9 -1 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungManagement Accounting and Control Systems for Strategic Purposes: Assessing Performance Over the Entire Value ChainChapter 99 -2 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungLearning Objective 1 Discuss the concept of control.9 -3 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungManagement Accounting and Control SystemsuWhat is a management accounting and control system?uIt is a system that generates and uses information to help decision makers assess whether an organization is achieving its objectives.uA system is in control if it is on the path to achieving its strategic objectives.9 -4 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungManagement Accounting and Control SystemsThe Cycle of ControlPlanMonitorEvaluateExecuteCorrect9 -5 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungManagement Accounting and Control SystemsuPlanning consists of developing an organizations objectives, choosing activities to accomplish the objectives, and selecting measures to determine how well the objectives were met.uExecution is implementing the plan.uMonitoring is the process of measuring the systems current level of performance.9 -6 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungManagement Accounting and Control SystemsuEvaluation occurs when feedback about the systems current level of performance is compared to the planned level. uCorrecting consists of taking the appropriate actions to return the system to an in-control state.9 -7 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungLearning Objective 2Identify the characteristics of well-designed management accounting and control systems (MACS).9 -8 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungCharacteristics of Well-Designed MACSuA well-designed management accounting and control system should include behavioral and technical considerations.uWhat are some behavioral considerations?1Embedding the organizations ethical code of conduct into MACS design9 -9 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungCharacteristics of Well-Designed MACS2Using a mix of short- and long-term qualitative and quantitative performance measures3Empowering employees to be involved in decision making and MACS design4Developing an appropriate incentive system to reward performance9 -10 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungCharacteristics of Well-Designed MACSuWhat are some technical considerations?1Relevance of the information generated2Scope of the system9 -11 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungCharacteristics of Well-Designed MACSuThe relevance of the information is measured by four characteristics: AccurateTimelyFlexibleConsistent9 -12 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungCharacteristics of Well-Designed MACSuThe scope of the system must be comprehensive and include all activities across the entire value chain.research, development, and engineeringmanufacturingcustomers9 -13 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungLearning Objective 3Describe the total-life-cycle costing approach to managing product costs over the value chain.9 -14 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungTotal-Life-Cycle-CostinguWhat is total-life-cycle costing?uIt is the process of managing all costs along the value chain.uA TLCC system provides information for managers to understand and manage costs through a products design, development, manufacturing, marketing, distribution, maintenance, service, and disposal stages.9 -15 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungTotal-Life-Cycle-CostingRD&ECycleManufacturingCyclePost ServiceCycle9 -16 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungTotal-Life-Cycle-CostinguWhat are the three stages of the research, development, and engineering cycle?1Market research2Product design3Product developmentu80% to 85% of a products total life costs are committed by decisions made in the RD&E cycle.9 -17 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungTotal-Life-Cycle-CostinguWhat are committed costs?uThese are costs that a company knows it will have to incur at a future date.uWhat are manufacturing cycle costs?uThese are the costs incurred in the production of the product.uUsually at this stage there is not much room for engineering flexibility.9 -18 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungTotal-Life-Cycle-CostinguWhen does the post-sale service and disposal cycle begin?uIt begins when the first unit produced is in the hands of the customer.9 -19 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungTotal-Life-Cycle-CostinguWhat are the three stages of the service cycle?1Rapid growth2Transition3Maturity9 -20 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungTotal-Life-Cycle-Costing Traditional Stages of theAccountingTotal life Cycle Focus Post-Sale$ Costs Research, Development, Manufacturing Service and and Engineering Cycle Disposal100% 80% 60% 40% 20% 0%Cost CommittedCosts Incurred9 -21 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungLearning Objective 4Explain target costing.9 -22 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungTarget CostinguWhat is target costing?uIt is a cost planning method used during the RD&E cycle that focuses on reducing costs for products that require discrete manufacturing processes and reasonably short product life cycle.9 -23 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungTarget CostingRD&ECycleManufacturingCyclePost ServiceCycleTarget Costing9 -24 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Target Costing Traditional Cost Target Reduction CostingMarket Research to DetermineCustomer Needs and Price PointsCustomer RequirementsProduct Specifications9 -25 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Target Costing Traditional Cost Target Reduction CostingTarget Selling PriceTarget ProductVolumeDesign Target ProfitEngineeringSupplier Pricing9 -26 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Target CostingEstimated CostTarget CostDesired ProfitMarginValueEngineeringSupplierPricingPressure Traditional Cost Target Reduction Costing9 -27 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Target CostingManufacturingPeriodic CostReductionContinuous CostReduction Traditional Cost Target Reduction Costing9 -28 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Target CostinguUnder traditional costing, the profit margin is the result of the difference between the expected selling price and the estimated production cost.uPt = St CtuThe cost-plus method is another traditional approach.9 -29 