From Motivation to Mastery
MOTIVATION:
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Test Bank
The Test Bank has been updated for this edition of Cornerstones of Cost Management with a focus on evaluating the students’ knowledge of topics fundamental accounting concepts.
Adaptive Study Plan
The Adaptive Study Plan is an assignable/ gradable study center that adapts to each student’s unique needs and provides a remediation pathway to keep students progressing.
APPLICATION:
MASTERY:
Mastery Problems are teaching problems that cover the primary learning objectives and help students understand the fundamental accounting concepts and their associated building blocks –not just memorizing the formulas.
Help students apply accounting concepts.
Excel Templates are problems focused on showing students how to apply concepts within the text to the real world.
Teach students to go beyond memorization to true understanding.
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Source Code: M17021452
ISBN: 978-1-285-96540-6
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CHAPTER4
CalculatingtheVariableOverheadSpending VarianceandVariableOverheadEfficiencyVariance474
CHAPTER9
CHAPTER10
CHAPTER17
CHAPTER19
CHAPTER20
Step1:IdentifyanOrganization’sConstraints1068
Step2:ExploittheBindingConstraints 1068
Step3:SubordinateEverythingElsetotheDecisions MadeinStep2 1069
Step4:ElevatetheOrganization’sBindingConstraints1070
Step5:RepeatProcess:DoesaNewConstraintLimit Throughput? 1071
KEYCHANGESTO THISEDITION
Twonewthemeshavebeenwovenintoeachchapter –SustainabilityandBigData.Thesearedetailedinthe chapter-by-chapterlistingbelow.
AllchaptershaveanEndofChaptersegmentwith questionstypicalofquestionsusedonprofessionalcerti ficationexams.Thiswillgivestudentsconfidenceinpreparing forcostaccountingmaterialonthevariouscertification exams.
Chapter1:IntroductiontoCostManagement
1. ExpandedtheAdvancesinInformationTechnology SectionwithasectiononBigData.
2. AddedasectiononSustainableDevelopment.
3. AddedaRealWorldExample(box)onsustainable developmentforacompanythatimprovedboth environmentalandeconomicperformance.
Chapter2:BasicCostManagementConcepts
1. UpdatedRealWorldExampleboxonMcDonald’ s menuchanges.
2. AddedaRealWorldExampleboxontheroleofcost accountantsinusingBigDatatoeffectbusiness change.
3. AddedaRealWorldExampleboxontheuseof sustainabledevelopmentbyschooldistrictstoreduce energyconsumption/costwithoutdegradingthe student/teacherexperience.
Chapter3:CostBehavior
1. Simpli fiedexpositionofstandarderrorsandgoodnessof-fitforstudentsbyremovingsectiononcalculation ofcon fidenceintervals.Emphasisisonconceptual useofgoodnessof fitratherthancalculationof con fidenceintervals.
2. AddedaRealWorldExampleboxonSustainability andBigDatausebyutilitycompaniesastheyswitch fromanalogtosmartmeters.Thischangehaseffected behavioralchangebyconsumersastheygainincreased understandingofenergyusage.
Chapter4:Activity-BasedCosting
1. AddedaRealWorldExamplethatillustrateshow DHLusedBigDataandABCtoimproveitscosting andpricingsystem.
2. AddedasectionandanewcornerstoneonDuration BasedCosting.
3. AddedanewcornerstoneexercisecoveringDurationBasedCosting(DBC)intheEOCmaterials.
4. AddedanewexercisecoveringDuration-Based Costing(DBC)
Chapter5:ProductandServiceCosting: Job-OrderSystem
1. AddedaRealWorldExampleonusingBigData
2. AddedaRealWorldExampleonSustainabilityas companiesreduceresourceuse(rawmaterials, supplies,energy,ortransportation/distribution) throughtheemploymentofadditivemanufacturing.
Chapter6:ProcessCosting
1. AddedaRealWorldExampleonusingBigDatato increaseoutputforprocessmanufacturing.
Chapter7:AllocatingCostsofSupport DepartmentsandJointProducts
1. AddedaRealWorldExampleonusingBigData analysistointegratedata filesacrossvarioussupport departmentstoreducecostandimprovecustomer service.
2. AddedaRealWorldExampleonSustainabilitybya meatprocessingplantthatusesby-productstoreduce wasteandcreateenergy.
Chapter8:BudgetingforPlanningandControl
1. AddedaRealWorldExampleonusingBigDatafrom pointofsale(POS)terminalstocreatedatathatare usedforinventorymanagementandtotrackcustomer preferencesforbudgeting.
2. AddedaRealWorldExampleonSustainabilitygoals andbudgetingdoneby3MCorporationtodevelopand trackgoalsreducewasteandimproveenergyefficiency.
Chapter9:StandardCosting:AFunctionalBasedControlApproach
1. AddedaRealWorldExampleontheuseofBigData bytheNationalRestaurantAssociationtodevelopan automatedfoodwastemonitoringsystem.
2. AddedaRealWorldExampleonSustainabilityinthe restaurantindustry.Foodwasteisasignificant problemforthisindustry,standardsaresettoreduce wasteandcost.
Chapter10:Decentralization:Responsibility Accounting,PerformanceEvaluation,and TransferPricing
1. AddedaRealWorldExampleonusingBigDataby professionalgolfersastheyusedataanalyticsofall shotstakenoneachPGAToureventholetodetermine thebestapproachtoeachshot.
