3. Advances In Management Accounting Flashcards
Outline the total quality management (TQM) philosophy.
Total quality management consists of continuous improvement in activities involving everyone in the organisation, managers and workers, in an integrated effort towards improving performance at every level.
TQM is a philosophy of getting it right the first time. It recognises the costs of bad quality may exceed the costs of good quality.
Outline the just-in-time (JIT) philosophy as it relates to production and purchases.
The demand for finished products drives a JIT production system, so each component on a production line is only produced when needed for the next stage.
JIT purchasing means that raw materials are received when needed for production, so raw material inventory is reduced to near zero levels.
At what stage of the product life cycle is target costing most appropriate?
The design phase.
Target costing is best suited for manufacturing entities. However, it may be utilised in service industries. What are some of the challenges of applying target costing to service industries?
- In many service industries, the “products” are non-standard and customised. It is difficult to define a target cost when there is no standard product.
- A higher portion of costs in service industries are indirect (overheads). It is harder to reduce these on a product-by-product basis.
- Reducing costs in a service industry may be at the expense of customer service or quality. In manufacturing industries, it may be possible to identify cost savings by removing parts of a product that customers do not value.
List some methods of narrowing the target cost gap.
- Reconsider the design to eliminate non-value-added elements.
- Reduce the number of components or standardise components.
- Use less expensive materials.
- Employ a lower grade of staff on production.
- Invest in new technology.
- Outsource elements of the production or support activities.
- Reduce manning levels or redesign the workflow (e.g. using Kaizen).
The following techniques may assist the above methods:
- tear down analysis or reverse engineering which involves examining a competitor’s product to identify possible improvements or cost reductions.
- value engineering - involves instigating the factors which affect the cost of a product or service.
- functional analysis - involves identifying the attributes/functions of a product which customers value.
Outline the concept of life-cycle costing.
A system which tracks and accumulates actual costs and revenues attributable to each product from development through to abandonment.
Describes the five stages of the product life cycle.
- Development stage (planning and design stage) - the product is designed and developed during this stage. Prototypes may be produced. Manufacturing processes will also be created, including any special machinery required to make the product. Cash flow will be negative at this stage, as there is no revenue.
- Introduction phase/launch - special pricing strategies may be used during the launch of a new product, such as market skimming or market penetration. Companies also need to consider that the pricing strategy used at the introductory stage may affect demand in later years.
- Growth - competition may rise due to new suppliers entering the market. This may force lower prices.
- Maturity - most profits are made during this phase. Prices may be stable. The company’s pricing strategy during this phase is more likely to focus on maximising short-term profits, unlike in the introduction phase.
- Decline - prices may fall with demand unless a niche market can be found.
List some costs that may arise in the following stages of a product’s lifecycle :
1. Planning and design
2. Manufacturing and sales
3. Service and abandonment
- Planning and design stage
Fixed costs
- product design
- building prototypes
- market research - Manufacturing and sales
Fixed costs
- marketing and advertising
- fixed production and sales overheads
- design updating
Variable costs
- materials and components
- direct Labour
- variable production and non-production overheads
- sales commissions
- Service and abandonment
Fixed costs
- decommissioning factories
- disposal of products
Variable costs
- servicing (maybe outsourced)
The lifecycle cost per unit can be reduced by extending the maturity of the product. The following strategies can be used for this:
- Issuing updated versions of the product, which include new features. The costs of developing updates for an existing product are likely to be considerable less than the cost of creating an entirely new product.
- Repackaging the product to give it a new image. This way, established products can be relaunched as if they were new.
- Selling the product in new markets. This could be new geographical markets or aiming the product at new market segments (e.g. by discounting the price).
What are 5 benefits of life-cycle costing?
- Life-cycle costing encourages management to plan the pricing strategy for the whole life of the product life rather than on a short-term basis.
- Identifying the costs incurred throughout the product’s life means that management understands the costs better, enabling management to control them better.
- By monitoring a product’s revenues and costs on a cumulative basis over the product’s life, management is provided with more meaningful information for control than it would have by monitoring costs and revenues period by period.
- It is much easier to “design out costs” during the design phase of a product than to “control out costs” later in a products lifecycle. By considering the whole lifecycle of the product at the design phase, management is more likely to achieve a reasonable cost base and therefore, reasonable profits.
- Decisions about whether to continue to develop and manufacture products will be based on complete information when the product lifecycle is considered. Where costs and revenues are monitored on a period-by-period basis, there is a risk that products in the development phase will be scrapped because they do not bring in revenues.
Discuss the relevance of life-cycle costing to service industries.
Life-cycle costing is relevant to services that require significant upfront research and development e.g. the software industry where R&D is required and the cost of which must be recovered before the software becomes obsolete.
Life cycle costing may also be performed concerning customers. The costs of proving goods or services to customers may vary over their life as customers. Eg high initial costs of setting up customers but as loyalty increases, less costs arise to retain customers.
Define throughput.
Throughput is the rate at which the system generates money through sales.
What is a bottleneck?
Bottlenecks are slower processes than those that precede and succeed them. They slow down the entire production process.
Outline the 5 Focusing Steps proposed by Goldratt and Coz to maximise profit when faced with bottlenecks.
- Identify the system’s bottlenecks.
- Decide how to exploit the bottlenecks identified in (1). (ie which products to make given the bottle necks).
- Subordinate everything else to the decisions made in (2). (ie ensure that other resources do not produce at a higher rate than the bottleneck).
- Elevate the system’s bottle necks (ie elevate production capacity)
- If a new constraint is broken in (4), go back to (1).
What is the formula for throughput contribution? What is the decision rule.
Throughput contribution = sales revenue less direct material costs.
Decision rule: produce the products which produce maximum throughput contribution per hour of the bottleneck.
