311209 paper f5 mnemonics sample download v2

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Mnemonics and Charts Paper F5: Performance Management

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Tony Surridge Online Limited, 2010 2

Fact Sheet: Backflush Accounting - Overview

Backflush Accounting is a product costing approach, used in Just-In-Time (JIT) operatingenvironments, in which accounting entries are delayed until the products are complete. Standardcosts are then flushed backward through the system to assign costs to products. The result is that

detailed tracking of costs is eliminated. Ledger entries to inventory accounts may be delayed until thetime of product completion (or even the time of sale) and standard costs are used to assign costs tounits when ledger entries are made.

The traditional method

(a) Sequential trackingSequential tracking is the traditional product costing method in which ledger entries occur in thesame order as actual purchases and production.

(b) Trigger point for accounting entryA trigger point is a stage in the production cycle at which ledger entries are made.

The traditional trigger points are shown in the following diagram and detailed inventory ledgeraccounts for raw material, three work-in-processes and finished goods using standard processaccounting are shown on the next screen.

Backflush AccountingBackflush Accounting (sometimes called 'Backflush Costing') is an approach to product and inventorycosting which delays recording changes in the status of the product and the inventory until the productsare certified as good and completed (as finished goods). Completion of good finished goods is thetrigger point. Other trigger points are: invoices for materials and timing of conversion costs.Furthermore, for the sake of simplicity of record keeping, numerous work-in-process accounts aremerged with raw materials inventory into one, meaning that only two inventory ledgers are maintained:raw-in-process, and finished goods.

Backflush Accounting uses standard costs to work backward and flush out costs for the units produced.The diagram shown on the second screen applies the data used in the next screen (the traditional'sequential tracking' method), to illustrate the two inventory accounts produced by using BackflushAccounting.

NEXT CHART NEXT MNEMONIC

Definition: Backflush accounting

A cost accounting system which focuses on the output of an organisation and then worksbackwards to attribute costs to inventories and cost of sales.End of Definition

Traditional Trigger Points

Purchaseof

DirectMaterials

Productionof

work inprogress

Completionof a goodfinished

unit/batch

Sale of afinished

good



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Fact Sheet: Backflush Accounting - Overview

Backflush Accounting is a product costing approach, used in Just-In-Time (JIT) operatingenvironments, in which accounting entries are delayed until the products are complete. Standardcosts are then flushed backward through the system to assign costs to products. The result is that

detailed tracking of costs is eliminated. Ledger entries to inventory accounts may be delayed until thetime of product completion (or even the time of sale) and standard costs are used to assign costs tounits when ledger entries are made.

The traditional method

(a) Sequential trackingSequential tracking is the traditional product costing method in which ledger entries occur in thesame order as actual purchases and production.

(b) Trigger point for accounting entryA trigger point is a stage in the production cycle at which ledger entries are made.

The traditional trigger points are shown in the following diagram and detailed inventory ledgeraccounts for raw material, three work-in-processes and finished goods using standard processaccounting are shown on the next screen.

Backflush AccountingBackflush Accounting (sometimes called 'Backflush Costing') is an approach to product and inventorycosting which delays recording changes in the status of the product and the inventory until the productsare certified as good and completed (as finished goods). Completion of good finished goods is thetrigger point. Other trigger points are: invoices for materials and timing of conversion costs.Furthermore, for the sake of simplicity of record keeping, numerous work-in-process accounts aremerged with raw materials inventory into one, meaning that only two inventory ledgers are maintained:raw-in-process, and finished goods.

Backflush Accounting uses standard costs to work backward and flush out costs for the units produced.The diagram shown on the second screen applies the data used in the next screen (the traditional'sequential tracking' method), to illustrate the two inventory accounts produced by using BackflushAccounting.


Definition: Backflush accounting

A cost accounting system which focuses on the output of an organisation and then worksbackwards to attribute costs to inventories and cost of sales.End of Definition

Traditional Trigger Points

Purchaseof

DirectMaterials

Productionof

work inprogress

Completionof a goodfinished

unit/batch

Sale of afinished

good



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Fact Sheet: Conventional standard processaccounting

Note: there is aseparate inventory

account for

raw material work-in-progress finished goods

RAW MATERIAL INVENTORY ACCOUNT$000 $000

Balance b/fwd(actual kg at standard price) 100 To Process 1(actual kg at standard price) 400

Actual cost(actual kg at actual price)

500 Residual variance(in this case the variance is adverse)

50

Balance c/fwd(actual kg at standard price)

150

600 600

PROCESS 1 WORK-IN-PROCESS INVENTORY ACCOUNT$000 $000

Balance b/fwd(actual kg at standard cost)

80 To Process 2(actual kg at standard cost)

900

From raw materials(actual kg atstandard price)


80

Actual conversion cost(actual labour/overhead)

700 Balance c/fwd(actual kg at standard cost)

200

1,180 1,180



90 To Process 3(actual kgs at standard cost)

1,500

From Process 1(actual kg atstandard cost)


120



170

1,790 1,790

FINISHED GOODS INVENTORY ACCOUNT$000 $000Balance b/fwd(actual kg at standard cost)

100 To Cost of goods sold(actual kgs at standard cost)

1,980

From Process 3(actual kgs atstandard price)

2,000 Inventory lost/damaged(actual kg at standard cost)

50

Returns(from customers, replacementssent actual kg at standard cost)

30

Balance c/fwd(actual kg at standard cost)

40

2,100 2,100



70 To Finished goods(actual kgs at standard cost)

2,000

From Process 2(actual kg atstandard cost)

1,500 Residual variance(in this case the variance is adverse)

90



80

2,170 2,170

Remember alltransfers are at

standard cost and allinventory is valued at

standard cost

Thats why its calledSTANDARD process

accounting

And the RESIDUALVARIANCE is simply asingle figure which is

the difference betweenthe ACTUAL costs andthe STANDARD costs

We could analyse thisvariance in more detailsomewhere else on the

spreadsheet

THE SAME FIGURESARE SHOWN ON THE

NEXT SCREENUSING

BACKFLUSH

ACCOUNTINGNEXT CHART NEXT MNEMONIC


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Fact Sheet: Backflush standard process accounting

RAW MATERIAL AND WORK-IN-PROCESS INVENTORY ACCOUNT

$000 $000Balance b/fwd(actual kgat standard price)

340 To Finished goods(actual kg at standard price)

2,000

Materials(actual kg at actual price)


340

Actual conversion cost(Actual labour/overhead)

2,100 Balance c/fwd(actual kg at standard price)

600

2,940 2,940

FINISHED GOODS INVENTORY ACCOUNT$000 $000


100 To Cost of goods sold(actual kgs at standard cost)

1,980

From Process 3(actual kgs atstandard price)

2,000 Inventory lost/damaged(actual kg at standard cost)

50

Returns(from customers, replacementssent actual kg at standard cost)

30

Balance c/fwd(actual kg at standard cost)

40

2,100 2,100

The Raw material andwork-in-process

account is simply anamalgamation of theconventional Raw

material and separatework-in-process

accounts

It is only necessary toADD together theseparate values,

conversion costs andresidual values from

the differentconventional raw

material and work-in-process inventory

accounts

The Finished goodsaccount does not

change

The human race has had long experience and a fine tradition in surviving adversity.But we now face a task for which we have little experience, the task of survivingprosperity.