2. AddedaRealWorldExampleonSustainabilityby P&Gthroughitssettingofobjectivesinfourmajor areasofemphasis:preservationofresources, renewableresources,worthfromwaste,andsocial programs.
Chapter11:StrategicCostManagement
1. AddedaRealWorldExampleforBigDatathatshows itsusefacilitatestheuseofABCtoassessandincrease customerprofitability.
Chapter12:Activity-BasedManagement
1. AddedaRealWorldExampleonSustainabilitythat illustrateshowDowTerneuzenusedactivity managementtoreducecostsand,atthesametime, improveenvironmentalperformance.
2. AddedaRealworldexampleonhowasteelcompany usedBigDatatoenhanceitsKaizenefforts.
Chapter13:TheBalancedScorecard:StrategicBasedControl
1. AddedaRealWorldExamplethatillustratesthat RoyalDutchShellintegratedsustainabilityobjectives andmeasuresintothetraditionalfourperspectives.
Chapter14:QualityandEnvironmentalCost Management
1. AddedaRealWorldExamplethatdescribes fiveways BigDatacanimpactqualitymanagement.
2. UpdatedwinnersoftheBaldrigeAward.
Chapter15:LeanAccountingandProductivity Measurement
1. AddedaRealWorldExampleonIntel’suseofBig Datatoimproveproductivityandquality.
2. UpdatedlisttoreflectmorerecentShingoPrize Recipients.
3. AddedareferencetoDBCasamethodtousefor Value-StreamCosting.
Chapter16:Cost-Volume-ProfitAnalysis
1. AddedaRealWorldExampleontheuseofBigData bytelecommunication firmstodetermineprobabilityof serviceinterruptionsanduseofbandwidthtoforecast futureneeds.
2. AddedaRealWorldExampleonSustainabilityuseby BestBuy,Inc.,todeterminethebreakevenpointin recyclingofusedelectronics.
Chapter17:ActivityResourceUsageModeland TacticalDecisionMaking
1. AddedaRealWorldExampleonusingBigDataand printingondemandtechnologytoimproveprofitability ofthecornerbookstore.
2. AddedaRealWorldExampleonSustainabilityefforts byFordasitincreasestheuseofrecycled,renewable, andlightweightmaterialsinitsvehicles.
Chapter18:PricingandProfitabilityAnalysis
1. AddedaRealWorldExampleontheuseofBigData bylargehotelchainsto findandsatisfytheirmost loyal,profitablecustomers.
2. AddedaRealWorldExampleonSustainabilityand theimportanceoflong-termcostsandbene fitsin explainingpricingforhomesolarinstallations.
Chapter19:CapitalInvestment
1. AddedaRealWorldExampleBoxforBigDatathat describeshowitsusecanimprovecapitalbudgeting decisions.
Chapter20:InventoryManagement:Economic OrderQuantity,JIT,andtheTheoryof Constraints
1. AddedaRealWorldExampleBoxthatshowshow Tesco,alargegroceryandmerchandiserretailersused BigDatatoimproveitsinventorypractices.
IntroductiontoCost Management
FINANCIALACCOUNTINGVERSUS
COSTMANAGEMENT:
ASYSTEMSFRAMEWORK
Asystemsframeworkhelpsusunderstandthevarietyoftopicsthatappear inthe fieldofcostmanagement.Italsofacilitatesourabilitytounderstand thedifferencesbetween financialaccountingandcostmanagement.An accountinginformationsystem consistsofinterrelatedmanualandcomputerpartsandusesprocessessuchascollecting,recording,summarizing, analyzing,andmanagingdatatotransforminputsintoinformationthatis providedtousers.
Theaccountinginformationsystemwithinanorganizationhastwo majorsubsystems:(1) the financialaccountinginformationsystem and
Afterstudyingthischapter,you shouldbeableto:
1 Describecostmanagementand explainhowitdiffersfrom financialaccounting.
2 Identifythecurrentfactors affectingcostmanagement.
3 Describehowmanagement accountantsfunctionwithinan organization.
4 Understandtheimportanceof ethicalbehaviorfor managementaccountants.
5 Identifythethreeformsof certificationavailableto internalaccountants.
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OBJECTIVE 1
Describecostmanagementand explainhowitdiffersfrom financial accounting.
(2) thecostmanagementaccountinginformationsystem. Oneofthemajordifferences betweenthetwosystemsisthetargeteduser.
FinancialAccountingInformationSystem
The financialaccounting informationsystemisprimarilyconcernedwithproducingoutputsforexternalusers.Ituseswell-speci fiedeconomiceventsasinputs,anditsprocesses followcertainrulesandconventions.For financialaccounting,thenatureoftheinputs andtherulesandconventionsgoverningprocessesaredefinedbytheSecuritiesand ExchangeCommission(SEC)andtheFinancialAccountingStandardsBoard(FASB). Amongitsoutputsare financialstatementssuchasthebalancesheet,incomestatement, andstatementofcash flowsforexternalusers(investors,creditors,governmentagencies,andotheroutsideusers).Financialaccountinginformationisusedforinvestment decisions,stewardshipevaluation,activitymonitoring,andregulatorymeasures.
