Management Accounting & Modern Business Environment Flashcards
Mass production
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
Mass production
Mass producers:
- Encourage a structure by function
- Encourage task specialisation in their production function
- Produce standardised parts or products
- Produce large batches
Mass production philosophy
Anticipate, Produce, Wait for Demands
Lean System - definition
Eliminates non value added activities
Different types of activities
value added
non value added but necessary activities
non value added activities
5 Main Principles
Value Value stream Flow Pull Perfection
Hadid and Mansouri (2014) (Lean principles into actions)
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)
8 Types of Waste
Intellect, over production, Waiting, over processing, Defects, Inventory, Transportation, Motion
5 Ss
Sort, Set, Sustain, Shine, Standardised
MATURE Lean Companies
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.
Advantages of ABC
- 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.
Limitations of ABC
- 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.
Castellano and Burrows (2011)
- 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.
Maskell (2006)
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.
Advantages of Lean accounting
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.
Limitations of Lean Accounting
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.
Throughput Accounting
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.
Bottleneck
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.
Impact of Bottleneck
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.’
Throughput accounting Measures
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.
Throughput Accounting Advantages
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)
Throughput Accounting Disadvantages
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.
Role of management accountants in the lean environment.
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.
Additional limitations of traditional costing from the lean system perspective (Maskell 2006)
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.
