AC206 Flashcards
1
Q
When does information become decision relevant?
A
- Objectivity: should adequately represent the status quo, i.e. mirror the economic reality of the organisation.
- Strategy: information shouldn’t only represent the status quo but also future related strategic aspects and how those will be affected by any managerial decisions
- Balance: info should be manageable and comprehensive i.e. there has to be a balance between too much and too little information
- Robustness: info should mean the same in different contexts and shouldn’t be subject to high fluctuation risks.
- Timeliness: info should be quickly accessible by a variety of actors across the organisation.
2
Q
Relevant costs & revenues
A
- future costs/revenues that will be impacted by a decision
- change depending on which option is chosen
3
Q
Irrelevant costs & revenues
A
- past costs (already spent) e.g. sunk costs
- unchanged (indifferent) by any decision
4
Q
Cause and effect relationships
A
- physical link: a direct connection between a cost and what causes it (tyres on cars)
- contractual agreement: costs that arise based on contracts and agreements (data traffic provided/delivery cost)
- operational logic: using knowledge of how things work to understand why certain costs happen (testing theories via statistical analysis - shows correlation)
5
Q
Types of errors in costing systems design
A
- specification error (choosing the wrong cost driver)
- selected cost driver has no real cause-effect relationship with overhead costs.
- the chosen base doesn’t actually reflect what drives the cost. - aggregation error (combining cost pools)
- resources are grouped incorrectly, using a single allocation rate for different activities
- similar but different costs are incorrectly “added together” under one rate - measurement error (measuring cost pools/drivers incorrectly)
- miscalculating the costs in a pool or the amount of activities used by each product
6
Q
less refined (low fineness)
A
pros: inexpensive to implement
cons: uses arbitary cost allocations; prone to serious errors or distortion in data.
7
Q
more refined (high fineness)
A
pros: costs are allocated based on clear cause-effect relationship; results in fewer errors or distortions
cons: expensive to set up and maintain key considerations
8
Q
Why isn’t accuracy in costing systems always needed?
A
managers may add biases to cost data to influence behaviour rather than just to inform decisions. These are called “behaviourally-orientated cost systems”
9
Q
Examples of bias in costing systems: upward bias
A
sales managers may lower prices too much or offer exessive discounts to meet revenue targets
solution: overstate product costs to prevent underpricing
10
Q
Examples of bias in costing systems: downward bias
A
firms use target costing to set goals below current standards or push innovation
costs are understated to create unfavourable variances, signalling the need for improvement
11
Q
Examples of bias in costing systems: low sophistication
A
firms use fewer cost pools to focus on key cost drivers, like the number of parts in a product design.
some costs may be misallocated, but the focus on simplifying design helps long term competitiveness.
12
Q
What is an activity measure?
A
An activity measure is a quantitative indicator of how much work or action is performed. It represents the level of an activity, such as the number of units produced or hours worked, and is used in cost analysis to evaluate performance.
13
Q
What is a cost driver?
A
A cost driver is a factor that causes a change in the total cost of an activity. It directly influences the cost incurred in producing goods or services, such as labor hours, machine usage, or number of units produced.
14
Q
What is a true cost driver?
A
A true cost driver is a factor that accurately and directly causes costs to change. It has a direct cause-and-effect relationship with the cost, meaning that when the cost driver changes, the associated cost also changes proportionally.
15
Q
What is the relevant range?
A
The relevant range refers to the range of activity levels within which the assumptions about cost behavior hold true. Within this range, fixed costs remain constant, and variable costs per unit stay the same, but outside this range, cost relationships may change.
16
Q
What are fixed costs?
A
Fixed costs are expenses that do not change with the level of activity or production. These costs are incurred regardless of the volume of goods or services produced, such as rent, salaries, or depreciation.
17
Q
What are variable costs?
A
Variable costs are expenses that change in direct proportion to the level of activity or production. As production increases, variable costs increase, and as production decreases, variable costs decrease, such as raw materials and direct labor.
18
Q
What are direct costs?
A
Direct costs are expenses that can be directly attributed to a specific cost object, such as a product, department, or project. Examples include the cost of raw materials used in manufacturing a product or wages paid to employees working on a specific project.
19
Q
What are indirect costs?
A
Indirect costs are expenses that cannot be directly traced to a specific cost object. These costs are shared across multiple products or departments and require allocation, such as utilities, rent, and administrative salaries.
20
Q
What are flexible costs?
A
Flexible costs are costs that can be adjusted based on the level of activity or demand. These costs are incurred only when needed and can be increased or decreased depending on production or operational requirements, such as raw material orders.
21
Q
What are committed costs?
A
Committed costs are long-term, fixed expenses that a company has agreed to pay in advance, regardless of current levels of activity. These costs are difficult to change in the short term, such as long-term lease agreements or capital investments.
22
Q
What is cost traceability?
A
Cost traceability refers to the ability to directly associate a cost with a specific cost object, such as a product, service, or department. It determines whether a cost is direct (easily traced) or indirect (requires allocation).
23
Q
What is a unit cost?
A
A unit cost is the total cost incurred to produce one unit of output. It is calculated by dividing the total costs (both fixed and variable) by the number of units produced.
24
Q
What is cost behavior?
A
Cost behavior refers to how costs change in response to changes in the level of activity or production. Costs can be classified as fixed, variable, or mixed, depending on how they react to increases or decreases in activity levels.
25
What is cost flexibility?
Cost flexibility refers to the extent to which a company can adjust its costs based on changes in demand or activity levels. More flexible costs are easier to scale up or down depending on business needs.
26
What is cost allocation?
Cost allocation is the process of assigning indirect costs to different cost objects, such as products, services, or departments. Since indirect costs cannot be traced directly, they are distributed using an allocation base, such as labor hours or square footage.
27
What is the difference between short-term and long-term costs?
Short-term costs are typically fixed and do not change within a short time frame, while long-term costs may become variable as companies have more time to adjust their resources, such as negotiating new contracts or changing suppliers.
28
CVP Analysis
analyses the relationship between costs, sales volume and profit
29
BE point in units
Fixed costs/ (contribution per unit)
30
Sales units required for desired (or target) profit
(FC + desired profit)/(contribution per unit)
31
Sales in £
(FC + DP)/(C/S ratio)
32
C/S ratio
(contribution/unit) / (selling price/unit)
33
BE in £
(FC) / (C/S ratio)
34
Margin of Safety in units
budgeted sales units - BE sales units
35
MOS in £
MOS x SP or budgeted £ - BE £
35
MOS in %
(MOS in units/ Budgeted sales units) x 100
36
Operating leverage
contribution/operating profit
37
Contribution
SP - VC
38
Key Decision Areas in CVP Analysis
1. Activity levels: How production changes impact costs/profits
2. Special pricing: offering discounts for bulk or special orders
3. Product mix: optimal product combinations to maximise profit
4. Outsourcing (make or buy): choosing to produce in-house or outsource
5. Routine vs Non-Routine decisions: routine are regular decisions (e.g. pricing) and non-routine are one time special decisions needing analysis.
