CHAPTER 2

MANAGEMENT ACCOUNTING AND THE BUSINESS ENVIRONMENT

Expanding Role of Management Accounting

The business environment in recent years has been characterized by increasing competition and relentless drive for
continuous improvement. These changes include:

1. An increase in global competition

2. Advances in manufacturing technologies
3. Advances in information technologies, the Internet and e-commerce
4. A greater focus on the customer
5. New forms of management organization
6. Changes in social, political, and cultural environment of business

Contemporary Management Techniques

a. Just-In-Time (JIT)
- is the philosophy that activities are undertaken only as needed or demanded. JIT is a production system
also known as pull-it-through approach, in which materials are purchased and units are produced only
as needed to meet actual customer demand.
- Four characteristics of JIT are:
1. Elimination of all activities that do not add value to the product or service
2. Commitment to a high level of quality
3. Commitment to continuous improvement in the efficiency of an activity
4. Emphasis on simplifications and increased visibility to identify activities that do not add value
- The main benefits of JIT are as follows:
a. Working capital position is improved by recovery of funds that were tied up in inventories
b. Throughout time is reduced, resulting in greater potential production and quicker response to
customers
c. Areas previously used to store inventories are released and are made available for other more
productive uses
d. Lesser waste and more customer satisfaction are achieved because of reduction in defect rates
b. Total Quality Management
- Is a technique in which management develops policies and practices to ensure that the firm’s products
and services exceed customer’s expectations?
- Most companies with TQM develop a company that stresses listening to the needs of customer, making
products right the first time, reducing defective products that must be reworked and encouraging
workers to continuously improve their production process
- Affects product costing by reducing the need to track the cist of scrap and rework related to each job.
- Two major characteristics:
a. A focus on serving customers
b. Systematic problem-solving using terms made up of front-line workers
c. Process Reengineering
- Reengineering
- is a process for creating a competitive advantage in which a firm reorganizes its operating and
management function
- it has been defined as the “fundamental rethinking and radical redesign of business processes to
achieve dramatic improvements in critical, contemporary measures of performance, such as
cost, quality, service and speed
- Process reengineering
 a. A more radical approach to improvement than TQM, is an approach where a business process is
diagrammed in detail, questioned and then completely redesigned in order to eliminate
unnecessary steps, to reduce opportunities for errors and to reduce costs.
b. Business process – is any series of steps that are followed in order to carry out some task in
business
c. Steps used in process reengineering are:
- A business process is diagrammed in detail
- Every step in the business process must be analyzed and justified
- The process is redesigned to include only those steps that make the product or service
more valuable
d. This process can yield the following anticipated results:
- Process is simplified
- Process is completed in less time
- Costs are reduced
- Opportunities for errors are reduced
- Process engineering has one basic recurrent problem, employee resistance. For the process to
prosper and succeed, employees must be convinced that the end result of the improvement will
be more secure, rather than less secure jobs.

d. Benchmarking
- Is a process by which a firm
a. Determines its critical success factors
b. Studies the best practices of other firms for achieving these critical success factors
c. Then implements improvements in the firm’s processes to match or beat the performance of
those competitors

e. Mass Customization
- Is a management technique in which marketing and production processes are designed to handle the
increased variety that results from delivering customized products and services to customers

f. Balanced Scorecard
- Is an accounting report that includes the firm’s critical success factors in four areas:
a. Financial performance
b. Customer satisfaction
c. Internal business process
d. Innovation and learning

g. Activity-based Costing and Management

- Activity analysis – is used to develop a detailed description of the specific activities performed in the
operation of the firm
- Provides the basis for activity-based costing and activity-based management
 Activity-based costing (ABC) – is used to improve the accuracy of cost analysis by improving the
tracing of costs to products or to individual customers
 Activity-based management – uses activity analysis to improve operational control and
management control

h. Theory of Constraints (TOC)

- Emphasizes the importance of managing the organization’s constraints or barriers that hinder or impede
progress toward an objective
 - The basic sequential steps followed in applying TOC are
- Analyze all the factors of production (materials, labor, facilities, methods) required in the
production chain
- Identify the weakest link, which is the constraint
- Focus improvement efforts on strengthening the weakest link
- If improvement efforts are successful, eventually the weakest link will improve to the point
where it is no longer the weakest link
- At this point, a new weakest link must be identified and improved efforts must be shifted over
that link

i. Life Cycle Costing

- Is a management technique to identify and monitor the costs of a product throughout its lifecycle
- Consists of all steps from product design and purchase of raw material to delivery of and service of the
finished product. Steps include:
- Research and development
- Product design, including prototyping, target costing and testing
- Manufacturing, inspecting, packaging and warehousing
- Marketing, promotion and distribution
- Sales and service
j. Target Costing
- Involves the determination of the desired cost for a product or the basis of a given competitive price so
that the product will earn a desired profit
- The basic relationship that is observed in this approach is