Alan GreggPollster



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Fact Sheet: Backflushing from the finished goodsstage

The product ismanufactured

The finishedproduct is

packaged into abox or carton

No accounting entriesso far .

The operator wands the bar code

This triggersseveral events:

A carton label is printed

Open quality (amount still to be produced) on theWorks Order is reduced

Materials (on the bill of materials) are credited to theRaw-in-Process Inventory account

Standard conversion costs are credited to the Raw-in-Process Inventory account

Finished Goods Inventory account is debited by thecarton quantity and standard cost of materials, labour

and overhead

Units $ Units $

Raw-in-Process

Units $ Units $

Finished Goods

Start here



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Fact Sheet: Backflush Accounting: the logic

Think about the situation logically.

When inventory levels are held at a very lowand constant level then costs incurred in aperiod MUST end up in the periods incomestatement either as standard cost or variance.

So why bother to track ALL these costs throughALL the accounts simply to arrive at the sameend result?

Raw materialinventory

Work-in-Processinventory

Finished Goodsinventory

Income statementOriginal costs

Such as labouraccount

Backflush accounting is part of modern Lean Accounting.

Yesterday is ashes; tomorrow wood.Only today does the fire burn brightly.

Eskimo proverb



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Backflush accounting is a product costing approach, used in a Just-In-Time (JIT) operating environment,in which costing is delayed until goods are finished. Standard costs are then flushed backward through thesystem to assign costs to products. The result is that detailed tracking of costs is eliminated. Journal

entries to inventory accounts may be delayed until the time of product completion or even the time of sale,and standard costs are used to assign costs to units when journal entries are made, that is, to flush costsbackward to the points at which inventories remain. It can also be argued that backflush accountingsimplifies costing since it ignores both labour variances and work-in-progress. Backflush accounting isemployed where the overall cycle time is relatively short and inventory levels are low.

Conventional standard process costing involves building a cost for a process by recording quantities andvalues as resources are input, or output, or losses occur - in an account opened for each separateprocess. In this way each process account is used to track costs and show transfers into and out of theprocess. For this reason the process work-in-progress accounts are detailed, and present a 'front-end'focus.

The main advantages of using backflush accounting are detailed below.C Cost reduction in the accounting system. The simplicity of backflush costing will reduce the

cost of the accounting system, by cutting back the need for accounting entries, supporting vouchersand relevant documents.

R Reduction in the volume of documentation/computer files. In production systems where stocksare low, such as those organisations using just-in-time systems, the majority of input resourcesdirectly form the cost of sales, and inventory valuation (as provided by the conventional system) isless relevant, leaving scope for simplification. Unlike the conventional system, backflush costingdoes not attempt to differentiate between stocks of raw materials, work-in-progress and sometimeseven finished goods. This removes the need for the large volume of documentation found in

conventional systems.A Appropriate for a system of inventory back flushing Back flushing is simply automatic goods

issue. The inventory system will automatically post the goods issued when operations areconfirmed. There is no need for stock entries to be made, the issue is automatically posted. Forexample, when a 4-wheeler car is rolled out from the assembly line, 5 wheels 5 tyres are deemed tobe consumed and issued to a production order automatically by way of back flushing by the system.The assembly line picks the material from stores and uses it. No physical issue and associatedmanual posting of the issue is made by Stores. Back flushing is used for materials which arestandard in the product and have a fixed relationship with the product.

M Movement of material (including between processes) is not accounted for with large savings

by way of input costs.S Stock level are reduced. Back flush costing will also reduce the motivation for managers to build

up work-in-progress and finished goods in order to increase short-term profit, which itself may be anon-value adding activity, since individual processes will not be credited with stock values underthe backflush costing procedures.

Benefits of using backflush accounting

Memory jog: the backflush accounting system simply CRAMSmaterials and ALL processing into one account.



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The main limitations are listed below.

L Low levels of inventory must be maintained. Backflush costing should only be used whenthere are low levels of stocks and stable raw material prices and labour inputs, as variations inthese costs will result in significant errors in stock valuation. In dynamic cost environments,influenced by interest rates, inflation, currency rates and so on, it may be difficult to rely on stablestandard costs. To the extent that backflush cost accounting depends on standard costs for thebackward valuation, this may prove to produce an unreliable and inaccurate record of costs/events.

A Attempts are not made to track particular costs. In the absence of actual input data, backflushcost accounting calculates an expected stock figure by deducting the standard costof goods

produced from costs incurred. Thus no attempt is made to track particular costs with particularitems of output. For this reason cost control is made more difficult.

S Suppliers invoices are more difficult to verify. One purpose of the conventional raw materialstock receipt/valuation system is to provide a basis for the verification of suppliers' invoices.Depending upon the method of backflush cost accounting adopted (for example, somepractitioners advocate backflushing direct from the finished goods [or even income statement] backto the trade creditors' account), this important internal control may be weakened.

T Traditional stock-take is made more difficult. The traditional stock-take uses stock levelsbased on inputs (i.e. stock available at any time), and stock control methods also use inputdocumentation, such as material requisitions. Furthermore the system of forward allocation ofstock and subsequent purchasing may be complicated.

Limitations of backflush accounting

Memory jog: even though backflush accounting presents a number of

problems we have not seen the LAST of this modern method ofcost accounting.

In the business world, everyone is paid in two coins:

cash and experience. Take the experience first, thecash will come later.

Harold GeneenCEO, IT&T



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Fact Sheet: Throughput Accounting (TA): Overview

The principles and practices associated with throughput accounting over the past decade or so have been

developed as an alternativesystem of management accounting in a modern industrial plant, especiallyone operating in a Just-in-Time (JIT) environment. It can be used as an alternative approach to thetraditional marginal costing and associated contribution analysis when making production/service mixturedecisions and other decisions which are affected by relevant (or opportunity) costs. Throughput has beendescribed as follows:

Throughput Accounting is not costing and does not allocate costs to products and services. Itcan be viewed as a business technique used for profit maximisation. Conceptually, throughputaccounting seeks to increase the velocity at which products move through an organisation byeliminating, or effectively using, bottlenecks within the organisation.

Calculation of 'throughputThroughput is defined as sales revenue less direct material cost. We see from this equation thatthroughput only exists when there is a sale of the product or service. Producing work-in-progress orfinished goods that sit in a warehouse does not count. Throughput is therefore the rate at which a systemproduces money, in contrast to output, which may be stored in a warehouse and for which money has notyet been received. Output that becomes part of the inventory in a warehouse may mislead managementand investors about the organisation's condition by inflating the apparent value of its assets.

Aim of throughput accountingThe aim of throughput accounting is to maximise the throughput measure. (Confusingly, "Throughput" issometimes referred to as "Throughput Contribution" and has similarities to the concept of "Contribution" inMarginal Costing. You should be able to compare "Throughput Contribution" with the traditional'Contribution' which is defined as sales revenue less all direct and other variable costs.) The aim, withtraditional marginal costing is to maximise contribution but without necessarily reducing investment ininventory.


Definition: Throughput accounting

A method of performance measurement which relates production and other costs to throughput.Throughput accounting product costs relate to usage of key resources by various products.End of definition

To manage a business well is to manage its future: and to manage the future isto manage information.

