Week 1 Understanding Processes and Value Creation

Transcription

1 Week 1 Understanding Processes and Value Creation Management Accounting 1 (ACCT2522) Notes Comparison of Management Accounting and Financial Accounting Information Users of information Management accounting Internal mangers and employees at all levels Financial accounting External shareholders, creditors, banks, securities exchange, trade unions and government agencies Regulations No accounting standards or external rules Must follow externally imposed rules Source of data Nature of the information Both financial and non-financial data from many sources Past, current and future oriented subjective with emphasis on the future Timely and relevant Supplied at various levels of detail to suit managers specific needs Financial data almost exclusively drawn from the transaction-based accounting system Past - objective with historical orientation (reliable) Verifiable Not timely and relevant Highly aggregated information Uses of Management Accounting Information To be effective and efficient à improve customer value and shareholder value, management accounting: Supports the organisation s formulation and implementation of strategy (long-term vs. short-term plan) o Strategic plan long-term planning to achieve the organisation s objectives, usually undertaken by senior managers o Implementing strategies à long-term plans needs to be implemented across all levels of the organisation Contributes to continuous improvement of the organisation s competitive advantage, especially in terms of quality, time and cost o Management accounting information should be shaped around the organistion s source of competitive advantage. E.g.: if a firm competes mainly on low cost, its management accounting information should focus on product costs and tight cost control. o If a firm uses a differentiation strategy, it should focus on measuring and reporting performance around the sources of differentiation (quality, delivery, time, flexibility and innovation).

2 Provides information to help manage resources, through systems for planning (such as budgets) and control (such as performance measures) o Control involves putting in place mechanisms to ensure that operations proceed according to plan and that objectives are achieved. o Plans are ineffective unless there is ways of ensuring that they are achieved. This is the role of control and control systems. Provides estimates of the costs of the organisation s output, to support both the strategic and operational decision needs of mangers. Assist in performance evaluation What is Management Accounting? The processes and techniques that focus on the effectiveness and efficient use of organisational resources, to support managers in their tasks of enhancing both customer value and shareholder value Resources Activities Products/ Services Value Creation Customer value Customer value is the value which a customer places on the feature of a particular good or service. The most important being QTC: Cost amount of resources consumed in a process. Processes must use as little resources are required to produce product or services Quality the degree to which a product/service meets expectations Time the amount of time it takes for processes to occur and the on-time performance of the business in all aspects o Two dimensions: duration and timeliness o Understanding the amount of time taken to perform each activity help managers recognise any bottlenecks that may exist in the process These primary process parameters are all interrelated. If cost was reduced to a very low amount, the quality might worsen. Likewise, a high quality product may take a very long time to produce and thus lower the firm s timeliness. Secondary process values are process attributes that are crucial in supporting and monitoring improvement efforts. These include: Responsiveness customers seek greater customisation of products. Processes should be able to flexibliy and efficiently cope with changing patterns of demand Productivity o Increased consistency (reduced variability) enhances productivity. Process variability increases time, cost and complexity relating to non-value added activities Linkages interdependencies between activities o When considering improvement efforts, we must recognise the linkages between activities: a change in one functional area may have an adverse or no impact on work in other areas, therefore improvement goal may not be achieved and customers usually do not see the value of an improvement in isolation from the process as a whole o E.g. reducing cost in one activity may increase costs in other activities Innovativeness and empowerment employee empowerment is the key to innovativeness Resources Resources inputs into an oganisation s production processes. It includes financial and non-financial (e.g. information, work processes, employees, committed customers and suppliers), tangible and non-tangible inputs of an organisation. 2

3 Processes A process is a group of logically related (interdependent) activities which, when performed in sequential order, utilise the resources of a business to produce a definite result. From this, we can define an activity as a subset of a process i.e. a unit of work; step in a process. Processes can either be operational or administrative. To classify a process into either of these categories requires knowledge of the firm and its context. E.g. an accountant filling a tax return for a car manufacturer would be seen as an administrative process, whereas an accountant that does tax return for clients would see this as an operational process Process Analysis Four objectives of process analysis (collectively, they are usually known as UMPP or UMPPS): 1. Understanding This process divides the business into processes and activities which makes it easier for management to understand the structure and flow of the business. It becomes a lot easier to see relationships between activities/ processes and the links between them. This is usually done with process mapping 2. Monitoring This objective involves continually monitoring processes and improving on them with comparison to benchmarks and targets. This is usually done by utilising Statistical Process Control (SPC) 3. Prioritising This process allows management to decide which processes are most critical to the business survival and thus allow them to appropriately address issues in a timely manner This is usually achieved with the aid of a Pareto diagram 4. Problem solving Process analysis assist in problem solving by recognising where and why a problem occurs, and by suggesting approaches to these problems 3

