ADVANCED MANAGEMENT ACCOUNTING

Definition of Management
Accounting: IMA
Management accounting is a profession
that involves partnering in management
decision making, devising planning and
performance management systems, and
providing expertise in financial reporting
and control to assist management in the
formulation and implementation of an
organizations strategy.
Managerial Accounting as a Career
Professional Organizations
Institute of Management Accountants (IMA)
Publishes
Management
Accounting
and research
studies.
Administers
Certified
Management
Accountant
program
Develops
Standards of
Ethical
Conduct for
Management
Accountants
Professional Ethics
Ethical business practices build trust and
promote loyal, productive relationships with
customers, employees and suppliers.
Many companies have written codes of
ethics which serve as guides for employees
to follow.
Professional Ethics
_Competence
_Confidentiality
_Integrity
_Objectivity
_Resolution of Ethical Conflict
Professional Ethics
Follow applicable laws,
regulations and
standards.
Prepare complete and clear
reports after appropriate
analysis.
Maintain
professional
competence.
Competence
Professional Ethics
Do not disclose confidential
information unless legally
obligated to do so.
Ensure that subordinates do
not disclose confidential
information.
Do not use
confidential
information for
personal
advantage.
Confidentiality
Professional Ethics
Avoid conflicts of interest
and advise others of
potential conflicts.
Recognize and
communicate personal and
professional limitations.
Do not subvert
organizations
legitimate
objectives.
Integrity
Professional Ethics
Integrity
Avoid activities that could
affect your ability to
perform duties.
Refrain from
activities
that could
discredit the
profession.
Communicate
unfavorable as well as
favorable information.
Refuse gifts
or favors
that might
influence
behavior.
Professional Ethics
Objectivity
Communicate information
fairly and objectively.
Disclose all information
that might be useful to
management.
Resolution of Ethical Conflict
Follow established policies of your
organization.
gIf unresolved or if policy does not exist:
_Clarify relevant concepts in a confidential discussion
with an objective advisor to explore possible courses
of action.
_Discuss problem with immediate supervisor.
Professional Ethics
Resolution of Ethical Conflict
@If immediate supervisor is involved in the
unethical behavior, discuss at the next level.
jIf problem is not resolved, the last resort is to
resign.
)Generally, do not communicate ethical
conflicts to outsiders.
Professional Ethics
Major Themes in Managerial Accounting
Managerial
Accounting
Information
and Incentives
Behavioral
Issues
Costs and
Benefits
Evolution and Adaptation in Managerial
Accounting
Service Vs. Manufacturing
Firms
Emergence of New
Industries
Global Competition
Focus on the Customer
Cross-Functional Teams
Computer-Integrated
Manufacturing
Product Life Cycles
Time-Based Competition
Information and
Communication
Technology
Just-in-Time Inventory
Total Quality
Management
Continuous Improvement
Change
Managerial Accounting in Modern
Production Environments
Key developments that reshaped Managerial
Accounting include:
Integrated information systems
Web hosting
Just-in-time and lean production
Total Quality Management
Theory of constraints
Benchmarking and continuous improvement
The Goal of Good Management is to
Create Value
Cost Management is applying the value criteria to every
decision we make, every activity we perform, and every
process we complete.
Modern accounting systems do not just evaluate good
stewardship but must provide managers with the
information managers need to improve value.
Management accounting systems are used to enhance
both decision making and management control.
Management accounting systems do not need to be
perfect, only good enough to increase value.

New Management Trends
to Create Value
Encourage Management Accounting
Systems Redesign, for example.
Customer focus
Quality focus
Delivery focus
Outsourcing and the virtual company
Communications
Shortening product life cycles
Team development
Deregulation in the service sector
Perubahan Lingkungan Bisnis
Beberapa praktek manajemen:
JIT (Just In Time)
Manajemen Mutu Total (TQM)
Rekayasa Ulang
Teori Kendala (Theory of Constrain/TOC)
Menentukan hal apa saja yang tidak perlu dilakukan,
bagaimana perusahaan harus dikelola dan bagaimana
pekerjaan dilakukan
JIT (Just In Time)
Sistem Pengendalian Persediaan dan Produksi JIT:
>> Membeli BB dan memproduksi unit output sesuai
dengan permintaan aktual dari pelanggan
>> Persediaan dikurangi sampai pada tingkat
minimum (bahkan sampai titik nol)

Dampak JIT (perush. Manufaktur):
>> Efisiensi dan mengurangi biaya (penyimpanan dan
pemesanan) serta meningkatkan efisiensi dan
efektifitas operasi.

