9

Management Accounting
& Control Systems for Strategic
Purposes: Assessing Performance
Over the Entire
Value Chain
Ma. Lorahdel C. Diamante * Sheryll A. Perez
* Rowelito Glorioso
1
 After reading this chapter , you will be able to:

 Apply the concept of control 9

 Describe the total-life-cycle costing approach to managing
product costs over the value chain
 Identify the characteristics of well-designed management
accounting and control systems ( MACS )
 Explain target costing
 Expalin Kaizen costing

 identify environmental costing issues

 Apply the process of benchmarking the best practices of other

organizations 1
 What are Management Accounting
and Control System? ( MACS) 9
 It maybe defined as part of the global information system through

which it is collected, processed, and analyzed and communicated

information ( financial, and non-financial, internal and external)

used for planning,monitoring and control of different organiza -

tional activities,to optimize the use of resourcesto support the

processof decision making and to the performance evaluation

 a cost management system is one of the central performance
, process
measurement systems at the core of a larger entity.
1
 Technical Characteristics of well-designed MACS

1. The scope of the system - MACS measured and

assess performance is only one part of the value
chain – the actual production process
2. Pre or post production cost- associated with
products and services, it is important in today`s
business, it puts organization at a distinct
disadvantage when trying to understand the
total-life-cycle costs of a product or service and
ways to reduce those costs.

134
Meaning of “control” in Management Accounting and
Control Systems 9

“In
“Incontrol”
control”
Refers
Refers to toaasystem
systemthatthat isis
ononthe
thepath
path to
toachieving
achieving
its
itsstrategic
strategic objectives.
objectives.
““ Out
Out of of control”
control”
AAstate
statewhen
whenaasystem
system isis
not
noton
onaapath
pathto
to
achieving
achievingorganizational
organizational
objectives.
objectives.

135
5 Stages on the Process of Keeping an Organization in
Control 9

For
For the
theprocess
process of of control
control  Planning
to
tohave
havemeaning
meaning and and
credibility,
credibility,the
theorganization
organization  Execution
must
must have
havethetheknowledge
knowledge
and
 Monitoring
and ability
abilitytotocorrect
correct
situations
situationsthat
that itit identifies
identifies  Evaluation
as
asout
out of
of control;
control;
otherwise
otherwise control
control serves
serves  Correcting
no
nopurpose.
purpose.

136
5 Stages on the Process of Keeping an Organization in
Control 1

• Consist of developing organization`s objectives,

choosing activities to accomplish
Planning • choosing activities to accomplish
• Selecting measures to determine how well the
objectives were met

• Is implementing the
Execution
plan

• Process of measuring the system`s

Monitoring
current level of performance

137
5 Stages on the Process of Keeping an Organization in
Control 1

• Occurs when feedback about the

system`s current level of
Evaluatio performance is compared to the
n planned level so that any
discrepancies can be identified
and corrective action prescribed.

• Consists of taking the

Correctin appropriate actions to
g return the systems to
an incontrol state

138
 The Cycle of Control 9
Exhibit 9-19-1
EXHIBIT
EXHIBIT 9-1

PLAN

CORRECT EXECUTE

EVALUATE MONITOR

139
Characteristics of Well- Designed Mangement
Accounting and Control Systems 9

1.1. Embedding
Embeddingthe
theorganization`s
organization`sethical
ethicalcode
codeof
ofconduct
conductinto
into
MACS
MACSdesign
design

2.2. Using
Usingaamix
mixofofshort
shortand
andlong
longterm
termqualitative
qualitativeand
and
quantitative
quantitativeperformance
performancemeasures
measures

3.3.Empowering
Empoweringemployees
employees totobe
beinvolved
involvedinindecision
decisionmaking
making
and
andMACS
MACSdesign
design

4.4.Developing
Developingan
anappropriate
appropriateincentive
incentivesystem
systemtotoreward
reward
performance
performance

1310
Technical Considerations fall into 2 considerations:
9

Technical
Considerations

Relevance of Scope of the

information system
generated

Include all activities

Accurate, timely,
Must be across the entire
consistent and
comprehensive value chain of the
flexible
organization

1311
What is a Value Chain ? 2

Value Chain is a sequence of

activities that should contribute
more to the ultimate value of the
product than to its cost. Product
produced by an organization rely
on different activities and use
different resources along the value
chain depending on their
specipications.