39
Short term decision problems: special pricing decisions
focus on immediate profitability, FCs are often considered irrelevant for ST decisions
40
Special Pricing Decisions: LT Considerations
- ST gains: decisions that seem beneficial in the ST may lead to higher complexity and costs over time.
- Repeated Special Orders: Shouldn't be treated as separate, independent ST decisions, but considered as part of a broader LT strategy
- Relevance of decisions depends on:
1. The time horizon
2. The specific decision being made
Qualitative/ Strategic Considerations:
1. Consider the LT market position
2. Future Opportunities
3. and the impact of the decrease in labour on company operations and morale
41
Product mix decisions under capacity constraints
- In the LT, many factors play a role:
1. Economies of Scope (synergies)
2. Cost of heterogenity and complexity
3. Value to customer and customer retention
4. Overall brand value and positioning
42
Outsourcing definition
the cost of making against the cost of buying
43
Outsourcing benefits and disadvantages
(-) Quality risk
(-) Relational risk (dependence)
(-) Reputational risks
(-) Inflexibilities of volume
(+) Certainty/ clarity of costs
(+) Access to expert knowledge
(+) Specialisation: it allows businesses to access expertise and skills that may not be available in-house.
44
Making: Advantages and Disadvantages
(+) Control over quality
(+) design flexibility
(-) secure good competence
(-) inefficiencies
(-) lack of EoS
(-) Alternative uses of resources (opp. cost)
45
Long Term vs Short Term
- FCs, especially overheads, may increase as a result of short term decisions that ignore them. e.g. expanding the product range by accepting repeat orders
- In the ST, only VC are treated as relevant
- Variable (marginal) costing is often preferred to over full (absorption) costing
- Expenses are assigned to products only if they vary with changes in product volumes.
46
Problems with Variable Costing
- Reliance on ST thinking can result in competitive decisions based on ST data.
- Products are considered viable only if CM>0
- May lead to exessive number of product lines
e.g. Paper industry in the 1960s, wanted to expand from US to Europe because Paper in Europe was very expensive, and so flooded the market with very cheap paper. Europoeans focused on FC so their prices were higher. USA relied on Marginal Costing. This forced EU companies to also lower their prices to remain competitive and led to a huge bankruptcy in this industry as a result.
47
Variable vs Full Costing
- Variable costing focuses on ST contributions, ignoring FCs.
- Full costing considers both FC and VC
48
Problems with the traditional cost focus
- Assumes that costs vary mostly with production volume (CVP analysis)
- volume is traditionally used as the base for indirect cost allocation
49
Modern Cost Drivers
Advanced environments introduce multiple "cost drivers" beyond volume, such as: product complexity, product mix heterogenity, factory layout, technology
50
Variable Costs
changes with production volume
51
Fixed Costs
doesn't change with volume
52
Flexible Costs
Acquired as needed
53
Committed Costs
Acquired in advanced and contractually fixed
54
Direct Costs
Can be directly traced to a cost object
55
Indirect costs
Cannot be traced to a cost object
56
Stand Alone (seperable costs)
Costs that aren't shared between users
57
Common (joint) cost
shared costs between users related to a specific activity or decision
58
Steps for cost allocation in FULL COSTING
1. Identify indirect costs e.g. MOH
2. Choose an allocation base e.g. use DL as a base for allocating MH
3. Calculate total indirect cost and the corresponding allocation base
4. Calculate the allocation rate = Total indirect cost/allocation base
5. Apply the allocation rate to assign indirect costs to each product (allocation rate % x the products cost for the chosen allocation base)
59
Common indirect costs + allocation bases
1. MOH and % direct labour costs
2. Indirect material overhead costs and % of DM costs
3. admin and sales costs and % of total manufacturing costs (DL + MOH + DM + IDM)
60
Set up of full cost (product company)
DL + MOH mark up % + DM + IDM mark up % = Sum of manufacturing costs
manufacturing cosys + SG&A mark up %
= Sum full cost (£ per unit)
Sales price
Profit/loss
61
Set up of full cost (service company)
Direct labour (DL) + special direct costs (equipment, fixtures, food) = service cost
service cost + indirect costs (IT, office rent, other staff, marketing) = full cost
62
so, what volume to use?
1. Budgeted Volume: very subjective but often used in practice! preferred by managers because it gives them more control e.g. budget lower so when the actual volume is higher it makes managers look good
2. Actual Volume: post result calculation, very volatile
3. Normal Volume: what would happen on average? e.g. average of last 5 years + growth = estimate; considered the most stable and robust
63
Advantages of full cost
Commonly Used Method: Full costing has been the most widely used method, especially in Europe, because it's well-established and familiar to companies. Many businesses have used it for years.
Easy to Apply: It’s a straightforward method for calculating costs. You add up all the direct and indirect (overhead) costs to get the total cost of producing a product.
Awareness of Total Costs: It helps managers see the full picture of all costs involved in making a product. This is useful when setting prices or analyzing profitability.
Works Well When Labor is Significant: Historically, when direct labor (DL) made up a large part of production costs, full costing was effective. It gave an accurate view of total production costs.
Encourages Scrutiny of Overhead Costs: By allocating overhead (indirect) costs, managers can see how much different parts of the business, like headquarters, are spending. This can lead to questions and improvements in cost management.
Improves Cost Understanding: When you allocate costs, it forces you to think about where those costs are coming from. This can help you identify areas where you can reduce expenses or improve efficiency.
64
Disadvantages of full cost
Less Effective with Automation: As companies rely more on machines (automation) rather than manual labor (DL), direct labor becomes a smaller part of total costs. This makes the full costing method less accurate because it overemphasizes labor costs, while overhead (MOH) costs skyrocket, leading to distorted figures.
Errors in Labor Cost Multiply: If you make a small mistake in calculating labor costs, it can be multiplied when you apply the overhead percentage. This can lead to major cost calculation errors.
Fixed Equipment Isn’t Used Like Labor: Unlike labor, machines and equipment (fixed assets) are not used in the same way across different products. Full costing doesn’t account for this variation, making the cost distribution less accurate.
Misleading Management Signals: High markups on costs, especially when overhead is too large, can give managers the wrong idea about which products are profitable or not. This can lead to poor business decisions.+
65
Cost Distortions under traditional costing systems
- Many TCS allocate indirect costs inaccurately, not reflecting actual resource consumption or activity useage
- commonly used volume related allocation bases (DLH and Direct Material Hours) assume indirect costs are a small part of total costs, leading to minor errors. This assumption is outdated due to:
Automation and advanced manufacturing technologies, resulting in "overhead creep"
- incorrect cost allocation can severely mislead product mix and pricing decisions
- products produced in large volumes (often standard) recieve a disproportionate share of indirect costs.