Bahan bahan baku yang diterima segera masuk ke
proses produksi, bahan produksi lainnya segera
digabungkan dan dikerjakan, dan produk yang telah
jadi segera dikirimkan kepada pelanggan.
TQM (Total Quality Management)
Perbaikan terus menerus yang memiliki
karakteristik :
>> Fokus pada pelayanan pelanggan
>> Pemecahan masalah secara sistematis
dengan menggunakan tim yang ada di
garda depan yang dibekali dengan salah
satu alat manajemen
>> Penentuan tolok ukur (benchmarking)
yang dilakukan dengan mempelajari
organisasi terbaik yang ada untuk
menjelaskan tugas tugas tertentu.

LO 8 Identify trends in management accounting.

Increased emphasis on product quality
because goods are produced only as
needed
Total Quality Management (TQM)
- a philosophy of zero defects -
Gambaran utama TQM adalah meningkatkan produktivitas
dengan mendorong penggunaan pengetahuan dalam
mengambil keputusan dan menekan perilaku defensif yang
tidak produktif.

Rekayasa Ulang Proses
(Process Reengineering-PR)
>> Merupakan pendekatan yang lebih radikal dibandingkan TQM
>> Sebagai ganti perbaikan sistem yang dirancang serial dan
bertahap.
>> Dalam PR suatu proses bisnis diplot dalam sebuah diagram
secara detail, dikritik dan kemudian dirancang ulang untuk
menghilangkan langkah-langkah yang tidak diperlukan,
mengurangi kemungkinan terjadinya kesalahan dan
mengurangi biaya.
Proses bisnis adalah serangkaian tahapan yang harus
dilakukan untuk menjalankan tugas-tugas dalam dalam suatu
bisnis.
Meliputi desain ulang secara menyeluruh proses bisnis dalam rangka
menghilangkan aktivitas yang tidak bernilai tambah dan mengurangi
kemungkinan terjadinya kesalahan. Rekayasa ulang mengandalkan
pada spesialis dari luar perusahaan.
Teori Kendala
(Theory of Contrains/ToC)
Teori kendala didasarkan pada
pandangan bahwa manajemen kendala
secara efektif merupakan kunci
keberhasilan
Menekankan pada pentingnya mengelola kendala yang
dihadapai oleh organisasi. Karena kendala adalah sesuatu
yang menghalangi organisasi, proses perbaikan akan efektif
kalau difokuskan pada kendala yang dihadapi
LO 8 Identify trends in management accounting.

Activity-Based-Costing (ABC)
Allocates overhead based on use of activities
Results in more accurate product costing and
scrutiny of all activities in the value chain
Balanced Scorecard
Evaluates operations in an integrated fashion
Uses both financial and non-financial
measures
Links performance measures to overall
company objectives
Which of the following managerial accounting
techniques attempts to allocate manufacturing
overhead in a more meaningful manner?
a.Just-in-time inventory.
b.Total-quality management.
c.Balanced scorecard.
d.Activity-based costing.
Review Question
LO 8 Identify trends in management accounting.
The Strategic Approach to
Teaching Management Accounting
Topics
An Introduction
Strategic Cost Management:
Basic Concepts
Strategic decision making is choosing among
alternative strategies with the goal of selecting a
strategy, or strategies, that provides a company
with reasonable assurance of long-term growth and
survival
The key to achieving this goal is to gain a
competitive advantage.
Strategic cost management is the use of cost data
to develop and identify superior strategies that will
produce a sustainable competitive advantage.
A Model of the Decision-Making
Process
Competitive Advantage
Competitive advantage is the process of creating
better customer value for the same or lower cost
than that of competitors or creating equivalent
value for lower cost than that of competitors.
Customer value is the difference between what a
customer receives (customer realization) and what
the customer gives up (customer sacrifice).
The total product is the complete range of tangible
and intangible benefits that a customer receives
from a purchased product.
Michael Porter: Strategic
Positioning
O Cost Leadershipoutperform
competitors by producing at the lowest
cost, consistent with quality demanded
by the consumer
O Differentiationcreating value for
the customer through product innovation,
product features, customer service, etc.
that the customer is willing to pay for
Aspects of the
Two Competitive Strategies
Aspect Cost Leadership Differentiation
Basis of competitive
advantage
Lowest cost in the
industry
Unique product or
service
Product line
Often, a limited
selection
Wide variety,
differentiating
features
Production emphasis
Lowest possible cost
with high quality and
essential product
features
Innovation in
differentiating
products
Marketing emphasis Low price
Premium price and
innovative,
differentiating
features
Strategic Positioning
There are three general strategies that
have been identified:
cost leadership
product differentiation
focusing

