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M MAC 302 | MANAGEMENT REPORTING

VI. STRATEGIC
MANAGEMENT
GROUP 5
MEET THE TOPIC PRESENTORS

Clarenz Calingasan James Enero Meryl Maala

Mariel Manguerra Maxima Maristela Sherlyn Pilapil


M MAC 302 | MANAGEMENT REPORTING

OBJECTIVES
At the end of this module, student should be able to:
1. Explain the importance of strategic management Philosophies and
techniques.
2. Discuss the principles of modern management.
3. Elaborate the differences between the two viewpoints of instituting
quality environment in an organization.
4. Explain the concept of Just-in-time (JIT) management.
5. Discuss the Activity-based management (ABM) process.
6. Prepare a quality cost report.
7. Elaborate the other management techniques.

@reallygreatsite
RECENT DEVELOPMENT AND
EMERGING BUSINESS PRACTICES
The continuing advancement in technology and
changes in management philosophy have paved
the way for the introduction of holistic
management accounting systems used to
03
generate information for management decisions
which brought into the forefront the importance of
Strategic Management Accounting
TECHNIQUES FOR STRARTEGIC
MANAGEMENT ACCOUNTING FUNCTIONS
TECHNIQUES FOR STRARTEGIC
MANAGEMENT ACCOUNTING FUNCTIONS
TECHNIQUES FOR STRARTEGIC
MANAGEMENT ACCOUNTING FUNCTIONS
TECHNIQUES FOR STRARTEGIC
MANAGEMENT ACCOUNTING FUNCTIONS
THE MODERN BUSINESS ENVIRONMENT
The influential developments in technological
revolution, especially in the fields of electronics
and biogenetic engineering, coupled with new
and more sophisticated needs and wants of
customers have permanently refaced
organizational structures, standards, processes,
and practices.

Meeting deadlines, optimizing resources,


increasing productivity and efficiency, and
creating innovative ideas have predominantly
characterized business dealings and managing.
THE MODERN BUSINESS ENVIRONMENT
Business entities are now more interdependent
than ever, and outsourcing has become an
attractive alternative of doing things.
Employees are increasingly empowered, multi-
skilled and are confidently accepting more
responsibility.
Trust and openness characterize human and
organizational relations, and teamwork is
encouraged versus individuality.
Direct labor becomes a lesser component of total
production cost as processes are reengineered while
machines and equipment play significant components in
the manufacturing process.
QUALITY IS WHAT THE CUSTOMER SAYS!
Quality may be associated with durability, color,
size, thickness, price, delivery response time,
relationship, or any measure of satisfying
customer's needs.
The business of industrial and commercial
companies is to satisfy wants, needs, desires,
and even vanity. Satisfying customer's needs
means finding what the customer wants.
Businesses who treats their customers as their
king are market competitive.
Multiple options should be available for the
customers
QUALITY IS WHAT THE CUSTOMER SAYS!
QUALITY IS WHAT THE CUSTOMER SAYS!
According to the American Society for Quality
Control (ASQC) quality is the "totality of features
and characteristics of a product made or a
service performed according to specifications, to
satisfy customers at the time of purchase and
during use".
Dimensions of quality
Performance
Aesthetic,
Reliability
Serviceability,
Fitness for Use
Perceived quality and
Conformance
THE PARADIGM SHIFT… NEW WAY OF
THINKING

The ability of the customer to fully exercise its


right in the marketplace coupled with the
calculated consent of the seller to align its
efforts with what the buyer wants and needs
have redefined management philosophies,
thinking, and ways of doing things.
THE PARADIGM SHIFT… NEW WAY OF THINKING
THE PARADIGM SHIFT… NEW WAY OF THINKING
THE PARADIGM SHIFT… NEW WAY OF THINKING
PRINCIPLES OF MODERN MANAGEMENT
Change is the genesis of quality environment.
Change is precipitated and exacerbated by
technological advancements in electronics,
biogenetic engineering, physics, and other fields of
modern science. Because of the incessant changes
in the business environment, people and customers
have re-created their needs necessitating
adjustments on the way businesses are done.
Change is triggered by technology germinated by
inventions ad discoveries, which in turn, are crafted
by needs. There is a change because a need is not
yet satisfied. And to satisfy a need, quality becomes
a necessity.
PRINCIPLES OF MODERN MANAGEMENT
CUSTOMERS

Internal External

Products and services are Outside users of


delivered with the organization’s products
organizational activities

Example: Business Owner, Example: Customers who


Employees, enters a store to buy a
Subcontractors and merchandise
suppliers
PRINCIPLES OF MODERN MANAGEMENT
IN SEARCH OF EXCELLENCE
Many of the principles applied in the early stages of
modern organizations are mentioned in the book in
Search of Excellence authored by Tom J. Peters, Price
Watermann, et. al. published in
1982.
The authors identified the following principles
practiced by excellent companies:
A bias for action. Hands on value driven
Close to customer. Stick of the knitting.
Simple form, lean staff.
Autonomv and entrepreneurship
Simultaneous lose-tigh
Productivity through people.
properties
M MAC 302 | MANAGEMENT REPORTING

WHAT IS

5S’S?

@reallygreatsite
5S’S

1 2 2 3 3 5

Sorting out (equivalent Systematic arrangement Spic and Span (or


Japanese term for Seisu) - (Seiton) - refers to sweep) (Seiso)- refers
means classifying tasks instituting best scientific to cleaning not only
and processes, organizing processes to effect best physically, in terms of
physical resources methods, procedures, and tangible resources, but
according to use, sizes, processes using the best also intrinsically, in
locations, age, etc. technologies. terms of organizational
culture and values.
5S’S

1 2 3 5
4 5

Standardizing (Seiketsu) Self-discipline (Shitsuko)- the stage of


- measures performance internalizing all the 5S and making it as a way
and expectations as to of life, thereby enhancing human relations,
interrelations and approaches which define
output, actions, attitude,
organizational climate, cultures, aspirations,
and processes.
dreams, and excellent results.
QUALITY COSTS

1 2 3 5
If you want

QUALITY

pay for it.