- products with lower volumes (often complex or specialty items) are frequently under costed.
66
Key factors affecting resource consumption
product complexity, variety, design, features, technology, manufacturing processes
67
Activity Based Costing (ABC)
- created by Johnson and Kaplan (1992) to address allocation limitations in traditional costing systems (TCS).
Key difference from TCS:
- TCS: costs allocated based on cost centres (broad categories)
- ABC: costs allocated based on specific activities
Benefits of ABC:
1. Direct cost tracing: allows for more precise tracing of costs by using various cost drivers tied to organisational activities
2. ABC provides a clearer picture of the actual resource consumption for products, improving cost accuracy
68
Levels of variability
1. Unit level: costs vary with the number of units produced
2. Batch level: costs vary with the number of batches processed
3. Product level: costs are proportional to the activity required for each product
4. Facility level: costs vary with the size or number of facilities
69
. How the Change in Costing System Affects Product Competitiveness
Large Volume vs. Small Volume Effects
Traditional costing systems often allocate overhead based on a simple measure such as direct labor or machine hours. This can lead to inaccurate cost estimates, especially in a diverse production environment.
ABC differentiates between large-volume and small-volume products, as it allocates overhead based on the actual activities consumed by each product. Large-volume products typically have lower overhead per unit, while small-volume products may incur more overhead due to complexity, customization, or small batch sizes.
Competitiveness: ABC can reveal that small-volume products are less competitive if they are burdened with higher costs. This allows companies to make more informed decisions on pricing or even discontinuation of less profitable products.
70
How the Change in Costing System Affects Product Competitiveness: Long Term vs. Short Term Effects
In the short term, the switch to ABC can create a clearer picture of product costs, leading to better pricing strategies and improved decision-making regarding product mix.
In the long term, ABC can highlight inefficient processes and excessive use of resources, prompting strategic shifts to improve overall competitiveness. It also allows for better capacity management by identifying and eliminating non-value-added activities.
71
Is One Costing System Good for All Decisions?: Short-Term Output Decisions vs. Long-Term Strategic Decisions
Short-term decisions: In a short-term context, ABC might be less useful for daily operational decisions where direct variable costs (like materials and labor) play a bigger role. A simpler costing system could be more efficient for quick production and pricing decisions.
Long-term strategic decisions: For long-term decisions, such as product line expansions, discontinuation, or resource allocation, ABC is more valuable as it provides a detailed understanding of where costs arise. It’s particularly useful for complex, multi-product firms where the traditional costing system may obscure inefficiencies.
72
Cost-Benefit Considerations of ABC
Do Advocates of ABC Use It?
Companies that advocate for ABC, particularly in complex and varied production environments, often use it for internal management purposes. For example, the activity "number of sales orders" could drive multiple actions such as:
- Making sales calls
- Handling inquiries
- Shipping products
- Processing invoices and credits
73
Cost-Benefit Considerations of ABC: Batch-Level Costs: Efficiency Implications
Batch-level costs refer to costs incurred every time a batch of products is processed, regardless of the number of units. With ABC, companies may discover that it’s more cost-efficient to have larger and fewer orders, reducing the frequency of setups and other batch-related activities.
Companies can then take actions like:
Eliminating orders that generate below-average revenues.
Evaluating sales managers based on their ability to increase the size and reduce the number of orders, thus lowering costs.
74
From ABC to Activity-Based Management (ABM): Identifying Value-Added vs. Non-Value-Added Activities
ABC helps identify non-value-added activities, which are tasks that do not contribute to customer value or the organization’s goals (e.g., unnecessary paperwork, excessive movement of materials).
By eliminating or reducing these activities, firms can improve efficiency and lower costs.
75
From ABC to Activity-Based Management (ABM): Tracking Performance
ABC also provides the framework to track cost drivers (e.g., the number of setups or machine hours) and use them as performance metrics for evaluating employee or departmental efficiency.
76
From ABC to Activity-Based Management (ABM): Concerns with ABM
While ABM has clear benefits, taking it too literally can lead to unintended consequences. For instance, if employees focus solely on cutting non-value-added activities without considering customer satisfaction, it could negatively impact the overall business.
77
Advantages of ABC
Improved cost visibility: ABC reveals how costs arise, particularly in areas where costs are not strictly tied to production volume but also to the complexity of the product or service.
Capacity management: ABC makes it easier to spot excess capacity, helping firms avoid unnecessary costs.
Usefulness in competitive industries: When indirect costs are high or cost differences between products are small, ABC provides more accurate costing, essential for firms in highly competitive environments.
78
Disadvantages of ABC
Complexity and cost: Implementing ABC can be difficult and costly, as it requires identifying a large number of activities and cost drivers. This could make the system overly complicated and resource-intensive.
Uncertainty of variable costs: ABC assumes that all costs are variable in the long run, which is not always accurate. Some costs may remain fixed even as production changes.
Measuring difficulties: Defining and measuring activities and cost drivers can be a challenge, potentially making the results less reliable and the system harder to justify.
79
What are the key steps in making strategic investment decisions?
- Identifying investment alternatives.
- Quantitative analysis of incremental cash flows.
- Qualitative analysis of strategic issues.
- Decision-making: "yes" or "no."
80
Why must strategic investment decisions integrate both financial and strategic perspectives?
- Financial analysis alone may overlook strategic benefits.
- New technologies may seem unviable financially but have strategic advantages.
Example: Discount rates historically penalize long-term benefits, making new technologies appear unfavorable.
81
Explain the concept of the Time Value of Money in investment decisions.
Investments are time trade-offs: forgoing present wealth to achieve future gains.
Calculations often use the present value formula
PV= X/(1+r)^n
where:
X = Future cash flow,
r = Opportunity cost of capital (hurdle rate),
n = Number of periods.
82
What is the importance of the hurdle rate (opportunity cost of capital) in investment appraisal?
Hurdle rate represents the minimum acceptable return.
It’s based on returns from projects with similar risk profiles.
Used in evaluating whether an investment will meet required returns.
83
List and briefly explain the four main investment appraisal methods.
1. Net Present Value (NPV): Calculates present value of future cash flows minus initial investment. Accept if NPV > 0.
2. Internal Rate of Return (IRR): The discount rate that makes NPV = 0. Accept if IRR > hurdle rate.
3. Payback Period: Time required to recover initial investment. Shorter paybacks are preferred.
4. Accounting Rate of Return (ARR): Average annual profit divided by initial investment cost.
84
In investment appraisals, which cash flows are considered relevant?
- Disposal value of old equipment.
