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12th International Conference of the TOC Practitioners Alliance - TOCPA
Practical aspects of managerial
accounting
in a company implementing TOC
Natalya AnisimovaNovosibirsk State Technical University (NSTU) Novosibirsk, Russia26.04.2014
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12th International Conference of the
TOC Practitioners Alliance TOCPA
April 26-27, 2014 Moscow, Russia
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12th International Conference of the TOC Practitioners Alliance - TOCPA
Natalya Anisimova
Associate professor of economic informatics
department of Novosibirsk State Technical University
NSTU Ph.D. in Economics, consultant
Ms. Anisimova starting from 2011 teaches TOC as a
part of economic disciplines for students and
undergraduates of NSTU. Natalya was the head of the
presidential program on training engineers in "Modern
approaches to manufacturing processes in 2013,
including the financial TOC indicators, TOC Logistical
Solutions for production and project management, and
thinking processes.
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Managerial accounting is a system that provides
needed decision-making information to managers
in linkage to the goal of the company as a whole
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A TEST TASK: WHY TRADITIONAL APPROACH
DOES NOT WORK?
Simple Case Study:
The company has one division that produces three types of
products.
Review its operation and draw a conclusion, whether it is worth
to discontinue a product based on the following data (traditional
managerial accounting and standard costing):
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A TEST TASK: WHY TRADITIONAL APPROACH
DOES NOT WORK?
Indicators Model A Model D
Volume of sales, units 1000 1200 900 1000
Price in RUB /unit 200 190 220 250
Variable Cost
RUB/unit190 50 120 15
Fixed costs, ths. RUB 60 000 102 000 90 000 105 000
Profit per unit., in RUB -50 55 0 -5
Profit, in RUB -50 000 66 000 0 -5 000
11 000What will be the profit, if they decide to reduce the product range?
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Traditional approach approach
Variable Cost
Variable Cost (VC) are the costs that
change in proportion to the volume of
production
Fixed costs (FC) are the costs that
remain unchanged irrespective of the
volume of production (or are almost
unchanged)
In case of mixed cost, mathematical
methods shall be used to allocate
mixed costs into product cost
Total Variable Cost (VC) are the costs that
grow in direct proportion to the sales volume
of each product item
Operating expenses (OE) do not vary in
direct ratio of each sales cost for the certain
period
Mixed and semivariable costs are related to
operating costs. Operating expenses are not
allocated among different types of products
and the full cost is not calculated.
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Traditional approach approach
Financial indicators of performance
Net profit (NP) helps to identify how
much money the solution generated
NP = P V CV
Return on Investment (ROI) helps to
compare the required investments with
the profit
ROI = NP / I
Throughput () speed at which the
organization generates the goal units
(by sales)
For commercial organizations:
TV = P V VC V
(income for a period total variable costs related to the sales
that ensured this throughput)
Per product unit:
Tunit = P VCunit
Linkage to traditional indicators :
NP = T OE ROI = ( - OE) / I
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DRAWBACKS OF THE TRADITIONAL
APPROACH
Distortion of the result as of the reporting period due to mixing of the indicators from different
categories:
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HOW HAS ACTUAL COST CHANGED?
The volume of production
Sales volume
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DRAWBACKS OF THE TRADITIONAL
APPROACH
Distortion of the result as of the reporting period due to mixing of the indicators from different
categories
approach: Accurate result as Throughput
calculation is based on the directly calculated
indicators per every unit of product or every order...
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DRAWBACKS OF THE TRADITIONAL
APPROACH
Traditional accounting additionally stimulates the creation of inventory, as allocation of costs to
products leads the situation, when part of the
companys expenses are "stored" together with the
products and recognition of them in accounting is
delayed.