TheCostManagementInformationSystem
The costmanagement informationsystemisprimarilyconcernedwithproducingoutputsforinternalusersusinginputsandprocessesneededtosatisfymanagementobjectives.Thecostmanagementinformationsystemisnotboundbyexternallyimposed criteriathatdefineinputsandprocesses.Instead,thecriteriathatgoverntheinputsand processesaresetbypeopleinthecompany.Thecostmanagementinformationsystem hasthreebroadobjectivesthatprovideinformationfor:
1.Costingoutservices,products,andotherobjectsofinteresttomanagement
2.Planningandcontrol
3.Decisionmaking
Theinformationrequirementsforsatisfyingthe firstobjectivedependonthenature oftheobjectbeingcostedandthereasonmanagementwantstoknowthecost.For example,productcoststhatsatisfytheFASBrulesareneededtovalueinventoriesfor thebalancesheetandtocalculatethecostofgoodssoldexpenseontheincomestatement.Theseproductcostsincludethecostofmaterials,labor,andoverhead.Inother cases,managersmaywanttoknowallcoststhatareassociatedwithaproductforpurposesoftacticalandstrategicprofitabilityanalysis.Ifso,thenadditionalcostinformationmaybeneededconcerningproductdesign,development,marketing,and distribution.Forexample,pharmaceuticalcompaniesmaywanttoassociateresearch anddevelopmentcostswithindividualdrugsordrugfamilies.
Costinformationisalsousedforplanningandcontrol.Itshouldhelpmanagers decidewhatshouldbedone,whyitshouldbedone,howitshouldbedone,andhow wellitisbeingdone.Forexample,informationabouttheexpectedrevenuesandcosts foranewproductcouldbeusedasaninputfortargetcosting.Atthisstage,the expectedrevenuesandcostsmaycovertheentirelifeofthenewproduct.Thus,projectedcostsofdesign,development,testing,production,marketing,distribution,and servicingwouldbeessentialinformation.
Finally,costinformationisacriticalinputformanymanagerialdecisions.For example,amanagermayneedtodecidewhethertocontinuemakingacomponent internallyortobuyitfromanexternalsupplier.Inthiscase,themanagerwouldneed toknowthecostofmaterials,labor,andotherproductiveinputsassociatedwiththe manufactureofthecomponentandwhichofthesecostswouldvanishiftheproductis nolongerproduced.Alsoneededisinformationconcerningthecostofpurchasingthe component,includinganyincreaseincostforinternalactivitiessuchasreceivingand storinggoods.
Costmanagementhasamuchbroaderfocusthanthatfoundintraditionalcosting systems.Itisconcernednotonlywithhowmuchsomethingcostsbutalsowiththefactorsthatdrivecosts,suchascycletime,quality,andprocessproductivity.Thus,cost managementrequiresadeepunderstandingofa firm ’scoststructure.Managersmust beabletodeterminethelong-andshort-runcostsofactivitiesandprocessesaswellas thecostsofgoods,services,customers,suppliers,andotherobjectsofinterest.Causes ofthesecostsarealsocarefullystudied.
DifferentSystemsforDifferentPurposes
The financialaccountingandcostmanagementsystemsshowusthatdifferentsystems existtosatisfydifferentpurposes.Asindicated,thesetwosystemsaresubsystemsofthe accountinginformationsystem.Thecostmanagementinformationsystemalsohastwo majorsubsystems:the costaccountinginformationsystem and theoperationalcontrolinformationsystem.Theobjectivesofthesetwosubsystemscorrespondtothe firstandsecondobjectivesmentionedearlierforthecostmanagementinformationsystem(the costingandcontrolobjectives).Theoutputofthesetwocostsystemssatisfiesthethird objective(thedecision-makingobjective).
The costaccountinginformationsystem isacostmanagementsubsystemdesignedto assigncoststoindividualproductsandservicesandotherobjectsasspecifiedbymanagement.Forexternal financialreporting,thecostaccountingsystemmustassigncosts toproductsinordertovalueinventoriesanddeterminecostofsales.Furthermore,these assignmentsmustconformtotherulesandconventionssetbytheSECandtheFASB. Theserulesandconventionsdonotrequirethatallcostsassignedtoindividualproducts becausallyrelatedtothedemandsofindividualproducts.Thus,using financial accountingprinciplestodefineproductcostsmayleadtounder-andoverstatementsof individualproductcosts.Forreportinginventoryvaluesandcostofsales,thismaynot matter.Inventoryvaluesandcostofsalesarereportedintheaggregate,andtheunderandoverstatementsmaywashouttotheextentthatthevaluesreportedonthe financial statementsarereasonablyaccurate.
Attheindividualproductlevel,however,distortedproductcostscancausemanagers tomakesignificantdecisionerrors.Forexample,amanagermighterroneouslydeemphasizeandoverpriceaproductthatis,inreality,highlyprofitable.Fordecisionmaking, accurateproductcostsareneeded.Ifpossible,thecostaccountingsystemshouldproduce productcoststhatsimultaneouslyareaccurateandsatisfy financialreportingconventions. Ifnot,thenthecostsystemmustproducetwosetsofproductcosts:onethatsatisfies financialreportingcriteriaandonethatsatisfiesmanagementdecision-makingneeds.