Strategic Positioning
A cost leadership strategy
happens when the same
or better value is provided
to customers at a lower
cost than a companys
competitors.
Example: A company might redesign a product so that
fewer parts are needed, lowering production costs and the
costs of maintaining the product after purchase.
Strategic Positioning (continued)
A product differentiation strategy strives to
increase customer value by increasing what
the customer receives (customer realization).
Example: a retailer of computers might
offer on-site repair service, a
feature not offered by other rivals
in the local market.
Strategic Positioning (continued)
A focusing strategy happens when a firm
selects or emphasizes a market or customer
segment in which to compete.
Example: Paging Network, Inc., a paging
services provider, has targeted
particular kinds of customers and
is in the process of weeding out
the nontargeted customers.
Consequences of Lack of Strategic Cost-
Management Information
Decision-making based on guess and intuition
Lack of clarity about direction and goals
Over time, lack of a clear and favorable perception of
the firm by customers and suppliers
Incorrect decisions: choosing products, markets, or
manufacturing processes that are inconsistent with the
organizations strategy
For control purposes, cannot link performance
effectively to strategic goals

Tools for Integrating Strategy
into Management Accounting
-- The Value Chain
-- Strategy Maps & the Balanced
Scorecard (BSC)
Introducing Strategy
Value
Chain
Strategic
Positioning

Strategy
Map

Balanced
Scorecard
(BSC)
Opportunities
Threats
Strengths
Weaknesses
LO 8 Identify trends in management accounting.
Value Chain
Refers to all activities associated with providing
a product or service
For a manufacturing firm these include the
following:
Industrial Value Chain
The industrial value chain is the linked set of
value-creating activities from basic raw
materials to the disposal of the finished
product by end-use customers.
Fundamental to a value-chain framework
is the recognition that there exist complex
linkages and interrelationships among
activities both within and external to the
firm.
o Upstream Activities
o Manufacturing/Operations
o Downstream Activities
Value Chain Analysis:
A Detailed Look at Strategy
The Value Chain is a linked set of value-
adding activities used by an organization to
deliver its value proposition to its customers. It
consists of:
Value-Chain Analysis
Identify value-chain activities
Develop competitive advantage by:
Identifying opportunities for adding value for
the customer
Identifying opportunities for eliminating non-
value added activities and reducing cost
Understand linkages among
suppliers, the entity, and customers
Internal and External Linkages
There are two types of linkages that must be
analyzed and understood: internal and external
linkages.
Internal linkages are relationships among activities
that are performed within a firms portion of the
value chain.
External linkages describe the relationship of a
firms value-chain activities that are performed with
its suppliers and customers. There are two types:
supplier linkages and customer linkages.
Strategy Maps &
the Balanced Scorecard (BSC)
The BSC and Strategy Map are used to
align the organizations activities with
achieving strategic goals, using the four
perspectives:
Financial
Customer
Internal Processes
Learning and Growth
Exceed shareholder
expectations
Improve profit
margins
Increase sales
volume
Diversify income
stream
Increase sales to
existing customers
Diversify
customer base
Attract new
customers
Target profitable
market segments
Develop new
products
Optimize internal
processes
Attract new
customers
Develop
employee skills
Integrate
systems
vision &
mission
Learning
& Growth
Internal
Process
Customer
Financial
Value
Chain
Strategic
Positioning
Strategy
Map