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Target CostinguUnder the cost-plus method the selling price is the sum of the expected product cost and the expected profit margin.uScp = Ccp + Pcp9 -30 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Target CostinguUnder target costing, the target profit margin results from a long-run profit analysis often based on return on sales.uThe target cost is the difference between the target selling price and the target profit margin.uCtc = Stc Ptc9 -31 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungConcerns About Target CostinguWhat are some potential problems in implementing target costing?1Conflict can arise between parties involved in the process.2Employees may experience burnout due to pressure.3Development time may increase.9 -32 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungLearning Objective 5Explain Kaizen costing.9 -33 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungKaizenuWhat is Kaizen?uIt is a Japanese term for making improvements to a process through small, incremental amounts rather than through large innovations.9 -34 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungKaizen CostinguWhat is Kaizen Costing?uIt is a planning method used during the manufacturing cycle with an emphasis on reducing variable costs in one period below the costs in a base period.uThe target-reduction rate is the ratio of the target reduction amount to the cost base.9 -35 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungKaizen CostingManufacturingCycleRD&E CyclePost ServiceCycleKaizen Costing9 -36 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Kaizen CostingStandard Costing1. Cost-control system concept2. Assumes stability in current manufacturing process3. Goal is to meet cost performance standardsKaizen Costing1. Cost-reduction system concept2. Assumes continuous improvements in manufacturing3. Goal is to achieve cost reduction standards9 -37 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Kaizen CostingStandard CostingTechniques1. Standards are set annually or semi- annually2. Variance analysis involves comparing actual to standard costs3. Investigation occurs when standards are not metKaizen CostingTechniques1. Cost reduction targets are set and applied monthly2. Variance analysis involves target Kaizen costs versus actual cost reduction amounts3. Investigation occurs when target reductions are not attained9 -38 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungComparing Traditional Cost Reduction to Kaizen CostingWho has the best knowledge to reduce costs?Standard CostingManagers andengineers developstandardsKaizen CostingWorkers are closestto the process andthus know best9 -39 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungConcerns About Kaizen CostinguWhat is a concern about Kaizen Costing?uThe system places enormous pressure on employees to reduce every conceivable cost.uWhat is a cost-sustaining period?uIt is a period that allows employees to learn new procedures before Kaizen targets are imposed.9 -40 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungLearning Objective 6Discuss environmental costing issues.9 -41 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungEnvironmental CostinguPerhaps the best way to control and reduce environmental costs is to use activity-based costing.uEnvironmental costs fall into two categories:1Explicit2Implicit9 -42 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungEnvironmental CostinguWhat are some examples of explicit costs?direct costs to modify technology and processescosts of cleanup and disposalcosts of permits to operate a facilityfines levied by government agencieslitigation fees9 -43 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungEnvironmental CostinguWhat are some examples of implicit costs?administration and legal counselemployee education and awarenessloss of goodwill if environmental disasters occur9 -44 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungLearning Objective 7Understand the process of benchmarking the best practices of other organizations.9 -45 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungBenchmarkinguWhat is benchmarking?uIt is an organizations search for implementation of the best way of doing something as practiced by another organization.uThe benchmarking process consists of five stages.9 -46 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungThe Benchmarking ProcessuStage 1Internal Study and Preliminarily Competitive AnalysesFactors to ConsiderPreliminary internal and external competitive analysisDetermine key areas for studyDetermine scope and significance of the study9 -47 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungThe Benchmarking ProcessuStage 2Developing Long-Term Commitment to the Benchmarking Project and Coalescing the Benchmarking TeamsFactors to ConsiderDevelop Long-Term Commitment to the Benchmarking Project:Gain senior management supportDevelop a clear set of objectives Empower employees to make change9 -48 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungThe Benchmarking ProcessuStage 2 (contd.)Developing Long-Term Commitment to the Benchmarking Project and Coalescing the Benchmarking TeamsFactors to ConsiderCoalescing the Benchmarking Team:Use an experienced coordinator Train employees9 -49 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungThe Benchmarking ProcessuStage 3Identify Benchmarking PartnersFactors to ConsiderSize of partnersNumber of partnersRelative position of the partners within and across industriesDegree of trust among partners9 -50 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungThe Benchmarking ProcessuStage 4Information Gathering and Sharing MethodsFactors to ConsiderType of benchmarking information:ProductFunctional (process)Strategic (includes management accounting methods)9 -51 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungThe Benchmarking ProcessuStage 4 (contd.)Information Gathering and Sharing MethodsFactors to ConsiderMethod of Information Collection:UnilateralCooperative: Database Indirect/third party Group9 -52 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungThe Benchmarking ProcessuStage 4 (contd.)Information Gathering and Sharing MethodsFactors to ConsiderDetermine performance measuresDetermine the benchmarking performance gap in relation to performance measures9 -53 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungThe Benchmarking ProcessuStage 5Taking Action to Meet or Exceed theBenchmarkFactors to ConsiderComparisons of performance measuresare made9 -54 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and YoungEnd of Chapter 9