The operationalcontrolinformationsystem isacostmanagementsubsystemdesigned toprovideaccurateandtimelyfeedbackconcerningtheperformanceofmanagersand othersrelativetotheirplanningandcontrolofactivities.Operationalcontrolisconcernedwithwhatactivitiesshouldbeperformedandassessinghowwelltheyareperformed.Itfocusesonidentifyingopportunitiesforimprovementandhelpingto find waystoimprove.Agoodoperationalcontrolinformationsystemprovidesinformation thathelpsmanagersengageinaprogramofcontinuousimprovementofallaspectsof theirbusinesses.
Productcostinformationplaysaroleinthisprocessbut,byitself,isnotsuf ficient. Theinformationneededforplanningandcontrolisbroaderandencompassestheentire valuechain.Forexample,everyprofit-makingmanufacturingandserviceorganization existstoservecustomers.Thus,oneobjectiveofanoperationalcontrolsystemisto improvethevaluereceivedbycustomers.Productsandservicesshouldbeproducedthat fitspecificcustomerneeds.(Observehowthisaffectsthedesignanddevelopmentsystem inthevaluechain.)Quality,affordableprices,andlowpost-purchasecostsforoperatingandmaintainingtheproductarealsoimportanttocustomers.
OBJECTIVE 2
Identifythecurrentfactors affectingcostmanagement.
Asecond,relatedobjectiveistoimproveprofitsbyprovidingthisvalue.Welldesigned,qualityproductsthatareaffordablecanbeofferedonlyiftheyalsoprovide anacceptablereturntotheownersofthecompany.Costinformationconcerningquality,differentproductdesigns,andpost-purchasecustomerneedsisvitalformanagerial planningandcontrol.
FACTORSAFFECTINGCOSTMANAGEMENT
Worldwidecompetitivepressures,deregulation,growthintheserviceindustry,and advancesininformationandmanufacturingtechnologyhavechangedthenatureofour economyandcausedmanymanufacturingandserviceindustriestodramaticallychange thewayinwhichtheyoperate.Thesechanges,inturn,havepromptedthedevelopment ofinnovativeandrelevantcostmanagementpractices.Forexample,activity-based accountingsystemshavebeendevelopedandimplementedinmanyorganizations. Additionally,thefocusofcostmanagementaccountingsystemshasbeenbroadenedto enablemanagerstobetterservetheneedsofcustomersandmanagethe firm ’sbusiness processesthatareusedtocreatecustomervalue.A firmcanestablishacompetitive advantagebyprovidingmorecustomervalueforlesscostthanitscompetitors.To secureandmaintainacompetitiveadvantage,managersseektoimprovetime-based performance,quality,andefficiency.Accountinginformationmustbeproducedtosupportthesethreefundamentalorganizationalgoals.
GlobalCompetition
Vastlyimprovedtransportationandcommunicationsystemshaveledtoaglobalmarket formanymanufacturingandservice firms.Severaldecadesago, firmsneitherknewnor caredwhatsimilar firmsinJapan,Brazil,Germany,andChinawereproducing.These foreign firmswerenotcompetitorssincetheirmarketswereseparatedbygeographicaldistance.Now,bothsmallandlarge firmsareaffectedbytheopportunitiesofferedbyglobal competition. StillwaterDesigns,asmall firmthatdesignsandmarketsKickerspeakers, hassignificantmarketsinEurope.ThemanufactureoftheKickerspeakersismostlyoutsourcedtoAsianproducers.Attheotherendofthesizescale, Procter&Gamble, The Coca-ColaCompany,and Mars,Incorporated aredevelopingsizablemarketsinChina. Automobiles,currentlybeingmadeinJapan,canbeintheUnitedStatesintwoweeks. Investmentbankersandmanagementconsultantscancommunicatewithforeignoffices instantly.Improvedtransportationandcommunicationinconjunctionwithhigherquality productsthatcarrylowerpriceshaveuppedtheanteforall firms.Thisglobalcompetitive environmenthasincreasedthedemandnotonlyformorecostinformationbutalsofor moreaccuratecostinformation.Costinformationplaysavitalroleinreducingcosts, improvingproductivity,andassessingproduct-lineprofitability.
GrowthoftheServiceIndustry
Astraditionalindustrieshavedeclinedinimportance,theservicesectoroftheeconomy hasincreasedinimportance.Theservicesectornowcomprisesapproximatelythree quartersoftheU.S.economyandemployment.Manyservices amongthemaccountingservices,transportation,telecommunications,andmedicalservices areexportedto othercountriessuchasIndiaandArgentina.Expertspredictthatthissectorwillcontinuetoexpandinsizeandimportanceasserviceproductivitygrows.Deregulationof manyservices(e.g.,airlinesandtelecommunicationsinthepastandutilitiesinthepresent)hasincreasedcompetitionintheserviceindustry.Manyserviceorganizationsare scramblingtosurvive.Theincreasedcompetitionhasmademanagersinthisindustry
moreconsciousoftheneedtohaveaccuratecostinformationforplanning,controlling, continuousimprovement,anddecisionmaking.Thus,thechangesintheservicesector addtothedemandforinnovativeandrelevantcostmanagementinformation.