Balanced
Scorecard
(BSC)
The Balanced Scorecard (BSC):
Feedback to Strategy
Activity-Based Costing (ABC),
RCA, and TDABC
Evolution of Cost Accounting Systems

Traditional
Costing
Resources
Cost Objects
Allocated
to
ABC
(simple &
minimal)
Resources
Activities
Consumed
by
Cost Objects
Consumed
by
ABC
(multidimensional)
Resources
Activities
Consumed
by
outputs
Consumed
by
channels
Users
Cost
Objects
ABC/M Framework
Root
Causes
of Costs
Work Activities
Performance
Measures
Cost Reduction
Process
reengineering
Cost of quality
Continuous
improvement
Waste elimination
Benchmarking
What Things
Cost
Resource
Costs
Cost Objects
Resource
Drivers
Activity
Drivers
Better Decision
Making
Why Things
Cost
Design for manufacturing
Make versus Buy
Activity Cost
Assignment
Organizational Activities and Cost
Drivers
Organizational activities are of two types:
structural and executional.
Structural activities are activities that determine
the underlying economic structure of the
organization.
Executional activities are activities that define the
processes and capabilities of an organization and
thus are directly related to the ability of an
organization to execute successfully.
Organizational Activities and Drivers
Structural Activities Structural Cost Drivers
Building plants Number of plants, scale, degree
of centralization
Management structuring Management style and
philosophy
Grouping employees Number and type of work units
Complexity Number of product lines,
number of unique processes,
number of unique parts
Vertically integrating Scope, buying power, selling
power
Selecting and using process Types of process technologies,
technologies experience
Organizational Activities and Drivers
Executional Activities Executional Cost Drivers
Using employees Degree of involvement
Providing quality Quality management approach
Providing plant layout Plant layout efficiency
Designing and producing products Product configuration
Providing capacity Capacity utilization
Operational Activities
Operational activities are day-to-day activities
performed as a result of the structure and
processes selected by the organization.
Examples:Receiving and inspecting incoming
parts, moving materials, shipping
products, testing new products,
servicing products, and setting up
equipment.
Organizational and Operational Activity
Relationships
Organizational Activity
(Selecting and using process technologies)
Structural Cost Driver
(JIT: Type of process technology
Operational Driver
(Number of moves)
Operational Activity
(Moving material)
Internal Value Chain
Design
Service
Market
Produce
Develop
Distribute
Exploiting Internal Linkages
An
Example:
Assume that design engineers have been told that the number of parts is a significant
cost driver and that reducing the number of parts will reduce the demand for various
activities downstream in the value chain. They plan to reduce the price by per-unit
savings. Currently 10,000 units are produced. The data of the new design and its
effects on demand are given below:
Current Expected
Activity Cost Driver Capacity Demand Demand
Material usage # of parts 200,000 200,000 80,000
Labor usage Labor hours 10,000 10,000 5,000
Purchasing # of orders 15,000 12,500 6,500
Warranty repair # of defects 1,000 800 500
Exploiting Internal Linkages (continued)
Potential Savings :
Material usage (200,000 - 80,000)$3 $360,000
Labor usage (10,000 - 5000)$12 60,000
Purchasing [$30,000 + $.50(12,500 - 6,500)] 33,000
Warranty repair [($28,000 + $20(800 - 500)] 34,000
Total $487,000
======
Units 10,000
Unit savings $48.70
Activity-Based Customer Costing
An Example:
Suppose that the Thompson Company produces precision parts
for 11 major buyers. An activity-based costing system is used to
assign manufacturing costs to products. The company prices
each customer's order by adding order-filling costs to
manufacturing costs and then adding a 20% markup (to cover
any administrative costs plus profits). Order-filling costs total
$606,000 and are currently assigned in proportion to sales
volume (measured by number of parts sold). Of the 11
customers, one accounts for 50% of sales, with the remaining ten
accounting for the remainder of sales. Orders placed by the
smaller companies are also about the same size. Data concerning
Thompsons customer activity are given on PPT 13-22:

Exploiting External Linkages
(continued)
Large Ten Smaller
Customer Customers
Units purchased 500,000 500,000
Orders placed 2 200
Manufacturing cost $3,000,000 $3,000,000
*Order-filling cost allocated 303,000 303,000
Order cost per unit $0.606 $0.606
*Order-filling capacity is purchased in blocks of 45 (225
capacity), each block costing $40,400; variable order-
filling activity costs are $2,000 per order; thus, the cost is
[(5 x $40,400) + ($2,000 x 202)]
Exploiting External Linkage (continued)
Large Customer Ten Smaller Customers
Units purchased 500,000 500,000
Orders placed 2 200
Manufacturing costs $3,000,000 $3,000,000
*Orders-filling costs 6,000 600,000
Order cost per unit $.012 $1.20
*Order-filling capacity is allocated using number of orders. The allocation
rate is $3,000 pre order ($606,000/202 orders).
Assume that ordering costs are allocated using a new driver:
I mplications:
By using a new driver, we are drastically reducing the ordering-
cost per unit of the high volume customer (50% of our business).
This information could assist Thompson in establishing a new
strategy for pricing.
Product Life Cycle Viewpoints
There are three basic views of the product
life cycle:
Marketing viewpoint
Production viewpoint
Consumable life viewpoint
Marketing Viewpoint
Units of
sales
Introduction Growth Maturity Decline
Life Cycle Cost Management
Research Planning Design Testing Production Logistics
100

90


75


25

Cost Commitment Curve
Life Cycle
Cost %
90 percent of life-cycle
costs are committed at this
point
A Life Cycle Costing Example
Suppose that engineers are considering two new product designs for one of its
power tools. Both designs reduce direct materials and direct labor content
over the current model. The anticipated effects of the two designs on
manufacturing, logistical, and postpurchase activities costs are listed below:
Cost Behavior
Functional-based system:
Variable conversion activity rate: $40 per direct labor hour
Material usage rate: $8 per part
ABC system:
Labor usage $10 per direct labor hour
Material usage: $8 per part
Machining: $28 per machine hour
Purchasing activity: $60 per purchase order
Setup activity: $1,00 per setup hour
Warranty activity: $200 per returned unit
Customer repair cost: $10 per hour
Life Cycle Costing (continued)
Traditional Costing (Overhead allocated by direct labor hours)
Design A Design B
Direct materials $ 800,000 $ 480,000
Conversion cost
b
2,000,000 3,200,000
Total manufacturing cost $2,800,000 $ 3,680,000
Units produced 10,000 10,000
Unit cost $ 280 $ 368
======== ========
a
$8 x 100,000 parts; $8 x 60,000 parts
b
$40 x 50,000 direct labor hours; $40 x 80,000 direct labor hours
Life Cycle Costing (continued)
ABC Costing (Overhead allocated by direct labor hours)
Design A Design B Classification
Direct materials $ 800,000 $ 480,000 Manufacturing
Direct labor
a
500,000 800,000 Manufacturing
Machining
b
700,000 560,000 Manufacturing
Purchasing
c
18,000 12,000 Upstream
Setups
d
200,000 100,000 Manufacturing
Warranty
e
80,000 15,000 Downstream
Total product costs $2,298,000 $1,967,000
Units productd 10,000 10,000
Unit cost $ 230 $ 197
Postpurchase costs $ 80,000 $ 15,000
======== ========
a
$5 x 50 ,000 hours ; $5 x 40,000 hours
d
$1,000 x 200 setups; $1,000 x 100 setups
b
$10 x 25,000 parts; $10 x 20,000 parts
e
$200 x 400 defects; $200x 1,000 defects
c$
60 x 300 design hours; $60 x 2000 design hours
Target Costing - Example
Assume that a company is considering the
production of a new trencher. Current product
specifications and the targeted market share
call for a sales price of $250,000. The required
profit is $50,000 per unit.
The target cost is computed as follows:
Target cost = $250,000 - $50,000
= $200,000
Target-Costing Model
MARKET SHARE
OBJECTIVE
PRODUCE
PRODUCT
No
Yes
TARGET COST
MET?
PRODUCT AND
PROCESS DESIGN
TARGET COST
TARGET PROFIT
TARGET PRICE
PRODUCT
FUNCTIONALITY
Resource Consumption Accounting
(RCA)
Resource consumption accounting (RCA) is an
adaption of ABC that emphasizes resource
consumption by greatly increasing the number of
resource cost pools, which allows more direct
tracing of resource costs to cost objects than an
ABC system with fewer cost centers.
RCA is particularly appropriate for large organizations
with repetitive operations and high-level
information systems such as those provided by
SAP, Oracle, and SAS.
Time-Driven ABC (TDABC)
When a substantial amount of the cost of a
companys activities are in a highly repetitive
process (much like in the RCA example above),
the cost assignment can be based on the
average time required for each activity.

