9. Contemporary Management Accounting Systems (Part 1)

Question 1

What is the supply chain management? (SCM)

Answer 1

SCM is the management of key business processes that extend across that supply chain from the original suppliers to the final customers. It includes the adoption of e-commerce technologies, process analysis techniques and many cost management techniques (discussed in previous topics) to improve efficiency, customer value and competitiveness.

Question 2

What does SCM help with?

Answer 2

• Improved supplier relationships can reduce supplier and inventory- related costs.
• Activity-based costing can be used to estimate supplier costs. Total cost of ownership are the costs associated in dealing with a particular supplier including the purchase of price of materials and a range of costs that are triggered by the purchase activity of the supplier.
• Supplier Performance Index = > ratio of supplier costs to total purchase price; the lower the SPI, the more cost-effective the supplier is.

Question 3

What makes up the total cost of ownership?

Answer 3

Costs of purchasing—ordering, receiving and inspection
Costs of holding inventory – carrying costs such storage, insurance, obsolescence, etc.
Costs of poor quality – costs of rework, scrap, returning defective materials, downtime
Costs of delivery failure – cost triggered by late/early delivery by a supplier

Question 4

What are the three ways SCM helps?

Answer 4

Relationship with suppliers
Analysing suppliers
Evaluating supplier performance

Question 5

What are the two types of inventory management approaches?

Answer 5

JIT

Economic quantity model

Question 6

What are the 7 features JIT production?

Answer 6

1. A pull method of coordinating production processes
2. Simplified production processes
3. Purchase of materials, and manufacture of sub-assemblies and products in small lots
4. Quick and inexpensive setups of production machinery
5. High-quality levels for raw materials, components and finished products
6. Effective preventative maintenance of equipment
7. Flexible work teams

Question 7

What are the 5 key features of JIT purchasing?

Answer 7

1. Only a few suppliers
2. Long-term contracts with suppliers.
3. Materials and parts delivered in small lots as needed.
4. Minimal inspection of delivered materials and parts.
5. Electronic ordering and payments.

Question 8

What are the costs of JIT?

Answer 8

• Substantial investment to change the production to minimise non-value-added activities
• An increase in the risk of inventory shortages and the associated loss of production, expediting materials costs and loss of sales

Question 9

What are the benefits of JIT?

Answer 9

• Savings in inventory-carrying costs
• Lower insurance costs
• Fewer losses due to spoilage, obsolescence and theft
• No opportunity costs of high inventory
• Elimination of non-value-added activities
• Meets customers’ needs more effectively

Question 10

What is EOQ? (economic order quantity)

Answer 10

This model determines that optimum order size for individual inventory items. An optimum order size is one that minimises the total of the ordering costs and carrying costs.

Question 11

What are the assumptions underlying EOQ?

Answer 11

• Demand is known and constant
• Incremental ordering costs are known, constant per order
• Acquisition cost per unit is constant
• Entire order is delivered at one time
• Carrying costs are known, constant per unit
• On average, one-half of order is in stock at any time

Question 12

What is the reorder point with EOQ?

Answer 12

The level of inventory on hand triggers a new order. This is simplest to compute when both demand and purchase-order lead time are known with certainty

Question 13

What is safety stock with EOQ?

Answer 13

Inventory held at all times regardless of quantity of inventory ordered using EOQ model. This is a buffer against unexpected increases in demand or lead time and unavailability of stock from suppliers.

Question 14

What is CRM?

Answer 14

Customer Relationship Management
CRM is an approach to collection and analysis of data to understand customers’ behaviour patterns and needs and to develop strong customer relationships. CRM involves a shift away from mass marketing based on products to marketing that is tailored to individual customers.

Question 15

What is Customer Profitability Analysis (CPA)?

Answer 15

Customer profitability analysis compares the costs of all the activities used to support a customer or customer group with their revenue generated.

Question 16

How does ABC costing help CPA?

Answer 16

Activity based costing (ABC) can be used to determine how profitable each customer or customer groups are. By identifying each customer as a cost object, ABC can help estimate the costs of doing business with particular customers.