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Cornerstones of Cost Management 4th Edition Don R. Hansen
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Source Code: M17021452
ISBN: 978-1-285-96540-6
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CHAPTER19
CHAPTER20
Step1:IdentifyanOrganization’sConstraints1068
Step2:ExploittheBindingConstraints 1068
Step3:SubordinateEverythingElsetotheDecisions MadeinStep2 1069
Step4:ElevatetheOrganization’sBindingConstraints1070
Step5:RepeatProcess:DoesaNewConstraintLimit Throughput? 1071
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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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.
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
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.