Marion Harper


Practice question on Backflush accounting: EVCO CompanyPage 17


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Fact Sheet: The concepts of Throughput Accounting

Throughput accounting for JIT, according to Galloway and Waldron is based on three concepts.

Concept 1In the short run, most costs in the factory (with the exception of material costs) are fixed. These fixedcosts include directlabour. (This takes a different view from the proponents of activity-based costing(ABC), who argue that many costs are 'variable with activity'.) It is therefore useful to group all thesecosts together (such as 'direct' labour, machine cell costs and support costs) and call them 'Total FactoryCosts (TFC)'. (Note:this is a term worth remembering.)

Concept 2In a JIT environment, all inventory is undesirable, and the ideal inventory level is zero. Products shouldonly be made in response to a customer order and this means, theoretically, that the factory operates atthe pace of the slowestprocess of the moment. This results in unavoidable idle capacity in someoperations (which must be accepted) except for the operation that is the bottleneck at that point in time.This restricts the company's manufacturing cycle time(which we might refer to as the time taken toconvert material into a finished product.)

Work in progress and finished goods (although logically, if products are made in response tocustomers' order there will be minimum finished goods inventory) should be valued at materialcostonly, until the output is sold, so that no profit will be earned (or value added) until the sale takes place.This is a very important concept, and because of this, managers will recognise that working on output(for which a sale has not already been agreed) will just add to either work in progress or finished

goods inventory without creating profit, and will then not be encouraged to perform such work.

Concept 3Profitability is therefore determined at the rate at which cash is generated. (You may remember theconcept of traditional costing techniques which suggest that profit is generated at the rate at whichproducts are made.) In a modern factory environment, especially a JIT environment, the speed at whichsales revenue is received depends on how quickly goods can be produced to satisfy customer orders. Theconcept of synchronous management techniques have been developed for this objective.


Tutorial comment

When cost accounting was developed in the 1890's, labour was the largest fraction of product cost andworkers might not know how many hours they would work in a week when they reported on Mondaymorning. If they were not required to work, for whatever reason, they were not paid. Now, however,workers who come to work on Monday morning almost always are guaranteed a wage based on aspecified number of hours (say, 40 hours) regardless of whether there is idle time or not. Labour costnow is fixedrather than variable, as it used to be.End of definition



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Fact Sheet: Throughput Accounting: A summary

ALL STOCK ISVALUED AT

RAWMATERIALPURCHASE

COST

THROUGHPUTIS

REGULATEDBY THE

CAPACITY/USAGE OF

THEBOTTLENECKCONSTRAINT

THROUGHPUT

THROUGHPUTCOSTING

MEASURES

OBJECTIVE:

TO INCREASETHROUGHPUT

1

2

Conforms with:- World Class Manufacturing aims

- JIT philosophy

This is accomplishedin two ways

- This will NOT encourage managers to buildstock for profit.

- Profit will only be obtained at the point ofsale.

- Managers will therefore be encouraged tomaximise throughput.

- The bottleneck constraint is identified.- Efforts are made to increase the capacity of

the bottleneck constraint.- Objective then is to maximise the utilisation

of the bottleneck capacity, by:- efficiency in use- optimum mix of products.

- Throughput = Sales Material costs- Throughput is affected by:

- sales price- volume of sales- material prices- material usage- capacity of the bottleneck constraint- efficiency of use of the bottleneck

constraint- mix of products using the bottleneck

constraint.

- Efficiency of bottleneck constraint %

- Throughput Accounting Ratio:


periodperhoursofNumber

periodpercostfactoryTotalhourpercostFactory

constraintbottleneckinunitperhoursofNumber

unitperThroughputhourperReturn

:where

hourpercostFactory

hourperReturnTAR

=

=

=


12


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FORMULAE


CUTTING

PROCESS 1

MOULDING

PROCESS 2

POLISHING

PROCESS 3

FINISHING

PROCESS 4

83 units per hour 122 units per hour 71 units per hour 95 units per hour

Example: The production of a product that moves in sequence through 4different processes, each of which works at a different production capacity

If work-in-progress stock is not to accumulate the product flow needs towork at the production rate of the slowest process, i.e. 71 units per hour.Process 3 (polishing) is therefore the bottleneck constraint.

Constraint


Fact Sheet: Example of a bottleneck constraint in afactory



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Throughput Accounting (TA) is an alternative to conventional cost accounting. Throughput Accountingis not cost accounting or costing because it does not allocate all costs (variable and fixed expenses,including overheads) to products and services. Only costs that are totally variable e.g. raw materials arededucted from sales to determine Throughput. Throughput Accounting is a management accountingtechnique used as the performance measures in the Theory of Constraints (TOC). Unlike traditional costaccounting that primarily focuses on 'cutting costs' and reducing expenses to make a profit, throughputaccounting primarily focuses on generating more throughput. Conceptually, throughput accounting seeksto increase the velocity or speed at which throughput is generated by products and services with respect tothe organisation's operational constraint, whether the constraint is internal or external to the organization.

An important factor influencing throughputis the volume of sales (hence, throughput). This in turn is

influenced by production bottlenecks, or constraints.

Constraints on throughput might include:

S Shortage of production resources (resulting in production delays). Such shortage also includesproduction bottlenecks.

P Poor product quality and reliability (resulting in wasted work, reduced production volume andreduced sales).

U Uncompetitive selling prices.

R Reliability of raw materials is inconsistent. This results in production delays and reduced salesvolume.

It is management's task to eliminate these constraints. Shortages of resources are usually termedbottleneckswhich is the prime concern in the 'Theory of Constraints'.

Constraints on throughput

Memory jog: such problems act as a SPUR to managementseeking to increase their profits.



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NEXT CHART

A critical evaluation of throughput accounting (TA) would argue the following:

S Short-term perspective. TA is a highly short term perspective on costs, which treats only materialas variableor activity related. In the medium term (and many decisions relate to the medium term)labour and other costs are within the control of management and are variable by nature.

L Labour and other variable overhead costs are neglected within the TA measure. The TAmethod does not focus on controlling and reducing these significant costs.

A As a result there is the risk of less than optimal performance resulting from the wrongproduction/service mix, or inappropriate production focus.

M Material must be a high proportion of the cost or selling price for the TA approach to beeffective.S Sales demand must be constant enough, or high enough, to put pressure on the output and

production resources. In other words, the bottleneck capacity should not exceed the productionresources necessary. This would result in an external constraint for which the logic behind thethroughput accounting ratio might not be applicable. .

Assessment of throughput accounting (TA)

Memory jog: remember this by word association: the above criticisms

SLAMS a big question mark against the use of throughputaccounting in some situations.

As in a game of cards, so in the game of life we must playwhat is dealt to us; and the glory consists, not so much inwinning, as in playing a poor hand well.

Henry Wheeler Shaw, 1818 - 1885

NEXT CHART


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The concepts entailing the use of throughput accounting (TA) shown in the table below provide acontrast to the fundamental principles of orthodox marginal cost accounting:

Differences between throughput costing and orthodox costing systems

Throughput accounting Orthodox marginal cost accounting

1. Inventory is not an asset. Inventory is an asset.Inventory is a result of unsynchronisedproduction (i.e. a lack of synchronisationof production, logistics and marketdemand) and is an impediment to makingprofit.

