Management Accounting & Modern Business Environment

Question 1

Mass production

Answer 1

Business context for mass producers

• Labour costs make up 50% of the product costs
• Stable economic environment
• Long term product life cycle
• Machine set up time is long

Question 2

Mass production

Answer 2

Mass producers:

• Encourage a structure by function
• Encourage task specialisation in their production function
• Produce standardised parts or products
• Produce large batches

Question 3

Mass production philosophy

Answer 3

Anticipate, Produce, Wait for Demands

Question 4

Lean System - definition

Answer 4

Eliminates non value added activities

Question 5

Different types of activities

Answer 5

value added
non value added but necessary activities
non value added activities

Question 6

5 Main Principles

Answer 6

Value 
Value stream 
Flow 
Pull 
Perfection

Question 7

Hadid and Mansouri (2014) (Lean principles into actions)

Answer 7

Identified 54 practices, classified into 2 groups, the two groups interact to improve performance.

Technical practices & Social Practices

Technical practices: (value stream mapping, 5S, Automation ,Group technology, Self-inspection)

Social practices: (Customer involvement, obtaining management support, Training, employee empowerment, employees involvement, effective communication system)

Question 8

8 Types of Waste

Answer 8

Intellect, over production, Waiting, over processing, Defects, Inventory, Transportation, Motion

Question 9

5 Ss

Answer 9

Sort, Set, Sustain, Shine, Standardised

Question 10

MATURE Lean Companies

Answer 10

Change of organisational Design from Function based - Value stream design:

Spans multiple function: production, engineering, maintenance, sales and marketing, accounting, human resource and shipping

Companies at the early stage of implementing lean system MAY NOT organise by value stream.

Question 11

Advantages of ABC

Answer 11

• Breaks down processes into activities and accumulates cost at activity level
• Generates more realistic and relevant cost information by using volume-based and non volume based drivers in allocating overheads.

Question 12

Limitations of ABC

Answer 12

• Is expensive to implement and maintain
• Its accuracy depends largely on the accuracy of input from employees which is not guaranteed.
• Continues to feed standard costing and the associated variances which are difficult to understand by non-financial people.
• May classify some critical activities as non-value added.
• It does not address the problem of considering inventory as an asset.

Question 13

Castellano and Burrows (2011)

Answer 13

• Annual Lean Accounting Summit
• Groups on LinkedIn discussing the lean accounting concept
• Institute of Management Accountants issued two statements
• Lean enterprise fundamentals
• Accounting for the lean enterprise: major changes to the accounting paradigm.

Question 14

Maskell (2006)

Answer 14

What is Lean accounting ?

1) Aims to eliminate wasteful activities from the accounting function by simplifying its processes.
2) Focuses on value streams and requires information at that level
3) Charges a value stream with all cost incurred within the value stream
4) Minimises cost allocation except for occupancy. The cost of the space not used by value streams is added to facility sustaining cost and treated as explained below.
5) Relies more on operational measures which are more timely and better reflect the current state of processes.
6) Presents inventory changes separately as below the line adjustment in the income statement and so they cannot be used for manipulation.

Question 15

Advantages of Lean accounting

Answer 15

1) Save resources previously used to collect wasteful actual cost information by production job or product.
2) Reduces the number of cost centres
3) Reports actual data which reflects exactly what happened in a week or month.
4) Minimises cost allocation and so avoids all associated complications
5) Generates reports and information understandable by the staff working in the value stream
6) Enhances responsibility and accountability of value stream managers by considering only costs and revenues belonging to their value stream.
7) Prevents profit manipulation through changes in inventory levels.

Question 16

Limitations of Lean Accounting

Answer 16

1) Companies must organise their operations by value stream.
2) It requires low raw material and work in process inventory.
3) It does not calculate the cost of each individual product but rather an average cost for all products produced within a value stream.

Question 17

Throughput Accounting

Answer 17

Output should never be delayed and any factor (limiting factor) which affects that should be carefully managed
Throughput accounting helps by focusing on the production actually sold and not stored in line with JIT/LEAN
Throughput = sales revenue less direct material cost.

More extreme version of variable costing. Because it only uses direct material costs everything else is fixed.

Question 18

Bottleneck

Answer 18

Bottleneck resource, binding constraint or limiting factor: can be defined as an activity with lower capacity than the preceding or following activities in a factory.

Question 19

Impact of Bottleneck

Answer 19

impractical to remove bottleneck in the short term

We should decide how to use this bottleneck resource to maximise throughput (which products give the best return in relation to the bottleneck resource)

‘One assumption here is that demands from customers are higher than the capacity of the bottleneck resource.’

Question 20

Throughput accounting Measures

Answer 20

Return per factory hour = Throughput (Sales price - material cost)/ Usage of bottleneck resource in hours (factory hours).
Throughput accounting ratio = Return per factory hour / Total conversion cost per factory hour.

Question 21

Throughput Accounting Advantages

Answer 21

1) Tightly targeted approach to decision making, focusing on bottleneck constraints and ignoring other potential constraints until they become bottlenecks.
2) Claims to be consistent with JIT systems
3) Facilitates a focus on the efficient use of scarce resources.
4) Distracts from the focus on the maximisation of profit (and emphasises throughput)

Question 22

Throughput Accounting Disadvantages

Answer 22

1) It assumes that all costs other than material costs are fixed and so it may be valid in the very short term.
2) Encourages innovation only in terms of facilitating solutions to bottleneck problems.
3) Discourages the more random generation of innovative ideas, which might allow worthwhile improvements in non-priority areas.
4) Concentrating on any one measure of performance may be seen as dangerous, especially from a stakeholder perspective.

Question 23

Role of management accountants in the lean environment.

Answer 23

1) Understands the changes in operations and production function.
2) develop a common language with the operations and production people.
3) Develop and provide timely measures understandable by non-financial people.
4) Simplify the accounting, control and measurement systems to eliminate waste.
5) Work on more strategic issues than collecting data to fee irrelevant traditional accounting systems.

Question 24

Additional limitations of traditional costing from the lean system perspective (Maskell 2006)

Answer 24

Absorption Costing

1) Hides waste in the standard costs and overheads absorption rate and so conceals ares fo continuous improvement.
2) Requires an expensive and wasteful data collection system.
3) It also produces late, aggregate data at the department level.
4) Emphasises financial rather than non financial
5) Produces variances which are difficult to understand by employees and non-financial managers.
6) considers inventory as an asset and so encourages overproduction.