Chapter 2

Management accounting and the Business environment

Expanding role of management accounting

The business environment in recent years has been characterized by increasing

competition and relentless drive for continuous improvement. These changes
include:

1. An increase in global competition

2. Advances in manufacturing technologies
3. Advances in information technologies, the internet, and e-commerce
4. A greater focus on the customer
5. New forms of management organization; and
6. Changes in social, political, and cultural environment of business

While many of the major programs or approaches also referred to as contemporary

management techniques:

1. Just-in-Time (JIT)
Is the philosophy that activities are undertaken only as needed or
demanded. JIT is a production system also known as pull-it-through approach,
in which materials are purchased and units are produced only as needed to
meet actual customer demand. In JIT system, inventories are reduced to
minimum and in some cases, zero.

Four Characteristics:

1. Elimination of all activities that do not add value to the product or service
2. Commitment to high level of quality
3. Commitment to continuous improvement in the efficiency of activity
4. Emphasis on simplifications and increased visibility to identify activities that
do not add value

Main benefits:

1. Working capital position is improved by recovery of funds that were tied up in

inventories.
2. Through put time is reduced, resulting in greater potential production and
quicker response to customers.
3. Areas previously used to store inventories are released and are made
available for other more productive uses.
4. Lesser waste and more customer satisfaction are achieved because of
reduction in defect rates.

2. Total Quality management (TQM)

 To survive in an increasingly competitive environment, firms realize
that they must produce high- quality products. As a result an
increasing number of companies have instituted TQM programs to
ensure that their products are to highest quality and that production
processes are efficient.

TQM is a technique in which management develops policies and

practices to ensure that the firms products and services exceed
customers expectations.
TQM affects product costing by reducing the need to track the
cost of scrap and rework related to each job. If TQM is able to reduce
these costs to a very low level, the benefit of tracking the costs is
unlikely to exceed the cost to the accounting system.
TQM is a formal effort improves quality throughout an
organizations value chain. The two major characteristics of TQM are:
1. A focus on serving customers, and
2. Systematic problem- solving using teams made up of frontline
workers.

3. Process Reengineering

Is a process for creating competitive advantage in which a firm

reorganizes its operating and management functions, often with
the result that jobs are modified, combined or eliminated. It has
been defined fundamental rethinking and radical redesign of
business processes to achieve dramatic improvements in
critical, contemporary measures of performance, such as cost,
quality, service, and speed.
Main objective of this approach is the simplification and
elimination of wasted effort and the central idea is that all
activities that do not add value to product or service should be
eliminated. In its most simplified version, the steps used in
process reengineering are
1. A business process is diagrammed in detail.
2. Every step in the business process must be analyzed and
justified.
3. The process is redesigned to include only those steps that
make the product or service more valuable.

This process can yield the following anticipated results:

1. Process is simplified
2. Process is completed in less time
3. Costs are reduced
4. Opportunities for errors are reduced
Problem: employee resistance.

5. Benchmarking is a process by which a firm

-determines its critical success factors
- studies the best practices of others firms 9 or other units within a firm) for
achieving these critical success factors, and
- The implements improvements in the firms processes to match or beat the
performance of those competitors
-facilitated by cooperative networks of noncompeting firms that exchange
benchmarking information.

5. Mass Customization

Is a management technique in which marketing and production processes are

designed to designed to handle the increased variety that results from delivering
customized products and services to customers.

The growth of mass customization is an effect another indication of the

increased attention given to satisfying the customer.

6. Balanced Scorecard

Is an accounting report that includes the firms critical success factors

in four (4) areas

a. Financial performance
b. Customer satisfaction
c. Internal business process
d. Innovation and learning

It captions the intent of broad coverage, financial and nonfinancial of all the
factors that contribute to the success of the firm in achieving its strategic
goals. The use of the balanced scorecard is thus a critical ingredient of the
overall approach that firms take to become and remain competitive.

7. Activity-based Costing and Management (ABM)

Activity analysis- is used to develop a detailed description of the
specific activities performed in the operation of the firm.
Activity- based Costing (ABC) - is used to improve the accuracy of cost
analysis by improving the tracing of costs to products or to individual
customers.
ABM- uses activity analysis to improve operational control and
management control.
ABC and ABM are key strategic tools for many firms, especially
those with complex operations, or great diversity of products.
8. Theory Of constraints (TOC)
Is sequential process of identifying and removing constraints in a
system. It emphasizes the importance of managing the organizations
 constraints or barriers that hinder or impede progress toward an
objective.

Basic sequential steps followed in applying TOC:

1. Analyzing all the factors of production (Materials, labor, facilities,
methods, etc.) required in the production chain.
2. Identify the weakest link, which is the constraint.
3. Focus the improvement efforts on strengthening the weakest link.
4. If improvement efforts are successful, eventually the weakest link
will improve to the point where it is no longer the weakest link.
5. At this point, a new weakest link (new constraint) must be identified
and improvement efforts must be shifted over that link.

