LTF
Chapter Fourteen
Management Accounting in a Changing Environment
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Connection to Other Chapters
- Chapter 14 summarizes the concepts developed in the previous chapters and applies them to recent internal accounting system innovations.
- Every chapter mentions the trade-offs between decision management (decision making) and decision control.
- Internal accounting systems continue to evolve in response to changing needs and environments.
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History of Management Accounting
- As firms evolve, internal accounting systems evolve.
- Early 1800s: Multi-process textile mills develop absorption costing.
- 1850 - 1910: Multi-location firms create cost controls.
- 1915 - 1925: Large corporations decentralize in operating divisions.
- 1925 - 1975: External reporting dictates internal accounting design.
- Recent: Automation induces redesign of product costing.
- Recent: TQM requires more non-financial measures
- Recent: JIT producers want to identify non-value-adding activities.
- Recent: The Balanced Scorecard links strategy to key performance indicators to help determine if the organization is moving in the right direction.
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Organizational Architecture
- See Figure 14-1.
- Decision rights partitioning
- Separating decision management and control
- Performance evaluation system
- Management accounting system
- Nonfinancial measures
- Performance reward and punishment system
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6 Sigma and Lean Production
- Six Sigma
- Extension of TQM
- Structured approach
- Project teams
- Lean Manufacturing
- Extension of JIT
- Eliminate all non-value activities from value chain
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Business Strategy
- Asset structure influences performance measurement.
- Some firms can use historical financial accounting.
- Publicly-traded firms may use stock market value.
- Customer base influences distribution of specialized knowledge.
- May decentralize into many responsibility centers
- Knowledge creation influences partitioning of decision rights.
- If knowledge is easy to acquire, more centralization is possible.
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Environmental and Competitive Forces
- Technological change
- Changes relative value of investment projects
- Changes performance measures and controls
- Global market conditions change
- Production sources dispersed internationally
- Competitors from other countries
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Quality’s Multiple Meanings
- Different meanings of quality can conflict.
- High mean
- Low variance
- Larger number of options
- Meeting customer expectations
- Partitioning decision rights
- Who determines quality goals?
- Who measures quality?
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TQM Program Elements
- A firmwide process
- communicate up, down, and laterally
- Quality is defined by customer
- specialized knowledge of customer needs
- Requires organizational changes
- push decision rights down to operating and marketing
- Designed into the product
- Reduce defects by redesigning production
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ISO 9000
- Issued by International Standards Organization, a European community body that sets quality standards.
- Requires written policies, procedures, and quality methods.
- Certifies that policies exist that allow quality products to be manufactured.
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TQM Quality Costs
- Benefits
- Reduce internal failures (before sold)
- Reduce external failures (after sold)
- Costs
- Prevention (reengineering and training)
- Appraisal (inspection and testing before delivery)
- Find optimal balance between benefits and costs.
- See Self-Study Problem 1.
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JIT Goals
- Just-in-time (JIT) production:
- Production does not start until order is received.
- JIT aims to minimize throughput time.
- Throughput time = Processing time + Non-value-added time
- Non-value-added time = Waiting + Transit + Inspection
- Manufacturing cycle efficiency (MCE) (not mentioned in textbook)
- MCE = (Processing time) = (Throughput time)
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JIT Techniques
- Increase quality of material and processes
- Reduce setup times
- Balance flow rates across manufacturing cells
- Coordinate deliveries from suppliers
- Improve factory layout to reduce transit time
- Change performance measurement and reward system to focus on reducing throughput time of entire production process rather than individual departments
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JIT Limitations
- Advantages:
- Simpler because no work-in-process accounting
- Focus attention on throughput time
- Disadvantages:
- Become dependent on suppliers for on-time delivery
- Still need periodic physical count of materials inventory
- Reorganizing production can be expensive.
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Balanced Scorecard
- Translates the strategy into a plan of action
- Identifies specific objectives and performance drivers (key performance indicators)
- Helps determine if the organization is moving in the right direction
- Attempts to achieve a balance between:
- short and long-term objectives
- outcome and performance measures for cause and effect objectives
- financial and non-financial performance measures
- all of the stakeholders of the organization
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Balanced Scorecard
- For each objective there are:
- Driver performance indicators
- Measure input activities to achieve the objective
- Outcome performance indicators
- Measure if the objective has been realized
- Driver and outcome performance indicators reflect the cause and effect nature of the balanced scorecard.
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The Balanced Scorecard’s Four Perspectives
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Innovation and Learning
Perspective
Customer
Perspective
STRATEGY
Financial
Perspective
Internal Business
Processes
Perspective
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What Makes the Balance Scorecard a Success or a Failure?
- Example 1: Philips Electronics (a success)
- Example 2: The U. S. retail banking operations of a leading international financial services provider
(a failure)
- Summarize what is needed to achieve success and avoid failure.
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When Should the Internal Accounting System be Changed?
- Continual evolution (Economic Darwinism)
- No single ideal management accounting system
- Respond to changes in technology and markets
- Trade-offs
- Decision making vs. Decision control
- Opportunity cost vs. Historical cost
- Simplicity vs. Comprehensiveness
- Internal users vs. External users
- Financial measures vs. Nonfinancial measures
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