2. Costs are classified as (a) direct material, Costs can be classified either as direct orand (b) total factory costs (all other costs). indirect.

3. Profitability is determined by the rate at Product profitability can be calculated by thewhich sales income is earned. contribution earned per unit of limiting factor.

4. Profit cannot be manipulated by changes Profit can be manipulated by increasingin inventory levels. or reducing inventory levels.

5. Profit is a function of material cost, total Profit can be increased by reducing directfactory cost and throughput. and indirect costs.

Fact Sheet: Distinctions between throughput costingand orthodox cost accounting

It is much more difficult to measure non-performance than performance.

Performance stands out like a ton of diamonds. Non-performance can almostalways be explained away.

Harold GeneenCEO, IT&T

Practice question on Throughput accounting: Sennelager CompanyPage 23


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FORMULAE


EVCO Company: Question 2 of 2(A question covering Back Flush Costing)

(c) Prepare a report for the period ended 31st December 2009 to the management team of EVCOCompany which details the factors which have contributed to the poor performance of EVCO

Company (5 marks)

(Show all relevant workings) (20 marks)

Table AEVCO Company: Standard process accounts for the period ended 31st December 2009

Making process Converting process Finishing processProduct $ Product $ Product $

units units units

DRWIP b/fwd 500 7,909 500 10,054Transfers from previous process 6,800 107,563 6,025 121,156Raw material cost 8,000 96,000Conversion costs 18,800 30,100 14,390

8,000 114,800 7,300 145,572 6,525 145,600

CRNormal losses 800 504 298Transfers to next process 6,800 107,563 6,025 121,156 5,365 124,655WIP damage (written off) 75 1,186 60 1,207Abnormal process losses 400 6,327 196 3,934 302 6,822

Residual variance 910 11,387 2,862WIP c/f 500 7,909 500 10,054

8,000 114,800 7,300 145,572 6,525 145,600

EVCO Company: Summary profit and loss account for the period ended 31st December 2009

Actual Budget$ $ $ $

Sales revenue 145,050 150,000

Less standard cost of sales 112,341 116,175Standard contribution 32,709 33,825Less:WIP damage losses 2,393 1,437Finished goods losses 697 232Abnormal losses 17,083Residual process variances 15,159Free replacement to customers 11,617 4,832Price reduction penalty 1,160 750Raw material stock damage losses 240 48,349 120 7,371

Gross profit/(loss) (15,640) 26,454

A

19


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FORMULAE


(a)RAW MATERIALS AND IN-PROCESS ACCOUNT

Working note $ Working note $Raw material and WIP (b/fwd) 1 20,963 Transfers to finished goods 4 124,655

Raw material input 2 96,000 Residual variances 5 34,635Conversion costs 3 63,290 Raw material and WIP c/fwd (bal) 20,963

180,253 180,253

FINISHED GOODS INVENTORY ACCOUNTWorking note $ Working note $

Finished goods inventory b/fwd 6 11,617 To cost of sales (P&L a/c) 7 112,341Materials and in-process a/c 124,655 Inventory loss (P&L a/c) 8 697

Free replacements 9 11,617Finished goods c/fwd 11,617

136,272 136,272

EVCO Company: Answer - 1 of 4

(A question covering Backflush Costing)

What confused students in the exam was the way the three work-in-process accounts werepresented. Many management accountants use spreadsheet software to hold their accountsand obviously the flat file approach of a spreadsheet makes the columnar approachappropriate after all, it saves duplicating the text labelling (on the left side of the account).

Look carefully and you will see that T accounts are still used but that the CR side of theaccount has been inserted under the DR entries rather than to the right side. Other than thisthere are no differences to the way conventional accounts are held.

Remember, with backflush accounting the Raw Materials and In-process Account is simplyan amalgam of the accounts previously held separately,

Notice the use of the system that cross references workings.

Q

Q20


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FORMULAE


1. (4,000 kgs x $0.75) + $7,909 (converting a/c) + $10,054 (finishing a/c)

2. From making process a/c

3. Total from all three accounts

4. From finishing process a/c$

5. Residual variances (for all processes) 15,159Abnormal losses (for all processes) 17,083Units damaged in WIP (for all processes) 2,393

34,635

6. 500 units (finished goods inventory) x $124,655/5,365(from finishing a/c) = $11,617

7. From actual P&L a/c



(b)

EVCO Company: Answer 2 of 4

(A question covering Backflush Costing)

WORKING NOTES

Answer plan: part (b)

Ask yourself . Whatis being examined

here?

The question

requires you todiscuss the merits of

using backflushaccounting

Its a 5-mark question, so tryand write about five things.

The companycurrently usesconventional

costing

In modernorganisations

inventory valueis less relevant

Backflushaccounting is a

simplifiedstandard

costing system

Reduces a lotof accountingadministration

Answerplan

format

EVCO currentlyholds constantinventory levels

Q

Q

21


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FORMULAE


The company currently uses conventional costingEVCO Company currently uses conventional standard process costing, which involves recording valuesand quantities in an account for each of the organisation's three processes. Each process accountshows the transfers into and out of the process, the various resources input to the process and anylosses and residual variances.

Inventory value is less relevantIn organisations where inventory levels are low and the vast majority of manufacturing costs form part ofthe cost of sales rather than being deferred in closing inventory values (such as in organisationsoperating a policy of just-in-time production and purchasing), inventory valuation (as provided by asystem of process costing accounts) is less relevant, however, and can therefore be simplified to acertain extent. In such circumstances, backflush accounting can be used.

Backflush is a simplified systemBackflush accounting is a simplified standard costing system which focuses on the output of anorganisation and then works backwards, allocating costs between inventories and the cost of goodssold (or finished goods). It therefore attempts to eliminate detailed accounting transactions since thereis no separate accounting for work in progress.

Reduces accounting workApart from its simplicity, other advantages include the reduction in accounting entries, supportingvouchers, documents and so on and the fact that it may discourage managers from producing forinventory since working on material does not add value if it moves into inventory.

Relevant for EVCOBackflush accounting would be particularly appropriate for EVCO Company since it currently has apolicy of holding constant levels of inventory and WIP. Back flush costing will also reduce the motivationfor managers to build up work-in-progress and finished goods in order to increase short-term profit, whichitself may be a non-value adding activity, since individual processes will not be credited with stockvalues under the backflush costing procedures.

EVCO Company: Answer 3 of 4(A question covering Backflush Costing)

Answer plan: part (c)


here?

The question simply

requires acomparison betweenthe budget and actualresults. Do this line

by line.

The question requires youranswer to be in report format.

Actual losscompared

with budgetedprofit

Salesvolume was

downLosses

Unitsdamaged

Answerplan

format

Productivitylevels

Latedelivery

Customerreplacement

Q

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(a) Step 1: Identify the bottleneck constraintMaximum number

of units ofAthlone per week

Machine A 78Machine B

Maximum output (100% capacity) = 272/4 = 68 units per weekAverage downtime per 4-week period: (15 + 20)/2 = 17.5 hourstherefore, average downtime per week: 17.5 hours/4 = 4.375 hoursMachine B's practical capacity: (68/40) x (40 - 4.375) = 60.5

Machine C 82Machine D 45

Machine D is the bottleneck (or 'key') resource and the maximum weekly output of Athlones is 45 units.