QUALITY COSTS

1 2 3 5
Instituting quality environment in an
organization involves the complete
participation of the top management
who will show the way towards
attaining it. In the process of producing,
non-conformance costs are incurred.
CONFORMANCE COSTS

1 2 3 5

*cover the costs of prevention and appraisal.

*are those incurred to know what the customer


wants, producing the same, and ensuring that the
produce is in conformity with what the customer
wants.
CONFORMANCE COSTS

1 2 3 5
*Conformance connotes precision. And
precision means an error-free environment.
And the best way to avoid errors is to prevent
it. Preventing errors should be done at the
very start.
NON-CONFORMANCE COSTS

1 2 3 5
include the internal failure costs and external
failure costs. The major sources and specific
activity costs of these quality costs are
identified in Table 4 shown in the following
page.
1 2 3 5
1 2 3 5
Design

1 2 3 5
The original source of wants and needs is the
customer. So, listen to what the customer
says and make a design based on it.
Design

1 2 3 5
becomes a very powerful tool in manufacturing and other
business activities. Designing is not the domain of only one
person. The process of designing should be participated by
people from marketing, manufacturing, distribution, finance,
legal services, human resources, purchasing, supply chain, and
representatives from the customer‟s chain. Once the design is
done, suppliers are evaluated as to their reliability and credibility,
employees are trained, and equipment and machineries are
prepared, mounted, installed, and maintained.
Suppliers’ management

1 2 3 5

Suppliers’ management refers to the careful selection of vendors


to ensure that materials will arrive on time and in accordance
with specifications. This means cultivating long-term supply
chain relationships based on precisely delivering orders on
schedule.
Employees shall be
continuously trained
1 2 3 5
*to heighten awareness
*give the best technical preparation
*improve selfesteem and self-respect
*make them understand more about people and
organizational culture
*and create an active, dynamic
*and well-motivated yet continuously learning
team of personnel
Many companies have restructured their
1 2 3 5
production by forming manufacturing cells or
work cells. In this set up, employees learn how to
work as a team. Individual responsibility has been
eclipsed by team‟s responsibility. Individualism
has been overtaken by teamwork. Rewards and
recognition for quality improvement are grouped
oriented and based on quality measures.
Equipment Maintenance
Program
1 2 3 5

To avoid the irritating occurrence of repairs, an


efficient and effective equipment maintenance
program should be in place. Consequently,
machines‟ commercial use has been shortened,
maintenance denotes machines utility and repairs
shall be avoided along the way.
Internal Failure Costs
1 2 3 5

In case where defects are detected on a product


before delivery to customers, internal failure costs
will be incurred. This cost includes the cost of
rework such as order costs, scheduling costs,
inspection costs, tooling changes, and production
downtimes.
External Failure Cost
1 2 3 5
Once the product is delivered and customers
discover the defects or errors, and external failure
cost will be incurred. This cost includes product
warranty, liability to damages, parts replacement,
and incremental costs of addressing and
correcting the complaint such as
decommissioning costs.
1 2 3 5

There is an observed inverse relationship


between conformance costs and non-
conformance costs. That is, if conformance cost is
increased, the non-conformance cost
consequently decreases, and vice-versa.
The locations in which quality costs are incurred are tabulated below:

1 2 3 5
Quality Costs Report
1 2 3 5
Quality costs are accumulated from the initial point of
research and development through the post-customer
services phase. Conformance and non-conformance costs
are to be accumulated per activity, batch, and plant.
Normally, if conformance costs are given more budget, the
costs of non-conformance consequently decline. An
example of a Cost of Quality Report is shown in Table 6
below.
1 2 3 5
1 2 3 5
1 2 3 5
1 2 3 5
Total
1 quality cost is the sum of conformance (e.g., prevention and
2 3 5
detection) costs and nonconformance (or failure) costs.
Increasing conformance costs would reduce nonconformance
costs. The objective is to reduce the cost of errors and customer
complaints and dissatisfactions. As the failure costs start
declining, efforts should be directed to intensify prevention costs
than appraisal costs. Errors are less costly when prevented rather
than when detected and remedied.
Life-cycle analysis

Quality costs are tranced and managed over the life cycle of an
1 activity or process. 2The life cycle has the 3following stages: 5
infancy, growth, expansion, and maturity/decline.

Throughout these life stages, strategic business functions are


created.

Expenditures related to research and development and design


engineering are labeled as “upward costs”, while marketing
and distribution expenditures are called as “downward
costs”.
Change and Managerial Lingo

There are two viewpoints of instituting quality


1 environment 2in an organization.3One is 5
business process re-engineering (BPR) and
the other is kaizen (i.e., continuous
improvement). They are not exclusive from
each other but are both applied in managing
change. BPR and kaizen have basic elements –
process mapping and process value analysis.
Process mapping and process value analysis

1 Process mapping
2 (i.e., input to output)
3 5

lines up activities from the start to the end of a


process cycle to show the connections of
different activities in completing a particular
cycle (e.g., production cycle, specific
department, or unit cycle).
Process mapping and process value analysis

1 Process value analysis


2 3 5
shows the relevance of the interrelationships and
interdependencies of the activities in a given process to determine
their usefulness, identifying possible areas where improvements
could be done, and creating options on how to make the process
more relevant and feasible.
In the process value analysis, activities are classified as either
value-added or non-value added.
Examples of activities measured in terms of time are process time,
1 move time, wait time 2 and inspection time. 3 5
Process time is a value-added activity while move time, wait time and
inspection time are non-value-added activities.
Based on this, the Manufacturing Cycle Efficiency is determined as
follows:

Manufacturing Cycle Efficiency Rate = Process Time/ Throughput Time

Throughput time (or manufacturing time) is the sum of all activities from
input to output which includes the process time, wait time, move time, and
inspection time.
Business Process Re-engineering
Process (re-engineering is a macro-approach to process
1improvement. It needs
2 a new paradigm (i.e.,
3 mental frame) of doing
5
the process. Process re-engineering is revolutionary, makes an
overhaul of the process (i.e., paradigm shift), and needs the
involvement and commitment of the top management. For example, a
mental shift happens when the seller listens first before serving
customers instead of assuming what they need. Such is the major
change in the way managers are conducting businesses now. Process
re-engineering creates a new standards, beliefs, goals, practices,
procedures, and systems of doing things.

The main writing on this topic is from Hammer and Champy‟s


Reengineering the Corporation (1993) from which the following
discussions are lifted.
Business Process Re-engineering
Business Process Re-engineering (BPR) is the fundamental rethinking and
1radical design of business
2 processes to achieve
3 dramatic improvements5 in
critical contemporary measures such as cost, quality, service, and speed.

The key words here are fundamental, radical, dramatic, and process.

Fundamental and radical that BPR starts by asking basic question such
as “why do we do what we do”, without making any assumptions or
looking back to what has always been done in the past.

Dramatic means that BPR should always achieve “quantum leaps in


performance,” not just marginal incremental improvements.
Business Process Re-engineering

A process is a collection of activities that takes one or more kinds of input


1 2 It is the processes that
and creates an output. 3 are subject to 5
fundamental and radical changes to achieve dramatic improvements. A
re-engineered process has certain characteristics:
Often several jobs are combined into one.
Workers often make decisions.
The steps in the process are performed in a logical order.
Work is performed where it makes most sense
Checks and control must be reduced and quality “built-in”.
One manager provides a single point of contact.
The advantages of centralized and decentralized operations are
combined.
According to Hammer, the principles of BPR are:

1 Processes should be
2 designed to achieve 3
a desired outcome rather
5
than focusing on existing tasks.
Personnel who use the output from a process should perform the
process. For example, a company could set-up a database of
approved suppliers, this would allow personnel who require supplies
to order from themselves, perhaps using on-line technology,
thereby eliminating the need for a separate purchasing function.
Information processing should be included in the work which
produces the information. This eliminates the differentiation
between information gathering and information processing.
According to Hammer, the principles of BPR are:
Geographically dispersed resources should be treated as if
1 they are centralized. This allows the benefits of centralization 5
to be obtained, for example, economies of scale through
negotiation of supply contracts, without losing the benefits of
decentralization, such as flexibility and responsiveness.
Parallel activities should be linked rather than integrated. This
would involve, for example, coordination between team
working on different aspects of a single process.
Doers should be allowed to be self-managing. The traditional
distinction between workers and managers can be abolished.
Decisions aids such as expert systems can be provided where
they are required.
Information should be captured once at source.
Most business organizations that have adopted BPR have
developed the following key characteristics:

Work units change from functional departments to process teams


1 where team members are expected to have multi-skills in handling
the tasks needed in the team.
Job enlargement and job enrichment where people do more as
each team member is responsible for results.
People empowerment where team members are empowered to
made decisions relevant to the process.
Performance measures concentrate on results rather than
activities. Process teams create value which is measurable.
Flat organizations, rather than hierarchical, is prevalent where
people work as a whole team, recognizing team‟s responsibility on
the task at hand, resolving interdepartmental issues in a team‟s
level requiring less managerial intervention, and allowing lines of
communications to “naturally” develop around business processes.
The emergence of business process re-engineering has given way
to the importance of value chain analysis where the
interrelationships and interdependence of players in the entire value
creation network are emphasized. The link between different
departments in the business and its relationships with external
parties (i.e., suppliers, customers) are recognized creating
interdependence among them. Interdependence may be viewed as
follows:

Pooled interdependence where each unit works independently of


the others subject to achieving the overall goals of the enterprise.
Sequential interdependence is where there is a sequence (or
a linked chain of activities) with a start and end point. For
example, the output of a preceding department in an
assembly line must be precise enough to serve as a valuable
input to this department of which output must be accurately
fitting to the input need of the next department.
Reciprocal interdependence where the output of one
department becomes the input of another department
whose output is also an input of the first department.
The significant changes caused by the introduction of BPR have
reshaped some of the fundamental processes in accountancy.
Responsibility centers have been modified in response to the
layering of organizational structure, information becomes much
more detailed to identify the creations of values in each
segment and activity, and new variances are identified and
developed explaining deviations of expectations from actual
results.
The BPR has the following implications for the accounting
systems:
Kaizen

Kaizen is a Japanese term which refers to the process of


continuously improving systems, interrelationships, processes, set-
ups, policies, and other details of activities. Improvements are not
only made in wholesale fashion but also in retail, piece by piece,
manner improvements and betterments could be done in every
facet of business operation, in every department or unit, in every
business dynamics and dealings. Small improvements gained from
different activities are powerful building blocks. As the saying goes, a
journey to a thousand miles begins with a single step!
Plan – DO – Check – Act Cycle
Several methods are used in the objective of continuously improving
processes. One of them is the Plan-Do-Check-Act Cycle (PDCA) or
the Deming Wheel. It is a “management by fact” or a scientific
approach to continuous improvement model based on a process-
centered approach as shown below:
A brief discussion on the activities covered by the PDCA Cycle
follows:
Just-in-time (JIT) Management
Speed up the manufacturing cycle

Just-in-time environment is when materials arrive just-in-time


they are needed in the production process and the conversion
process is completed just-in-time the delivery to customers is to be
made. In short, materials storage and warehousing should be
eliminated, finished goods warehousing should be avoided, and the
production process should be expedited to its best performance
while maintaining accuracy.

