Lesson Plan on Advanced Topics in Management Accounting

Introduction: Management Accounting is the most dynamic and flexible area of accounting. It draws much of its usefulness with the continuous evolvement of management concepts and principles. With the entry of Information Age, there are several new management principles that have been developed and management accounting has always been in stride with these changes and developments. Advanced Business Developments in Management Accounting I. JUST-I -TIM! I "! T#$% S%T!M &JIT' JIT is a manufacturing philosophy popularized by the Japanese that combines purchasing, production and inventory control system with the goal of minimizing inventory levels to the ideal level of (ero inventor). A. Key elements for a successful JIT system are: . !eduction or elimination of waste of materials, labor, factory space and machine usage. &*ero +aste' ". #actory is organized as to bring materials and tools close to the point of use rather than $eeping them in storage areas. &$educed Set-up Time' %. &uppliers are expected to delivery the goods just in time for production to commence ' not before. &Ultra-relia,le Suppliers' (. )mployees are efficient and effective and can perform multi*functions &-le.i,le +or/0orce' B. Benefits of the JIT System +he ultimate benefit of the JI+ &ystem is $eduction in Inventor) Levels that results to, . ". %. (. .. /. less money invested in idle assets. reduction of storage space re-uirements. less sophisticated inventory control systems and fewer control people needed lesser ris$ of obsolescence, theft and other losses generate increased sales due to -uic$er response to customers. increased bottom line with reduced defective rates, less wastage, maximum use of resources and greater customer satisfaction. Just-In-Time Inventor) S)stem 0ull &ystem Insignificant or 1ero Inventories Manufacturing 2ells Multifunction 3abor +otal 4uality Management &imple 2ost Accounting

Traditional Inventor) S)stem 0ush &ystem &ignificant Inventories 0rocess &tructure &pecialized 3abor Acceptable 4uality 3evel 5A436 2omplex 2ost Accounting

Applicability of JIT System in the Philippines a personal note 3oo$ing from the current economic situation, infrastructure facilities and road networ$, JI+ system is a bit way off our short term realization. +here are a lot of changes that have to be made and the change must be thorough and deep into the whole system. We need 73+!A*reliable suppliers that can deliver on time and provide assurance of -uality 5zero*defect6 raw materials at the most reasonable cost. 3oo$ing for at least one supplier that can fit the description may be a daunting tas$ and the cost benefit scenario will force us into stic$ing with the traditional approach. #urthermore, to be able to fully implement a JI+ system in the country will definitely re-uire much political will to change a negative cultural trait of 8#ilipino +ime9 and the lac$ of importance and value accorded the wor$ing hours. II. Business Process $eengineering &BP$' With the pursuit of increased -uality, global competition and advancements in technology, :0! is the solution. It examines processes to identify and act on value added and non*value*added activities and prescribes radical, -uic$ and significant changes to accomplish improvements and results. Business Process 1 any series of steps that are followed in order to carry out some tas$ in a business Process $eengineering 1 simplification and elimination of wasted effort particularly those regarded as non*value added activities. "alue added activities ' activities that are ;udged to contribute to customer value or satisfy an organizational need. a. 0rimary Activities ' transform inputs into outputs b. &upport Activities ' handled by staff functions "alue c2ain ' set of activities re-uired to design, procure, produce, mar$et, distribute and service a product or service.

A business process is diagrammed in detail.

Every step in the business process must be justified.

The process is redesigned to include only those steps that make our product more valuable.

Anticipated results: . ". %. (. 0rocess is simplified. 0rocess is completed in less time. 2osts are reduced. <pportunities for errors are reduced III. T2eor) o0 3onstraints &T#3' It is a short*term approach to managing bottlenec$s with the goal of ma.imi(ing t2e contri,ution margin o0 t2e constraint 4 ,ottlenec/ &t2e t2roug2put contri,ution'.

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T2roug2put ' rate of production of a defined process over a state period of time. +hus the focus is on producing goods that are sold, rather than simply producing goods. Managers are not encouraged to produce excess inventory because products are measured as throughput only when they are sold. Bottlenec/ ' point of slowdown in the production process thus extending production time and slowing down throughput. T2roug2put 3ontri,ution ' &ales less =irect Materials ays to effecti!ely increase capacity of bottlenec" wor$ing overtime on the bottlenec$ subcontracting some of the processing that would be done at the bottlenec$ investing in additional machines at the bottlenec$ shifting wor$ers from processes that are not bottlenec$s to the process that is a bottlenec$ reducing defective units since each defective unit that is processed through the bottlenec$ and subse-uently scrapped ta$es the place of a good unit that could be sold. I". Total 5ualit) Management &T5M' and 3ost o0 5ualit) 5ualit) is difficult to define and can be classified into the following concepts . 6ig2 Mean ' above average from the standard or norm ". Lo7 "ariance ' delivery of what is actually expected %. Availa,ilit) o0 #ptions ' variety of choices is provided (. Meeting customer e.pectations ' customer satisfaction achieved. T5M ' comprehensive approach to -uality and treats pursuit of -uality as a basic organization function that is as important as mar$eting and production. Benc2mar/ing 1 evaluating and measuring the company>s performance level vis*?*vis that of the industry leader. #our types of :enchmar$ing a. b. c. d. Internal Benc2mar/ing ' evaluation of business units within the organization which have similar business processes to identify the best practices. 3ompetitive Benc2mar/ing 1 process of measuring an organization>s products, services and processes against those of its toughest competitors. -unctional Benc2mar/ing ' business functions in organizations outside the firm>s industry. 8eneric Benc2mar/ing 1 examination of specific activities such as invoicing, payroll, purchasing etc.