Step 2: Calculate the throughput per factory hour

Using weekly data:

Step 3: Calculate the factory cost per hour

Answer: Throughput accounting ratio (TAR)

Sennelager Company: Answer 1 of 5(A question covering Throughput Accounting)

$2,362.5hours40

$900)-($3,000x45hourfactoryperThroughput =

hourper$830hours40

$12,980$20,220:Therefore

weekper$12,98052

$674,960arecostsproductionfixedOther

=+

=

2.846$830

$2,362.5

hourpercostFactory

hourperreturnThroughputTAR ===

Step 1 involves determining which of the machines is the bottleneck constraint. The answeris simply copy out, except for Machine B which needs some thought. Dont just makeassumptions the examiner will have allocated marks for the calculations involved and youneed to gain them!

Steps 2 and 3involvecalculating theTAR.

Q

Q

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(b)

Throughput is defined as sales revenue less direct material cost.

Throughput accounting is based on three main concepts.

(i) In the short run, most costs in the factory (with the exception of material costs) are fixed.These fixed costs include direct labour. It is therefore useful to group all these coststogether (such as 'direct' labour, machine cell costs and support costs) and call them 'Total

Factory Costs (TFC)'.

(ii) In modern industry, inventory is undesirable, and the ideal stock level is zero. Productsshould only be made in response to a customer order and this means, theoretically, that thefactory operates at the pace of the slowest process of the moment. This results inunavoidable idle capacity in some operations (which must be accepted) except for theoperation that is the bottleneck at that point in time. The bottleneck resource restricts thecompany's manufacturing cycle time (which we might refer to as the time taken to convertmaterial into a finished product.)

Work in progress should be valued at material cost only, until the output is sold, so that no

profit will be earned (or value added) until the sale takes place. This is a very importantconcept, and because of this, managers will recognise that working on output (for which asale has not already been agreed) will just add to either work in progress or finished goodsstock without creating profit, and will then not be encouraged to perform such work.

(iii) Profitability is therefore determined at the rate at which cash is generated. (This is differentfrom the concept of traditional marginal and opportunity costing techniques which suggestthat profit is generated at the rate at which sales are made.) In a modern factory environment,especially a JIT environment, the speed at which sales revenue is received depends on howquickly goods can be produced to satisfy customer orders. The concept of synchronous (orsynchronised) management techniques have been developed for this objective.


Answer plan: part (b)


here?

The questionrequires an

explanation of theconcept ofthroughputaccounting

Your answer could spreadacross the three main

concepts associated with TA

The TA

formula

Total Factory

Costs arefixed

Inventory isvalued at

raw materialsprices

Profitabilityis

determined

at the rate atwhich cashis generated

Answerplan

format

Q

Q

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(c)

The JIT environmentThe principles and practices associated with throughput accounting over the past decade or so have beendeveloped as an alternative system of management accounting in a modern industrial plant, especially oneoperating in a JIT environment. It can be used as an alternative approach to the traditional marginalcosting and associated contribution analysis when making production/service mixture decisions and otherdecisions which are affected by relevant (or opportunity) costs.

The aims of throughput accounting and traditional marginal costing

The aim of throughput accounting is to maximise the throughput measure (sales less material costs).This should be compared with the traditional 'contribution' (marginal costing) which is defined as salesrevenue less all direct and other variable costs. The aim, with traditional marginal costing is to maximisecontribution. Unlike traditional marginal costing, throughput accounting assumes that all internal costs arefixed in the short term, and only the external cost of materials is variable.

The following chart summarsises the differences between the two accounting approaches.


Answer plan: part (c)


here?

The questionrequires a

comparison betweentraditional marginal

costing andthroughput costing

A diagram is always useful

if you can draw one, andhave the time!

The JITenvironment

Comparisonof the two

approaches

A chartshowing

main pointsof difference

Answerplan

format

Throughput accounting Orthodox marginal cost accounting1. Inventory is not an asset. Inventory is an asset.

Inventory is a result of unsynchronised

production (i.e. a lack of synchronisationof production, logistics and marketdemand) and is an impediment to makingprofit.

2. Costs are classified as (a) direct material, Costs can be classified either as direct orand (b) total factory costs (all other costs). indirect.

3. Profitability is determined by the rate at Product profitability can be calculated by thewhich sales income is earned. contribution earned per unit of limiting factor.

4. Profit cannot be manipulated by changes Profit can be manipulated by increasingin inventory levels. or reducing inventory levels.

5. Profit is a function of material cost, total Profit can be increased by reducing direct

factory cost and throughput. and indirect costs. Q

Q

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(d)

STEP 1: Identify the revised bottleneck resource

Maximum number

of units ofAthlone per week

Machine A 78Machine B 68Machine C 82Machine D 68

Machines B and D are the bottleneck (or 'key') resources and the maximum weekly output ofAthlones is now 68 units.

STEP 2: Calculate the incremental increase in production/sales per year

Month Weekly demand Weeks in month Increase in Athlones(above previous 45) (units)

January (45- 45) x 5 = NilFebruary (45 - 45) x 4 = NilMarch (50- 45) x 5 = 25April (54 - 45) x 4 = 36May (58- 45) x 4 = 52June (66 - 45) x 4 = 84July (68*- 45) x 5 = 115August (68*- 45) x 4 = 92

September( 63 - 45) x 4 = 72October (60 - 45) x 5 = 75November (50 - 45) x 4 = 20December (45 - 45) x 4 = NilAnnual incremental increase in sales (units) 571

* 68 is the revised maximum weekly production capacity.


There are 4 steps involved in answering part (d):

STEP 1: Identify the revised bottleneck resource (assuming the two investments take place).STEP 2: Calculate the incremental increase in production/sales per year.STEP 3: Calculate the incremental annual return of the two investments.STEP 4: Calculate the payback period (in years and months).

Q

Q

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STEP 3: Calculate the incremental annual return of the investment

$Incremental annual throughput: 571 x ($3,000 - $900) = 1,199,100Incremental annual cost: $6,750 x 52 weeks = (351,000)Annual incremental return 848,100

STEP 4: Calculate the payback period

ANSWER

From the data provided the payback period is calculated as:

4 years + (0.12687 x 12) = 4 years and 1.5 months = 4 years and 1 complete month.


years4.12687$848,100

$300,000$3,200,000

investmentthefromprofitAnnual

costtInvestemenperiodPayback

=+

=

=

Q

Q

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Glossary of terms

Accountability

Accountability is often used synonymously with such concepts as responsibility, answerability,enforcement, blameworthiness, liability and other terms associated with the expectation of account-giving.

Artificial intelligenceJohn McCarthy, who coined the term in 1956, defines artificial intelligence as "the science andengineering of making intelligent machines."

Balanced scorecardThe Balanced Scorecard (BSC) is a performance management tool for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision andstrategy.

By focusing not only on financial outcomes but also on the operational, marketing and developmentalinputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which inturn helps organisations act in their best long-term interests. This tool is also being used to addressbusiness response to climate change and greenhouse gas emissions.