Time-Driven Activity-Based Costing assigns
resource costs directly to cost objects using the
cost per time unit of supplying the resource,
rather than first assigning costs to activities and
then from activities to cost objects.
TDABC Example
TDABC computes the cost per minute of the resources
performing the work activity.
Assume 2 clerical workers paid $45,000 annually perform a
certain activity that is expected to require 17 minutes.
TDABC calculates the total cost as $45,000 x 2 = $90,000;
TDABC then calculates the total time available for the activity
as 180,000 minutes (assuming 30 hours per week with two
weeks vacation: 2 workers x 50 weeks x 30 hours x 60 minutes
per hour = 180,000 minutes per year).
The TDAC rate for the activity is $0.50 per minute ($90,000 /
180,000).The cost of a unit of activity is $0.50 x 17 min = $8.50;
if the activity required 20 min, then the allocation would be $.50
x 20 = $10.
Customer Profitability
Analysis
Customer Relationship Management
(CRM):
Customer Lifetime Value (CLV)
Customer Equity
Customer Profitability Analysis
The Whale Curve: 80% from the top 20% (or more!)
Most Profitable Least Profitable
Cumulative Profits
50 %
100 %
100 % 20%
300 %
Customer Profitability Analysis:
The Whale Curve
4Less profitable customers
4 Small order quantities
4 Special products ordered
4 Heavy discounting
4 Unpredictable demands
4 Delivery times change
4 High technical support
4 Slow payment (imputed
interest)
Profitable and unprofitable customers are distinguished
by the demands they place on the organization
4More profitable customers
4 Large order sizes
4 Standard products ordered
4 Little discounting
4 Predictable demands
4 Delivery times standard
4 Low technical support
4 On-time payment (imputed
interest)
These demands can be estimated
by activity costs and activity cost drivers
What Makes for a Profitable Customer?
Types of Customers
76
High
(Creamy)
Low
(Low Fat)
Low
High
Cost-to-Serve
Product Mix
Margin
Very
Profitable
Very
unprofitable
Migrating Customers to Higher Profitability
A Strategic Analysis
Customer Relationship Management (CRM)
Requires Strategic Cost Management Data
Who is more important to pursue with
the scarce resources of our marketing
budget?
Our most profitable customers? Our most
valuable customers?
What is the difference?
The customer lifetime value (CLV)
measure is intended to answer this
question.
You are a pharmaceutical supplier:
which customer is more important?
Dentist A
Sales = $750,000
profits = $100,000
Age 61
Dentist B
Sales = $375,000
profits = $40,000
Age 25
Which is more profitable?
Which is more valuable?
What is it?
The projected economic value of customer
relationships during the whole period of the
relationship between the customer and company.
The Measure
The net present value (NPV) of all future profits
from that customer; it is a projection, from when
the customer is acquired or from the current date.
Customer Lifetime Value (CLV)
What is it?
The economic value of ALL customer
relationships.
The Measure
The sum of the CLVs for all customers.
How Used
Provides a measure of the value of the company
from the perspective of customer profitability.
Customer Equity
The Management & Control of
Quality (including Six-Sigma
and Lean)
Relationship between TQM & Financial Performance
A Strategic Model for Managing Quality
Lean Manufacturing
At the heart of lean manufacturing is the Toyota
Production System (TPS):
a long-term focus on relationships with suppliers
and coordination with these suppliers;
an emphasis on balanced, continuous flow
manufacturing with stable production levels;
continuous improvement in product design and
manufacturing processes with the objective of
eliminating waste ; and
flexible manufacturing systems in which different
vehicles are produced on the same assembly line
and employees are trained for a variety of tasks
Accounting for Lean
There are three reasons why the improvements in financial
results typically appear later than the operating
improvements from implementing lean.