There are several conditions in the successful implementation of a


just-in-time inventory management, namely:
Unqualified Support from Top Management

The greatest success factor in applying the JIT


system is a strong support from top management.
This is needed as the flow of goods, machines and
activities is modified, the allocation of substantial
amount of financial resources at the initial stage of
implementation is done, and a ground-zero
installation of organizational culture, attitude and
work ethics has been institutionalized.
Use of electronic technology (i.e., electronic data interchange,
internet of things) and highly efficient lines of telecommunications
in the integrated operating process are greatly in use. The
application of JIT system is made easily possible by the advances in
electronics and telecommunications fields. As databases in
production requirements and scheduling are shared,
communications between and among participating companies
have been dramatically shortened, the order lead time and
suppliers' delivery lead time have continuously reduced, thereby
reducing the overall delivery cycle time to customers. Suppliers are
sometimes given a blanket purchase order in delivering needed
materials on time.
Suppliers accreditation and retention
Companies who have undertaken the JIT system were
forced to evaluate their suppliers. According to their
reliability, dependability, and fitness in an integrated
quality environment. Suppliers (i.e., back-end) and
customers (i.e., front-end) should be managed to ensure
accuracy and timeliness of material inputs and in
defining and designing specifications from customers.
Suppliers who cannot meet the standards demanded in
a quality environment are dropped and only those that
have the capability to participate in a quality process
shall be accredited and retained.
Most efficient equipment and machinery
maintenance program
Equipment and machineries should always be on their top condition
and performance to avoid the unnecessary costs of production
stoppages, downtimes, repairs, and lost sales. In a quality production
environment, if an equipment is stopped due to repairs or human
errors in the production line, the batch production is put in halt and
the cause of stoppage found and corrected. If work stoppages
occurred on account of poor equipment performance, schedules are
not met, customers become dissatisfied, costs soar up, profit
declines, situations exacerbate to losses, and the sustainability of the
business is put under heavy pressure. To avoid this unwanted
situation, equipment should always be maintained at its best.
Well-trained, responsible, and
quality-oriented personnel

Employees and personnel are empowered in a quality


environment. They are given the chance to improve their work
processes on their best approaches, skills and understanding, and
are also rewarded and recognized according to their
performance and skills. To do this, they are capacitated to work
with others and extol human relationships and interrelationships.
They are honed not only as individuals but as invaluable
members of a team.
The team is also called a manufacturing cell or work cell. The
team is responsible in designing its workflows, dealings with
suppliers, dealings with freight forwarders, and meeting
customer's demands. The team practices the musketeers
principles of "one for all and all for one". The fault of a teammate is
the fault and inadequacy of the team and all its members.
Employees are forced to be multi-skilled and do multi-tasks.
Along the way, team standards, systems, processes, and
socialization occur of which all team members are expected to
conform. Non-conformity results to delays, inefficiencies, and
poor yield.
Most importantly, employees have self-respect and self-esteem.
They are individually and periodically (e.g., daily) acknowledge
their mistakes and errors and make efforts and ways not to
repeat the same. In return, the whole team appreciates said
humbling act and wisely institutes policies for the team and whole
business organization to practice the same.
Effective and efficient design
department

Design defines what needs to be done. It clearly


articulates what the customer wants and how the
processes are performed. It is the cornerstone of
a quality product. Design means precision and
accuracy. It encourages involvement of
customers and suppliers.
Use of statistical quality control
techniques.

Monitoring quality process needs models and tools


to identify conformance and deviations. Statistical
control techniques serve as an early warning
device that releases managers' adrenalin to
urgently attend to a problem potential or possible
problem. Examples of statistical controls are linear
programming, regression analysis, PERT/CPM, Gantt
Chart, graphs, Pareto rule, and fish-bone analysis.
Improving plant layout

As employees are given the authority to improve their work


processes, production layout is changed from a functional,
individually oriented production process into an integrated
production process. Equipment are not arranged according to
their similarity of output but on their process relationship with
other equipment. Machines and equipment are now arranged
from an input to output involvement. These machines are used
and maintained by responsible employees who are accountable
in their production output and machine performance. This is one
of the changes created by work cells.
JIT and Velocity

Manufacturing velocity refers to the speed with which units or


tasks are process in a system. In an industry characterized by
high technology, shortening product life cycles, and continuous
improvement, the quickness of response time to customers spells
success to survival and survival to failure.

For example, if there are 4,000 units in each process at a given


time and the process produces 1,000 units a day, how long will it
take a unit to complete? The answer is 4 days (i.e., 4,000 units/
1,000 units a day).
Fig 4. The Manufacturing Velocity

Manufacturing velocity = No. of units in a process/ Production rate

To reduce the manufacturing process or increase the velocity, the


number of units in process should be reduced or the number of
units produced per day should be increased.

To illustrate further, consider the original data of 4,000 units in-


process and 1,000 units produced a day, let us assume that the
in-process is reduced by 40%. Then, the velocity shall b:
Activity-Based Management

The application of the activity-based costing (ABC) has been driven by the
based management (ABM) model. The terms activity-based management
activity-based cost management (ABCM) are used to describe the cost
management of ABC.

The cornerstone of the ABM system is the management of activities. Activiti


comprise processes which are to be analyzed and redefined in accordance
objective of greater customer satisfaction and delight. Each activity is to be
as to its significance in the newly defined process. It is to this reason that ac
are grouped as to either value-added or non-value added.
Activity-Based Management

Kaplan, et. Al in Management Accounting defines ABM as... "the


management processes that use the information provided by the
activity-based cost analysis to improve organizational profitability.
Activities-based management (ABM) involves performing activities
more efficiently, eliminating the need to perform certain activities that
do not add value to customers, improving the design of products, and
developing better relationships to customers and suppliers. The goal of
ABM is enabled customer needs to be satisfied while making fewer
demands on organizational resources.
.
An activity uses time and costs. The classification of business activities as to time is categorized
as follows:

Process time (ie., production time, performance time) in which the actual transformation of
materials and other production input are made to produce the ordered goods or services.

