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

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

3. 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

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

5. 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

6. 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

7. 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

8. 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

9. 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

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

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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. 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

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