10. Contemporary MAS (Part 2)

Question 1

What is time-based management?

Answer 1

An approach focused on compressing the time it takes to undertake all of the business’s processes to enhance customer value and reduce costs.

Question 2

What do managers have to do for time-based management?

Answer 2

Managers are encouraged to shift from the cost control focus to a time management mindset to make the firm more customer- oriented and responsive. To manage time, non-value added activities must be identified and eliminated. The aim is to reduce new product development time, throughput time and delivery time

Question 3

What is the theory of constraints?

Answer 3

Introduced by Eliyahu Goldratt, it is an approach focused on identifying and removing bottlenecks to manage costs and improve quality and delivery performance.

Question 4

How does the theory of constraints help with inventory flow?

Answer 4

The rate of production is limited to the capacity of the constraints (or bottlenecks) that exist in an organisation. Any attempt to improve efficiency in non-bottleneck areas will not improve performance but will only lead to inventory build-up. Management efforts should therefore be focused on removing bottlenecks to increase revenue, reduce costs and improve customer response time.

Question 5

What does Goldratt recommend to help with the bottlenecks of inventory?

Answer 5

Throughput accounting.

Question 6

What is the three factors of throughput accounting?

Answer 6

a) Throughput measures the rate at which a business generates money through sales.
b) Inventory measures all the money that the business spends in buying things that it intends to sell.
c) Operating expense measures all the money that the business spends in turning inventory into throughput.

Question 7

What happens when throughput is increased?

Answer 7

When throughput is increased with no change in inventory or operating expense, then net profit, ROI and cash flow will increase. Likewise, when operating expense and inventory decrease with no change in throughput, then profit, ROI and cash flow will also increase. Obviously, the reverse will decrease profitability. Throughput accounting is focused on the short term, hence critics question its usefulness over the longer term.

Question 8

What is Activity-based management (ABM)?

Answer 8

ABM, the management of activities— not just costs, is the key to successful control for firms operating in dynamic environments.

Question 9

What is Process Value Analysis (PVA)?

Answer 9

It is fundamental to activity-based management. It focuses on accountability for activities rather than only costs. Additionally, it emphasizes the maximization of system wide performance instead of individual performance. Additionally, PVA is concerned with cost driver analysis, activity analysis, and performance measurement.

Question 10

What is Cost Driver Analysis?

Answer 10

Analysis used to identify the root cause of the activity

Question 11

What is Activity Analysis?

Answer 11

The process of identifying, describing, and evaluating the activities an organisation performs. Activity analysis should produce four outcomes:

1. What activities are done?
2. How many people perform the activities?
3. The time and resources required to perform the activities.
4. Determination of the value-added portion of the activities.

Question 12

What are Value-Added activities?

Answer 12

Value-added activities are activities that are necessary to achieve corporate objectives and remain in business. Value-added costs are costs caused by value-added activities.

Question 13

What are non-value added activities?

Answer 13

Are unnecessary activities and are all activities other than those that are absolutely essential to remain in business. Nonvalue-added costs are costs caused by either nonvalue- added activities, or the inefficient performance of value-added activities.

Question 14

What does Activity analysis do?

Answer 14

Activity analysis attempts to:
 identify and eliminate all unnecessary activities
 increase the efficiency of necessary activities.

Question 15

Five major categories of nonvalue-added activities are

Answer 15

• Scheduling—an activity that uses time and resources to determine when different products have access to processes (or when and how many setups must be done) and how much will be produced.
• Moving — an activity that uses time and resources to move raw materials, work in process, and finished goods from one department to another.
• Waiting — an activity in which raw materials or work in process use time and resources by waiting on the next process.
• Inspecting— an activity where time and resources are spent on ensuring that the product meets specifications.
• Storing — an activity that uses time and resources while a good or raw material is held in inventory.

Question 16

Activity analysis can reduce costs in four ways:

Answer 16

1. Activity elimination— eliminating nonvalue-added activities.
2. Activity selection—choosing among activities caused by competing strategies.
3. Activity reduction— decreasing the time and resources required by an activity. This approach to cost reduction should be primarily aimed at: making the necessary activities more efficient or reducing the nonvalue-added activities until they can be eliminated.
4. Activity sharing —increasing the efficiency of activities by using economies of scale. An example is designing a product to use components already used in other products. By using existing components, activities associated with these components, such as design and machine tooling, are not duplicated.

Question 17

What is Activity performance measurement?

Answer 17

Activity performance measures exist in both financial and nonfinancial forms. These measures are designed to assess how well an activity was performed and the results achieved. They are also designed to reveal if constant improvement is being realized.

Question 18

What is the three dimensions of activity performance measurement?

Answer 18

Three dimensions of activity performance measures are:

• Efficiency —focuses on the relationship of activity inputs and activity outputs. For example, activity efficiency is improved by producing the same activity output with less input.
• Quality — concerned with doing the activity right the first time it is performed.
• Time — longer times usually result in more resource consumption and less ability to respond to customer demands.

Question 19

What is Value and Nonvalue-Added Cost Reporting?

Answer 19

Performance reports should highlight the nonvalue-added costs. By highlighting these costs, managers can focus on measures to reduce them and to eventually eliminate them. In effect, value-added activities and costs correspond to the traditional notion of ideal standards and costs. Although ideal standards were criticized earlier as being unsuitable because they tend to frustrate workers and managers, this outlook assumed that they would be used as standards that must be achieved currently (immediately).

Question 20

What is Trend Reporting?

Answer 20

Reporting trends in actual costs is becoming a key part of the control system in the new manufacturing environment. The emphasis is on improvement, and trend reporting allows managers to assess whether improvement is occurring. This is especially important for nonvalue-added costs. The idea is to eliminate these costs by aggressive activity management.

Question 21

What are the drivers and behavioural effects?

Answer 21

Fundamental to the identification of nonvalue-added costs is the identification of cost drivers. Their selection, however, along with the emphasis on elimination of nonvalue-added costs, carries with it some strong behavioural ramifications. For example, using number of setups as the cost driver may encourage a manager to reduce the number of setups by simply producing larger lot sizes, thereby creating unnecessary inventories. Using setup time as the cost driver, however, may encourage a manager to search for ways to reduce setup time, a desirable outcome.

Question 22

What is life-cycle cost management?

Answer 22

Accumulate and manage costs over the life cycle of the product

Question 23

What are the 4 stages of product life cycle?

Answer 23

1. Product planning and initial concept design
2. Product design and development
3. Production
4. Distribution and customer (logistic) support

Question 24

What is the useful hint for the life-cycle point of view?

Answer 24

Product cost consists of all life-cycle costs, not just manufacturing costs. Furthermore, 90 percent or more of the life-cycle costs are committed (not incurred) by the end of the development stage. Life-cycle cost management is particularly important for products with short life cycles.