- Cash flows from operational savings.
- Tax effects and opportunity costs of replacement.
- Exclude: Depreciation, allocated overhead, financing costs, and irrelevant revenues (e.g., when revenues remain constant).
85
What are the "5 Rules" for identifying relevant cash flows in investment decisions?
1. Undo accrual effects (like depreciation).
2. Include only relevant future cash flows.
3. Consider opportunity costs (next-best alternative).
4. Ignore sunk costs (already incurred).
5. Ignore financing costs, as they are reflected in discounting.
86
How does tax affect cash flows in investment decisions?
Additional taxable profits from cost savings are taxed.
Capital allowances (like depreciation) reduce taxable profits.
87
What is Incremental Cash Flow, and why is it crucial in investment decisions?
Incremental Cash Flow: Cash flow difference with and without the project.
It includes operational savings, tax benefits, and any disposal values, adjusted for relevant financing and tax considerations.
88
How is NPV used to assess a project’s viability?
NPV = Costs - FCF
FCF = OCF + change in NWC + CapEx
OCF = (Sales - revenue - depr)(1+t) + depr
Accept if NPV > 0, which indicates that the project’s returns exceed the required rate of return.
89
IRR
IRR = r* such that NPV(r) = 0
– PV of inflows = PV of outflows
– NPV(r) polynomial function: can have more than one solution or
none… may not be able to find r*
* The calculation of r* does not require to know the cost of capital,
but a hurdle rate r is needed to interpret r*:
– If r* > r accept project
– If r* < r reject project
* If choosing between two projects, choose the one with
highest r*
90
NPV advantages and disadvantages
(+) takes size of project into account
(not a %)
(+) can be used even if different
rates r used in different time periods
(+) more realistic reinvestment
assumptions (CFs reinvested at r)
(-) depends on setting a required
rate r
91
IRR advantages and disadvantages
(-) does not capture size of project
(-) ambiguous in case of
unconventional cash-flows or if r
changes over time
(-) unrealistic assumption of
reinvestment at r* = IRR
(+) does not depend on setting a
required rate r
92
Payback period
Payback period = time t needed to recover initial investment
= Net initial investment/annual increase in CFs
* If annual incremental increase in CFs is constant:
* Set cut-off date t*:
– tt* Þ reject
– the riskier the investment the shorter the required t*
93
Benefits and disadvantages of payback period
Benefits:
– Rule of thumb, easy to understand
– Useful if:
* Distant cash flows highly uncertain
* Preliminary phase, initial screening
Limitations:
– how is t* established?
– ignores time value of money/opportunity cost of capital
– Ignores CFs beyond t*
* More concerned with cash management in the short
or medium term
94
Accounting rate of return (ARR)
ARR (also known as ROI) = Income divided by investment
* Usually:
– Average annual increase in operating profit
– Average investment over project’s life or Net Initial
Investment
* If ARR > required rate of return r, then accept
– Need to establish r = benchmark
* Between 2 projects, choose project with highest ARR
95
ARR advantages and disadvantages
Advantages:
* Based on information readily available (financial
statements)
* Gives managers an idea of how investments will
affect future accounting results
Disadvantages:
* Affected by chosen accounting methods (e.g.
depreciation)
* Ignores size
Other issues:
* ARR often used for performance measurement
– Managers tempted to make decisions using the same rule by which
they will be evaluated (i.e. ARR, not NPV)
– Even if NPV used, managers tempted to prefer projects which perform
better in terms of short term profitability…
Þ Need to evaluate managers by project and look at project results
rather than overall accounting results
* Required rate of return r for the whole firm may be lower than
the ARR of a business unit: any ARR in between causes goal
incongruence
96
Quantitative analysis of automation
1. Flexibility
* The new machine causes a loss of flexibility
* leaves the firm exposed to risk from downtime
* and able to perform only jobs requiring all four combined operations, thus potentially changing its product mix in favour of more complex products
2. Quality and customer value
* Are these more complex machined products necessarily increasing customer value?
- For example: is manual customisation a source of competitive advantage for Mavis?
- Are there labour-intensive jobs which are equally important – or even more important – for the competitiveness of Mavis?
- Potential reduction of Mavis’ role in the value chain
3. Strategy pursued
* Mavis = small firm: can it succeed in the automated technology segment of the market?
* Is the company aiming to achieve cost leadership or product differentiation?
- Given small size, cost leadership is unlikely to be feasible (requires economies of scale)...
* Vertical integration may not be a feasible option as flexibility seems a key-attribute in this competitive environment
4. Labour and skills
* Moving to automation implies a shift in key competencies
* How quickly can operators learn to use the new machine?
* What are the consequences of firing 6 employees (3 out of 4 per shift) at once, in a firm which is possibly employing no more than 60?
* How crucial are manual skills for competitiveness?
5. Supply chain
* …is Mavis running the risk of becoming a captive supplier, too dependent on Buckeye?
* Is Mavis likely to become more dependent on its major suppliers and on the quality of the incoming raw castings
(no longer manually reworked)?
* Thus, the new machine may cause Mavis to lose both buyer power and seller power within the supply chain
7. Performance measurement
Replacement = loss on disposal of $236,000 (127,440 net of tax savings)
= substantial erosion of current profitability
§ Recognising such loss implies acknowledging a mistake made 3 years ago...
97
What are the three revolutions that shaped management accounting and their core philosophies?
1. Taylorism (1900-1940s):
Known as "scientific management," it emphasized efficiency in the production process.
Focused on technical processes and worker productivity by breaking tasks into smaller, more manageable components.
Workers were often treated like parts of a machine, with strict controls to maximize efficiency.
Example: Assembly lines in factories introduced during this era.
2. Toyotism (1950-1980s):
Shifted focus from treating workers as machines to viewing them as assets.
Emphasized continuous improvement (kaizen) and teamwork.
Workers were encouraged to develop skills and contribute ideas for process improvements.
Example: Toyota’s production system revolutionized manufacturing through just-in-time (JIT) inventory and lean processes.
3. Strategic Turn (1990-Present):
Prioritizes aligning every part of an organization with its strategic goals.
Involves proactive decision-making and adapting to market changes.
Management accounting expanded to include external environmental factors like competition and customer behavior.
98
What are Henry Mintzberg's five dimensions of strategy, and how do they apply in practice?
1. Plan:
A deliberate course of action designed to achieve specific goals.
Example: A company developing a business plan to expand into a new market.
2. Pattern:
Strategy can emerge through consistent patterns of past behavior, even if it wasn't explicitly planned.
Example: A restaurant that realizes customers love its delivery service and shifts focus to prioritize it.
3. Position:
Involves positioning the company or its products in the competitive landscape.
Example: A luxury brand placing itself as a premium option in the market to differentiate from competitors.