4 Practical Issue in Cost Estimation Why do some managers prefer to use judgment instead of qualitative analysis (even though judgment is prone to error)? Lack of knowledge Data o o Time required to collect or collate data Problems with data: Missing data misplaced source documents or failure to record a transaction accurately can result in missing data Outliers extreme observations of cost/ activity may represent highly unusual circumstances, they may be eliminated from analysis. If outliers are a result of errors à corrected/eliminated from analysis Mismatched time periods units of time for which dependent and independent variables are measured may not match Trade-offs in choosing the time period (accuracy vs timeliness) Increasing the number of observations increases the accuracy of cost functions However, we want the cost functions to describe current or future cost relationships. By extending the period analysis further into the past to include more observations, the costs will not be current and work practices and technology may have changed during that period Allocated fixed costs fixed costs are sometimes allocated on a per unit basis E.g. fixed MOH costs such as the production manager s salary may be allocated to units of production as a result, such costs may appear to be variable, but in practice they do not behave in a variable manner Inflation during periods of inflation, historical data may not reflect future cost behaviour Solution: adjust historical data with current inflation rate Not a big issue inflation rate is generally low The learning curve new employees take longer to do things when they have stayed for a longer period of time, will start doing things faster. This complicates the cost process A low priority is given to high accuracy (cost-benefit principle) o Subjective cost estimates may be good enough, depending on the use of this information Predetermined manufacturing overhead rate = Budgeted manufacturing overhead Budgeted level of cost driver 1. Apply the MOH cost to the product based on the predetermined MOH rate Applied MOH = Predetermined MOH rate Quantity of cost driver consumed by the product Avocado Toys Limited manufactures Darth Potato and Storm Trooper Potato. Its manufacturing plant has: Two support departments: Maintenance and Quality Control Two production departments: Moulding and Assembly Plantwide method Step 1: Identify the MOH cost driver Direct labour hours Step 2: Calculate MOH rate per unit of cost driver 4

5 Budgeted MOH = = $ Budgeted level of cost driver (from direct labour hours of table 2) = = Step 3: Apply MOH costs to toy lines DP s quantity of cost driver ( DLH) comes from hours of moulding DL and assembly DL STP s quantity of cost driver ( DLH) comes from moulding DL and assembly DL Disadvantage: does not take into account the possibility that different departments may have different cost drivers Ideally, moulding department and assembly departments should have different cost drivers: o Moulding machine intensive o Assembly labour intensive 2. Departmental Method Two-stage cost allocation process: 1. MOH costs are allocated to products via departments o MOH costs are assigned to production and support departments This step is called cost distribution and may involve both tracing and allocating costs MOH costs are indirect product costs, but some of them may be the direct costs of department o MOH costs applied to products This step is called support department cost allocation Support department costs must be reassigned to production departments because, in stage two, overhead is applied to products using overhead rates for each production department 2. Separate MOH rates are calculated for each production department, using different cost drivers 5

6 Allocating Support Department Costs Purpose: to inform users of costs of using services, to assist in planning and control activities. Allocation methods used include direct: 1. Direct method 2. Step-down method 3. Reciprocal method Lecture example: 1. Direct Method Support departments costs are allocated directly to end production/service departments. It does not consider that support departments may provide service to other support departments. Advantage: simple allocation Disadvantage: ignores the fact that some support departments provide service to support other support departments 6

7 The following schedule reflects the use of the Maintenance Department s and Quality Control Department s services by the various departments: 2. Step-Down Method Partially accounts for the provision of services between support departments. Costs are assigned in sequential order. Steps: 1. Determine sequence of allocating support department costs to other support departments 7

8 o Rule of thumb: start with support department that serves the largest number of support departments; however if more than one support departments serve the same number support departments, allocate the one with the biggest budgeted cost first 2. Allocate the total of operating support department costs to departments that use its service 8