BenchmarkingBenchmarking is the process of comparing the cost, cycle time, productivity, or quality of a specificprocess or method to another that is widely considered to be an industry standard or best practice.Essentially, benchmarking provides a snapshot of the performance of a business and helps managementunderstand where the company in relation to a particular standard. The result is often a business case formaking changes in order to make improvements. Some say that the term benchmarking was first used bycobblers to measure ones feet for shoes. They would place the foot on a "bench" and mark to make thepattern for the shoes.

BreakevenIn business, specifically management accounting, the break-even point (BEP) is the point at which cost orexpenses and revenue are equal: there is no net loss or gain.

BudgetAn finance budget is a short-term (usually annual) plan of action made in terms of physical resourcesand their monetary equivalents.

Budgetary controlBudgetary control is the establishment of budgets relating the responsibilities of executives to therequirements of a policy, and the continuous comparison of actual with budgeted results, either to secureby individual action the objective of that policy or to provide a basis for its revision.

BureaucracyBureaucracy is the structure and set of regulations in place to control activity, usually in largeorganisations and government. It is represented by standardised procedures (rule-following) that dictatethe execution of most or all processes within the organisation, formal division of powers, hierarchy, andrelationships.

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Glossary of terms - 2

Closed system

A closed system is a state of being isolated from the environment. No system can be completely closed;there are only varying degrees of closure.

CompromiseIn disputes or arguments, compromise is a basis of finding agreement through communication, through amutual acceptance of terms - often involving variations from an original goal or desire.

ConsensusConsensus a general agreement among the members of a given group, each of which exercises somediscretion in decision making and follow-up action.

Contingency planA contingency plan is an alternative plan to be put into operation if needed, especially in case ofemergencies, or if a primary plan fails. Contingency planning is sometimes referred to as soft planning.

ConventionA convention is a set of agreed, stipulated or generally accepted standards, norms, social norms orcriteria, often taking the form of a custom.

CoordinationCoordination is the act of coordinating, making different people or things work together for a goal oreffect.

CorrelationIn statistics, correlation (often measured as a correlation coefficient, r) indicates the strength and directionof a linearrelationship between two random variables. That is in contrast with the usage of the term incolloquial speech, which denotes any relationship, not necessarily linear.

Critical Success Factor (CSF)Critical Success Factor (CSF) is a business term for an element which is necessary for an organizationor project to achieve its mission. There are a number of critical factors or activities required for ensuringthe success of an organisation, department or individual manager. The following are examples oforganisational CSFs:

Finance: positive cash flow, revenue growth, and profit margins. Market:Acquiring new customers and/or distributors. Customer satisfaction Quality: Product or service development: Innovative skills that will increase business with existing

customers and attract new ones? Intellectual capital: Increasing knowledge. Strategic relationships: New sources of business, products and external revenue. Employee attraction and retention:

Strategy should be implemented that takes into consideration the organisations critical success factors.

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Customer empowerment

The process which enables a customer to gain power and influence the decisions of suppliers. Customerempowerment is the totality of the following or similar capabilities:-

Having independent decision-making (choice) power. Having access to information and resources for taking proper decision. Having a range of options from which to make choices (not just yes/no, either/or.). Ability to exercise assertiveness in buying agreements.

In short, customer empowerment is the process that allows a person to gain the knowledge, buying-skillsand attitude needed to make free choices between competing products and services.

Cybernetic controlCybernetic control is closely related to control theory and systems theory and relates to systems thatself-regulate or control themselves. In other words, systems than contain activities designed for controlpurposes and where the control mechanism is closed within the system itself. (For example, it you injureyourself slightly, your body will automatically heal itself without reference to any external control agent,such as a doctor.)

Data miningData mining is the process of extracting hidden patterns from electronic data. As more data is gathered,with the amount of data doubling every three years, data mining is becoming an increasingly important toolto transform this data into information. It is commonly used in a wide range of profiling practices, such asmarketing, surveillance, fraud detection and scientific discovery.

Data warehouseA Data warehouse is a repository of an organization's electronically stored data. Data warehouses aredesigned to facilitate reporting and analysis.

Decision Support Systems (DSS)Decision support systems constitute a class of computer-based information systems includingknowledge-based systems that support decision-making activities.

Dividend per share (DPS)The Dividend per share (DPS) is the portion of a companys profits paid as dividend to each outstanding

ordinary share (or share of common stock). For example, a company that paid $10 million dividends lastyear and has 10 million shares in issue would report dividends of $1 per share. Current and futuredividends per share are key statistics in evaluating a shares outlook.

DysfunctionalDysfunctional refers to abnormality, in the sense of something deviating from the normal or differing fromthe typical and is a subjectively defined behavioural characteristic. One example of dysfunction isdistress in which a person displays depression, anxiety, unhappiness, etc.

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Dynamic change

Dynamic change can be related to as change which makes an organisation change what it is doing.This is compared with change that does not have a direct impact on an organisations strategy oroperations.

Earnings per share (EPS)The Earnings per share (EPS) is the portion of a companys profits allocated to each outstanding ordinaryshare (or share of common stock). For example, a company that earned $20 million profits last year andhas 10 million shares in issue would report earnings of $2 per share. Current and future earnings pershare are key statistics in evaluating a shares outlook.

Economies of scale

Economies of scale are the cost advantages that a business obtains due to expansion. They are factorsthat cause a producers average cost per unit to fall as volume (or scale) is increased. Economies of scalemay be utilized by any size firm expanding its scale of operation. The common ones are purchasing (bulkbuying of materials through long-term contracts), managerial (increasing the specialisation of managers),financial (obtaining lower-interest charges when borrowing from banks and having access to a greaterrange of financial instruments), and marketing (spreading the cost of advertising over a greater range ofoutput).

EcosystemAn ecosystem is a unit of interdependent organisms which share the same habitat. For example, anindustry could be called an ecosystem.

EfficacyEfficacy is the capacity to produce an effect. It is used to mean different specific things in different fields.

EnvironmentAn organisations environment comprises all those features of the surrounding world which in some wayare detectable and which affect the organisations behaviour. In considering the effects of the environmentupon management behaviour is useful to consider the environment as being those factors whichmanagement do not control. For example, management do not control the behaviour of their customers(market) or their competitors, government policy, technological change, economic events or stock-exchange prices, and so on.

Ex ante dataEx-ante is used most commonly in the commercial world, where results of a particular action, or series ofactions, are forecast in advance on the basis of the data available at the time of the forecast. The oppositeof ex-ante is ex-post.

ExceptionException is an action that is not part of ordinary operations or standards.

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Executive Support System (ESS)

An Executive Support System (ESS) (or Executive Information System [EIS]) is a type of managementinformation system intended to facilitate and support the information and decision-making needs of seniorexecutives by providing easy access to both internal and external information relevant to meeting thestrategic goals of the organisation.

Expert systemAn expert system is software that attempts to reproduce the performance of one or more human experts,most commonly in a specific problem domain, and is a traditional application and/or subfield of artificialintelligence.

Ex post data

Ex post data is based on knowledge of the past. For example, after a control period is over managementmight then know that the ex ante data used to predict a budget was inaccurate or inappropriate. Theyknow this from the ex-post data they have available after the budget period has finished.

