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Chapter 2: Management Accounting and The Business Environment of noncompeting firms that exchange benchmarking information
5. Mass Customization
Changes: Is a management technique in which marketing and production
1. Increase in global competition processes are designed to handle the increased variety that results
2. Advances in manufacturing technologies from delivering customized products and services to customers.
3. Advances in information technologies, the internet, and e-commerce Growth of mass customization is in effect another indication of the
4. A greater focus on customer increase attention given to satisfying the customer.
5. New forms of management organization 6. Balance Scorecard
6. Changes in the social, political and cultural environment of business An accounting report that includes the firms critical success factors in
4 areas:
NOTE! o Financial performance
Corporate executives are now using cost data to chart successful futures for o Customer satisfaction
their companies. o Internal business process
In todays automated environment management accountants use their o Innovation and learning
management control system to support and reinforce manufacturing and 7. Activity-based Costing and Management
other operating strategies. Activity Analysis is used to develop a detailed description of the
specific activities performed in the operation of the firm.
CONTEMPORARY MANAGEMENT TECHNIQUES o Provides the basis for activity-based costing and activity-
1. Just-In-Time (JIT) based management.
The philosophy that activities are undertaken only as needed or Activity-based Costing (ABC) is used to improve the accuracy of
demanded. cost analysis by improving the tracing of costs to products or to
A production system also known as pull-it-through approach individual customers.
Materials are purchased and units are produced only as needed to Activity-based Management (ABM) uses activity analysis to
meet actual customer demand. improve operational control and management control.
In JIT system, inventories are reduced to the minimum and in some ABC and ABM are key strategic tools for many firms, especially
cases, zero. those with complex operations, or great diversity of products.
4 Characteristics of JIT 8. Theory of Constraints (TOC)
1. Elimination of all activities that do not add value to the product A sequential process of identifying and removing constraints in a
or service system.
2. Commitment to a high level of quality Emphasizes the importance of managing the organizations
3. Commitment to continuous improvement in the efficiency of an constraints or barriers that hinder or impede progress toward an
activity objective.
4. Emphasis on simplification and increase visibility to identify Basis Sequential Steps in Applying TOC
activities that do not add value. a. Analyze all the factors of production required in the production
Main Benefits of JIT chain.
1. Working capital position is improved by recovery of funds that b. Identify the weakest link, which is the constraint
were tied up in inventories c. Focus improvement efforts on strengthening the weakest link
2. Throughput time is reduced, resulting in greater potential d. If improvement efforts are successful, eventually the weakest
production and quicker response to customers link will improve to the point where it is no longer the weakest
3. Areas previously used to store inventories are released and are link.
made available for other more productive uses. e. At this point, a new weakest link must be identified and
4. Lesser waste and more customer satisfaction are achieved improvement efforts must be shifted over that link.
because of reduction in defect rates. It is a perfect complement to TQM and Process reengineering
2. Total Quality Management (TQM) It focuses improvements efforts where they are likely to be most
Instituted by many companies to ensure that their products are of the effective.
highest quality and that production processes are efficient. 9. Life Cycle Costing
A technique in which management develops policies and practices to a management technique to identify and monitor the costs of a product
ensure that the firms products and services exceed customers throughout its lifecycle.
expectations. Consists of all steps from product design and purchase of raw material
Currently, there is no generally agreed upon perfect way to institute to delivery of and service of the finished product.
TQM program. Steps
o listening to the needs of customers a. Research and development
o making products right the first time b. Product design, including prototyping, target costing and testing
o reducing defective products that must be reworked c. Manufacturing, inspecting, packaging and warehousing
o encouraging workers to continuously improve their d. Marketing, promotion and distribution
production process. e. Sales and service
Some TQM programs are referred as Continuous Quality Management accountants now strategically manage the products full
Improvement Programs. life cycle of costs, including upstream and downstream costs as well
It affects product costing by reducing the need to track the cost of as manufacturing costs.
scrap and rework related to each job. 10. Target Costing
It is a formal effort to improve quality throughput an organizations Involves the determination of the designed cost for a product or the
value chain. basis of a given competitive price so that the product will earn a
2 Major Characteristics of TQM desired profit.
o Focus on serving customers The basic relationship that is observed in this approach is
o Systematic problem-solving using teams made up of Target Cost = Market determined Price - desired profit
front-line workers Entity using this must often adopt strict cost-reduction measures to
meet the market price and remain profitable.