Inspection time where errors, inefficiencies, and breakdowns are monitored, reported, and
remedied.

Wait time (i.e., idle time, storage time) where men, machines, materials, and money are held in
inertia either in a standstill or waiting fashion without creating value in the process of producing
goods or services.

Move time (i.e., transfer time) where men, materials and other factors of production are moved
from one place to another without necessarily contributing to the quality of the goods or services
to be delivered.
The ABM process

First, identify the activities.

In activity-based management, processes are mapped and


analyzed. The activities comprising a process are identified
and classified as to either value-added or non-value added.
Value- added activities are those where customers are
willing to pay for it. If customers are not willing to pay for an
activity in the process of ordering and receiving the goods or
services, then such is a non-value-added activity.
PROCESS TIME IS THE ONLY VALUE-ADDED ACTIVITY. The
three other time, ie., inspection, wait, and move time
are non-value-added activities. Non-value-added
activities ought to be eliminated or reduced to their
possible minimum exposure and costs. Value-added
activities should also be reduced to its optimum time
and costs. The objective of ABM is to enable customer
needs to be satisfied while making lower demands for
organizational resources.
Second, determine the cost drivers.

Costs drivers are activities that trigger or drive the


incurrence or non-incurrence of costs. The control and
management of the cost drivers would mean the control
and management of costs.

Costs drivers may be classified according to their


relationship to activities in the production process. First, a
production plant is to be provided. Second, a product is to
be produced. Third,
a production batch may be ordered. And fourth, machine, materials,
men, and other inputs of actual production process are needed. Along
this line, the mapping of the cost's drivers may be as presented in Table
9 below:
Managers should have a clear
understanding of the activities they
handle, where the costs are incurred, and
for what purpose.
Costs should then be accumulated not
by functional occurrences but by activity
groupings and influences. It is in this mode
set the of information collection and reporting
that a manager would know his breakeven
operational
point, contribution margin, the process in
control preparing budgets, and decide whether to
environment accept or reject special sales order, make
or buy a part, drop or continue an
organizational segment, and such other
similar business decisions.
Non-quantitative factors in ine
with efficiency and productivity
should be set, monitored, and
reported for instant corrective
actions to sustain a “no-error” and
“no-delay” process environment.
set the
operational The decisions to be made should
control also be in line with the evaluation
environment models, standards, and bases
where manager’s performance
would be evaluated.
Managers ought to be
assessed as to how they
use their authorities, do
their assignments, deliver
set the results, and perform their
evaluation duties in accord with the
platform
overall goal of enhancing
shareholders’ value.
TABLE 10. ACTIVITY EVALUATION EMPHASIS

Area of Evaluation
Explanation
evaluation measures
It refers to the number of units produced or
services rendered indicating the capacity Manufacturing velocity,
utilization and throughput time; it may also service velocity,
Volume refer to speed in producing goods or
delivering services and the number of times manufacturing cycle, and
the same goods or services are delivered in partial productivity rates
a period (eg., a year).

It indicates the ability of the manager to


eliminate or reduce non-value-added activities
Manufacturing cycle efficiency,
Time resulting
customers’
to quicker
orders
response
leading to
time
customer
to
production cycle time.
satisfaction
TABLE 10. ACTIVITY EVALUATION EMPHASIS

Area of Evaluation
Explanation
evaluation measures
Number of, or
This relates to the level by which customers
orders, wants and needs are satisfied by percentage in terms of,
receiving repeat orders or initiating orders customer complaints,
Quality from new customers; quality may also be late deliveries, sales
manifested by customers responses such returns, repeat orders,
as return orders and complaints
new orders, etc.

Financial measures such as in terms of cost per Cost driver rates such
driver should be established to assess financial
as per set-up, per number
Cost effectiveness and to properly communicate to
managers on possible techniques of managing
of parts, per order
activity costs. processes, etc.
Once the environment has been
converted into the ABM systems, people
should be continuously encouraged to
identify areas, and suggest possible
mechanisms for improvements.
Processes should be continuously
analyzed and mapped out, activities
set the should be carefully managed and
culture for controlled, and chains and linkages
should be improved to increase
continuous
productivity, savings, speed in response
improvements
time, the systems accuracy, all in the
name of increasing the shareholders’
value.
OTHER ISSUES IN ABM
ABM also integrates into its systems the principles of benchmarking,
business process re-engineering, customer profitability analysis,
pricing and product mix decisions using activity-based costing.

Benchmarking is a process where standards (i.e., mark) are set at the


current level of the highest performance, also known as “best-in-
class practices”, analyzing the strategies and techniques employed
for such performance, developing models for the adoption or
improvement of such benchmarked strategies, and executing plans to
meet and beat the standards set.
Business process re-engineering is a strategic model of
redefining the processes applied to shorten business cycle
time, improve the accuracy of meeting customer orders and
specifications, and create customers value.

Customer profitability analysis is a technique of


understanding and analyzing the contribution of each
customer or group of customers to the overall profitability of
an enterprise. Profitability can vary widely between difference
customers because various overhead costs are, to some
extent, variable or customer driven.
Regular and special pricing decisions need accurate
costing system to set a competitive and strategic
pricing. This normally influences the decision of the
customer whether to place an order or not.

