BMA Inc. Email for More Information infowmaskell.com hUip:www.maskell. com/FutureolMgr Pagina | de 3 Future of Management Accounting in the 21% Century by Brian H. Maskell, President, and Bruce L. Baggaley, Senior Partner, BMA inc. Journal of Cost Management, Jan/Feb 2001 {Change is needed in the methods, approach, and function of management accountants, ‘i most Western companies - if we are to be relevant and useful in these increasingly challenging times. The focus of management accounting needs to move from cost value creation. Our planning and performance management must start with the needs of the customer. The role of the management accountant must move from collector and presenter of financial data to team-member and change agent, Management Accounting systems must move from transaction-heavy inspection and reconetliation engines, to lean and vital providers of business insight. While this articte emphasizes lean manufacturers, the principles are applicable to a wide range of organizations Support for Value Creation {return to top) The fundamental role of management accountants in 24% century companies is to support the creation of value for the customers. Traditional management accounting emphasizes such sssues asthe control of the organization through the planning and tracking of costs, full utilization of resources, the integration of management. accounting with the company's financial accounts thrauigh inventory valuation and full ost absorption, optimizing efficiency through the comparison of “actual: eects te Predetermined standards, and so forth, The change taking place in forward. thinking ‘manufacturing companies place the emphasis upon the creation of customer value Value creation starts with the customer. Everything we do as manufacturers must be focused on customer needs and desires for products, services, and other value-added offerings. Our existing customers understand the walue we ereate for then, But owt {ustomers may not be aware of their future needs; and we must anticipate and innovate to create new value; through innovative products, services, and processes. It 1s vital that we understand the value we provide to the customers; both now ard! ie te the future. at-the end of the day, our companies will only prosper when we provide increasingly high levels of value to the marketplace. Understand And Evaluate Customer Value (retum to top} {f our companies ate to focus on the value we create for the customer we must have a method of recognizing and evaluating that value, We must clearly understand our ‘value proposition” and how that value proposition can be applied daily to the benefit of the customers, and to drive the company’s emplayees to further enhance the vali Created and to reduce waste. This requires the integration of the company’s market research, product development, and customer development activities with a detailed assessment of the financial implications of this work, uch tools as quatity function deployment help assess the value placed by customers | {and potential customers) an the features and characteristics of the companys products ie gihets, like reputation, brand, oF customer portfolio are inevitably less clear-cut, But the aim of the analysis to provide a financial interpretation of how our eastomers view the value created by the company. Performance Measures Linked To Value Stream Goals Many companies suffer from performance measurements - particularly financial Performance measurements - that are driving the people in a different direction from the company’s strategy, The classic example isa company implementating team manufacturing methods that continues to use traditional variance analysis and standard costing. The measurements pul the people one way while the lean phitosophy i pulling another. Usually the financial measurements win out and a major opportunity for the ntAcety htm 6/12/02‘ Pagina 2 de ‘company is lost or curtailed Often companies facing this problem develop new performance measurements for the ‘operational control of the business, while maintaining traditional cost accounting ‘methods to "keep the books straight’. This is perhaps the worst of both worlds, instead cof one control system, the company now has two. This is not only creating mare waste, it s creating a platform for conflict, confusion, and misdirection, We need to develop a single, balanced, and consistent performance measurement system that directly translates the company’ strategy, goals, and objectives into ‘measurements used at every level of the organization. The system must measure not ‘only the outcomes of the company’s strategies bul alsa those elements of the business that drive the success of the company’s strategy. The measurement system must, in addition, clearly identify the obstacles to this success and provide methods for measuring and analyzing these iswes. Obstacles To The Flow Of Work Highlighted —_(retum to top) ‘The company's management accounting systems must cleatly identify the obstacles to flow. If we are in the value creating business then the value is created when the work flows unencumbered through the company’s value streams and processes. When the flow stops value is no longer created and waste begins. The management accounting systems must have a way to show this clearly and timely. The obstacles to flow must be 1 ‘identified and show their impact on time, cost, and quality. The management accounting system must also have a method for showing the raat causes of this waste and how these obstactes impact the company’s strategic and tactical goals, The management accounting system must have deep rocts into the company’s capacity analysis. Merely tracking and reporting costs and variances does nathing to address the real issues an organization faces when transitfoning ta a lean and eustomer-value focused company. The capacity available throughout the value streams and processes is of the first importance; particularly the capacity constraints and the unused capactty, ‘The management accounting systems need to address these issues and provide business insight Waste Made Visible (retum-to t Closely tied to the issues