Lesson Plan on Advanced Topics in Management Accounting

Introduction:

Management Accounting is the most dynamic and flexible area of accounting. It draws much of its usefulness with the continuous evolvement of management concepts and principles. With the entry of Information Age, there are several new management principles that have been developed and management accounting has always been in stride with these changes and developments.

Advanced Business Developments in Management Accounting

I. JUST-IN-TIME INVENTORY SYTEM (JIT)

JIT is a manufacturing philosophy popularized by the Japanese that combines purchasing, production and inventory control system with the goal of minimizing inventory levels to the ideal level of zero inventory.

A. Key elements for a successful JIT system are:

1. Reduction or elimination of waste of materials, labor, factory space and machine usage. (Zero Waste)

2. Factory is organized as to bring materials and tools close to the point of use rather than keeping them in storage areas. (Reduced Set-up Time)

3. Suppliers are expected to delivery the goods just in time for production to commence – not before. (Ultra-reliable Suppliers)

4. Employees are efficient and effective and can perform multi-functions (Flexible Workforce)

B. Benefits of the JIT System

The ultimate benefit of the JIT System is Reduction in Inventory Levels that results to:

1. less money invested in idle assets.2. reduction of storage space requirements.3. less sophisticated inventory control systems and fewer control people needed4. lesser risk of obsolescence, theft and other losses5. generate increased sales due to quicker response to customers.6. increased bottom line with reduced defective rates, less wastage, maximum use of resources and

greater customer satisfaction.

Traditional Inventory System Just-In-Time Inventory SystemPush System Pull SystemSignificant Inventories Insignificant or Zero InventoriesProcess Structure Manufacturing CellsSpecialized Labor Multifunction LaborAcceptable Quality Level (AQL) Total Quality ManagementComplex Cost Accounting Simple Cost Accounting

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Applicability of JIT System in the Philippines – a personal note

Looking from the current economic situation, infrastructure facilities and road network, JIT system is a bit way off our short term realization. There are a lot of changes that have to be made and the change must be thorough and deep into the whole system. We need ULTRA-reliable suppliers that can deliver on time and provide assurance of quality (zero-defect) raw materials at the most reasonable cost.

Looking for at least one supplier that can fit the description may be a daunting task and the cost benefit scenario will force us into sticking with the traditional approach.

Furthermore, to be able to fully implement a JIT system in the country will definitely require much political will to change a negative cultural trait of “Filipino Time” and the lack of importance and value accorded the working hours.

II. Business Process Reengineering (BPR)

With the pursuit of increased quality, global competition and advancements in technology, BPR is the solution. It examines processes to identify and act on value added and non-value-added activities and prescribes radical, quick and significant changes to accomplish improvements and results.

Business Process – any series of steps that are followed in order to carry out some task in a business

Process Reengineering – simplification and elimination of wasted effort particularly those regarded as non-value added activities.

Value added activities – activities that are judged to contribute to customer value or satisfy an organizational need.

a. Primary Activities – transform inputs into outputsb. Support Activities – handled by staff functions

Value chain – set of activities required to design, procure, produce, market, distribute and service a product or service.

Anticipated results:

1. Process is simplified.2. Process is completed in less time.3. Costs are reduced.4. Opportunities for errors are reduced

III. Theory of Constraints (TOC)

It is a short-term approach to managing bottlenecks with the goal of maximizing the contribution margin of the constraint / bottleneck (the throughput contribution).

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A business processis diagrammed

in detail.

The process isredesigned to include

only those steps that makeour product more valuable.

Every step inthe businessprocess mustbe justified.

Throughput – rate of production of a defined process over a state period of time. Thus the focus is on producing goods that are sold, rather than simply producing goods. Managers are not encouraged to produce excess inventory because products are measured as throughput only when they are sold.

Bottleneck – point of slowdown in the production process thus extending production time and slowing down throughput.