4. Ploy:
Short-term tactical moves aimed at outmaneuvering competitors.
Example: A company cutting prices temporarily to capture market share and weaken rivals.
5. Perspective:
A long-term view or ideology guiding how the organization operates.
Example: A tech firm that fosters innovation as its core identity.
99
What are Porter’s Five Forces, and how do they influence strategy formulation?
1. Rivalry Among Existing Firms:
Intensity of competition among current players in the industry.
Example: Highly competitive markets like airlines often see price wars.
2. Threat of New Entrants:
The risk of new competitors entering the market.
Example: High entry barriers (e.g., costs, patents) can protect existing firms.
Threat of Substitutes:
3. Availability of alternative products or services.
Example: Streaming services are substitutes for cable TV.
4. Buyer Power:
Customers' ability to influence pricing and terms.
Example: In industries where buyers have many options, they hold more power.
Supplier Power:
5. Suppliers’ ability to control prices or supply availability.
Example: A sole supplier of a critical component can exert significant influence.
6. Strategic Implications:
Companies can position themselves where forces are weakest, exploit changes (e.g., new technology), or reshape forces (e.g., lobbying for regulations).
100
How is management accounting linked to strategy, and why is this important?
Traditional Role: Management accounting focuses on internal operations, such as budgets, cost control, and efficiency within teams or departments.
Strategic Role: Modern management accounting contributes to strategy by:
- Providing data: Analyzing costs and revenues to guide strategic decisions.
- Supporting implementation: Ensuring resources align with strategic priorities.
- Measuring performance: Monitoring profitability, market share, or customer satisfaction.
- Adapting to external contexts: Examples include environmental accounting to address sustainability trends.
101
What makes Strategic Management Accounting (SMA) different, and why is it valuable?
SMA integrates external factors like market trends, competition, and customer behavior into decision-making.
- Forward-Looking: Unlike traditional methods focusing on past or present performance, SMA anticipates future needs.
Examples of SMA Techniques:
1. Competitor analysis to understand market positioning.
2. Customer profitability analysis to identify high-value customers.
3. Supplier performance metrics to strengthen supply chain management.
102
How do traditional and strategic approaches to management accounting differ in addressing strategy?
Traditional Management Accounting:
Techniques: Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and Accounting Rate of Return (ARR).
Often retroactive, aligning strategy after financial data is available.
Strategic Management Accounting:
- Starts with strategy and adapts accounting techniques to support it.
- Techniques like life-cycle costing consider costs and benefits over multiple periods, aiding long-term planning.
Example: A company investing in green technologies uses SMA to analyze long-term environmental and financial impact.
103
What is a business plan, and why is it important?
A business plan is a written document outlining the future direction of a business, detailing what it plans to do and how.
Strategic Role:
Summarizes resources and actions for achieving goals.
Coordinates externally (e.g., with investors) and internally (e.g., among teams).
Serves as a tool for:
1. Simulation: Testing possible strategies.
2. Motivation: Setting goals for teams.
3. Monitoring: Tracking progress using a dashboard of metrics.
Content: Combines qualitative, quantitative, financial, and non-financial information.
Key Insight: A business plan integrates
strategy and management accounting, making it a central tool for planning and execution.
104
How do business plans help in formulating and situating strategies?
They define what the organization wants to achieve.
Utilize strategic analysis tools to assess profitability and risks, such as:
1. SWOT Analysis: Evaluates strengths, weaknesses, opportunities, and threats.
3. Porter’s Five Forces: Assesses competitive pressures like rivalry, buyer power, and substitutes.
Draws insights from various disciplines, including macroeconomics and marketing.
105
What are the levels of quantitative analysis in business plans?
Break-even Analysis:
Determines the sales volume at which total costs equal total revenues.
Formula:
1. Break-even Volume = (Fixed Costs + Start-up Costs)/ (Price - Variable Costs)
Limitation: Does not consider working capital costs.
2. Contribution Margin Analysis:
Measures profit contribution per unit.
Formulas:
- Unit Contribution Margin (CM)=Price - Variable Costs
- CM Ratio = Total Contribution Margin/ Total Revenue
3. Cost-Volume-Profit (CVP) Analysis:
- Analyzes the relationship between costs, volume, and profits.
- Helps visualize scale issues and planning.
4. Discounted Cash Flow (DCF):
- Considers time value of money and capital investment.
- Key for long-term strategy alignment.
106
What is scenario and sensitivity analysis, and why is it important?
Scenario Analysis: Tests outcomes by changing key variables to simulate possible futures.
Sensitivity Analysis: Examines how changes in one input affect outputs.
Uses:
Reduces uncertainty by identifying critical factors.
Simplifies models by excluding insignificant variables.
Improves communication among decision-makers.
107
How did Apple use business planning and strategic management accounting (SMA)?
Apple's growth from a startup to a global leader involved:
- Formulating clear strategies.
- Conducting extensive market analyses (using tools like SWOT and Porter’s Five Forces).
- Implementing product costing and margin analysis for decision-making.
- Using SMA techniques to guide long-term strategic plans.
Key Insight: Apple's success highlights the integration of SMA with traditional management accounting to guide innovation and growth.
108
What challenges exist in costing intangible assets, and how are they addressed?
Challenges:
- Intangible assets (e.g., R&D, brand equity) yield long-term benefits that are difficult to observe or trace to initial investments.
- Traditional financial reporting often overlooks these.
Solutions:
Product Life-Cycle Costing: Extends cost tracking beyond the market cycle.
Balanced Scorecard: Tracks multiple dimensions of performance, including intangible assets, through new reporting mechanisms like Integrated Reporting (IR).
109
What is life-cycle costing, and what are its benefits and limitations?
Tracks costs across the entire product life cycle, from development to disposal.
Key Stages:
Pre-market costs (e.g., R&D, design).
Market cycle costs (e.g., production, materials).
Disposal costs (e.g., recycling, dismantling).
Benefits:
Captures costs outside the market phase for better planning.
Supports strategic decisions by visualizing the total cost of ownership.
Limitations:
Overlap between product cycles makes it complex.
Works best when combined with other costing methods.
110
How does strategic management accounting address non-financial elements?
Traditional methods (e.g., contribution margin, absorption costing) focus on financial data.
SMA incorporates non-financial metrics through:
- Activity-Based Costing (ABC): Focuses on non-financial activity drivers, later converting them to financial terms.
- Balanced Scorecard: Measures performance across four dimensions: financial, customer, internal processes, and learning/growth.
Key Insight: By capturing non-financial aspects, SMA supports holistic decision-making.
111
What is the Balanced Scorecard, and why is it used?
The Balanced Scorecard (BSC) is a strategic management tool that extends beyond traditional financial metrics to provide a comprehensive view of organizational performance.