ExtrapolationIn mathematics, extrapolation is the process of constructing new data points outside a discrete set ofknown data points. It is similar to the process of interpolation, which constructs new points between knownpoints, but the results of extrapolations are often less meaningful, and are subject to greater uncertainty.

FacilitatorA facilitator is someone who helps a group of people understand their common objectives and assiststhem to plan to achieve them without taking a particular position in the discussion. The facilitator will try to

assist the group in achieving a consensus on any disagreements that pre-exist or emerge in the meetingso that it has a strong basis for future action.

FeedbackFeedback is a process (mechanism or signal) whereby results (back from the process, i.e. after theprocess) is looped back to control the process within itself. Such a loop is called a feedback loop. Thesystem then becomes self-regulating because it enables a system that is out of control to be returned to acontrolled state. It is a cybernetic control system. Feedback is considered to be reactive in that thesystem reacts to an event after it has occurred.

Feedforward

Feedback is a process (mechanism or signal) whereby predicted results (before the process, i.e. inadvance of the input) is looped forward to control the process within itself. It involves predictingenvironmental influences affecting both the systems input and processing state. It is a cybernetic controlsystem. Feedback is considered to be proactive in that the system reacts to an event before the deviationoccurs.

ForecastingForecasting is the process of estimating how a condition will be in the future.

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GAAP

Generally Accepted Accounting Principles (GAAP) is the term used to refer to the standard frameworkof guidelines for financial accounting used in any given jurisdiction. GAAP includes the standards,conventions, and rules accountants follow in recording and summarising transactions, and in thepreparation of financial statements.

GoalA goal is a projected state of affairs that an organisation plans or intends to achieve. It is normally lessspecific than business objectives which are derived from it.

Goal congruenceGoal congruence is the state which leads individuals or groups to take actions which are in their best

interests and in the best interests of the organisation. It is an ideal state, but one that is difficult to achieve.

Greenfield strategyGreenfield strategy refers to a situation where a company plans to start up using its own resourcesrather than acquire another company or enter into some other form of business alliance.

IndustryIndustry is any branch of manufacture or trade and is often classified into groups. For example heavyindustry relates to such basic industries as coalmining, steel-making, shipbuilding, etc. involving heavyequipment, light industry to small factory-process goods, e.g. knitwear, glass, electronics components, etc.

Intermediaries

An intermediary is a third party that offers intermediationservices between two trading parties. Theintermediaryacts as a conduit (or channel) for goods or services offered by a supplier to a consumer.Typically the intermediary offers some added value to the transaction that may not be possible by directtrading. An example of an intermediary would be a retail outlet that intermediates between manufacturerand consumer.

Internal controlsIn accounting and auditing, internal control is defined as a process effected by an organization'sstructure, work and authority flows, people and management information systems, designed to help theorganization accomplish specific goals or objectives.

Laissez-faireLaissez-faire is a term used to describe a policy of allowing events to take their own course. The term is aFrench phrase literally meaning "let do".

Lean enterpriseLean manufacturing or lean production, which is often known simply as "Lean", is a production practicethat considers the expenditure of resources for any goal other than the creation of value for the endcustomer to be wasteful, and thus a target for elimination. Working from the perspective of the customerwho consumes a product or service, "value" is defined as any action or process that a customer would bewilling to pay for. Basically, lean is centered around creating more value with less work.

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Litmus test

Blue litmus paper turns red under acidic conditions and red litmus paper turns blue under basic (i.e.alkaline) conditions. It now taken to represent any event or outcome seen as an indicator of importance.

LobbyingLobbying is the practice of influencing decisions made by management or a group. It includes all attemptsto influence managers and group members.

Macro-economicsMacroeconomics (from Greek: - /makri-s/long, large and /ikonomia/ economy) a branch ofeconomics that deals with the performance, structure, and behaviour of a national or regional economy asa whole. Along with microeconomics (a branch of economics that studies how individuals, households

and firms make decisions to allocate limited resources) macroeconomics is one of the two most generalfields in economics. It is the study of the behaviour and decision-making of entire economies.

Management accountingManagement accounting is concerned with the provisions and use of accounting information tomanagers within organizations, to provide them with the basis to make informed business decisions thatwill allow them to be better equipped in their management and control functions.In contrast to financial accountancy information, management accounting information is:

usually confidential and used by management, instead of publicly reported; forward-looking, instead of historical; pragmatically computed using extensive management information systems and internal controls, instead of

complying with accounting standards.

This is because of the different emphasis: management accounting information is used within an organization,typically for decision-making.

Management information system (MIS)A management information system (MIS) is a subset of the overall internal controls of a businesscovering the application of people, documents, technologies, and procedures by managementaccountants to solving business problems such as costing a product, service or a business-wide strategy.

Market development strategyMarket development is one of the four growth strategies of the Product-Market Growth Matrix defined byAnsoff. Market development occurs when a company sells existing products in a new market.

Marketing mixThe marketing mix is generally accepted as the use and specification of the 'four P's' describing thestrategic position of a product in the marketplace. A prominent marketer, E. Jerome McCarthy, proposed a4 P classification in 1960, which has seen wide use. The four Ps concept of Product, Price, Place andPromotion is explained in most marketing textbooks. In recent years with the advent of website selling afurther 3Ps have been added to the mix: Physical evidence, Process and People.

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Market penetration strategy

Market penetration is one of the four growth strategies of the Product-Market Growth Matrix defined byAnsoff. Market penetration occurs when a company penetrates an existing market with current products.

Market researchMarket research is the management process of discovering what people want, need, or believe. It can alsoinvolve discovering what their buying behaviour is. Once that research is completed, it can be used todetermine the products (services) the customer requires and how they should be marketed.

Market segmentationMarket segmentation is the process of dividing a market into groups who have unique needs, wants andbuying behaviour or who might want different products and services so that a distinct marketing mix can be

offered to them. (For example, students wanting to pass Paper F5 represent a market, but within thismarket there are different needs [or segments] such as those wanting [1] a full-time course, [ii] a weekendcourse, [iii] a home-study course, [iv] a revision-course or [v] e-book course (!).) Segmentation leads tosmall market targets, which in turn lead to small batch production/service.

Matrix organisationA matrix organisation is a combination of different structures. For example it could include thecombination of product and geographic divisions operating in tandem.

Mission statementA mission statement is a brief written statement of the purpose of a company or organization. Ideally, amission statement guides the actions of the organisation, spells out its overall goal, provides a sense of

direction, and guides decision making for all levels of management.

Negative feedbackThe nature of some types of system dictate that the detected errors need to be eradicated by changingthe activity or process without changing or affecting the state of the objectiveor standard. The signalresulting in this action is termed negative feedback. In this case it is thought expedient to maintain theinitial standard for a term. In this case the activities within the process would be changed in anendeavour to reach the standard.

ObjectiveAn objective is a projected state of affairs that an organisation plans or intends to achieve and is more

detailed than the mission or goal from which it derives. An objective usually has the following SMARTcharacteristics.

S specificM measurableA achievableR relevantT time based

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Objectivity

An objective fact means a truth that remains true everywhere, independently of human thought orfeelings. For instance, it is true always and everywhere that 'in base 10, 2 plus 2 equals 4'. Objectivitymeans basing decisions on true facts and not on opinion or judgement.

