduce costs during the manufacturing stage It is a relevant example of:  How a well-designed MACS can be used for strategic purposes  How critical it is for organizations to have a system in place that considers performance measurement across the entire value chain

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-26 The Traditional Method Begins with market research into customer requirements followed by product specification Companies engage in product design and engineering and obtain prices from suppliers  Product cost is not a significant factor in product design at this stage After the engineers and designers have determined product design, they estimate cost  Product designers do not attempt to achieve a particular cost target  If the estimated cost is considered to be too high, then it may be necessary to modify the product design

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-27 The Target Costing Method (1 of 5) Both the sequence of steps and the way of thinking about determining product costs differ significantly from traditional costing Although the initial steps appear similar to traditional costing, there are some notable differences: First, marketing research under target costing is not a single event as it often is with the traditional approach  While customer input is obtained early in the marketing research process, it is also collected continually throughout the target costing process

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-28 The Target Costing Method (2 of 5) Second, much more time is spent at the product specification and design stage  To minimize design changes during the manufacturing process when it is far more expensive to implement Third, the total-life-cycle concept is used by making it a key goal to minimize the cost of ownership of a product over its useful life  Not only are costs such as the initial purchase price considered, but also the costs of operating, maintaining, and disposing of the product

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-29 The Target Costing Method (3 of 5) After these initial steps, the target costing process becomes even more distinctive Determining a target selling price and target product volume depends on the company’s perceived value of the product to the customer The target profit margin results from a long-run profit analysis, often based on return on sales  Return on sales is the most widely used measure because it can be linked most closely to profitability for each product The target cost is the difference between the target selling price and the target profit margin

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-30 The Target Costing Method (4 of 5) Once the target cost has been set, the company must determine target costs for each component The value engineering process includes examination of each component of a product to determine whether it is possible to reduce costs while maintaining functionality and performance  In some cases, product design may change, materials used in production may need replacing, or manufacturing processes may require redesign Several iterations usually are needed before it is possible to determine the final target cost

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-31 The Target Costing Method (5 of 5) Two other differences characterize the process First, cross-functional teams made up of individuals representing the entire value chain guide the process throughout  From both inside and outside the organization A second difference is that suppliers play a critical role in making target costing work  If there is a need to reduce the cost of specific components, firms will ask their suppliers to find ways to reduce costs

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-32 Supply Chain Management Develops cooperative, mutually beneficial, long- term relationships between buyers and suppliers As trust develops between buyer and supplier, decisions about how to resolve cost reduction problems can be made with shared information about each other’s operations  The buyer may expend resources to train the supplier’s employees in some aspect of the business  A supplier may assign one of its employees to work with the buyer to understand a new product

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-33 Concerns About Target Costing Some studies of target costing in Japan indicate that there are potential problems in implementing the system  Especially if focusing on meeting the target cost diverts attention away from the other elements of overall company goals Companies may find it possible to manage many of these factors Organizations interested in using the target costing process should be aware of them before attempting to adopt it

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-34 Examples of Problems (1 of 2) Conflicts can arise between various parties involved in the target costing process  Excessive pressure on subcontractors and suppliers to conform to a schedule and reduce costs can lead to alienation and/or failure of the subcontractor  Design engineers may become upset when other parts of the organization are not cost conscious They argue that they exert much effort to squeeze pennies out of the cost of a product while other parts of the organization (administration, marketing, distribution) are wasting dollars

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-35 Examples of Problems (2 of 2) Employees in many Japanese companies working under target costing goals experience burnout due to the pressure to meet the target cost  Burnout is particularly evident in design engineers Development time may increase because of repeated value engineering cycles to reduce costs  May lead to the product coming late to market  For some types of products, being six months late may be far more costly than having small cost overruns

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-36 Kaizen Costing (1 of 2) Similar to target costing in its cost- reduction mission However, it focuses on reducing costs during the manufacturing stage of the total life cycle of a product Kaizen is the Japanese term for making improvements to a process through small, incremental amounts rather than through large innovations

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-37 Kaizen Costing (2 of 2) Kaizen costing’s goal is to ensure that actual production costs are less than the prior year cost Kaizen’s goals are reasonable  The product is already in the manufacturing process, thus it is difficult and costly to make large changes to reduce costs It is tied to the profit-planning system If the cost of disruptions to production are greater than the savings due to kaizen costing, then it will not be applied

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-38 Example From Auto Plant (1 of 2) An annual budgeted profit target is allocated to each plant Each automobile has a predetermined cost base, which is equal to the actual cost of that automobile in the previous year All cost reductions use this cost base as their starting point The targeted cost reduction is the amount the cost base must be reduced to reach the profit target

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-39 Example From Auto Plant (2 of 2) The target reduction rate is the ratio of the target reduction amount to the cost base This rate is applied over time to all variable costs  Results in specific target reduction amounts for materials, parts, direct and indirect labor, and other variable costs Then management makes comparisons of actual reduction amounts across all variable costs to the pre-established targeted reduction amounts If differences exist, variances for the plant are determined