It evaluates performance from multiple perspectives:
1. Financial Indicators: Traditional measures of profitability and shareholder value.
2. Customer Perspective: Measures customer satisfaction and retention.
3. Internal Processes: Assesses efficiency and quality of internal operations.
4. Innovation and Improvement: Tracks learning, development, and adaptability.
Key Insight: The BSC aligns metrics with the organization's overall strategy, helping managers focus on both short-term and long-term goals.
112
How does the BSC complement traditional financial metrics?
Traditional financial indicators (e.g., profit, ROI) focus on past performance.
The BSC integrates non-financial aspects to provide a forward-looking view of the business.
Helps capture intangible factors like innovation, customer loyalty, and employee engagement.
Example: In a tech company, focusing solely on financials might overlook customer satisfaction or the need for R&D investment, which are crucial for long-term growth.
113
How does Apple’s strategy align with the BSC?
Apple’s Strategy (1993):
Deliver the best user experience through innovation in hardware, software, and services.
Support a community of third-party developers to enhance product offerings.
Provide a high-quality buying experience through knowledgeable salespeople.
BSC Linkage:
Customer Perspective: Focus on delivering superior user experiences.
Internal Processes: Leverage unique capabilities to design and develop proprietary systems.
Innovation Perspective: Foster a developer community for third-party enhancements.
Financial Perspective: Enhance shareholder value by increasing market share and customer satisfaction.
114
What metrics did Apple include in its BSC in 1993?
Market Share: Measures growth and competitive position in the market.
Customer Satisfaction: Reflects how well Apple meets customer needs and expectations.
Employee Attitudes: Tracked through bi-annual surveys to assess employee morale and engagement.
Shareholder Value: Monitored financial returns and profitability.
Core Competencies: Difficult to quantify but focused on proprietary capabilities (e.g., innovative product design).
115
In what ways does the BSC help organizations manage innovation?
- Encourages organizations to measure innovation efforts (e.g., R&D investments, product lifecycle).
- Links innovation metrics directly to strategic goals.
- Balances immediate operational needs with long-term development priorities.
- Provides a structured framework for evaluating intangible assets like intellectual property and brand equity.
Example: Apple’s BSC tracks customer satisfaction and innovation activities to ensure alignment with its strategy of delivering exceptional user experiences.
116
How does Strategic Management Accounting (SMA) relate to the supply chain?
SMA incorporates tools to enhance supply chain management:
1. Industry Roadmaps: Long-term plans for market trends and innovations.
2. Supplier Scorecards: Assess supplier performance based on cost, quality, and delivery.
3. Open-Book Accounting: Transparent sharing of cost data between supply chain partners.
4. Customer Profitability Profiles (CPP): Analyze customer-related costs and profitability.
5. Target Costing: Focus on meeting market-driven price expectations.
6. Cost of Quality: Measures costs associated with maintaining quality (e.g., prevention, failure costs).
117
How can costs be categorized in the supply chain from an SMA perspective?
Traditional View: Costs are sorted by resources used (e.g., labor, materials).
SMA View: Costs are categorized based on their effects on stakeholders, especially customers:
- Customer Profitability Analysis (CPA): Assigns costs to specific customers to understand profitability.
- Helps identify:
Profitability differences among customers.
Relationships between costs and pricing.
The cost of quality.
118
What are Customer Profitability Profiles (CPP), and what do they enable?
CPP classifies customer-related costs into levels:
- Output-Unit-Level Costs: Per-unit costs, like handling costs.
- Batch-Level Costs: Order processing, delivery costs.
- Customer-Sustaining Costs: Sales visits, customer support.
- Distribution-Channel Costs: Costs for specific sales channels.
- Corporate-Sustaining Costs: General administrative expenses.
Enables:
Measuring customer or group profitability.
Making informed decisions about pricing, discounts, and customer retention.
119
How does the Spring Distribution example demonstrate CPP?
Scenario: Spring sells bottled water and analyzes profitability for five customers using activity-based costs.
Findings:
Customer S is most profitable, contributing 46% of total profits.
Customer T incurs a loss (-€3,260) due to high costs.
Interventions Considered:
Improve efficiency for high-profit customers like R.
Assess strategic or reputational reasons for retaining unprofitable customers like T.
120
What strategic factors should firms consider for unprofitable customers?
Reputation: Some customers may enhance the firm's reputation.
Future Potential: Economic recovery or growth potential may make a customer profitable later.
Cost Disappearance: Not all costs vanish if a customer is dropped; fixed costs remain.
Strategic Growth: Retaining unprofitable customers may align with market penetration strategies.
Political Reasons: External pressures may necessitate keeping certain customers.
121
What is target costing, and how is it applied?
Definition: A method focused on managing costs to meet market-driven price expectations while maintaining profitability.
Steps:
1. Define the target selling price.
2. Subtract desired profit margin to determine allowable costs.
3. Use value engineering to reduce costs and meet targets.
Example:
TargetCo wants to lower the price of Product X from €1,000 to €800 to remain competitive.
Target cost = €720 per unit after deducting a €80 profit margin.
Challenge: Reduce current costs (€900/unit) by €180 using value engineering.
122
What is value engineering, and how does it help in target costing?
Definition: A systematic evaluation of all business activities to reduce costs while satisfying customer needs.
Process:
Distinguish between:
Value-Added Costs: Enhance product value (e.g., design, assembly).
Non-Value-Added Costs: Do not enhance value (e.g., rework, obsolete stock).
Form a cross-functional team to optimize processes and costs.
Outcome: Achieves cost reduction without compromising product quality or customer satisfaction.
123
How do SMA techniques assist in pricing decisions?
Short-Term: Fixed costs are often irrelevant; focus on marginal costs for pricing special orders.
Long-Term: All costs, including fixed and variable, must be managed.
Techniques include:
Target Pricing: Sets price based on market conditions and adjusts internal costs accordingly.
Life-Cycle Costing: Accounts for costs over the entire product life, from development to disposal.
124
What are the strengths and weaknesses of Customer Profitability Profiles?
Advantages:
Combines customer data with financial insights for better decision-making.
Identifies unprofitable customers and opportunities for efficiency.
Integrates across departments like marketing and operations.
Limitations:
Best suited for firms with few customers or segments.
Excludes non-financial or strategic customer value.
Potential conflicts with marketing priorities.
125
What is the role of target costing in Tata’s Nano car development?
Challenge: Build a car for $2,500 while meeting regulatory and performance standards.
Approach: "Gandhian Engineering" – extreme cost-cutting through innovative thinking and long-term supplier partnerships.
Results:
Minimalist design: One windshield wiper, no radio, no air conditioning.
Re-engineered parts: Simplified steering and trunk designs.
Outcome: Tata Nano, introduced in 2008, set a new cost-efficiency benchmark in India’s auto market.