9ai(en 1 Japanese term meaning 82ontinuous Improvement9 initially developed in the )ast. 9ai(en 3ong term and long lasting but undramatic &mall &teps 2ontinuous and Incremental Bradual and 2onstant )verybody 2ollectivism, group efforts and systems approach Maintenance and improvement 0eople !e-uires little investment but great effort to maintain Innovation &hort term but =ramatic :ig &teps Intermittent and @on incremental Abrupt and Colatile &elect 8#ew 2hampions9 !ugged, individualism, individual ideas and efforts &crap and !ebuild +echnology !e-uires large investment but little effort to maintain

)ffect 0ace +iming 2hange Involvement Approach Mode )ffort orientation Investment

3ost o0 5ualit)
=efects cause costs, which can be classified into I. 3on0ormance 3ost ' financial measure of internal performance A. Prevention costs * incurred to $eep defects from happening. Includes, system development and -uality engineering 4uality training and -uality circles &tatistical process control activities &upervision of prevention activities Audits of the effectiveness of the -uality system

B. Appraisal costs * incurred to ensure that defective products, once made, are not shipped to customers. Includes, +est and inspection of incoming materials +est and inspection of in*process goods #inal product testing and inspection &upplies used in testing and inspection Maintenance and =epreciation of test e-uipment 0lant utilities in the inspection area #ield testing and appraisal at customer site

II. oncon0ormance 3ost * a financial measure of internal performance and financial measure of customer satisfaction or the lac$ of both A. Internal failure costs * incurred as a conse-uence of detecting defective products before they are shipped to customers. Includes, @et cost of scrap and spoilage !ewor$ labor and overhead !e*inspection and !etesting of rewor$ed products =owntime caused by -uality problems =isposal of defective unitsA products Analysis of the cause of defects in production !e*entering data because of $eying errors =ebugging of software

B. External failure costs * the conse-uences 5in terms of repairs, servicing, and lost future business6 of delivering defective products to customers. Includes, 2ost of field servicing and handling of complaints Warranty repairs and replacements !epairs and replacements beyond warranty period 0roduct recalls 3iability arising from defective products !eturns and allowances arising from -uality problems 3ost sales arising from a reputation for poor -uality

Tec2ni:ues to Anal)(e 5ualit) Pro,lems: ;. 3ontrol 32art

It is a graph of a series of successive observations of a particular step, procedure or operation ta$en at regular intervals of time. )ach observation is plotted relative to specified ranges that represent the limits within which the observations are expected to fall. <nly those observations outside the control limits are ordinarily regarded as nonrandom and worth investigating. <. Pareto Diagram

It is a chart that indicates how fre-uently each type of defect occurs, ordered from the most fre-uent to the least fre-uent. +he 0areto 0rinciple 5DE*"E 0rinciple6 states that only "EF of the factors cause the DEF of effects. +hus we need to focus attention on the "EF rather than the DEF that is bringing in only "EF of the effects. =. 3ause and !00ect Diagram &-is2,one Diagram'

It identifies potential causes of defects through further analysis by enumerating more detailed factors. Most experts agree that management effort should be focused on preventing defects. &mall investments in prevention can lead to dramatic reductions in appraisal costs and costs of internal and external failure. +he $ey therefore is to obtain the optimum balance 5indifference point6 between the conformance and non* conformance costs as depicted in a graphical solution. >. Si. Sigma

&ix &igma is a methodology that provides businesses with the tools to improve the capability of their business processes. +he increase in performance and decrease in process variation leads to defect reduction and vast improvement in profits, employee morale and -uality of product. Illustration on 3ost o0 5ualit): Metropolitan Manufacturing expects to spend 0(EE,EEE in "EE: in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save 0(E,EEE in fixed appraisal costs and variable costs of 0E.(E per unit of finished product. +he new method involves 0/E,EEE in training costs and an additional 0 /E,EEE in annual e-uipment rental. It ta$es two units of material for each finished product.