Throughput Contribution – Sales less Direct Materials

Ways to effectively increase capacity of bottleneck

- working overtime on the bottleneck- subcontracting some of the processing that would be done at the bottleneck- investing in additional machines at the bottleneck- shifting workers from processes that are not bottlenecks to the process that is a bottleneck- reducing defective units since each defective unit that is processed through the bottleneck and

subsequently scrapped takes the place of a good unit that could be sold.

IV. Total Quality Management (TQM) and Cost of Quality

Quality is difficult to define and can be classified into the following concepts

1. High Mean – above average from the standard or norm

2. Low Variance – delivery of what is actually expected

3. Availability of Options – variety of choices is provided

4. Meeting customer expectations – customer satisfaction achieved.

TQM – comprehensive approach to quality and treats pursuit of quality as a basic organization function that is as important as marketing and production.

Benchmarking – evaluating and measuring the company’s performance level vis-à-vis that of the industry leader.

Four types of Benchmarking

a. Internal Benchmarking – evaluation of business units within the organization which have similar business processes to identify the best practices.

b. Competitive Benchmarking – process of measuring an organization’s products, services and processes against those of its toughest competitors.

c. Functional Benchmarking – business functions in organizations outside the firm’s industry.

d. Generic Benchmarking – examination of specific activities such as invoicing, payroll, purchasing etc.

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Kaizen – Japanese term meaning “Continuous Improvement” initially developed in the East.

Kaizen InnovationEffect Long term and long lasting but undramatic Short term but DramaticPace Small Steps Big StepsTiming Continuous and Incremental Intermittent and Non

incrementalChange Gradual and Constant Abrupt and VolatileInvolvement Everybody Select “Few Champions”Approach Collectivism, group efforts and systems approach Rugged, individualism,

individual ideas and effortsMode Maintenance and improvement Scrap and RebuildEffort orientation People TechnologyInvestment Requires little investment but great effort to maintain Requires large investment

but little effort to maintain

Cost of Quality

Defects cause costs, which can be classified into

I. Conformance Cost – financial measure of internal performance

A. Prevention costs - incurred to keep defects from happening.

Includes: system development and quality engineeringQuality training and quality circlesStatistical process control activitiesSupervision of prevention activitiesAudits of the effectiveness of the quality system

B. Appraisal costs - incurred to ensure that defective products, once made, are not shipped to customers.

Includes: Test and inspection of incoming materials Test and inspection of in-process goodsFinal product testing and inspectionSupplies used in testing and inspectionMaintenance and Depreciation of test equipment Plant utilities in the inspection areaField testing and appraisal at customer site

II. Nonconformance Cost - a financial measure of internal performance and financial measure of customer satisfaction or the lack of both

A. Internal failure costs - incurred as a consequence of detecting defective products before they are shipped to customers.

Includes: Net cost of scrap and spoilageRework labor and overheadRe-inspection and Retesting of reworked productsDowntime caused by quality problemsDisposal of defective units/ productsAnalysis of the cause of defects in productionRe-entering data because of keying errorsDebugging of software

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B. External failure costs - the consequences (in terms of repairs, servicing, and lost future business) of delivering defective products to customers.

Includes: Cost of field servicing and handling of complaintsWarranty repairs and replacementsRepairs and replacements beyond warranty periodProduct recallsLiability arising from defective productsReturns and allowances arising from quality problemsLost sales arising from a reputation for poor quality

Techniques to Analyze Quality Problems:

1. Control Chart

It is a graph of a series of successive observations of a particular step, procedure or operation taken at regular intervals of time. Each observation is plotted relative to specified ranges that represent the limits within which the observations are expected to fall. Only those observations outside the control limits are ordinarily regarded as nonrandom and worth investigating.

2. Pareto Diagram

It is a chart that indicates how frequently each type of defect occurs, ordered from the most frequent to the least frequent.

The Pareto Principle (80-20 Principle) states that only 20% of the factors cause the 80% of effects. Thus we need to focus attention on the 20% rather than the 80% that is bringing in only 20% of the effects.

