Types of Information
Foundation information
Basic diagnostics
May indicate something is wrong, but not why Basic financial ratios Benchmarked
Productivity information
Productivity of key resources Concern should be for total productivity Benchmarked
Types of information
Competence information
Indicates where a business has a leadership advantage Innovation is the most important core competence
To win, you have to be the best at something
Idea
Return on Management
Management effort is a vital resource Return on management
Return on Management
Channel energies into the correct projects
Detrimental capital budgeting
Return on Management
Does everyone watch what the boss watches?
Are there common goals within the organization?
VALUE
QUALITY
FUNCTIONALITY
- COST (TOPAZ VS GILLETE BLADES) - FUNCTIONALITY (GILLETE VS TOPAZ BLADE) - QUALITY (ROLEX VS OTHER WATCH BRANDS) - VALUE (PERCIEVED VALUE OF A
CLASSIFICATION OF COSTS
Costs may be classified as follows :(a) By Nature Material. Labour, Expenses (b) In relation to Cost Centre Direct material, Direct labour, Indirect material, Indirect labour (c) By Function/Activities Production, Admin, Selling, Distribution Cost (d) By Time Historical Cost, Pre-determined Cost, Standard Cost
CLASSIFICATION OF COSTS
(e) For Management Decision Making Marginal Cost, Opportunity Cost, Replacement Cost (f) By Nature of Production Process Batch Cost, Process Cost, Operating Cost (g) By Behaviour Fixed, Variable and Semi-Variable Cost
TARGET COSTING
It is a system where-in the cost of the final product is fixed before putting the product on the drawing board. Thereafter, the raw material, production processes, functionality (Features), quality, etc are selected to meet the cost objective. This system is relevant for products made for extremely price sensitive segment. It is also used as a market penetration strategy by the new entrants in a matured products market.
TARGET COSTING
As companies begin to realize that the majority of a product's costs are committed based on decisions made during the development of a product, the focus shifts to actions that can be taken during the product development phase.
TARGET COSTING
Until recently, engineers have focused on satisfying a customer's requirements. Most development personnel have viewed a product's cost as a dependent variable that is the result of the decisions made about a products functions, features and performance capabilities. Because a product's costs are often not assessed until later in the development cycle, it is common for product costs to be higher than desired
TARGET COSTING
TARGET COSTING
TC is based on three premises: -
affordability or market-driven pricing - Treating product cost as an independent variable during the definition of a product's requirements - Proactively working to achieve target cost during product and process development.
TARGET COSTING
TARGET COSTING
Target costing builds upon a design-to-cost (DTC) approach with the focus on marketdriven target prices as a basis for establishing target costs. Following steps required to required to install a comprehensive target costing approach within an organization :a. Re-orient culture and attitudes b. Establish a market-driven target price c. Establish a market-driven target price
TARGET COSTING
d. Balance target cost with requirements e. Establish a target costing process and a teambased organization f. Brainstorm and analyze alternatives g. Establish product cost models to support decision-making h. Use tools to reduce costs i. Reduce indirect cost application j. Measure results and maintain management focus
PRODUCTIVITY CONCEPTS
Productivity is defined as ratio between Output of Work and Input of Work used in process of creating wealth. Productivity = Output --------------Input
I/P PROCESS O/P
WASTE
PRODUCTIVITY CONCEPTS
Productivity is simply the ratio between amount produced & amount used in course of production These resources can be :(a) Land (Area) (b) Material (Metric Ton) (c) Plant & Machinery (Machine Hours) (d) People (Man Hour) (e) Capital (Rupees)
PRODUCTIVITY CONCEPTS
Productivity is different from Performance Productivity = Output = Performance Achieved Input Resources Consumed Performance =
PRODUCTIVITY CONCEPTS
Partial Productivity = Ratio of output to one class of input. At one time it considers only one input and ignores all other inputs. It tells us utilization of one resource.
Labour Productivity is measured using utilization of Labour hours whereas Capital Productivity is measured in Rupees.