Customers will benefit from the improved manufacturing
flexibility by ordering in smaller, more diverse quantities.
Improvements in productivity will create excess capacity;
as equipment and facilities are used more efficiently, some
will become idle.
The decrease in inventory that results from lean means
that, using full cost accounting, the fixed costs incurred in
prior periods flow through the income statement when
inventory is decreasing.
Accounting for Lean
Lean accounting uses value streams to measure
the financial benefits of a firms progress in
implementing lean manufacturing.
Each value stream is a group of related products
or services.
Accounting for value streams significantly reduces
the need for cost allocations (since the products
are aggregated into value streams) which can
help the firm to better understand the profitability
of its process improvements and product groups.

Lean Accounting Value Streams
Rimmer Company
Value Stream Income Statement
Total

Sales 585,000 $ 540,000 $ 1,125,000 $
Operating Costs
Materials 25,200 $ 12,800 $
Labor 168,000 88,000
Equipment related costs 92,400 - 48,400
Occupancy costs 11,200 4,800
Total Operating Costs 296,800 154,000 450,800 $
Less Other Value Stream Costs
Manufacturing 120,000 240,000
Selling and Administration 10,000 130,000 10,000 250,000 380,000
Value Stream Profit before inventory change 158,200 136,000 294,200
Less: Cost of decrease in inventory (10,000) (20,000) (30,000)
Value Stream Profit 148,200 $ 116,000 $ 264,200 $
Less Nontraceable Costs
Manufacturing 155,000
Selling and Administration 54,000
Total Nontraceable Fixed Costs 209,000
Operating Income 55,200 $
Digital Cameras Video Cameras
Operational and
Management-level
Performance Measurement
Performance Measurement
Motivation and Evaluation
Incentives: right decisions
Align performance measurement with strategy
Incentives: working hard
Compensation and bonus plans
Equity/fairness
Controllability
Cost allocations
Operational-level and Management-level
Operational Performance Measurement
with a Flexible Budget
Schmidt Machinery Company
Analysis of Operations
For the period ended October 31, 20X6
Data Item for
Analysis Actual
Flexible
Budget
Variance
Flexible
Budget
Sales
Volume
(Activity)
Variance
Master
(Static)
Budget
Units Sold 780 0 780 220 U 1000
Sales $639,600 $15,600 F $624,000 $176,000 U $800,000
Variable Expenses 350,950 50 F 351,000 99,000 F 450,000
Contribution Margin $288,650 $15,650 F $273,000 $77,000 U $350,000
Fixed Expenses $160,650 $10,650 U $150,000 $0 $150,000
Operating Income $128,000 $5,000 F $123,000 $77,000 U $200,000
2010
2010
Management Performance
Measurement
Cost Centers
Engineered Cost (cost driver: volume based)
Flexible Budget
Discretionary Cost (cost driver?)
Master Budget
Profit Center one step from outsourcing
Management Performance
Measurement
Profit Centers:
Variable costing income statements
Issue of transfer pricing
Role and importance of nonfinancial
performance indicators
Investment Centers:
ROI vs. RI vs. EVA
Measurement issues
Issue of transfer pricing
Role and importance of non-financial
performance indicators
Management Level
Performance Measurement:
When to Use Profit or Cost Center
Customer
Plant
Warehouse
Using Software in the
Strategic Cost Management
Using Software in the
Strategic Cost Management
1. Excel:
Goal Seek
Solver
2. ABC:
OROS (SAS), SAP,
Excel
3. Simulation:
Crystal Ball, @Risk,
Excel(Formulas/Functions)