1312
What is TLCC or Total – Life – Cycle Costing? 9

Total-life-Cycle Costing is also known as

managing costs “ from the cradle to the
grave” or maybe termed as “ whole-life
product costling. It is a system provides
information to managers to understand and
manage costs through a products design,
development, manufacturing, marketing,
distribution , maintenance, service and
disposal stages

1313
How Information Technology ( IT ) align to the Value Chain in
Financial Services? 9

1. Companies have begun to align IT with

their business goals
2. Some create alignment by splitting off a
separate elerctronic commerce group .
3. Some form teams of IT people and
personnel from other functional areas.
4. Some includes IT people in product
development meeting to discuss types of
future service issues for customers who
are purchasing yhe products.

1314
People who aligned InformationTechnology ( IT ) to their
financial services? 9
Vincent Philips
is a Vice President of WEB
Systems at Charles Schwab, San
Francisco Californa

“Marketing people and IT

are in the same building
and same floor.”

“ We can do it this fast,

“ It is very
or we might want to do
collaborative effort.”
it this way.”

1315
People who aligned InformationTechnology ( IT ) to their
financial services? 9

Bill Burnham
e-commerce analyst at Credit
Suisee First Boston in New York

“We have seen a big explosion of product

development as companies move from competing
on price to ( competing in) product and services
offering.”
“ It will continue as “ If the technology doesn’t
competition intensifies and work, business will not work”-
companies pick their technology is the bedrock
spots.” .” foundation of business

1316
What is R D & E or Research and Development Enginnering
Cycle ?
9

Research and development

Engineering or RD & E –
a life –cycle concept that
develop, redesign new or
existing products and
perform research and testing
on products concepts.

1317
What is Commited Cost?
9

Commited Cost –
those costs that a company incurs
before knowing actual production or
sales volumes. It refers to the costs
associated with establishing and
maintaining the readiness to conduct the
business The benefits obtained from these
expenditures are represented by the
company`s infrastructure.
Example: purchase order, / a signed
contract, insurance, rent, taxes

1318
What is Manufacturing Cycle?
9

Manufacturing Cycle–

those costs
incurred the factory
associated with
transforming raw
materials into a
finished product.

1319
What is Manufacturing Cycle?
9

Post - sale service and

Disposal Cycle
those costs incurred
the factory associated with
transforming raw materials
into a finished product.

1320
R D & E or Research and Development Enginnering Cycle
9

Market
Research

Three
stages of
RD&E

Product Product
Design Development

1321
 9
Three
ThreeStages
Stagesof
ofRD&E
RD&E

1.1.Marketing
MarketingResearch
Research-- where
whereemerging
emergingcustomer
customerneeds
needsare
areassessed
assessed
and
andideas
ideasare
aregenerated
generated for
fornew
newproducts.
products.

2.2.Product
ProductDesign
Design––inin which
whichscientists
scientistsand
andengineers
engineersdevelop
developthe
the
technical
technicalaspects
aspectsofofproducts
products

3.Product
3.ProductDevelopment
Development––ininwhich
which the
thecompany
companycreates
createsfeatures
features
critical
criticaltotocustomer
customersatisfaction
satisfactionand
anddesigns
designsprototypes,
prototypes,production
production
processes
processesand andany
any special
specialtooling
toolingisisrequired.
required.

1322
EXHIBIT
EXHIBIT9-2
9-2 9
Total
Total--Life
Life–Cycle
–CycleCosting:
Costing:Relationship
Relationship between
betweenCommited
CommitedCost
Costss
and
andIncurred
Incurredcosts
costs

1323
Exhibit 9 - 2 9
Total
Total--Life
Life–Cycle
–CycleCosting:
Costing:Relationship
Relationship between
betweenCommited
CommitedCost
Costss
and
andIncurred
Incurredcosts
costs

Sir meron sa book na info about

this..
Di ko lng gaya gawin.. Ung nsa
taas na slide ay
search ko lng sa google…..