Open systemAn open system is a state of a system, in which a system continuously interacts with its environment.

Operational managementOperational decisions are made in response to changing circumstances so as to make best use ofexisting resources. It often refers to day-to-day working decisions.

OptimisingOptimising involves planning what is best for the achievement of a goal or result. It involves thegeneration and evaluation of optional courses of action available to achieve the goal.

Ordinal scaleAn ordinal scale defines a total pre-order of objects; the scale values themselves have a total order;names may be used like "bad", "medium", "good"; if numbers are used they are 1st, 2nd, 3rd and so on.

ParticipationParticipation is the process during which individuals, groups and organisations are consulted about orhave the opportunity to become actively involved in a project or program of activity.

PortmanteauA portmanteau word is used broadly to mean a blend of two (or more) words, such as BLOG is a blendof WeB and LOG (diary).

Positive feedbackThe nature of some types of system dictate that the detected errors need to be eradicated by changingthe system objectiveor standard. The signal resulting in this action is termed positive feedback. Forexample, if an advertising budget is overspent but the resultant increase in the sales of it's products issufficient to justify the overspending, or where there is a situation causing an acceptable favourabledeviation (for example, the use of lower-than-standard-price material which is found suitable for itspurpose), it may be decided that the objectiveor standard(the control parameter) be adjusted

immediately, in which case the deviation is eliminated and will not be subject to amplification as theobjectives of the system have been changed.

Proactive managementProactive management is where managers make decisions to act in advance to deal with an expectedchange or difficulty.

Process of eliminationThe process of elimination is a basic logical tool to solve real world problems. By subsequently removingoptions that may be deemed impossible, illogical, or can be easily ruled out due to some sort of explicitunderstanding relative to the entire set of options, the pool of remaining possibilities grows smaller.

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Product development

Product development is one of the four growth strategies of the Product-Market Growth Matrix defined byAnsoff. Product development occurs when a company sells a new product in an existing market.

PrognosisPrognosis is the foretelling : an indication of something to come, what is likely to happen.

PrototypeIn many fields, there is great uncertainty as to whether a new design will actually do what is desired. Newdesigns often have unexpected problems. A prototype is often used as part of the product design processto allow engineers and designers the ability to explore design alternatives, test theories and confirmperformance prior to starting production of a new product. Engineers use their experience to tailor the

prototype according to the specific unknowns still present in the intended design. For example, someprototypes are used to confirm and verify consumer interest in a proposed design where as otherprototypes will attempt to verify the performance or suitability of a specific design approach.

Ratio analysisA ratio is an expression that compares quantities relative to each other. The most common examplesinvolve two quantities, but any number of quantities can be compared. It is possible to identify and analyseover 100 different financial ratios.

RationalityA decision or situation is often called rational if it is in some sense optimal, and individuals ororganisations are often called rational if they tend to act somehow optimally in pursuit of their goals. Thus

one speaks, for example, of a rational allocation of resources, or of a rational corporate strategy.

Reactive managementReactive management is where managers make decisions that react to past events and results ratherthan anticipating the future.

Relevant rangeThe relevant range is the range of volume change in which a linear relationship can be assumedbetween two variables, such as costs and units. When a decision causes a volume change that exceedsthe relevant range the linear relationship is no longer applicable.

Quality circleA Quality Circle is a volunteer group composed of workers usually under the leadership of their supervisor(but they can elect a team leader), who are trained to identify, analyse and solve work-related problemsand present their solutions to management in order to improve the performance of the organization, andmotivate and enrich the work of employees

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Satisficing

Satisficing (a portmanteau of "satisfy" and "suffice") is a decision-making approach which attempts tomeet criteria for adequacy, rather than to identify an optimal solution. A satisficing decision may often benear optimal. The word satisfice was coined by Herbert Simon. He pointed out that human beings lack thecognitive resources to maximise: we usually do not know the relevant probabilities of outcomes, we canrarely evaluate all outcomes with sufficient precision, and our memories are weak and unreliable. A morerealistic approach to rationality takes into account these limitations: This is called bounded rationality.

ScattergraphA scatter graph is a type of display using coordinates to display values for two variables for a set of data.The data is displayed as a collection of points, each having the value of one variable determining theposition on the horizontal axis and the value of the other variable determining the position on the vertical

axis. A scatter graph is also called a scatter chart, scatter diagramand scatter plot.

Semi-variable costSemi variable cost is an expense which contains both a fixed cost component and a variable costcomponent. The fixed cost element shall be a part of the cost that needs to be paid irrespective of the levelof activity achieved by the entity. On the other hand the variable Component of the cost is payableproportionate to the level of activity. A semi-variable cost might be divided into the fixed and variablecomponents by using any one of a number of quantitative techniques.

Sensitivity analysisSensitivity analysis is the term used to describe a systematic approach to risk by which variation in theexpected outcome of a decision is associated with the possible behaviour of the individual variables

making up the decision.

SensorA sensor is a process (device or mechanism) that measures results and converts them into a signalwhich can be read by a regulator (human) or by an instrument. In management the process of usingsensors to measure the results of activity (costs, budgets, etc.) is known as monitoring.

Set upA 'set up' is the work needed at the end of one job or batch of work to get the production process readyfor the next job or batch. An example would be the need to change the colour of paint in a paint machinebetween the manufacture of one batch of products and a batch of different products. The paint machine

would need to be closed down, stripped, cleaned and then the new (required) paint put into the machinebefore the new production starts.

It is obvious that the overhead cost involved (including the machine downtime cost) would be the sameregardless of the number (volume) of products involved in the new batch.

SimulationSimulation is the imitation of some real thing, state of affairs, or process. Simulation can be used to showthe eventual real effects of alternative conditions and courses of action.

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Spillover

Spillover effects are externalities of economic activity or processes upon those who are not directlyinvolved in it. For example a permanent rise in the price of petrol would have a negative spillover effect onthe sales of large-engine cars.

Statistical significanceIn statistics, a result is called statistically significant if it is unlikely to have occurred by chance.

Status quoStatus quo, is a Latin term meaning the current or existing state of affairs. To maintain the status quo is tokeep the things the way they presently are.

Strategic managementStrategic management is the process of drafting, implementing and evaluating cross-functional decisionsthat will enable an organisation to achieve its long-term objectives. It is the process of specifying theorganisation's mission, and objectives, developing policies and plans, often in terms of projects andprograms, which are designed to achieve these objectives, and then allocating resources to implement thepolicies and plans, projects and programs. A balanced scorecard is often used to evaluate the overallperformance of the business and its progress towards objectives.

SubjectivitySubjectivity refers to a person's perspective or opinion, particularly feelings, beliefs, and desires. It isoften used casually to refer to unsubstantiated personal opinions, in contrast to knowledge and fact-basedbeliefs. In philosophy, the term is often contrasted with objectivity.

Sub-optimalSub-optimal is a state where the objective of a sub-system (e.g. department) is achieved at the expense ofthe objective of the overall system (company). It results from a situation where there is lack of goalcongruence between the system and the sub-system.

SurrogateA surrogate is a thing (or person) standing in for another thing (or person). Financial surrogates are oftenused to represent physical

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