Chapter 13

Controlling Costs in the Changing Workplace

1. What is open-book management and why does

its adoption require changes in accounting

methods and practices?

2. Why are games often used as the basis to teach

and motivate open-book management concepts?

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Learning Objectives

3. Why is implementing open-book management

more difficult in large organizations than in

small organizations?

4. Why does business process reengineering cause

radical changes in how firms execute processes?

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Continuing . . . Learning Objectives

5. Why is throughput an important performance

measure for organizations that apply the theory

of constraints?

6. How does throughput accounting differ from

variable cost accounting?

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Continuing . . . Learning Objectives

7. How does value chain cost analysis create opportunities

to achieve competitive advantages using concepts of

interorganizational cost management?

8. What factors are driving the increased reliance on

outsourcing; and what are the financial considerations

of the outsourcing decision?

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Continuing . . . Learning Objectives

9. Why are joint ventures and strategic alliances

increasingly used by firms to exploit new market

opportunities?

10. How are target costing and value engineering used

to manage costs? In which life cycle stage are these

tools used?

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Continuing . . . Learning Objectives

11. What are the competitive forces that are driving

decisions to downsize and restructure operations?

12. Why are operations of many firms becoming more

diverse and how does the increasing diversity

affect the roles of the firms’ accounting systems?

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Continuing . . . Learning Objectives

Open-Book Management

Open-book management is a philosophy about increasing a firm’s performance by involving all workers, and by ensuring that all workers have access to operational and financial information necessary to achieving performance improvements.

Games People Play

Games make learning both fun and competitive while allowing for complex financial practices to be simplified.

Ten Common Principles

of Open-Book Management

1. Turn the management of a business into a game that employees can win.

2. Open the books and share financial and operating information with employees.

3. Teach the employees to understand the company’s financial statements.

4. Show employees how their work influences financial results.

5. Link nonfinancial measures to financial results.Tim Davis, “Open-Book Management: Its Promises and Pitfalls,” Organization Dynamics (Winter 1997), pp.. 6-20.

Ten Common Principles

of Open-Book Management6. Target priority areas and empower employees to make

improvements.

7. Review results together and keep employees accountable. Regularly hold performance review meetings.

8. Post results and celebrate successes.

9. Distribute bonus awards based on employee contributions to financial outcomes.

10. Share the ownership of the company with employees. Employee stock ownership plans (ESOPs) are routinely established in firms that practice open-book management.

Tim Davis, “Open-Book Management: Its Promises and Pitfalls,” Organization Dynamics (Winter 1997), pp.. 6-20.

Open Book Management

Implementation Challenges

Characteristics of firms that are best suited to successful implementation include– small size

– decentralized management

– a history of employee empowerment

– the presence of trust between employees and managers

Business Process Reengineering

Business process reengineering (BPR) means examining processes to identify -- and then eliminate, reduce, or replace -- functions and processes that add little customer value to products or services.

Steps to Business Process

Reengineering

1. Define the objectives of the BPR project.

2. Identify the processes that are to be reengineered.

3. Determine a baseline for measuring the success of the BPR project.

4. Identify the technology levers--these are the potential sources of innovation, increased quality, increased output, and decreased costs.

5. Develop initial prototypes of the reengineered process and then, through subsequent iterations, develop incremental improvements to the prototypes until satisfactory results are achieved.

Yogesh Malhotra, “Business Process Redesign: An Overview,” 1996.

Theory of Constraints

The theory of constraints (TOC) is management philosophy about focusing attention on the constraints (bottlenecks) that limit organizational achievements (such as maximization of profits) so that throughput can be maximized.

In profit-oriented organization, throughput is the rate at which a company generates cash from selling products and services to customers.

Comparison of Variable Costing

and Throughput Accounting

VARIABLE COSTING THROUGHPUT ACCOUNTING

Revenue Revenue

- Direct Materials - Direct Materials

- Direct Labor

- Variable Overhead - Variable Overhead

= Contribution Margin = Throughput

- Fixed Expenses - Operating Expenses

= Profit = Profit

Eric Noreen, Debra Smith, and James T. Mackey, The Theory of Constraints and Its Implications for Management Accounting (Great Barrington, Mass.: North River Press, 1995), p. 14.

Value Chain

A value chain is the set of all processes that convert materials into products and services for the final consumer.

• Vertical integration is a measure of the extent to which the value chain resides within a single firm.

• Outsourcing is contracting with outside vendors to provide necessary parts or services rather than producing them in-house.

Insource/Outsource Considerations

Relevant quantitative factors:• Incremental production costs for each unit• Unit cost of purchasing from outside supplier• Availability of production capacity to

manufacture components• Opportunity costs of using facilities for

production rather than for other purposes• Availability of storage space for units and raw

materials

Continuing . . .

Insource/Outsource Considerations

Relevant qualitative factors:• Relative net advantage given uncertainty of

estimates• Reliability of source(s) of supply• Ability to assure quality when units are

purchased from outside• Nature of the work to be subcontracted• Availability of suppliers

Continuing . . .

Insource/Outsource Considerations

Relevant qualitative factors:• Impact on customers and markets• Future bargaining position with supplier(s)• Perceptions regarding possible future price

changes• Perceptions about current product prices• Strategic and competitive importance of

component to long-run organizational success

Insource or Outsouce

Cost Information

Present Mfg. Relevant Mfg.Cost per Set Cost per Set

Direct materials $6.00 $6.00Direct labor 2.00 2.00Variable factory OH 4.00 4.00Fixed factory OH* 2.50 1.00 Total unit cost $14.50 $13.00

Quoted price from All-American $13.50

*Of the $2.50 fixed factory overhead, only $1.00 is directly linked to production of the serving sets. This amount is related to the production supervisor's salary and could be avoided if the firm chose not to produce serving sets. The remaining $1.50 of fixed factory overhead is an allocated indirect (common) cost that would continue even if production of serving sets ceased.

Strategic Alliances

A strategic alliance is an agreement of two or more firms with complementary core competencies to jointly contribute to the value chain.

Interorganizational Cost

Management Systems

Types of information that are commonly shared between suppliers and customers include:

•Production cost data•Technological and engineering data•Research and design information•Cost reduction plans•Quality data•Target costing and value engineering information