126
What are the two types of quality in product development?
Quality of Design:
How well the product matches customer needs and expectations.
Central to value engineering, ensuring design aligns with customer value.
Conformance Quality:
How well the product adheres to specifications.
Financial measures of quality focus on conformance costs:
Prevention Costs: Avoiding defects.
Appraisal Costs: Testing products for defects.
Internal Failure Costs: Addressing defects before shipment.
External Failure Costs: Handling failures after delivery.
127
How can quality problems be visualized?
Cause-and-Effect Diagram: Identifies root causes of quality issues.
Pareto Diagram: Highlights the most significant problems by frequency.
Statistical Quality Control Charts: Tracks product quality trends over time.
128
What is open-book accounting, and how is it applied?
Definition: Buyers and suppliers share cost information to identify supply chain efficiencies.
Example:
Sainsbury collaborated with suppliers to cut costs by creating a central consolidation center.
Data from open-book accounting highlighted inefficiencies and facilitated negotiations.
Benefits:
Reduces costs for all parties.
Builds trust and strengthens buyer-supplier relationships.
Enables inter-organizational value engineering.
129
What are the benefits and challenges of open-book accounting?
Benefits:
Improves data quality and transparency.
Builds trust and fosters collaboration.
Identifies cost-saving opportunities across the supply chain.
Challenges:
Suppliers may resist sharing sensitive data.
Risk of opportunism if buyers use data to negotiate lower prices.
Success depends on trust and the nature of the buyer-supplier relationship.
130
What is Just-in-Time (JIT) purchasing, and what are its benefits?
Definition: Materials are delivered exactly when needed, eliminating inventory costs.
Benefits:
Reduces stock carrying costs and obsolescence.
Simplifies costing (e.g., backflush costing).
Minimizes waste and paperwork.
Improves cash flow by reducing tied-up capital.
131
How does JIT influence buyer-supplier relationships?
Requires tight coordination:
Reliable transportation and delivery systems.
High-quality control standards.
Fast and transparent communication systems.
Buyers depend on suppliers for timely, defect-free delivery, necessitating robust control systems:
Supplier scorecards.
Open-book accounting.
Performance contracts.
132
What is the purpose of supplier scorecards?
Definition: A tool to assess supplier performance on various dimensions over time.
Key Metrics:
Delivery timeliness.
Product quality.
Cost efficiency.
Benefits:
Provides benchmarks for improvement.
Enhances accountability and transparency.
Aligns supplier performance with buyer goals.
133
What are industry roadmaps, and when are they used?
Definition: Collaborative tools used to coordinate strategies across an entire industry.
Example:
Moore's Law in the semiconductor industry provided a shared vision for technological advancements.
Benefits:
Aligns investments and goals across competitors and partners.
Facilitates "coopetition" (collaboration among competitors).
Reduces uncertainty and guides long-term planning.
134
Why is time an important variable in cost management?
Time as a Cost:
Holding inventory for too long incurs storage costs.
Stock shortages lead to production delays.
Coordination Needs:
JIT systems reduce time-related costs but require synchronized efforts between buyers and suppliers.
Effective tools include scorecards, open-book accounting, and performance contracts.
135
What factors should management consider when implementing new systems?
Technical Problems:
Integrate new systems without disrupting existing technical workflows.
Social and Organizational Context:
Adapt to organizational values, cultures, and routines.
System Design:
Define scope and level of detail to balance usability and cost-efficiency.
Implementation Procedure:
Plan thoroughly to avoid unforeseen complications and ensure flexibility.
136
What steps should be taken before implementing a new system?
Assign Responsibilities:
Identify teams or individuals responsible for implementation tasks.
Capture Economic Reality:
Map organizational processes via site visits, interviews, and document analysis.
Use graphical mappings to clarify workflows.
Design the System:
Define the system's scope and detail level (cost pools, drivers).
Avoid overcomplication, as detail can increase costs.
137
What are the stages of the implementation process?
Planning:
Anticipate complications and build flexibility with scenario planning.
Monitoring and Evaluation:
Apply monitoring to adjust quickly, but avoid overly frequent monitoring to control costs.
Execution:
Choose a top-down or bottom-up approach based on organizational culture.
Decide whether to maintain old systems in parallel or replace them immediately.
138
What key decisions must management make during implementation?
Short vs. Long Horizon:
Short-term for immediate gains (e.g., cost savings).
Long-term for strategic alignment.
Tight Planning vs. Flexibility:
Strict roadmaps for efficiency; flexibility for adaptability.
Core Team vs. Multiple Teams:
Core team for simplicity; multiple teams for complex systems.
Replace vs. Align Culture:
Replace culture for new mentalities (e.g., cost-saving focus).
Align culture to reinforce existing values.
139
How do implementation strategies differ between a foreign aid NGO and a semiconductor producer?
NGO:
Long-term horizon for accountability.
Flexible, bottom-up approach to encourage participation.
Align with existing culture to maintain team spirit.
Semiconductor Producer:
Short-term horizon to reduce costs under competition pressure.
Tight, top-down approach for efficiency.
Replace culture to instill cost-saving mentality.
140
How can value creation be visualized in different contexts?
Physical Products:
Map processes along the value chain (e.g., manufacturing, packaging).
Highlight cost drivers like energy, labor, or materials.
Services:
Categorize by geographical regions or activity types (e.g., recruitment, advisory).
Avoid unintended consequences like prioritizing cheaper activities (e.g., lobbying over crisis response).
141
What are parallel and stand-alone systems, and how do they differ during implementation?
PARALLEL SYSTEM:
Definition: Old and new systems operate simultaneously during the transition period.
Advantages:
Minimizes risk by providing a fallback if the new system fails.
Allows employees time to adapt to the new system.
Disadvantages:
Increases costs due to maintaining two systems.
May lead to confusion or errors from using both systems.
STAND-ALONE SYSTEMS:
Definition: The old system is entirely replaced by the new system during implementation.
Advantages:
Encourages faster adoption and avoids redundancy.
Streamlines operations and simplifies workflows.
Disadvantages:
Higher risk if the new system fails or isn’t fully functional.
Requires extensive preparation and testing before launch.
142
What is open-book accounting, and how does it work in practice?
Definition: A method where buyers and suppliers share internal cost data to enhance supply chain transparency and collaboration.
How It Works:
Partners access each other’s management accounting data.
Identify inefficiencies and opportunities for cost reduction.
Collaborate to improve overall supply chain performance.
Benefits:
Reduces costs for both parties by identifying shared inefficiencies.
Builds trust and strengthens buyer-supplier relationships.
Provides benchmarks for negotiation and performance improvement.
Challenges:
Risk of opportunism: Buyers might use cost data to demand lower prices.
Suppliers may be reluctant to share sensitive financial information.