AdvancesinInformationTechnology
Foursigni ficantadvancesrelatetoinformationtechnology.Oneisintimatelyconnected withcomputer-integratedapplications.Withautomatedmanufacturing,computersare usedtomonitorandcontroloperations.Becauseacomputerisbeingused, aconsiderableamountofusefulinformationcanbecollected,andmanagerscanbe informedaboutwhatishappeningwithinanorganizationalmostasithappens.Itis nowpossibletotrackproductscontinuouslyastheymovethroughthefactoryandto report(onareal-timebasis)suchinformationasunitsproduced,materialused,scrap generated,andproductcost.Theoutcomeisanoperationalinformationsystemthat fullyintegratesmanufacturingwithmarketingandaccountingdata.
Enterpriseresourceplanning(ERP)software hastheobjectiveofprovidinganintegratedsystemcapability asystemthatcanrunalltheoperationsofacompanyand provideaccesstoreal-timedatafromthevariousfunctionalareasofacompany.Using thisreal-timedataenablesmanagerstocontinuouslyimprovetheef ficiencyoforganizationalunitsandprocesses.Tosupportcontinuousimprovement,informationthatis timely,accurate,anddetailedisneeded.
Automationandintegrationincreaseboththequantity(detail)andthetimelinessof information.Formanagerstofullyexploitthevalueofthemorecomplexinformation system,theymusthaveaccesstothedataofthesystem theymustbeabletoextract andanalyzethedatafromtheinformationsystemquicklyandefficiently.This,inturn, impliesthatthetoolsforanalysismustbepowerful.
Thesecondmajoradvancesuppliestherequiredtools:theavailabilityofpersonal computers(PCs),onlineanalyticprograms(OLAP),anddecision-supportsystems(DSS). ThePCservesasacommunicationslinktothecompany’sinformationsystem,and OLAPandDSSsupplymanagerswiththecapabilitytousethatinformation.PCsand softwareaidsareavailabletomanagersinalltypesoforganizations.Often,aPCactsas anetworkingterminalandisconnectedtoanorganization’sdatabase,allowingmanagers toaccessinformationmorequickly,dotheirownanalyses,andpreparemanyoftheir ownreports.Theabilitytoenhancetheaccuracyofproductcostingisnowavailable. Becauseofadvancesininformationtechnology,costaccountantshavethe flexibilityto respondtothemanagerialneedformorecomplexproductcostingmethodssuchasactivity-basedcosting(ABC).Evenwiththeinformationtechnology,however,many firms havenotembracedABCbecauseofitscostandcomplexity.Simplifiedandimproved costingsystemssuchastime-drivenactivity-basedcosting(TDABC)havebeendeveloped inordertodealwiththeseissues,whilepreservingthebenefitsofenhancedaccuracy.
ABCsoftwareisclassi fiedasonlineanalyticsoftware.Onlineanalyticapplications functionindependentlyofanorganization’scoretransactionsbutatthesametimeare dependentonthedataresidentinanERPsystem.ABCsoftwaretypicallyinterfaces withDSSsoftwareandotheronlineanalyticsoftwaretofacilitateapplicationssuchas costestimating,productpricing,andplanningandbudgeting.Thisvastcomputing capabilitynowmakesitpossibleforaccountantstogenerateindividualizedreportson anas-neededbasis.Many firmshavefoundthattheincreasedresponsivenessofacontemporarycostmanagementsystemhasallowedthemtorealizesigni ficantcostsavings byeliminatingthehugevolumeofinternallygeneratedmonthly financialreports.
Thethirdmajoradvanceisthedevelopmentofbusinessanalytics(relatedtoorsynonymouswithBigDataordataanalytics).Oneofthekeydifferencesbetweenthisthird advanceininformationtechnologyandthesecondadvancejustdiscussedistheexpansion ofbusinessanalyticstoincludeexternaldatasetsand,atthesametime,integratethe analysiswithanorganization’sinternaldatabases.Anotherkeydifferenceisthe
emergenceofverylargedatasets datasetssolargethattheyexceedtheabilityofcommonlyusedsoftwaretocaptureandanalyzetherelationships(hencetheBigDatalabel thathasbecomepopular).Analyzingthesebigdatasetsmayprovidesignificantinsights thatwillallowcompaniestodosuchthingsasreducecosts,improvequality,decrease cycletimes,detectfraudulentactivity,andenhancedecisionmaking.Asmightbe expected,softwareforanalyzingbigdatasetshasbeendevelopedbycompaniessuchas Oracle and SAP;moreover,softwaresuchasMicrosoftPowerBIandTableauprovides similaranalyticalcapabilitiesforindividuals,smallbusinesses,andlargebusinesses.
Thefourthmajoradvanceistheemergenceofelectroniccommerce. Electronic commerce(e-commerce) isanyformofbusinessthatisexecutedusinginformationand communicationstechnology.Internettrading,electronicdatainterchange,andbar codingareexamplesofe-commerce.Internettradingallowsbuyersandsellerstocome togetherandexecutetransactionsfromdiverselocationsandcircumstances.Internet tradingallowsacompanytoactasavirtualorganization,thusreducingoverhead. Electronicdatainterchange(EDI) involvestheexchangeofdocumentsbetweencomputers usingtelephonelinesandiswidelyusedforpurchasinganddistribution.Thesharingof informationamongtradingpartnersreducescostsandimprovescustomerrelations, thusleadingtoastrongercompetitiveposition.EDIisanintegralpartofsupplychain management(value-chainmanagement). Supplychainmanagement isthemanagement ofproductsandservicesfromtheacquisitionofrawmaterialsthroughmanufacturing, warehousing,distribution,wholesaling,andretailing.TheemergenceofEDIandsupply chainmanagementhasincreasedtheimportanceofcostingoutactivitiesinthevalue chainanddeterminingthecosttothecompanyofdifferentsuppliersandcustomers.