of obstacles to flow is thé identification and analysts of waste. Traditional management accounting systems deliberately hide the waste through standard costs and budgets. The management accounting systems needed by 21st century organizations must be the opposite. We need to see the waste clearly and ‘often. We need to identify the root causes of that waste and assess ‘ts impact on the company’s strategic and tactical goals, The waste can be identified financially, in terms of time (particularly lead time and cycle time}, and In terms of quality, ‘Much waste within traditional companies is contained within high levels of inventory. Inventory can be considered as “stored capacity’. It is capacity that is expended at one lime and used later. Inventory can also be seen as the principle method used to cover ‘over problems the company can not solve at this time. The identification of inventory, ‘not merely as an item on the balance sheet, but classified and with assigned | ‘esponsibility is an important driver of improvement. Companies that place a high value (financial or otherwise) on the reduction and elimination of inventory are companies, that drive fast effective improvement throughout their production and distribution ‘operations, ‘Show Continuous Improvement Progress _(retum to top} The most important purpose of management accounting is to engender relentless continuous improvement. Our management accounting systems must provide measurements, analysis, classification, and insight into the problems of the process; cost problems, time problems, quality problems, waste prablems, iaventory problems, ‘customer service and satisfaction problems, and so forth. The management accounting systems must not only identify these issues but provide guidance on their importance and their root causes, The reports and measurements within the management accounting system must actively support the focal empowerment of continuous improvement teams, This is lone by making available the right information at the right time, and ina format that is accessible and useful to the team members, Much of this information is gathered and provided locally. Other information is constantly made available within data warehouses or web-sites; ready for the teams to pull down, analyze, summarize, and hup:/www maskell. com/FutureofMgmtAcety, htm 06/1202Ment Accly Pagina Fes provide graphical presentation. This information fs used ta initiate improvement: project designed to achieve strategic performance goals. Other information is used to identify variability or problems ahead of time so they can “headed off atthe pass Information is also analyzed so that root causes and their sources can be identified and ‘eliminated, When a company has @ large number of continuous improvernent projects on the go all the time, itcan be important to assess the impact of these changes. The management accounting system must have a simple and standard method to assess the impact of each project on the company’s steategle and local performance measurements, the costs and waste within the processes, and the combined effect of multiple projects. The management accounting process must be able to identify the success (or otherwise) Of the projects. And the continuous improvement process (often the 7 Steps of quality improvement) must include the updating of the management accounting cost and ‘measurement information along with the standardization changes made to bills of ‘materials, production routings, work standards, and other documentation ‘The company’s continuous improvement teams - in whatever form they ate established should see the management accounting systems as their principle source for project initiation, analysis, prioritization, and measurement of success. The management accounting system must not be seen as a watchdog to keep track of the business ‘changes, but an inherent part of every aspect of the continuous improvement process. ‘The Value Creating Management Accountant {return to top) ‘To achieve the transformation from traditional management accounting to this focus on creation of value requires changes to every aspect of a management accountants war = indeed to the role of the management accountant in the company. Changes are needed in the regular accounting methods of the business to eliminate transactions, replace traditional control methods with operational controls, and to free-up the management accountant for a more pro-active role. Traditional ‘management accounting methods including budgeting, performance measurements, financial planning, and variance analysis need to be changed. The work of financial planning and control the business is integrated with the operational planning and ‘control of the business using such methods as sales & operations planning, balanced performance measurements, and simple, summary direct costing that eliminates most cost allacation, ‘The broader business control becomes focused on customer-driven value creation . through the use of such methods as target costing. Target costing is used to understand ® the value created for the customers and the drive the implications of this through the entire value stream. The company is organized into value stream units focused on addressing customer requirements; new and into the future. Value stream organization greatly simplifies the accounting processes by enabling summarized direct costing. The i value streams are somewhat autonomous entities with their own PEL and Balance Sheet responsibility, The role of the management accountant becomes very much integrated with the value- creating business functions. The finance people become important members of the value stream teams. The accounting, control, and performance measurement information is designed to support and enhance the continuous improvement process. ‘The management accountant becomes a change-agent within a world-class organization {return to top) Email for More Information: infognaskell.com Phone (USA): 609-239-1080 lost tod gu 1, 2007 copy 07002 Ae ve or reprsiced in any fr that the expe pestnsion af Ths materi my not huty:/Avww maskell .com/PutureofMgmtAcelg. htm 6/12/02