PRODUCTIVITY CONCEPTS
Total Productivity Factor = Ratio of output to two input factors labour and capital Eg When a firm installs a new machine, productivity of labour goes up whereas capital productivity decreases Eg Production worth Rs 1000 was manufactured And it consumed Rs 200 worth labour hours and Rs 550 worth capital so TPF = 1000 = 1 .33 200 + 550
PRODUCTIVITY CONCEPTS
Total Productivity Model developed in 1979 by David J Sumanth. This considers 05 inputs like Human, Material, Capital, Energy and an item called Other Expenses. It is applied in Service and Manufacturing organisations. Total Productivity = Total Tangible Output Total Tangible Input
PRODUCTIVITY CONCEPTS
Hard and Soft Factors of an Organization. Hard Factors such as costs, quality and availability of resources and raw materials are part of traditional organisations evaluation and are reasonably quantifiable. Soft factors include issues like political and social issues( anti-growth movements, environmental restrictions, labour laws) and factors like Job satisfaction, Incentives, Recognition, Job Morale, Safety etc
PRODUCTIVITY CONCEPTS
Hard and Soft Factors of an Organization. Hard Factors in Productivity are concerned with physical comforts and other quantifiable elements desired by employees like :(a) Plant conditions (b) Ergonomics (c) Transportation and Canteen Facilities (d) elimination of hazard
PRODUCTIVITY CONCEPTS
Hard and Soft Factors of an Organization. Improving Soft Factors will lead to higher morale and improved Productivity in a firm. A manager can do the following :(a) involve workers in development of new methods of working (b) Asking for suggestions from workers (c) Understanding employees through Maslows Hierarchy of Needs
The term Customer refers to all those whom we supply products, service etc. Apart from ultimate users, retailers, stockists etc are external customers wheras departments within the company are internal customers to each other.
Eg Production department is customer to Purchase department and supplier to Sales and Dispatch department.
Quality is defined as :1. Quality is fitness for use Lays emphasis on Customer. Customers may put product or service to multiple use which manufacturer may not have intended. 2. Quality is establishing Standards and Specifications Laying down standards and specifications for products and services offered is very important. 3. Quality is conformance to standards Standards laid down have to be conformed to
Customer satisfaction is unique. Conformance to 99.9% standards maintained in the product may not rise customer satisfaction to 99.9% proportionately. Only when Conformance reaches to 100%, customer satisfaction jumps to 100%. Customer DELIGHT means gaining Customer satisfaction to 100%. TQM means Meeting the agreed requirements of the Customer at the LOWEST COST, FIRST TIME AND EVERY TIME. First time and every time means without rework or rejection. TQM is not a ONE TIME ACTIVITY but has to be pursued by all the employees of the organisation continuously.
A customer needs three things Quality, Price and Delivery (QCD). There need not be a tradeoff between Quality and Cost. Costs go up when one blindly raises the standards and specifications of the products without analyzing whether it is adding proportional value to the product in eyes of the Customer. Eg Gold car. QFD Matrix helps in designing the product that is oriented towards customer requirements.
QUALITY FUNCTION DEPLOYMENT. All the information is summarized in a matrix called House of Quality. It consists of :(a) WHAT Specifies voice of customer in terms of requirements to be satisfied. These are termed as Primary, Secondary and Tertiary and ranked as per relative importance. (b) HOW Answers as to HOW customer requirements will be fulfilled. (c) RELATIONSHIP MATRIX - Joins WHAT and HOW rooms. It gives relationship between engineering design and voice of the customer
Selectivity
Sustainability
Systems
Sanctity
Sensitivity
VALUE ENGINEERING
1. It indicates application on a product at its design stage 2. VE is done by a specific product design team
Non- Separate Activities -Corporate Fund Raising, Corporate HRD - Corporate Procurement, Corporate Promotion
Product a,b,c
Accounting Personnel Purchase Market Maintenance Accounting Personnel Purchase Market Maintenance
NON-SEPARABLE FACILITIES
RESPONSIBILITY ACCOUNTING
Creating a SBU structure is not enough until and unless one identifies its responsibilities clearly and develops realistic parameters to monitor its performance. Within each SBU each activity or department could be a Responsibility Centre. Responsibilities that are of a importance would make these independent centres pivotal for planning, empowerment, accounting and appraisal. There are three types of these responsibility centres, based on degree of responsibility and authority handled by them :-
RESPONSIBILITY ACCOUNTING
Responsibility & Authority
Cost
Profit
Invest ment
RESPONSIBILITY ACCOUNTING
A Cost centre is the most restricted version of a Responsibility centre. A factory or production centre is a classic case of a Cost centre since only costs are incurred at this centre to produce output or for an activity. This centre doesnot sell the output & therefore doesnot make profit. The output travels from Factory to marketing department at Factory cost. The marketing people decide the sale price after adding the sales overheads, corporate & administrative overheads. So a Cost centre only incurs costs and has limited powers. Executives working at Cost centres have following problems :-
RESPONSIBILITY ACCOUNTING
(a) Feel powerless as they do not make profits
(b)
(c)
(d)
(e) (f)
directly Perform thankless jobs without recognition. Enough parameters do not exist to assess the cost performance of a cost centre. Extra performance of a cost centre is not recognized. Other centres keep pressurizing cost centre for unrealistic cost reductions. Executives do not enjoy pay & perks like marketing or Headquarters Staff.