AdvancesintheManufacturingEnvironment
Manufacturingmanagementapproachessuchas thetheoryofconstraintsandjust-in-time haveallowed firmstoincreasequality,reduceinventories,eliminatewaste,andreduce costs.Automatedmanufacturinghasproducedsimilaroutcomes.Theimpactofimproved manufacturingtechnologyandpracticesoncostmanagementissignificant.Productcostingsystems,controlsystems,allocation,inventorymanagement,coststructure,capital budgeting,variablecosting,andmanyotheraccountingpracticesarebeingaffected.
TheoryofConstraints
The theoryofconstraints isamethodusedtocontinuously improvemanufacturingandnonmanufacturingactivities.Itischaracterizedasa “thinkingprocess” thatbeginsbyrecognizingthatallresourcesare finite.Someresources, however,aremorecriticalthanothers.Themostcriticallimitingfactor,calledaconstraint,becomesthefocusofattention.Bymanagingthisconstraint,performancecan beimproved.Tomanagetheconstraint,itmustbeidentifiedandexploited(i.e.,performancemustbemaximizedsubjecttotheconstraint).Allotheractionsaresubordinatetotheexploitationdecision.Finally,toimproveperformance,theconstraintmust beelevated.Theprocessisrepeateduntiltheconstraintiseliminated(i.e.,itisnolonger thecriticalperformance-limitingfactor).Theprocessthenbeginsanewwiththe resourcethathasnowbecomethecriticallimitingfactor.Usingthismethod,leadtimes and,thus,inventoriescanbereduced.
Just-in-TimeManufacturing Ademand-pullsystem, just-in-time(JIT)manufacturing,strivestoproduceaproductonlywhenitisneededandonlyinthequantities demandedbycustomers.Demand,measuredbycustomerorders,pullsproducts throughthemanufacturingprocess.Eachoperationproducesonlywhatisnecessaryto satisfythedemandofthesucceedingoperation.Noproductiontakesplaceuntilasignal fromasucceedingprocessindicatestheneedtoproduce.Partsandmaterialsarrivejust intimetobeusedinproduction.
JITmanufacturingtypicallyreducesinventoriestomuchlowerlevels(theoreticallyto insignificantlevels)thanthosefoundinconventionalsystems,increasestheemphasison qualitycontrol,andproducesfundamentalchangesinthewayproductionisorganized andcarriedout.Basically,JITmanufacturing focusesoncontinualimprovementbyreducinginventorycostsanddealingwithothereconomicproblems.Reducinginventoriesfrees upcapitalthatcanbeusedformoreproductiveinvestments.Increasingqualityenhances thecompetitiveabilityofthe firm.Finally,changingfromatraditionalmanufacturing setuptoJITmanufacturingallowsthe firmtofocusmoreonqualityandproductivityand, atthesametime,allowsamoreaccurateassessmentofwhatitcoststoproduceproducts.
LeanManufacturing JITisacriticalpartofamorecomprehensiveapproach referredtoas leanmanufacturing. Leanmanufacturing isthepersistentpursuitandeliminationofwastethatsimultaneouslyembodiesrespectforpeople.Wasteisanythingthat doesnotaddvaluetotheenduser(customer).Asaresultofeliminatingwaste,lead timeisdecreased,productionprocessesarestreamlined,andcostsaredecreased. Dependingonthenatureofthevaluestreamscreatedinleanmanufacturing,amore accurateassessmentofproductcostsmayresult.
Computer-IntegratedManufacturing Automationofthemanufacturingenvironmentallows firmstoreduceinventory,increaseproductivecapacity,improvequalityand service,decreaseprocessingtime,andincreaseoutput.Automationcanproduceacompetitiveadvantagefora firm.Theimplementationofanautomatedmanufacturingfacility typicallyfollowsJITandisaresponsetotheincreasedneedsforqualityandshorter responsetimes.Asmore firmsautomate,competitivepressureswillforceother firmsto dolikewise.Formanymanufacturing firms,automationmaybeequivalenttosurvival.
Thethreepossiblelevelsofautomationare(1)thestand-alonepieceofequipment, (2)thecell,and(3)thecompletelyintegratedfactory.Beforea firmattemptsanylevel ofautomation,itshould firstdoallitcantoproduceamorefocused,simplifiedmanufacturingprocess.Forexample,mostofthebene fitsofgoingtoacompletelyintegrated factorycanoftenbeachievedsimplybyimplementingJITmanufacturing.
Ifautomationisjustified,itmaymeaninstallationofacomputer-integratedmanufacturing(CIM)system.CIMimpliesthefollowingcapabilities:(1)theproductsaredesigned throughtheuseofacomputer-assisteddesign(CAD)system,(2)acomputer-assistedengineering(CAE)systemisusedtotestthedesign,(3)theproductismanufacturedusing acomputer-assistedmanufacturing(CAM)system(CAMsusecomputer-controlled machinesandrobots),and(4)aninformationsystemconnectsthevariousautomated components.