1324
 9
Total
Total--Life
Life–Cycle
–CycleCosting:
Costing:Relationship
Relationship between
betweenCommited
CommitedCost
Costss
and
andIncurred
Incurredcosts
costs

Committed cost are those cost for which a legal

obligation to pay exists . Ex. Purchase order / a
signed contract. A cost is incurred when the related
services and works are performed or in the case of
supplies, the supplies have been used for the
purposes of the action

1325
Three Stages of Service Cycle 9
1.1.Rapid
Rapidgrowth
growththe
thefirst
firsttime
timethetheproductis
productisshipped
shipped
through
throughthe
thegrowth
growthstage
stageof ofits
itssale;
sale;

2.2.Transition
Transitionfrom
fromthevpeak
thevpeakof
ofsales
salestotothe
thepeak
peakofint
ofinthe
he
service
servicecycle;
cycle;

3.3.Maturity
Maturityfrom
fromthe
thepeak
peakininthe
theservice
servicecycle
cycletotothe
the
time
timeof
ofthe
thelast
lastshipment
shipmentmade
madetotoaacustomer
customer

1326
EXHIBIT
EXHIBIT9-3
9-3 9
Percent
Percentof
ofLife
Life––Cycle
CycleCosts
Costs Incurred
IncurredAcross
Across
Four
FourTypes
Typesof
ofproduct
product

Stage
Stageof
ofLife
LifeCycle
Cycle TYPES
TYPESOF
OFPRODUCTS
PRODUCTS
Cycle Combat Commer Nuclear Computer
Jets Missiles Software
cial
Aircraft

RD &E 21% 20% 20% 75%*

Manufacturing 45% 40% 60% *
Service and 34% 40% 20% 25%
Disposal
Average Length 30 years 25% 2 to 25 5 years
of Life Cycle years

* For computer software, both RD&E and manufacturing are often tied directly together.

1327
What
WhatisisTarget
TargetCosting
Costing?? 9

Target
Target Costing
Costing isis aamethod
methodof ofprofit
profit planning
planning and and
cost
cost management
management that that focuses
focuseson onproducts
productswith
with
discrete
discretemanufacturing
manufacturingprocesses.
processes.The Thegoal
goal ofofitit isis
to
todesign
designcosts
costs out
outof ofproducts
products inin the
the RD&E
RD&Estagestage of of
aaproduct`s
product`stotal
totallife
lifecycle,
cycle, rather
rather than
thantrying
tryingto to
reduce
reduce costscosts during
during the themanufacturing
manufacturing stage.
stage. ItIt isis aa
relavant
relavantexample
example of ofhow
how aawell-designed
well-designed MACS MACS
can
canbe beused
usedfor
for strategic
strategicpurposes,
purposes, and and how
how critical
critical itit
isisfor
fororganizations
organizationsto tohave
haveaasystem
system in inplace
placethat
that
considers
considersperformance
performancemeasurement
measurement across across the
the
entire
entirevalue
value chain.
chain.

1328
Exhibit
Exhibit 9-5
9-5 9
TARGET
TARGETCOSTING
COSTINGEXAMPLE
EXAMPLE

After
Afterconducting
conductingaamarketing
marketing research
researchstudy,
study,Illumina
Illumina
Company
Company decides
decidestotoproduce
produceaanew newlight
lightfixture
fixturetoto
complement
complement its itsoutdoor
outdoorlightning
lightningline.
line.According
Accordingtoto
estimates,the
estimates,thenew
new fixture
fixturecan
canbe
besold
soldatataatarget
targetprice
priceofof
$20,
$20,and
andthe
theestimated
estimatedannual
annualtarget
targetsales
salesvolume
volumeisis
100,000
100,000light
lightfixture.
fixture.Iilumina
Iiluminahas
hasaa20%expected
20%expected returnreturn
on
onsales
salestarget.
target.The
Thetarget
targetcost
costisiscomputed
computedas asfollows:
follows:

Target
Targetsales
sales( (100,000
100,000fixtures
fixturesxx$20
$20) ) $2,000,000
$2,000,000
Less: Target Profit ( 20% x $20/unit x 100,000 units
Less: Target Profit ( 20% x $20/unit x 100,000 units 400,000
400,000
Target Cost for 100,000 fixtures
Target Cost for 100,000 fixtures $1,600,000
$1,600,000

Unit
UnitTarget
TargetCosts
Costsper
perfixture
fixture( ($1,600,000
$1,600,000÷÷100,000 fixtures) )
100,000fixtures $$16.
16.0000
1329
 CONCERNS
CONCERNSABOUT
ABOUTTARGET
TARGET COSTING
COSTING 9
1.Concerns
1.Concernscan canarise
arisebetween
betweenbetween
betweenvarious
variousparties
partiesinvolved
involvedininthe
thetarget
targetcosting
costing
process.
process.Often
Oftencompanies
companiesput putexcessive
excessive pressure
pressureononsubcontractors
subcontractorsand andsupplier
supplier
totoconform
conform to schedule and reduce costs, this can lead to alienation or failureofofthe
to schedule and reduce costs, this can lead to alienation or failure the
subcontractor.
subcontractor. Sometimes design enginneers become upset when other parts ofthe
Sometimes design enginneers become upset when other parts of the
organization are not cost conscious.
organization are not cost conscious.