RESPONSIBILITY ACCOUNTING
The Cost centre can be made into Profit centre by making it more accountable and giving recognition to Executives of the centre. The output of Cost centre should be transferred as Cost + Profit to the Marketing department. Eg Maintenance department can sell its services to other department at Cost + Profit to other departments. This price is called as Transfer Pricing. The profit charged may be collected by it or transferred to its account by Headquarters. Further, the maintenance department can sell its services/idle capacity to outsiders for profit.
RESPONSIBILITY ACCOUNTING
The key question is as to who decides the Transfer Price. The user department may want outside agency to do its maintenance or the maintenance department may not be satisfied with the Transfer price decided by Headquarters. These questions are required to be answered Strategically and Quantitatively. This is known as Responsibility Accounting. The ultimate stage of total empowerment given to a Responsibility centre is with the birth of Investment Centre. A profit centre may be given greater authority to decide on size and scope of its investments.
RESPONSIBILITY ACCOUNTING
It should be allowed to decide about routine and special investments for its expansion, diversification and improvement in systems. The gradual increase in the authority and responsibility of a responsibility Centre would depend fundamentally on the degree of control of operations desired by the firm, nature of business and accuracy of productcosting desired.
18
No of Years
Eg A long term project will have to be assessed with an Average CBA for the projects life cycle.
COST BENEFIT ANALYSIS (CBA) Pre-operative CBA (negative incremental , Break-even point CBA, CBA at market leadership, CBA at times of boom and recession will all have to be considered separately and also collectively for an
integrated appraisal of a project. CBA of a single project or activity may indicate negative results but its strategic importance to the organisation may offset these negative results. Hence CBA in totality or CBA with strategic perspective is of significance.
Sub-Activity B- 2 Cost
X
PRODUCT COST
In the above example, activity analysis indicates that the costs of sub-activities B 1 and C2 are irrelevant for Product X. Under traditional costing these costs would have been charged to the Product through broad allocation ratio.
Value
Cost differential
CORPORATE RESTRUCTURING
Symptoms for Restructuring When & Why should a firm restructure? The major symptoms for Restructuring are as follows:(a) Operational (b) Strategic (c) Financial (d) Market, Economy led and Global
CORPORATE RESTRUCTURING
Operational Symptoms Continuously reducing employee productivity Delays in Supply Chain and distribution chain Poor market feedback on products, prices and policies High employee turnover Decline in new market developmental efforts Growing incidences of IR problems, production stoppages etc Uncomfortable relations with external stakeholders like Contractors, Vendors, Govt depts etc Disturbed ratio between number of core employees and support employees and time and effort spent on core and support functions
CORPORATE RESTRUCTURING
Strategic Symptoms Slowed down desire for perpetual growth and wealth creation Growing mismatch between strategy formulations by owners and managers Declining market leadership to influence competitors, vendors, distributors and customers Heavy subsidisation of weak products & divisions, creating increased pressure on strong products & divisions Imbalance between short term tactics and long term strategies
CORPORATE RESTRUCTURING
Financial Symptoms Increasing operating cost & cost of finance Falling share price in market Declining earning ratios for divisions, vendors, distributors & shareholders Increasing prices of licenses, copy right, patents etc Increasing costs at supply and demand side of value chain Increasing costs on marketing operations and growing pressure on manufacturing costs High cost of wastage, inefficiencies, idle time, maintenance, deliveries etc
BALANCED SCORECARD
Balanced Scorecard gives more information than routine accounting ledgers. It gives the status of various vital parameters like manpower (attrition rate, comparative worth of various key employees), product life cycle, status of competition, technological movement, opportunities and risks, etc.