AparticulartypeofCAMisthe flexiblemanufacturingsystem.Flexiblemanufacturingsystemsarecapableofproducingafamilyofproductsfromstartto finishusingrobots andotherautomatedequipmentunderthecontrolofamainframecomputer.Thisability toproduceavarietyofproductswiththesamesetofequipmentisclearlyadvantageous.
CustomerOrientation
Firmsareconcentratingonthedeliveryofvaluetothecustomerwiththeobjectiveof establishingacompetitiveadvantage.Accountantsandmanagersrefertoa firm ’ s value chain asthesetofactivitiesrequiredtodesign,develop,produce,market,anddeliver productsandservicestocustomers.Asaresult,akeyquestiontobeaskedaboutany processoractivityiswhetheritisimportanttothecustomer.Thecostmanagementsystemmusttrackinformationrelatingtoawidevarietyofactivitiesimportanttocustomers(e.g.,productquality,environmentalperformance,newproductdevelopment,and deliveryperformance).Customersnowcountthedeliveryoftheproductorserviceas partoftheproduct.Companiesmustcompetenotonlyintechnologicaland
manufacturingtermsbutalsointermsofthespeedofdeliveryandresponse.Firmssuch as FedEx haveexploitedthisdesirebyidentifyinganddevelopingamarketthe U.S.PostalService couldnotserve.
Companieshaveinternalcustomersaswell.Thestafffunctionsofacompanyexist toservethelinefunctions.Theaccountingdepartmentcreatescostreportsforproductionmanagers.Accountingdepartmentsthatare “customerdriven” assessthevalueof thereportstobesurethattheycommunicatesignificantinformationinatimelyand readablefashion.Reportsthatdonotmeasureuparedropped.
NewProductDevelopment
Ahighproportionofproductioncostsiscommittedduringthedevelopmentanddesign stageofnewproducts.Theeffectsofproductdevelopmentdecisionsonotherpartsof the firm ’svaluechainarenowwidelyacknowledged.Thisrecognitionhasproduceda demandformoresophisticatedcostmanagementproceduresrelatingtonewproduct development proceduressuchastargetcostingandactivity-basedmanagement. Targetcosting encouragesmanagerstoassesstheoverallcostimpactofproductdesigns overtheproduct’slifecycleandsimultaneouslyprovidesincentivestomakedesign changestoreducecosts. Activity-basedmanagement identifiestheactivitiesproducedat eachstageofthedevelopmentprocessandassessestheircosts.Activity-basedmanagementiscomplimentarytotargetcostingbecauseitenablesmanagerstoidentifythe activitiesthatdonotaddvalueandtheneliminatethemsothatoveralllifecyclecosts canbereduced.
SustainableDevelopment
Sustainabledevelopment isdefinedasdevelopmentthatmeetstheneedsofthepresent withoutcompromisingtheabilityoffuturegenerationstomeettheirownneeds. Althoughabsolutesustainabilitymaynotbeattainable,progresstowarditsachievementcertainlyseemstohavesomemerit.Many firmshavediscoveredthatpaying attentiontotheenvironmentcanbeeconomicallybeneficial thatitispossibletopreventpollution,reducewastedischarges,andreducethedispersionoftoxicsubstances whilesimultaneouslyincreasingprofits.
Sustainability
RicohCompany,Ltd. isamultinationalcompanyheadquarteredinJapan.Ricoh producescamerasandofficeimagingequipmentsuchasmultifunctionprinters,copiers,laserprinters,scanners,anddigitalduplicators.Thecompanyhasearneda strongreputationforcorporatesocialresponsibility.In2016,theEnvironmental ProtectionAgencyselectedRicohtoreceivetheENERGYSTARPartnerofthe YearAward.ThisawardrecognizedRicohforitssuccessinreducinggreenhouse emissionsbyproducingenergy-ef ficientproducts.Ricohisagoodexampleofacompanythathasmanagedtobalanceenvironmentalperformanceandeconomicperformance.Forexample,inits2010SustainabilityReport,Ricohreportedan Eco-ProfitRatioof1.6[Eco-ProfitRatio = (TotalEconomicBenefit)/(TotalEnvironmentalConservationCost)].
Apositiverelationshipbetweenenvironmentalperformanceandeconomicperformanceprovidesamuchdifferentviewthanthetraditionalview.Underthisnewview, environmentalpollutionandcontaminationareatypeofeconomicinef ficiency,and therefore,effortstoenhanceenvironmentalqualityimprovea firm ’ sprofitability.Environmentalmanagerialaccountingcanprovideinformationvitaltomeasuringtheeffects ofenvironmentalinitiatives.
TotalQualityManagement
Continuousimprovementandeliminationofwastearethetwofoundationprinciplesthatgovernastateofmanufacturinge xcellence.Manufacturingexcellenceis thekeytosurvivalintoday ’ sworld-classcompetitiveenvironment.Producingproductsandservicesthatactuallyperformaccordingtospeci fi cations 1 andwithlittle wastearethetwinobjectivesofworld-class fi rms.Aphilosophyof totalquality management ,inwhichmanagersstrivetocreateanenvironmentthatwillenable organizationstoproducedefect-freeproductsandservices,hasreplacedtheacceptablequalityattitudesofthepast.Theempha sisonqualityappliestoservicesaswell asproducts.