3. Cause and Effect Diagram (Fishbone Diagram)

It identifies potential causes of defects through further analysis by enumerating more detailed factors.

Most experts agree that management effort should be focused on preventing defects. Small investments in prevention can lead to dramatic reductions in appraisal costs and costs of internal and external failure.

The key therefore is to obtain the optimum balance (indifference point) between the conformance and non-conformance costs as depicted in a graphical solution.

4. Six SigmaSix Sigma is a methodology that provides businesses with the tools to improve the capability of their business processes. The increase in performance and decrease in process variation leads to defect reduction and vast improvement in profits, employee morale and quality of product.

Illustration on Cost of Quality:

Metropolitan Manufacturing expects to spend P400,000 in 200B in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save P40,000 in fixed appraisal costs and variable costs of P0.40 per unit of finished product. The new method involves P60,000 in training costs and an additional P160,000 in annual equipment rental. It takes two units of material for each finished product.

Internal failure costs average P80 per failed unit of finished goods. During 200A, 5% of all completed items had to be reworked. External failure costs average P200 per failed unit. The company's average

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external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used.

Required:1. What is the net effect on appraisal costs for 200B, assuming the new receiving method is implemented

and that 800,000 material units are received?

Solution:Current costs P400,000

Savings: Fixed P 40,000Variable 160,000 (P200,000)

New method: Training cost P 60,000Equipment cost 160,000 220,000 20,000

New costs of method 420,000Net change - Increase P 20,000

2. How much will internal failure costs change, assuming 800,000 units of materials are received and that the new receiving method reduces the amount of unacceptable product units in the manufacturing process by 10%?

Solution:Internal failure costs [(800,000/4) x 0.05 x P80] P800,00010% reduction from new method x 0.10

Savings P 80,000

3. How much will external failure costs change assuming 800,000 units of materials are received and that product failures with customers are cut in half with the new receiving method?

Solution:External failure ((800,000/4) x 1% x P200) P400,000Failure reduction of 50% x 0.50

Savings P200,000

Quality Cost Reports

Quality costs are summarized on a quality cost report. This report shows the type of quality costs being incurred and their significance and trends. The report helps managers understand the importance of quality costs, spot problem areas, and assess the way in which the quality costs are distributed.

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Project Feasibility Studies

Definition: The systematic investigation that ascertains whether a business undertaking is viable in relation to the marketing, technical and financial aspects of a project or venture.

Basic Steps:

1. Gathering and collection of data necessary and relevant to all aspects of the undertaking through research work.

2. Analysis and evaluation of data collected

3. Based on the analysis, to formulate conclusions and recommendations.

Major Aspects of a Feasibility Study:

1. Organization and Management2. Marketing3. Technical4. Taxation5. Financing6. Financial Projections7. Profitability8. Social Desirability

Limitations of a Feasibility Study:

1. Certain required information necessary to draw an opinion or conclusion are not available.

2. Assuming all information necessary is available, errors in judgment by person preparing the study may result in formulating wrong conclusion or recommendation.

3. The study itself is primarily a forecast that usually does not tally with actual events.

Major Parts of a Feasibility Study

I. Project Summary

a. Name of the Firmb. Location of the head office and projectc. Brief description of the project.d. Highlights of major assumptions and summary of findings and conclusions regarding:e.

1. Market feasibility2. Technical feasibility3. financial feasibility4. Economic and social desirability

II. General Information

a. Management of the projectb. Project Timetable and Status

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III. Economic Aspects

1. Market description2. Demand and Supply analysis3. Prices4. Competitive position5. Marketing Program

IV. Social Desirability Aspects

V. Technical Aspects

1. Project Description and specification2. Manufacturing Process3. Plant Size and production schedule4. Machinery and equipment requirements5. Plant Location and Layout6. Building and facilities7. Raw materials8. Utilities9. Waste Disposal10. Production Costs11. Labor Requirements

VI. Financial Aspects

1. Total Project Cost2. Initial Capital Requirements3. Sources of Capital requirements4. Projected Financial Statements5. Financial Analysis

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