2.2.Employees
EmployeesininmanymanyJapanese
Japanesecompanies
companiesworking
workingunder
under target
targetcosting
costingprocess
process
goals experience burnout due to the pressure to meet the target cost. Burnout
goals experience burnout due to the pressure to meet the target cost. Burnout
isisparticularly
particularlyevident
evidentfor
fordesign
designengineers.
engineers.

3.3.Although
Althoughthe
thetarget
targetcost
cost might
mightbebemet,
met,developments
developmentstime
timemay
mayincrease
increasebecause
becauseofof
repeated
repeatedvalue
valueengineering
engineeringcycles
cyclestotoreduce
reducecosts,
costs,which
whichultimately
ultimatelycan
canlead
leadtotothe
the
product coming late to market. For some types of products, being 6 months
product coming late to market. For some types of products, being 6 months late late
maybe
maybemore
morecostly
costlythan
thanhaving
havingsmall
smallcost
costoverruns.
overruns.

1330
 9
COMPARISON
COMPARISONOF
OFTRADITIONAL
TRADITIONALCOST
COSTREDUCTION
REDUCTIONTO
TOTARGET
TARGETCOSTING
COSTING

TRADITIONAL TARGET
COSTING
REDUCTION COSTING
Takes on more proactive
approach to pricing where
General administrative, marketing
the price of the product will
and distribution costs is taken
be estimated first and the
consideration.
cost of manufacturing
process will be considered
later

It begins with market research into

customer requirements followed by Determines cost based on the design
product specification of the product, adds mark up and
establish price

1331
 COMPARISON
COMPARISONOF
OFTHE
THEPROCESS
PROCESSOF
OFTRADITIONAL
TRADITIONALU.S
U.S&&
9-4
JAPANESE
JAPANESECOST
COST––REDUCTION
REDUCTION METHODS
METHODS

Traditional U. S Cost Reduction Japanese Target Costing

Market Research to determine customer Market Research to determine consumer needs

requirements and price points

Production specification Production specification and design

DESIGN Target selling price ( Stc ) & ( Target product

volume)

ENGINEERING TARGET PROFIT

SUPPLIER PRICING TARGET COST

1332
 COMPARISON
COMPARISONOF
OFTHE
THEPROCESS
PROCESSOF
OFTRADITIONAL
TRADITIONALU.S
U.S&&
JAPANESE
JAPANESECOST
COST––REDUCTION
REDUCTION METHODS
METHODS
9-4
9
Value Supplier pricing
Engineering pressure
ESTIMATED COST ( Ct ) ( Both value engineering and pressure of
if too high, return to design phase ) suppliers to reduce cost are applied as a
Desired profit margin ( Pt ) result of the target costs for each
component )

EXPECTED SELLING PRICE ( St )

ESTIMATED COST ( Ct )

MANUFACTURING MANUFACTURING

PERIODIC COST REDUCTION CONTINOUS COST REDUCTION

1333
 WHAT
WHAT IS
ISKAIZEN
KAIZENCOSTING
COSTING ?? 9
Kaizen costing
 “ Kaizen” comes from a Japanese term for making
improvements to a process through small,
incremental amounts rather than through large
innovations.
 it focuses on reducing costs during the
manufacturing stage of the total life cycle of a
product.
 It contrast with target costing, which allows many
opportunities to effect change because it occurs much
earlier in the product`s life cycle.
 Its goal is reasonable, because when the product is
already in the manufacturing process its difficult and
costly to make large changes to reduce costs.

1334
 KAIZEN
KAIZENCOSTING
COSTINGCONCERNS
CONCERNS 9
Kaizen costing :
 The system places enormous pressure on employees
to reduce every conceivable cost.
 In addressing problems, some company is use cost-
sustainment period or grace period to provides
employees with the opportunity to learn any new
procedures before the company imposes Kaizen and
target costs on them.
 It leads toincremental rather than radical process
improvements. This can cause myopia as
management tends to focus on the details than the
overall systems.