3. Process Reengineering Common strategic approach used by intensely competitive industries
Reengineering is a process for creating competitive advantage in where even small price differences attract consumers to the lower-
which a firm recognized its operating and management functions, priced product.
often with the result that jobs are modified, combined, or eliminated. 11. Computer-Aided Design and Manufacturing
o Defined as the fundamental rethinking and radical Many companies used this to respond to changing consumer tastes
redesign of business processes to achieve dramatic more quickly.
improvements in critical, contemporary measures of These innovations allow companies to significantly reduce the time
performance, such as cost, quality service and speed. necessary to bring their products from the design process to the
Process Reengineering, a more radical approach to improvement distribution stage.
than TQM. CAD is the use of computers in product development, analysis, and
o An approach where a business process is diagrammed in design modification to improve the quality and performance of the
detail, questioned and then completely redesigned in product.
order to eliminate unnecessary steps, to reduce CAM is the use of computers to plan, implement, and control
opportunities for errors and to reduce costs. production.
o Employee Resistance is one basic recurrent problem 12. Automation
Business Process is any series steps that are followed in order to carry Involves and requires a relatively large investment in computers,
out some task in a business. computer programming, machines and equipment.
Main Objective: simplification and elimination of wasted effort and 2 Integrated Approaches
the central idea is that all activities that do not ass value to product or a. Flexible Manufacturing System (FMS)
service should be eliminated. i. A computerized network of automated equipment
Steps Used in Process Reengineering that produces one or more groups of parts or
o A business process is diagrammed in detail variations of a product in a flexible manner.
o Every step in the business process must be analyzed and ii. It uses robots and computer-controlled materials-
justified handling system to link several stand-alone,
o The process is redesigned to include only those steps that computer-controlled machines in switching from
the product or service more valuable one production run to another.
This process can yield the following anticipated results: b. Computer Integrated Manufacturing (CIM)
o Process is simplified i. Is a manufacturing system that totally integrates all
o Process is completed in less time office and factory functions within a company via
o Costs are reduce a computer-based information network to allow
o Opportunities for errors are reduced hour-by-hour manufacturing management.
4. Benchmarking Major Characteristics of Modern manufacturing companies
A process by which a firm: adopting FMS and CIM
o Determines its critical success factors o Production of high-quality products and services
o Studies the best practices of other firms for achieving o Low inventories
these critical success factors o High degrees of automation
o Then implements improvements in the firms processes o Quick cycle time
to match or beat the performance of those competitors. o Increased flexibility and
o Advanced information technology
13. E-Commerce Continuous Improvement and Competitive Strategy
14. The Value Chain o Continuous Improvements is the constant effort to eliminate
An analysis tool that firms use to identify the specific steps required to waste, reduce response time, simplify the design of both
provide a product or service to the customer. products and processes, and improve quality and customer
Key Idea: firm studies each step in its operation to determine how service.
each activity contributes to the firms competitiveness and profits. Managerial accountants contribute to this program.
Analyzing the firms value chain helps management discover: o Competitive Strategy involves determination and
o Which steps or activities are not competitive implementation of a set of policies, procedures and approaches
o Where costs can be reduced to business that produces long-term success.
o Which activity should be outsourced
o How to increase value for the customer as one or more of
the steps of the value chain
If properly implemented, it can:
o Enhance quality
o Reduce cost
o Increase output
o Eliminate delays in responding to customers