Product-mix decisions also need an accurate report


as to the profitability performance of each product.
This would give critical information as to the mixing of
products to optimize returns.
CHALLENGES WITH ABM
ORGANIZATIONAL FITNESS
Setting ABM in motion needs the right organizational culture. The organization should be
prepared to the point where men are ready to accept and adjust to the new way of
doing things.
Resistance should be minimized, misunderstanding should be cleared, and acceptance
of the new system should be put in place. Benefits over the systems should be
communicated across responsibility lines and systems should be user-friendly to
encourage excellent results.
People should be thoroughly trained as to the philosophy, principles, processes,
management, and expected results to perfect fitness and applicability.
CHALLENGES WITH ABM
BENEFIT OVER COSTS

The installation of ABM entails costs, a cash outlay. The


benefits to be derived from the new system should be clearly
identified and measured. The benefits to be received from
the ABM must exceed the cost of system development,
installation, adjustment, operation, and maintenance to
firmly justify its use.
Introduction
First there must be a goal. Second, there
must be a strategy. Then, there must be a
balanced scorecard.

BALANCE
Goal
SCORECARD
(BS) A goal is an abstract expression of the enterprise‟s
desired situation or things to accomplish in each period.
An enterprise goal may be expressed in many ways, such
as to be the leading provider of technology, the best
producer of appropriately skilled manpower, the most
efficient distributor of health products, or the least-cost
provider of retail services. In business terms, all these
goals should be geared towards an enterprise‟s objective
of increasing shareholders value and wealth.
Strategy
Strategy may be developed by
zeroing on in the statement of profit
or loss of an enterprise, and on its
BALANCE statement of financial position or
statement of cash flows. If the
SCORECARD enterprise focuses on its statement of
(BS) profit or loss, its strategy may be
“product differentiation” or “cost
leadership”. Other strategies are
“confrontational strategy” and “quick-
response strategy”.
Strategy
Product differentiation relates to
producing products where the
enterprise can dictate leadership
BALANCE through branding, unique customer
service, strategic pricing, technology
SCORECARD orientation, and product innovations.
(BS) This strategy normally applies in a
technology-driven market, high-end
market, and other markets where
buyers have significant economic
power to buy the products offered.
Strategy
Cost leadership relates to the enterprise‟s
awareness and efforts to reduce its costs
and expenses through means and
measures that would result to the least
BALANCE possible cost of producing goods and
SCORECARD services. This may be done through
employment of skilled and productive
(BS) personnel, efficient machines, effective
alignment of duties and rewards systems,
and properly maintaining beneficial
business relationships with suppliers,
customers, and government regulators.
Strategy
Strategy describes how an organization
matches its own capabilities with the
opportunities in the marketplace to
BALANCE accomplish its overall objectives. In
developing a strategy, industry analysis
SCORECARD should be focus with respect to
(BS) competitors, potential entrants into the
market, equivalent products, bargaining
power of customers, and bargaining
power of input suppliers.
Once the strategy is developed, the next step is to
“operationalize” it. This is where the importance of
balanced scorecard comes into play.

Balanced scorecard is a system used to effectively


BALANCE communicate strategies into concrete terms to all
personnel of the organization, identify key success
SCORECARD areas to focus the attention of all members in the
organization, and critically linked series of
(BS) performance measures to monitor the ongoing
series of successes and failures in the
ASSESSES implementation of strategies on the road towards
the achievement of corporate goals.
STRATEGY Balanced scorecard comes in after the business
strategy has been developed or chosen. It is not
used to find or invent strategy, nor it is a tool in
selecting a strategy.
The objective of business activities is
always to maximize the owners‟ wealth.
This means measuring the results of
enterprise operations in terms of financial
performance. In the process of doing so,
there are activities that need to be
THE performed. The need of the customer must
be identified, the internal resources of the
BALANCED enterprise must be harnessed, and the
long-term capability of the enterprise to
SCORECARD sustain its business must be in place.

PHILOSOPHY The Balanced Scorecard has four (4)


important perspective of performance that
need to be measured as an indicator of
enterprise success. These perspectives are
customer perspective, internal business
perspective, innovation and learning
perspective, and financial perspective.
TABLE 11. THE BALANCED SCORECARD PERSPECTIVE
Success
Indicators
Perspectives Activities Goals

This involves knowing what the customer really


wants and serving what the customer wants. This
Lead process includes listening to customers, making
Satisfy the customers
activities
Customer design to fit what the customer wants, showing
prototype to confirm what he really wants, and wants and needs.
delivering the goods or services on the date the
customer wanted it to be.

This measures the capability of the enterprise to


deliver what the customer wants at the least cost
of doing business possible. In this category
includes the use of production variables such as
Internal machines, men, money and materials in order to Tap the most fitting
business create, produce, make or in any way obtain the
goods or services wanted by the customer.
and economical
Production variables should always be on their top resources available
operating conditions free from repairs, errors,
absences, wastages, and other forms of system
inefficiencies which would result to lower
productivity ratios.
TABLE 11. THE BALANCED SCORECARD PERSPECTIVE
Success
Indicators
Perspectives Activities Goals
Sustain the capability of
This indicates the capability of the enterprise to the enterprise to meet
generate new knowledge, systems, techniques, future customer
Innovation patents, inventions, methods and processes that
would contribute to better business performance
demands through the
acquisition of new skills
and learning in terms of meeting at its best customer wants and the development of
and improving internal processes for greater new products at the best
market share or lower business costs. business environment
possible

This measures the ability of the enterprise to use


money and other enterprise resources to generate
Lag Financial money and other expressions of wealth. This
involves the areas of investment risk, financing
Optimize the use of
money and owners
Activities risk, operating risk, and general business risk wealth
which have always the potential of diluting the
wealth of the owners.
The customer, internal business processes, and learning and growth perspectives
are considered lead activities because they are the initial and required activities
to be performed to generate revenues, incur costs, derive profit, and increase the
enterprise‟s wealth. In short, they lead in generating financial performance.