AdvocateGoodSamaritanHospital isanacutecarefacilitylocatedinDowners Grove,Illinois.In2010,GoodSamaritanreceivedtheMalcolmBaldridgeNational QualityAwardinthehealthcarecategory.Thisawardispresentedtoorganizations thatdemonstratequalityandperformanceexcellence.GoodSamaritanHospital improveditsmortalityrate(actualmortality/expectedmortality)from0.73in2004 to0.25in2010.Furthermore,theratioofobservedtoexpectedrenalfailures decreasedfrom3.0in2007to0.86in2009.Bycreatingacultureofpatientsafety, GoodSamaritanHospitaldecreaseditsmalpracticeexpensesby83percentfrom 2005to2010,saving$10million.
Themessageisclear.Pursuinganobjectiveofhighqualitypromisesmajorbenefits. Costmanagementsupportsthisobjectivebyprovidingcrucialinformationconcerning quality-relatedactivitiesandqualitycosts.Savingsassociatedwithqualityinitiatives canbereportedaswell.Managersneedtoknowwhichquality-relatedactivitiesadd valueandwhichonesdonot.Theyalsoneedtoknowwhatqualitycostsareandhow theychangeovertime.
TimeasaCompetitiveElement
Timeisacrucialelementinallphasesofthevaluechain.Firmscanreducetimeto marketbyredesigningproductsandprocesses,byeliminatingwaste,andbyeliminating non-value-addedactivities.Firmscanreducethetimespentondeliveryofproducts orservices,reworkingaproduct,andunnecessarymovementsofmaterialsand subassemblies.
Decreasingnon-value-addedtimeappearstogohandinhandwithincreasing quality.Withqualityimprovements,theneedforreworkdecreases,andthetimeto produceagoodproductdecreases.Theoverallobjectiveistoincreasecustomer responsiveness.
1 Asreportedathttp://www.nist.gov/baldridge/award_recipients/good-samaritan_pro file.cfmonAugust1,2011.
Timeandproductlifecyclesarerelated.Therateoftechnologicalinnovationhas increasedformanyindustries,andthelifeofaparticularproductcanbequiteshort. Managersmustbeabletorespondquicklyanddecisivelytochangingmarket conditions.Informationtoallowthemtoaccomplishthisgoalmustbeavailable. Hewlett-Packard hasfoundthatitisbettertobe50percentoverbudgetinnewproduct developmentthantobesixmonthslate.Thiscorrelationbetweencostandtimeisapart ofthecostmanagementsystem.
Efficiency
Whilequalityandtimeareimportant,improvingthesedimensionswithoutcorrespondingimprovementsin financialperformancemaybefutile,ifnotfatal.Improvingefficiencyisalsoavitalconcern.Both financialandnonfinancialmeasuresofefficiencyare needed.Costisacriticalmeasureofef ficiency.Trendsincostsovertimeandmeasures ofproductivitychangescanprovideimportantmeasuresoftheefficacyofcontinuous improvementdecisions.Fortheseefficiencymeasurestobeofvalue,costsmustbe properlydefined,measured,andaccuratelyassigned.
Productionofoutputmustberelatedtotheinputsrequired,andtheoverall financial effectofproductivitychangesshouldbecalculated.Activity-basedcostingandpro fitlinkedproductivitymeasurementareresponsestothesedemands.Activity-basedcosting isarelativelynewapproachtocostaccountingthatprovidesmoreaccurateandmeaningfulcostassignments.Byanalyzingunderlyingactivitiesandprocesses,eliminating thosethatdonotaddvalue,andenhancingthosethatdoaddvalue,dramaticincreases inef ficiencycanberealized.
OBJECTIVE 3
Describehowmanagement accountantsfunctionwithinan organization.
THEROLEOFTHEMANAGEMENT ACCOUNTANT
World-class firmsarethosethatareatthecuttingedgeofcustomersupport.Theyknow theirmarketandtheirproduct.Theystrivecontinuallytoimproveproductdesign,manufacture,anddelivery.Thesecompaniescancompetewiththebestofthebestina globalenvironment.Accountants,too,canbetermedworldclass.Thosewhomeritthis designationareintelligentandwellprepared.Theynotonlyhavetheeducationand trainingtoaccumulateandprovide financialinformation,butalsostayuptodatein their fieldandinbusiness.Inaddition,world-classaccountantsmustbefamiliarwith thecustomsand financialaccountingrulesofthecountriesinwhichtheir firmoperates.
LineandStaffPositions
Theroleofcostandmanagementaccountantsinanorganizationisoneofsupportand teamwork.Theyassistthosewhoareresponsibleforcarryingoutanorganization ’ s basicobjectives.Positionsthathavedirectresponsibilityforthebasicobjectivesofan organizationarereferredtoas linepositions.Ingeneral,individualsinlinepositions participateinactivitiesthatproduceandselltheircompany’sproductorservice. Positionsthataresupportiveinnatureandhaveonlyindirectresponsibilityforan organization’sbasicobjectivesarecalled staffpositions. Inanorganizationwhosebasicmissionistoproduceandselllaserprinters,thevice presidentsofmanufacturingandmarketing,thefactorymanager,andtheassemblers arealllinepositions.Thevicepresidentsof financeandhumanresources,thecost accountant,andthepurchasingmanagerareallstaffpositions.