Internal failure costs average 0DE per failed unit of finished goods. =uring "EEA, .F of all completed items had to be rewor$ed. )xternal failure costs average 0"EE per failed unit. +he companyGs average external failures are F of units sold. +he company carries no ending inventories, because all ;obs are on a per order basis and a ;ust*in*time inventory ordering method is used. !e-uired, . What is the net effect on appraisal costs for "EE:, assuming the new receiving method is implemented and that DEE,EEE material units are receivedH Solution: 2urrent costs &avings, 0(EE,EEE 0 (E,EEE /E,EEE 0 /E,EEE /E,EEE 50"EE,EEE6 ""E,EEE "E,EEE ("E,EEE 0 "E,EEE

#ixed Cariable @ew method, +raining cost )-uipment cost @ew costs of method @et change * Increase

".

Iow much will internal failure costs change, assuming DEE,EEE units of materials are received and that the new receiving method reduces the amount of unacceptable product units in the manufacturing process by EFH Solution: Internal failure costs J5DEE,EEEA(6 x E.E. x 0DEK EF reduction from new method &avings 0DEE,EEE x E. E 0 DE,EEE

%.

Iow much will external failure costs change assuming DEE,EEE units of materials are received and that product failures with customers are cut in half with the new receiving methodH Solution: )xternal failure 55DEE,EEEA(6 x F x 0"EE6 #ailure reduction of .EF &avings 0(EE,EEE x E..E 0"EE,EEE

5ualit) 3ost $eports 4uality costs are summarized on a -uality cost report. +his report shows the type of -uality costs being incurred and their significance and trends. +he report helps managers understand the importance of -uality costs, spot problem areas, and assess the way in which the -uality costs are distributed.

)uality *entures Company )uality Cost +eport For years % and , -ear , Amount Percent Prevention Cost System Development Quality Training Supervision of prevention activities Quality improvement projects Total Appraisal Cost Inspection Reliability Testing Supervision of testing and inspection Depreciation of test equipment Total Internal Failure Costs Net Cost of Scrap Rewor labor and over!ead Downtime due to defects in quality Disposal of Defective products Total E ternal Failure Costs "arranty repairs "arranty replacements #llowances Cost of filed sevicing Total Total Quality Cost 400,000.00 210,000.00 70,000.00 320,000.00 1,000,000.00 0.80% 0.42% 0.14% 0.64% 2.00% -ear % Amount Percent 270,000.00 130,000.00 40,000.00 210,000.00 650,000.00 0.54% 0.26% 0.08% 0.42% 1.30%

600,000.00 580,000.00 120,000.00 200,000.00 1,500,000.00

1.20% 1.16% 0.24% 0.40% 3.00%

560,000.00 420,000.00 80,000.00 140,000.00 1,200,000.00

1.12% 0.84% 0.16% 0.28% 2.40%

900,000.00 1,430,000.00 170,000.00 500,000.00 3,000,000.00

1.80% 2.86% 0.34% 1.00% 6.00%

750,000.00 810,000.00 100,000.00 340,000.00 2,000,000.00

1.50% 1.62% 0.20% 0.68% 4.00%

400,000.00 870,000.00 130,000.00 600,000.00 2,000,000.00

0.80% 1.74% 0.26% 1.20% 4.00%

900,000.00 2,300,000.00 630,000.00 1,320,000.00 5,150,000.00

1.80% 4.60% 1.26% 2.64% 10.30%

!"#$$"$$$.$$ %#& '"$$$"$$$.$$ %(& =========== =========== =========== ========

% based on assu ed sales !i"u#e o! $50,000,000.

Pro?ect -easi,ilit) Studies

Ma?or Aspects o0 a -easi,ilit) Stud): &. *. +. ,. .. 0. 1. 2. 'r#ani(ation and )ana#ement )ar"etin# Technical Ta-ation /inancin# /inancial Projections Profitability Social 3esirability

Limitations o0 a -easi,ilit) Stud): . ". %. 2ertain re-uired information necessary to draw an opinion or conclusion are not available. Assuming all information necessary is available, errors in ;udgment by person preparing the study may result in formulating wrong conclusion or recommendation. +he study itself is primarily a forecast that usually does not tally with actual events.

Ma?or Parts o0 a -easi,ilit) Stud) I. a. b. c. d. e. 0ro;ect &ummary

4ame of the /irm 5ocation of the head office and project Brief description of the project. 6i#hli#hts of major assumptions and summary of findin#s and conclusions re#ardin#: &. *. +. ,. II. )ar"et feasibility Technical feasibility financial feasibility 7conomic and social desirability Beneral Information )ana#ement of the project Project Timetable and Status

a. b.

III. &. *. +. ,. ..

)conomic Aspects

)ar"et description 3emand and Supply analysis Prices 8ompetiti!e position )ar"etin# Pro#ram IC. C. &. *. +. ,. .. 0. 1. 2. <. &=. &&. CI. &. *. +. ,. .. &ocial =esirability Aspects +echnical Aspects Project 3escription and specification )anufacturin# Process Plant Si(e and production schedule )achinery and e9uipment re9uirements Plant 5ocation and 5ayout Buildin# and facilities :a$ materials ;tilities aste 3isposal Production 8osts 5abor :e9uirements #inancial Aspects Total Project 8ost Initial 8apital :e9uirements Sources of 8apital re9uirements Projected /inancial Statements /inancial Analysis