It is a perfect complement to TQM and Process Reengineering it

focuses improvement efforts where they are likely to be most
effective.
9. Life Cycle Costing
Is a management technique to identify and monitor the costs of a
product throughout its cycle. It consists of all steps from product
design and purchase of raw material to delivery of and service of the
finished product. Steps:
1. Research and development
2. Product design, including prototyping, target costing and testing
3. Manufacturing, inspecting, packaging and warehousing
4. Marketing, promotion and distribution
10.Target Costing

Involves the determination of the desired cost for a product or

the basis of a given competitive price so that the product will earn a
desired profit.

Target cost= market determined price desired profit

The entity using target costing must often adopt strict cost- reduction
measures to meet the market price and remain profitable. This is a
common strategic approach used by intensely competitive industries
where even small price differences attract consumers to the lower-
priced product.

11.Computer- Aided Design and Manufacturing

More companies are using Computer- Aided Design (CAD) and

Computer- Aided manufacturing (CAM) to respond to changing consumer
tastes more quickly. These innovations allow companies to significantly
reduce the time necessary to bring their products from the design process to
the distribution stage.
 CAD is the use of computers in product development, analysis, and
design modification to improve the quality and performance of the product.

CAM is the use of computers to plan, implement, and control

production.

12.Automation
Involves and requires a relatively large investment in computers,
computer programming, machines and equipment. Many firms add
automation gradually, one process at a time. To improve efficiency and
effectiveness continuously, firms must integrate people and equipment
into the smoothly operating teams that have become a vital part of
manufacturing strategy.

Flexible manufacturing Systems (FMS) and Computer- Integrated

Manufacturing (CIM)
Are two integration approaches
FMS- is a computerized network of automated equipment that
produces one or more groups of parts or variations of a product in a
flexible manner. It uses robots and computer- controlled machines in
switching from one production run to another.

CIM- is manufacturing system that totally integrates all office and

factory functions within a company via a computer- based information
network to allow hour- by- hour manufacturing management.
13.E-Commerce
A number of internet-based companies have emerged and been been
proven successful in last decade. This is adopted by Amazon.com and
eBay has also attracted many investors to pursue the use of internet in
conducting business.
14.The Value Chain
Is an analysis tool that firms use to identify the specific steps required
to provide a product or service to the customer. The key idea of this
concept is that the firm studies each step in its operation to determine
how each activity contributes to the firms competitiveness and profits.

Analyzing the firms value chain helps management discover

- Which steps/ activities are not competitive
- - where costs can be reduced
- Which activity should be outsourced
- How to increase value for the customer at one or more of the steps
of the value chain

These approaches can

A. Enhance quality
B. Reduce cost
 C. Increase output
D. Eliminate delays in responding to customers

THE CHANGING WORLD OF THE MANAGEMENT ACCOUNTANT

Institute of Management Accountants (IMA) recently conducted surveys and

interviews and asked them to look to the coming year and predict major changes
and skills required for professional in management accounting.

Major Findings:

- More Chief executive officers or CEOs and chief operating officers or

COOs will have experience as management accountants.
- Management accountant will serve as internal consultants who
create strategies and recommendations to guide management
decisions.
- Management accountant will be key players in cross- functional
teams.
- Management accountant will be actively involved in initiating and
implementing new technology
- Management accountants will need to adapt to an accelerating rate
of change.

CURRENT FOCUS OF MANAGEMENT ACCOUNTING

Impact on organization Structure

4 themes common to to many companies:

1. Customer focus (or focus on the customer)

Generally, firms chose a strategic position corresponding to one of two
general strategies:
a. Cost leadership
b. Superior product through differentiation
A focus on customer value means that the management accounting
system should produce information about both realization and sacrifice.

2. Value- chain and supply chain analysis

Value chain- sequence of business functions in which usefulness is added to
products or services of a company.

Value- refers to the increase in the usefulness of the product or services and
as a result its value to the customer.

Internal value chain- set of activities required to design, develop, produce,

market and deliver products or services to customers.
 Industrial value chain- is the linked set value-creating activities from basic
raw materials to the disposal of the final product by end-use customers.

2 types of linkages:
1. Internal are relationships among activities that are performed within a
firms portion of the industrial value chain.
2. External linkages- activity relationships between the firm and the firms
suppliers and customers.

3. Key success factors (cost and efficiency, quality, time and innovation)

Cross functional teams

Computer-Integrated Manufacturing

Product life Cycles and Diversity

Time-Based Competition

Global Competition

Competition has become worldwide in many industries over the last

several decades.

CAUSES:

a. Reductions in tariffs, quotas and other barriers to free trade

b. Improvements in global transportation systems and information
technology
c. Increasing sophistication in international markets

Information and Communication technology

Cost management System

4. Continuous improvement and benchmarking

Continuous Improvement- is the constant effort to eliminate waste, reduce
response time, simplify the design of both products and processes, and
improve quality and customer service.

Competitive Strategy- involves determination and implementation of a set of

policies, procedures and approaches to business that produces long-term
success.