1335
Comparison
ComparisonofofKaisen
KaisenCosting
Costingto
to
Traditional
Traditional Reduction
ReductionCost
Cost 9

• Quite distinct from TRD, its typical

goal is to meet the cost standard

Kaizen
while avoiding unfavorable
variances, to achieve cost reduction
targets that are continually adjusted

Costing
downward.
• Variance analysis here compares the
target costs with actual cost-
reduction amount.
• It operates outside the standard
costing system. The workers alone
know best here.

Traditional
• Variance analysis under a standard cost
system usually compares actual to
standard costs.
Reduction • It assumes managers and enginners
know best because they have the
Costing expertise and can determine procedure
how to improve products.

1336
 Computing
Computing Kaizen
Kaizen Costs
Costsfor
forPlants
Plants 9-6

 Cost savings in Japanese automobile plants involve reducing both

commited ( fixed ) and flexible ( variable) costs. Since fixed costs are believed
necessary for growth, the main emphasis is on reducing variable costs

 In this example , the total amount of Kaizen costs in all plants determined in
a Kaizen planning meeting is designated as C in the formulae that follow :

Amount of Actual Cost Amount of Actual Cost Actual production in

per Car in the last in the Last Period the Last period
Period ( A)

Estimated amount of Amount of Actual Cost Estimated production

Actual Cost for All Plants per Car in the Last in this period
in this Period ( B ) Period ( A )

Kaizen Cost Target in Estimated amount of Target Ratio of Cost

this Period for all Actual Cost for all plants Decrease to the
Plants ( C ) in this Period ( B ) estimated Cost
1337
  Computing
Computing Kaizen
Kaizen Costs
Costsfor
forPlants
Plants 9-6

 The target ratio of cost decrease to the estimated cost is based on

attaining the target profit for the year.

 The Kaizen cost target for each plant is determined in the

following manner:

Assignment Ratio Cost Controlled Total Amount of Costs

(D) Directly by Each Controlled Directly by
Plant Plants

Total Kaizen Cost Kaizen Cost target in

for each plant This period for all Assignment Ratio
Plants ( C ) (D)

 The amount of Kaizen cost for each plant is subdivided to each division
and subdivisions as costs-reduction goals.
1338
  Computing
Computing Kaizen
Kaizen Costs
Costsfor
forPlants
Plants 9-6

 The target ratio of cost decrease to the estimated cost is based on

attaining the target profit for the year.

 The Kaizen cost target for each plant is determined in the

following manner:

Assignment Ratio Cost Controlled Total Amount of Costs

(D) Directly by Each Controlled Directly by
Plant Plants

Total Kaizen Cost Kaizen Cost target in

for each plant This period for all Assignment Ratio
Plants ( C ) (D)

 The amount of Kaizen cost for each plant is subdivided to each division
and subdivisions as costs-reduction goals.
1339
WHAT
WHATIS
ISENVIRONMENTAL
ENVIRONMENTALCOSTING
COSTING??

 A costing system that computes the cost

of the effects an organization has on the
environment.
 It involves selecting suppliers whose
philosophy and practice in dealing with
9
the environment matcher`s 9
buyer`s
disposing of waste products during the
production process, and adressing post –
sale service and disposal issues are
being incorporated into cost management
systems and overall MACS.

1340
HOW
HOW TO
TO CONTROL
CONTROLENVIRONMENTAL
ENVIRONMENTALCOSTING
COSTING??
9

 Use the activity based costing method in Chapter

5.
- First, the activities that cause environmental
have to be identified
- Second, the costs associated with the activities
have to be determined.
- Third , these cost must be assigned to the
most appropriate products, distribution
channels and costumers.

1341
HOW
HOW TO
TO CONTROL
CONTROLENVIRONMENTAL
ENVIRONMENTALCOSTING
COSTING??
9

 Use the activity based costing method in Chapter

5.
- First, the activities that cause environmental
have to be identified
- Second, the costs associated with the activities
have to be determined.
- Third , these cost must be assigned to the
most appropriate products, distribution
channels and costumers.

1342
2 CATEGORIES OF ENVIRONMENTAL COSTS
9

“EXPLICIT COSTS”
It includes the direct
cost of modifying
technology and
processes, cost of “IMPLICIT COSTS”
cleanup and disposal,
costs of permit to Are often closely tied to
operate a facility, fines the infrastructure required
levied by government to monitor environmental
agencies, and litigation issues. It is usually
fees. administration and legal
counsel, employee
education and awareness
1343
9-7

1344