approach: Reflect the actual situation, because
does not accumulate errors arising from the allocation
of costs and playing" with inventory
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DRAWBACKS OF ACCOUNTING BASED ON
TRADITIONAL APPROACH
PLANT
10 units
Warehouse
5 units
Customers
5 units
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Initial indicator Sum
Cost of products in the
warehouse (5 units)
Cost of shipped
products (5 units)Revenue
Profit
Standard costing
Variable Costs 10 RUB/unit 50 50
Fixed Costs 100 RUB 50 50
Total 100 100
Price 40 RUB/unit 200 100
Direct-costing
Variable Costs 10 RUB/unit 50 50
Fixed Costs 100 RUB 100
Total 50 150
Price 40 RUB/unit 200 50
Variable Costs 7 RUB/unit 35 35
Fixed Costs 130 RUB 130
Total 35 165
Price 40 RUB/unit 200 35
DRAWBACKS OF ACCOUNTING BASED ON
TRADITIONAL APPROACH
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DRAWBACKS OF THE TRADITIONAL
APPROACH
The methodology is difficult for understanding:
- difficulty in identification and differentiation of
variable or fixed costs.
- It is not clear on what basis costs were allocated or
such allocation may seem not fair to any staff
member who does not deal with accounting directly
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METHODS OF COST ALLOCATION IN
TRADITIONAL ACCOUNTING
(not applicable in TOC!!!)
1. Logical methods
2. High-Low method
21
21
VVVCunit
=22 VVCCFC unitV =
3. Based on regression and correlation analysis
=+
=+
.
,
2 VVVCVFCVVCFCn
unitV
unitV
( )
=22 VnV
VnVVCunit
n
VVCCFC unitV
=
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DRAWBACKS OF THE TRADITIONAL
APPROACH
The methodology is difficult for understanding:
approach:
- Ease of perception and logic reports that were
prepared according to TOC are significantly more
understandable to people who are not accountants
- Ease of preparation - focus on fewer facts, there is no
need to allocate costs, recalculate and reallocate them
at the end of the period
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DRAWBACKS OF THE TRADITIONAL
APPROACH
Does not provide information for selection the best product range, valuation of business portfolio as financial result
depends on the of fixed cost allocation base.
Jeopardizes the marketing campaign of the company thus deteriorating the companys offer
approach:
Allows to identify SKUs that contribute to the growth of profit
There is no dependence on subjective decisions (e.g. on selection of fixed costs allocation base)
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DRAWBACKS OF THE TRADITIONAL
APPROACH
Misleads production divisions, takes away from the companys common goal achievement
- based on the premise that all resources are equally important
- Motivates overloading of equipment/workers, increases batches to
minimize cost per unit
approach:
Plays a motivating role as a positive contribution to the achievement of companys goal is visible.
Allows to decentralize decision-making process, while keeping orientation to the global result
Focuses on exploiting the constraint
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DRAWBACKS OF THE TRADITIONAL
APPROACH
Has a negative impact on assessment of performance of the divisions or entities that are part of the Holding and
participate in on value chain based on the evaluation of their
equivalent measurement as profit centers.
approach: In corporate reporting focuses on movement of money
between the system and the rest of the world instead of
internal movement of money within the system
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CHALLENGES OF TOC ACCOUNTING
IMPLEMENTATION
1. Need to change the mindset:
jumping from using the full cost concept to full
uncontrollable costs
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PRIORITIES
Traditional management
Traditional management
II
TT
Japanese management JIT
Japanese management JIT
II
TT
TT
II
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CHALLENGES OF TOC ACCOUNTING
IMPLEMENTATION
does not call for ignoring costs!
- -based accounting also captures all costs on a daily basis
- For each decision ROI of the decision is identified:
i.e. all core indicators that change upon the decision making are
checked carefully: TVC, OE, T, I
- By knowing and controlling the constraint we avoid cost escalation.
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POINT OF THROUGHPUT
GENERATION
2. Identification of point of throughput generation
receipt of order,
invoicing,
production of order (shipment preparation),
delivery,
receiving payment from the customer
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POINT OF THROUGHPUT
GENERATION
Throughput is generated when the product is shipped
and money are transferred to the seller (two
conditions should be met simultaneously)
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CHALLENGES OF TOC ACCOUNTING
IMPLEMENTATION
It could be:
Payment date = Shipment date
Payment date is earlier than the shipment date
Shipment date is earlier than the payment date
One date of payment and partial shipment (as soon as they are available,
as needed ...)