ABC Software: OROS Quick
(from SAS)
Comprehensive: resources through
objects
Allow a couple of classes
Short Tutorial, 13 pages, couple of
hours
Blue Ridge Manufacturing Case















Introduction to Management Accounting

Strategic Positioning

Ethics
Implementing
Strategy
Product
Costing
Cost Behavior
(Planning and
Operational
Control)
Product Life
Cycle


The Value
Chain


The
Balanced
Scorecard


Volume
Based
(Job
Costing)



Activity -
based
Costing





Cost Estimation


CVP Analysis


Master Budget


Decision
Making


Flexible Budget s



Target
Costing


Life
Cycle
Costing

Management
Control















Cost Accounting

Strategic Positioning

Ethics
Implementing
Strategy
Product
Costing
Cost Behavior
(Planning and
Operational
Control)
Product Life
Cycle


The Value
Chain



The
Balanced
Scorecard


Job Costing



ABC Costing



Process Cost



Joint Costs



Standard
Costing


Cost Estimation



CVP Analysis
(ABC)


Master Budget
(ABC)


Decision
Making (ABC)



Target
Costing



Life Cycle
Costing


Managing
Constraints















Advanced Management Accounting

Strategic Positioning

Ethics
Implementing
Strategy
Cost Behavior
(ABC - based)
Product Life
Cycle

The Value Chain



The Balanced
Scorecard (BSC)


Cost Es timation
(Regression)


CVP Analysis



Master Budget



Decision
Making (LP)

Target
Costing



Life
Cycle
Costing

Management Control (TP)


Executive Compensation


Business Valuation
Comparison of JIT Approaches with
Traditional Manufacturing and Purchasing
JIT Traditional

1. Pull-through system 1. Push-through system
2. I nsignificant inventories 2. Significant inventories
3. Small supplier base 3. Large supplier base
4. Long-term supplier contracts 4. Short-term supplier contracts
5. Cellular structure 5. Departmental structure
6. Multiskilled labor 6. Specialized labor
7. Decentralized services 7. Centralized services
8. High employee involvement 8. Low employee involvement
9. Facilitating management style 9. Supervisory management style
10. Total quality control 10. Acceptable quality level
11. Buyers market 11. Sellers market
12. Value-chain focus 12. Value-added focus
Example Backflushing
To illustrate backflush costing and compare it with the
traditional approach, assume that a JIT company had the
following transactions during June:
1. Raw materials were purchased on account for $160,000.
2. All materials received were placed into production.
3. Actual direct labor costs, $25,000.
4. Actual overhead costs, $225,000.
5. Conversion costs applied, $235,000.
6. All work was completed for the month.
7. All completed work was sold.
8. The difference between actual and applied costs is
computed
Traditional Journal Entries
1. Materials 160,000
Accounts Payable 160,000

2. Work in Process 160,000
Materials 160,000

3. Work in Process 25,000
Payroll 25,000

4. Overhead Control 225,000
Accounts Payable 225,000

Traditional Journal Entries
5. Work in Process 210,000
Overhead Control 210,000

6. Finished Goods 395,000
Work in Process 395,000

7. Cost of Goods Sold 395,000
Finished Goods 395,000

8. Cost of Goods Sold 15,000
Overhead Control 15,000
Backflush Journal Entries
1. Raw Materials and in Process 160,000
Accounts Payable 160,000

2. No entry


3. Combined with overhead: See next entry.


4. Conversion Cost Control 250,000
Payroll 25,000
Accounts Payable 225,000

Backflush Journal Entries
5. No entry


6. Finished Goods 395,000
Raw Materials and in Process 160,000
Conversion Cost Control 235,000

7. Cost of Goods Sold 395,000
Finished Goods 395,000

8. Cost of Goods Sold 15,000
Conversion Cost Control 15,000
End of Week