Target cost = Market determined – desired profit

- The entity using target costing must often adopt strict cost-reduction measures to meet the market
price and remain profitable

k. Computer-Aided Design and Manufacturing

- Computer-aided design (CAD) – is the use of computers in product development, analysis and design
modification to improve the quality and performance of the product
- Computer-aided manufacturing (CAM) is the use of computers to plan, implement and control
production

l. Automation
- Involves computers, computer programming, machines, and equipment.
- To improve efficiency and effectiveness continuously, firms must integrate people and equipment into
smoothly operating teams tat have become a vital part of manufacturing strategy
- Two integration approaches:
a. Flexible manufacturing system (FMS)
- Is a computerized network of automated equipment that produces one or more groups
of parts or variations of a product in a flexible manner
- Uses robots and computers-controlled materials-handling systems to link several stand-
alone, computer-controlled machines in switching from one production run to another
b. Computer -integrated manufacturing (CIM)
- Is a manufacturing system that totally integrated all office and factory functions within a
company via a computer-based information network to allow hour-by-hour
manufacturing management
-
 m. E-Commerce
- Adopted by Amazon.com and eBay
- The Internet has important advantages over more conventional marketplaces for some kinds of
transactions such as mortgage banking

n. The Value Chain

- Is an analysis tool that firms use to identify the specific steps required to provide a product or service to
the customer
- The key idea of this concept is that the firm studies each step in its operation to determine how each
activity contributes to the firm’s competitiveness and profits
- Analyzing the firm’s value chain helps management discover
a. Which steps or activities are not competitive?
b. Where costs can be reduced or
c. Which activity should be outsourced, and
d. How to increase value for the customer at one or more of the steps of the value chain
- When properly implemented, these approaches can:
a. Enhance quality
b. Reduce cost
c. Increase output
d. Eliminate delays in responding to customers

The Changing World of the Management Accountant

- The following are IMA’s prediction of major changes and skills required for professionals in the
management accounting based on surveys:
 More CEO’s and COO’s will have experience as management accountants
 Management accountant will serve as internal consultants who create strategies and
recommendation to guide management decisions
 Management accountant will be key players in cross-functional teams
 Management accountant will be actively involved in initiating and implementing new technology
 Management accountants will need to adopt to an accelerating rate of change. This involve
lifelong learning

Current Focus of Management Accounting

Impact on Organization Structure

Four themes of the design of a management accounting system:

1. Customer focus theme

2. Value-chain and supply-chain analysis
3. Key success factors (i.e., cost and efficiency, quality, time, and innovation)
4. Continuous improvement and benchmarking

Focus on the Customer

- Customer value – is a key focus that businesses of all types must be concerned with
 - The value of a product or service to the customer is affected by such diverse attributes as product price,
quality, functionality, user-friendliness, customer service, warranty and maintenance costs
- Cost information plays an important part in the process called strategic cost management. Generally,
firms chose a strategic position corresponding to one of two general strategies:
a. Cost leadership
b. Superior product through differentiation

Value Chain and Supply Chain Analysis

Value Chain

- Refers to the sequence of business functions in which usefulness I added to the products or services of a
company

Internal Value Chain

- Is the set of activities required to design, develop, produce, market and deliver products or services to
customers.
- A management accounting system should track information about a wide variety of activities that span
the internal value chain

KEY SUCCESS FACTORS

Cross-Functional Terms

- Cross-functional approach to management is crucial in managing the time to market.

- Cross-functional managerial teams bring together production and operations managers, marketing
managers, purchasing and material-handling specialists, design engineers, quality management
personnel and managerial accountants to focus their varied expertise and experience on virtually all
management issues
- Working together, the cross-functional team creates value for the organization by meeting the
customer’s needs in the most effective manner possible

Computer-Integrated Manufacturing (CIM)

- Process is fully automated, with computers controlling the entire production process
- Using computers to control equipment, including robots, generally increases the flexibility and accuracy
of the production process.

Production Life Cycles and Diversity

- The rate at which technology is changing means that the life cycles of most products are becoming
shorter.
- To be competitive, manufacturers must keep up with the rapidly changing marketplace. Managers must
have timely information about production costs and other product characteristics in order to respond
quickly and effectively to the competition

Time-based Competition

- A company can gain an important edge over its competitors by reducing the time it takes to develop a
new product and transporting the product in the market more quickly
- Response time, lead time, on time and downtime are among the many time-based phrases that crop up
in conversations of today’s managers.
- Delays between product development stages must be reduced if not totally eliminated. The production
process must be efficient and product quality must be high
Global Competition

- Businesses as well as consumers and regulators are all affected by the rapid growth of economic
interdependence and increased competition from other countries
- Competition has become worldwide in many industries over the last several decades. This has been
caused by:
a. Reductions in tariffs, quotas and other barriers to free trade
b. Improvements in global transportation systems and information technology
c. Increasing sophistication in international market

How would increase global competition affect management accounting?

For a firm to become world-class, it should be able to plan, direct, control its operations, and
make decisions using an effective management accounting system that provide the relevant data it
needs. An excellent management accounting system will not by itself guarantee success, but a poor
system can stymie the best efforts of people in an organization to make the firm truly competitive.

Information and Communication Technology Management

It has been reported by executives from 150 of the Fortune 1000 companies that the use of information
technology is considered the major driver of globalization. Majority of the executives viewed information technology as
a strategic investment because it Enabled them to track financial and operating events in the firm, to improve service
quality, to improve profits and to improve product quality.

Cost Management System

- The activities of managers in short-run and long-run planning and control of costs.
- Is often carried out as an important part of general management strategies and their implementation

Continuous Improvement and Competitive Strategy

Constant Improvement – is the constant effort to eliminate waste, reduce response time, simplify the design of both
products and processes, and improve quality and customer service. Managerial accountants contribute to the
continuous improvement programs of many organizations through the development of cost management systems which
are discussed next.

Competitive strategy – involves determination and implementation of a set of policies, procedures and approaches to
business that produces long term success.

** end of Chapter 2**