Example:
Sainsbury's Case: Identified cost inefficiencies in supplier logistics and implemented a primary consolidation center to cut expenses for both parties.
143
What should be considered when implementing self-check-in systems?
Technical Considerations:
Train staff on the new equipment.
Ensure high reliability and minimal errors.
Formal Considerations:
Address legal responsibilities (e.g., screening for dangerous goods).
Define liability for system errors.
Behavioral Considerations:
Manage customer resistance and build trust in technology.
Address potential employee resistance due to role changes.
Implementation Steps:
Planning Phase: High external involvement, testing, and bottom-up input.
Initial Roll-Out: Run parallel systems, provide assistance, and phase in features.
Stabilization Phase: Gradually reduce staffed counters and incentivize self-check-in.
144
What are industry roadmaps, and how do they aid implementation?
Definition: Shared strategic plans for industry-wide coordination.
Example: Moore’s Law guided semiconductor investment and development timelines.
Benefits:
Aligns technological and cost advantages across competitors.
Facilitates coopetition (collaboration among competitors).
Provides flexibility for alternative strategies.
145
What is JIT, and how does it impact cost and operations?
Definition: A production and inventory management system where materials and products are delivered only when needed, reducing inventory costs.
Key Principle: Operates on a demand-pull system (production is triggered by demand) rather than a push system (production based on forecasts).
Benefits:
Minimizes inventory carrying costs and obsolescence.
Simplifies costing through backflush accounting (costs are recorded at the end of production).
Reduces waste and increases cash flow efficiency.
Challenges:
Requires highly reliable supplier relationships and coordination.
Vulnerable to supply chain disruptions.
Example:
Used in automotive manufacturing, where parts are delivered to assembly lines as needed, eliminating the need for large stockpiles.
146
What factors influence the complexity and cost of implementing SMA tools?
Size of the Organization: Larger organizations may face higher complexity and costs.
Level of Detail: More detailed systems increase costs but may improve accuracy.
Location: Geographically dispersed organizations face logistical and cultural challenges.
Involvement of Software: Advanced software can streamline processes but adds initial costs.
Organizational Culture: Resistance to change or misalignment with values can increase complexity.
Key Insight: Evaluate whether the implementation truly adds value before proceeding.
147
Why is cost representation subjective, and how does it impact manageability?
Costs are not objective facts but interpretations based on the observer's assumptions.
Trade-offs: Striving for extreme accuracy can make systems unmanageable; approximations are often necessary.
Challenges:
Overlapping product life cycles blur cost boundaries.
Common costs (e.g., shared staff activities) are hard to allocate accurately.
Example: In service departments, activities are intertwined, making exact cost allocation challenging.
148
How should SMA tools align with organizational strategy?
Tools like ABC, life-cycle costing, and target costing primarily aim to reduce costs by identifying and eliminating non-value-added activities.
However, cost reduction should not overshadow customer value and long-term competitiveness.
Selective Visibility: SMA tools often assume activities are separable, repetitive, and standard, potentially ignoring unique or innovative practices.
Key Insight: Balance cost efficiency with customer-focused value creation.
149
What are common organizational challenges during SMA implementation?
Employee Involvement:
Top-down approaches may exclude “people in the process,” leading to misunderstanding and resistance.
Motivational Issues:
Fear of job loss or lack of trust in management can undermine efforts.
Internal Politics:
Changes may be used to justify workforce reductions or other unpopular goals.
Improper Communication:
Miscommunication through hierarchies can create confusion.
Lack of Skills/Training:
Employees need adequate training to adopt new systems effectively.
Example: Soin, Seal, and Cullen (2002) highlight how fear and lack of trust during SMA implementation can lead to organizational turmoil.
150
Why do employees resist change, and how can it be mitigated?
Reasons for Resistance:
- Emotional responses (e.g., fear of the unknown).
- Self-interest (e.g., protecting personal agendas).
- Exclusion from decision-making processes.
Lack of understanding or mistrust.
Mitigation Strategies:
- Communicate openly and empathetically through face-to-face interactions.
- Provide mechanisms for anonymous feedback.
- Involve employees in planning to foster ownership.
- Offer incentives to encourage participation.
151
What challenges did Global Electronics, Inc. face during ABC implementation?
Context:
GEI suffered a $100M loss due to severe cost distortions caused by an outdated costing system.
High-volume, less complex products were over-costed, while low-volume, complex products were under-costed.
Challenges:
Disagreements over integrated vs. offline systems.
Resistance to ABM due to:
Lack of understanding and resources.
Cultural inertia and old conventions.
Minimal top management support.
Key Lesson: Implementation must address cultural and technological realities, not just theoretical models.
152
What does "What gets measured gets done" mean, and why is it significant?
Meaning: Activities prioritized in metrics receive attention, while unmeasured tasks risk neglect.
Implications:
SMA tools may oversimplify complex processes, leading to the exclusion of valuable but unmeasured activities.
Encourages short-term focus over long-term innovation.
Key Insight: Ensure metrics align with strategic goals and reflect both measured and unmeasured activities.
153
What technical challenges arise during SMA implementation?
Scope and Assumptions:
SMA tools assume activities are standard and repetitive, which may not align with real-world processes.
Loss of Flexibility:
Over-standardization can stifle creativity and learning.
High Implementation Costs:
Balancing representational accuracy with affordability is critical.
Example: Life-cycle costing may fail to account for overlapping product cycles, leading to inaccurate cost allocation.
154
What strategic decisions influence SMA implementation success?
Top-Down vs. Bottom-Up:
Top-Down: Centralized control; suitable for hierarchical organizations.
Bottom-Up: Employee-driven; better for collaborative cultures.
Parallel vs. Stand-Alone Systems:
Parallel: Reduces risk but is costlier and more complex.
Stand-Alone: Faster but riskier if not well-prepared.
Cultural Alignment vs. Replacement:
Align to reinforce existing values; replace to foster new behaviors.
Example: NGOs may prefer bottom-up and culturally aligned approaches, while manufacturers may adopt top-down and cost-driven models.
155
Why is the transition from ABC to ABM challenging?
Definition:
ABC (Activity-Based Costing): Focuses on assigning costs to activities.
ABM (Activity-Based Management): Uses ABC data to improve decision-making and efficiency.
Challenges:
Lack of understanding of ABM's purpose.
Resistance to changing routines.
Inadequate technological support.
Key Insight: ABM requires both cultural and technical readiness, as well as active leadership support.
156
Why is balancing accuracy and usability critical in costing systems?
- Overemphasis on accuracy can result in complex, costly systems that are difficult to manage.
- Approximation allows for simpler, more practical systems, but risks misrepresenting data.
Example: An overly detailed ABC system may become unmanageable for employees, while a simpler system may omit key insights.
157