The BS philosophy basically says that if an enterprise precisely identifies and


delivers the needs and wants of a customer then the latter would be satisfied and
would make repeat order or would encourage others to make the same orders
resulting to greater revenues. In the act of delivering the precise goods or
services, organizational resources would be used, and the enterprise must
organize and see to it that these resources are on their top operating conditions,
best coordination, engaging the best production operating systems to accurately
produce the goods and services at the least-cost possible outcome. In the long-
range, the enterprise should endeavor to generate new systems, processes, and
technology to continuously improve the business environment, offer new
products, and stay alive in the competition. All of these are done in the holy name
of increasing business wealth.
For each of the four (4)
perspectives used in the
balanced scorecard philosophy,
KEY performance indicators are to
PERFORMANCE be established to monitor and
INDICATORS measure operating and
financial success, such as those
shown in the box immediately
presented below:
TABLE 13. EXAMPLES OF KEY PERFORMANCE INDICATORS

Perspectives Goals Measures


New product Percentage of sales from new products

Responsive supply On-time delivery (as defined by customer)

Preferred supplier Share of key accounts purchases

Customer Ranking by key accounts

Customers partnership Number of cooperative engineering efforts

Other measures: market share, customer


retention percentage, time taken to fulfill
customer request, hours of customer
training for using the product
TABLE 13. EXAMPLES OF KEY PERFORMANCE INDICATORS

Perspective
Goals Measures
s
Technology capability Manufacturing configuration vs. competition

Manufacturing excellence Cycle time, unit cost, yield


Internal Design productivity
business
Silicon efficiency, engineering efficiency

New product introduction Actual introduction schedule vs. plan

Other measures: set-up time, manufacturing


downtime, yield-defect rates
TABLE 13. EXAMPLES OF KEY PERFORMANCE INDICATORS
Perspective
Goals Measures
s
Technology leadership Time to develop next generation of products

Manufacturing learning Process time to maturity

Innovation Product focus Percentage of products that equals 80% of sales


and Time to market
learning
New product introduction vs. competition

Other measures: new product development time,


number of new patents, employee education and skill
level, employee satisfaction scores, employee
turrnover rates, information systems availability,
percentage of processes with advanced controls

Financial Survive Cash flows


Monthly sales growth and
Succeed
operating income by division

Prosper Increase market share and ROI

Other measures: operating


income, revenue growth, cost
reduction in some areas, return
on investment
Advantages and disadvantages

The applications of the balanced scorecard have the following advantages and
disadvantages:
Table 12. Balanced Scorecard Pros and Cons

Advantages Disadvantages

1. It considers both the internal and 1. Conflicting measures. Some measures in


external variables. the scorecard such as increasing research
while reducing costs may result to conflict in
determining the balance which will achieve
2. It is related to the corporate
the best results.
strategy.
2. Selecting measures. Measures have to be
3. It includes financial and non- devised, agreed upon, and monitor as to its
financial measures relevance.
3. Expertise. Inability of personnel to fit the
meaning of the performance measure in their
area of expertise.

4. Interpretation. Inability of the managers to


bring into focus the relevance of each
performance measure in accordance with
the overall performance of the enterprise.

OTHER MANAGEMENT TECHNIQUES


Benchmarking

Benchmarking is basically standards-setting and standard getting. The idea is to identify


the best practices in the organization and make it as the benchmark (e.g., standards) for
others to emulate. Best practices could be adapted, modified, or may serve as mark or record
for others to beat.
A benchmark could either financial or non-financial in nature, internal or
external in source. The benchmarking process does not end within the
company. Best practices are identified within the industry, country or
internationally to emulate, and eventually, to overtake

Advanced manufacturing technology (AMT)

The increasing sophistications in the marketplace have also redefined


manufacturing processes. The shortening of the product life cycle, the use of
the flexibility manufacturing system, the presence of robotics and automatic
production technology, computer-aided manufacturing and computer-
aided design, and a wide array of manufacturing equipment have made
manufacturing more responsive to unique customer demands and orders.
Computer-aided manufacturing

Computer-integrated manufacturing (CIM) uses a high-level automated manufacturing


system. It is a holistic approach of dealing with the production process from the design stage
to post-sales services with heavy application of electronic technology, automation, robotics,
and internet of things. It has the advantages of flexibility, integration, and synergism.

CIM involves designing products using computer-aided design (CAD), testing design using
computer-aided engineering (CAE), manufacturing products using computer-aided
manufacturing (CAM), and integrating all components with a computerized information
system.
Materials Requirements Planning

Materials requirements planning 1 (MRP) is an inventory technique with heavy use


of technology but is more limited than CIM. It uses simulation as to the number,
class, and timing of materials needed in each production, in each location. These
analyses are done in relation with bills of materials, inventory levels, and process
of production. The timing of deliveries is vital to avoid delays. One must input only
in the computer system the number of units to be manufactured and the
computer generates a material requirement schedule and tells in advance the
feasibility of producing the product. When inventory levels are not enough, a
purchase order is automatically processed. MRP uses an MPS, master production
schedule, which is a statement of anticipated manufacturing schedule to selected
items for selected periods.
Manufacturing Resource Planning 2
MRP-2 integrates all facets of a manufacturing business, including production, sales,
inventories, schedules, and cash flows. MRP-2 is an extension of MRP. Scheduling of
activities is not only focused on materials requirements but extends to sales and cash
flows.
Enterprise Resource Planning

It is an organization-wide planning technique of managing resources using computerized


system. Organizational resources such as men, money, information, distribution networks,
marketing, engineering, and policies are interlinked and relate to suppliers and customers.
Pareto's Law
In the nineteenth century, an Italian economics, Vilfredo Pareto, observed that 80% of the wealth of
Milan, Italy was owned by 20% of its citizens. In the 1950s, Joseph Juran, a pioneering business and
industrial quality guru, observed a few causes of poor quality usually accounted for most of the
quality problems. His observation jived with the 80-20 analysis of Pareto. Since then, many
researchers and analysts discovered that in social, educational, medical, business, and other field
of research observed data tend to cluster with about 80% of the observations account for the 20%
explanations of the situations or, it is the other way around, that about 20% of the observations
explain the 80% occurrences of the situation.