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-40 Concerns About Kaizen Costing The system places enormous pressure on employees to reduce every conceivable cost  Some Japanese automobile companies use a grace period just before a new model is introduced  This cost-sustainment period provides employees with the opportunity to learn any new procedures before the company imposes kaizen targets on them Kaizen costing leads to incremental rather than radical process improvements  This can cause myopia as management tends to focus on the details rather than the overall system

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-41 Environmental Costing Environmental remediation, compliance, and management have become critical aspects of many businesses All parts of the value chain, and their costs, are affected by environmental issues Environmental costing involves:  Selecting suppliers whose philosophy and practice in dealing with the environment matches the buyer’s  Disposing of waste products during the production process  Addressing post-sale service and disposal issues These issues are being incorporated into cost management systems and overall MACS design

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-42 Controlling Environmental Costs Only when managers and employees become aware of how the activities in which they engage create environmental costs will they be able to control and reduce them  The activities that cause environmental costs have to be identified  The costs associated with the activities have to be determined  These costs must be assigned to the most appropriate products, distribution channels, and customers

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-43 Types of Environmental Costs Environmental costs fall into two categories:  Explicit costs The direct costs of modifying technology and processes, costs of cleanup and disposal, costs of permits to operate a facility, fines levied by government agencies, and litigation fees  Implicit costs More closely tied to the infrastructure required to monitor environmental issues These costs are usually administration and legal counsel, employee education and awareness, and the loss of goodwill if environmental disasters occur

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-44 Benchmarking A way for organizations to gather information regarding the best practices of others Often highly cost effective, by:  Avoiding the mistakes that other companies have made  Not reinventing a process or method that others have already developed and tested Selecting appropriate benchmarking partners is a critical aspect of the process The process typically consists of five stages

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-45 Stage 1 Internal study and preliminary competitive analyses  The organization decides which key areas to benchmark for study  Then the company determines how it currently performs on these dimensions by initiating Preliminary internal competitive analysis Preliminary external competitive analyses  Both types of analyses will determine the scope and significance of the study for each area These analyses are not limited to companies in a single industry

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-46 Stage 2 (1 of 2) Developing long-term commitment to the benchmarking project and coalescing the benchmarking team  Because significant organizational change can take several years, the level of commitment to benchmarking has to be long term rather than short term  Long-term commitment requires Obtaining the support of senior management to give the benchmarking team the authority to spearhead the changes Developing a clear set of objectives to guide the benchmarking effort Empowering employees to make change

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-47 Stage 2 (2 of 2) The benchmarking team should include individuals from all functional areas in the organization An experienced coordinator is usually necessary to organize the team and develop training in benchmarking methods Lack of training often will lead to the failure of the implementation

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-48 Stage 3 (1 of 3) Identifying benchmarking partners—willing participants who know the process Some critical factors are as follows:  Size of the partners Will depend on the specific activity or method being benchmarked For example, if an organization wants to understand how a huge organization with several divisions coordinates its suppliers, then it would probably seek an organization of similar size Size is not always an important factor

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-49 Stage 3 (2 of 3)  Number of partners Useful for an organization to consider a wide array of benchmarking partners Must be aware that as the number of partners increases, so do issues of coordination, timeliness, and concern over proprietary information disclosure Researchers argue that today’s changing business environment is likely to encourage firms to have a larger number of participants »Increased competition and technological progress in information processing increases benchmarking benefits relative to costs

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-50 Stage 3 (3 of 3)  Relative position of the partners within and across industries Newcomers and those whose performance has declined are more likely to seek a wider variety of benchmarking partners than those who are established industry leaders Those who are industry leaders may benchmark because of their commitment to continuous improvement  Degree of trust among partners Developing trust among partners is critical to obtaining truthful and timely information Most organizations operate on a quid pro quo basis, with the understanding that both organizations will obtain information they can use

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-51 Stage 4 Information gathering and sharing methods Two related dimensions emerge from the literature:  Type of information that benchmarking organizations collect There are three broad classes of information on which firms interested in benchmarking can focus: product, functional (process), and strategic benchmarking  Methods of information collection There are two major methods of information collection for benchmarking, unilateral and cooperative

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-52 Stage 5 Taking action to meet or exceed the benchmark  The organization takes action and begins to change  After implementing the change, the organization makes comparisons to the specific performance measures selected  The decision may be to perform better than the benchmark to be more competitive  The implementation stage is perhaps the most difficult stage of the benchmarking process, as the buy-in of members is critical for success

 2003 Prentice Hall Business Publishing, PowerPoint supplement to Management Accounting, 4rd ed., Atkinson, Kaplan, and Young, prepared by Terry M. Lease, Ph.D., CPA, Sonoma State University 7-53 If you have any comments or suggestions concerning this PowerPoint presentation, please contact: Terry M. Lease Sonoma State University