Several payment dates (prepayment or payment by installments) and one
shipment date
Several payment dates, several shipment dates, clients obliviousness on
payment for a part of the order, rejection of a part of the order with a refund,
re-sorting of the order, replacement or the client said ok, return of
defective product, barter transactions
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CHALLENGES OF TOC ACCOUNTING
IMPLEMENTATION
It could be :
Price of the SKU is the same for all clients (shopping in supermarket), Tu is same
There can be a discount system, considering:
- Lead-times or shipment of stock available in the warehouse
- Dates of shipment
- Prepayment
- Volume
- Seasonal /unseasonal
- Long-term relationships with the client...
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CHALLENGES OF TOC ACCOUNTING
IMPLEMENTATION
It could be:
- environment
- environment
- Mixed environment
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CHALLENGES OF TOC ACCOUNTING
IMPLEMENTATION
Need of throughput identifying for:
- individual SKUs
- orders (deals)
- individual divisions
- company
- group of companies (holding)
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HOW TO TAKE INTO ACCOUNT
EVERYTHING?
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POINT OF THROUGHPUT
GENERATION
Invoice/Date
Amount
of cash
proceeds
Amount of
shipment
Accumulativ
e amount of
cash
proceeds
Accumulativ
e amount of
shipment
Amount of
proceeds for
throughput
estimation
upon
request
Amount of
proceeds for
daily
throughput
estimation
1
01.02.2014 10 0 10 0 0 0
02.02.2014 10 15 20 15 15 15
03.02.2014 20 15 40 30 30 15
04.02.2014 20 25 60 55 55 25
05.02.2014 30 55 90 110 90 35
Total: 90 110 90
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Performance evaluation of holdings entities
and the whole holding
Holdings entities: Holding company :
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THROUGHPUT ACCOUTING USAGE IN THE
PERSONNEL MOTIVATION SYSTEM (E.G.
COMMERCIAL DEPARTMENT )
Bonus fund calculation base for personnel of commercial department -
excess of the actual throughput over statutory minimum
The actual throughput is fixed upon receipt of payment for shipped
products
Minimum statutory throughput minimum throughput value, calculated
on a monthly basis according to the approved budget that allows to
cover annual operating expenses
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THROUGHPUT ACCOUTING USAGE IN THE
PERSONNEL MOTIVATION SYSTEM (E.G.
COMMERCIAL DEPARTMENT )
Comparison of throughput and operating expenses
( ) ( )
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THROUGHPUT ACCOUTING USAGE IN THE
PERSONNEL MOTIVATION SYSTEM (E.G.
COMMERCIAL DEPARTMENT )
Level of achievement of target throughput
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THROUGHPUT ACCOUTING USAGE IN THE
PERSONNEL MOTIVATION SYSTEM (E.G.
COMMERCIAL DEPARTMENT )
Bonus award criteria:
The bonus is not charged if minimum throughput is not
exceeded
The actual bonus fund calculation scale is applied for
the T above the minimum throughput
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THROUGHPUT ACCOUTING USAGE IN THE
PERSONNEL MOTIVATION SYSTEM (E.G.
COMMERCIAL DEPARTMENT )
Proposed balance of fixed and variable parts of Payroll
PositionFixed salary Bonus
% %
Head of Department 50,00% 50,00%
Senior manager 30,00% 70,00%
Department manager 30,00% 70,00%
Records manager 30,00% 70,00%
Head of Procurement 50,00% 50,00%
Dispatcher 60,00% 40,00%
Head of tender department 50,00% 50,00%
Specialist of tender department 50,00% 50,00%
Head of marketing department 70,00% 30,00%
Marketing-analyst 80,00% 20,00%
Advertising specialist 80,00% 20,00%Marketing manager 80,00% 20,00%
Head of retail department 50,00% 50,00%
Managers of retail department 60,00% 40,00%
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THROUGHPUT ACCOUTING USAGE IN THE
PERSONNEL MOTIVATION SYSTEM (E.G.
COMMERCIAL DEPARTMENT )
Basic bonus indicator:
!"#$"%'()'$*+(%)$+ ,%'(#+-$+()+)
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We do not propose giving up traditional accounting methods of
accounting, as it is necessary to prepare external statements for
investors and tax authorities, but we claim that, in general,
management based on traditional cost accounting leads to
suboptimal results for the system (company) and does not allow
to make quick management decisions
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Thank you for your attention!