Boston Consulting Group (BCG) Portfolio Matrix


The BCG Portfolio Matrix helps in strategizing the individual role, position, and contribution of
each product, throughout its life cycle, in a portfolio in relation to the investment strategy of
an enterprise.
Fig. 5. The BCG Portfolio Matrix
The application of the BCG Portfolio Matrix can be best viewed in relation with the product
life cycle which has four (4) stages infancy, growth, expansion, maturity, or decline. In the
infancy stage of product introduction, it still has an unknown product destination (a
"question mark"), a product could either become a "star" product or become a "dog". A star
product belongs in a market with a high growth rate and has the tendency to gain high
market share. If a product sustains its star performance, it will eventually slow down its
market growth but retains its market leadership. At this stage, the product becomes a
"cash cow". At this point, the product is expected to bring in tremendous liquidity to the
business which may be used to finance products with the potential to become future star
or to support existing stars.
Also, during the product life cycle, an enterprise may follow any or a combination of the following
strategies:

• Build. It is used to turn a question mark product into a star. This involves sacrificing short-term
profit with the objective of increasing market share. Penetration pricing (i.e., offering lower prices),
increasing investment to create quality and brand loyalty are employed to pursue long-term
growth.

• Hold. This involves preserving market share as a star or a cash cow. It also ensures that cash cows
remain as is to enjoy product liquidity and profitability. Additional investment in customer retention
through competitive pricing and marketing may be required.

• Harvest. This involves using the cash generated by the cash cows to support product with star
potential or sustain the performance of star products.

• Divest. It involves eliminating underperforming products that normally belong in the dog and
question mark categories.
Contingency Theory

Contingency theory in management accounting simply states that the design of the accounting information
system depends on the need of the management using it.

To illustrate the use of contingency theory in management accounting, let us consider the following:

ABC Corporation has been producing three products in the last five years with almost no competition in the
rubber industry. Out of this business environment, the management has been casually receiving monthly
operating reports with consolidated totals of all its products. In the last two quarters, XYZ Corporation,
another company, has entered the market, vigorously promoted its product, and prices while gaining
significant market share along the way. This development prompted ABC Corporation management to
instruct the management accountant to make a detail analysis of the costing of each product, provide
operating results on a per product basis, and submit reports on a weekly basis.
Emmanuel. Otley, and Merchant in their book Accounting for Management Control have identified
the following major factors observed to have been affecting the design of management
accounting systems:

•The environment
Its degree of predictability
The degree of competition faced.
The number of different product markets faced
The degree of hostility exhibited by competing

• Organizational structure
Size
Interdependence of parts
Degree of decentralization
Availability of resources
• Technology
The nature of the production process
The routineness/complexity of the production process
How well the relationship between ends (finished output) and means (production process) is
understood
The amount of variety or complexity in each that has to be performed

Mckinsey 7S Model

The Mckinsey 7s Model described the link between the organization's behavior and the
behavior of the individuals within it. There are three (3) hard elements and four (4) soft
elements of business behavior and their interrelationships are depicted as follows:
Fig. 6. The Mckinsey 7S Model

The hard elements are easily quantified and defined, and deal with facts and rules. All
elements, both hard and soft, must pull in the same direction for the organization to
be effective.

The use of this model would have strong implications to the management accounting
systems and processes employed by the enterprise.
A tabulated discussion on the elements of the Mckinsey &S Model follows:
Table 14. Comments on Mckinsey 7S Model

Elements 7S Comments

Hard The formal division of tasks in the organization and the


Structure
elements hierarchy of authority from the most senior to junior

It deals on how the organization outperforms its competitors,


Strategy or if it is a business, how it intends to achieve its objectives.
This is linked to share values.

These include the technical systems of accounting, personnel,


Systems management information, and so forth. These are linked to the
skills of the staff.
It refers to the corporate culture which is the shared
Soft Elements Style
assumptions, ways of working, attitudes and beliefs.

These are guiding beliefs or purpose of people in the


Shared Values organization as why it exists (e.g. people in the hospital seek
to save lives)

Staff The people in the organization.

Skills It refers to those things the organization does well.


Sample Problems
A. Quality Cost
Several things should be noted from the data in the quality cost
report. First, note that the quality costs are poorly distributed in
both years, with most of costs being traceable to either internal or
external failure. The external failure costs are particularly high in
year 1 in comparison to other costs. Second note that the company
increased its spending on prevention and appraisal activities in
year 2. As a result, internal failure costs went up in that year (from
$2 million in first year to $3 million in year 2), but external failure
costs dropped sharply (from $5.15 million in year 1 to $3 million in
year 2). Because of the increase in appraisal activates in year 2,
more defects were caught inside the company before they were
shipped to the customers. This resulted in more cost for scrap,
rework, and so forth, but saved huge amounts in warranty repairs,
warranty replacements, and external failure costs.
Third, note that because of greater emphasis on
prevention and appraisal, total quality cost
decreased in year 2. As continued emphasis is
placed on prevention and appraisal in future
years, total quality cost should continue to
decrease. That is, future increases in prevention
and appraisal costs should be more than offset
by decreases in failure costs. Moreover,
appraisal costs should also decrease as more
effort is placed into prevention.
B. Life cycle analysis
Thank you for
listening

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