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IN THE 1980S, CRITICISM OF TRADITIONAL MANAGEMENT ACCOUNTING WERE PUBLICISED & SCM APPROACHES WERE ADVOCATED, WHICH ARE MORE IN TUNE WITH TODAYS COMPETITIVE & BUSINESS ENVIRONMENT. INNES (1998) DEFINES STRATEGIC MANAGEMENT ACCOUNTING AS THE PROVISION OF INFORMATION TO SUPPORT THE STRATEGIC DECISIONS
EXTERNAL INFORMATION ABOUT COMPETITORS TO PROTECT AN ORGANIZATIONS STRATEGIC POSITION & DETERMINE STRATEGIES TO IMPROVE ITS FUTURE COMPETIVENESS, MANAGERS REQUIRE INFORMATION THAT INDICATES THAT BY WHOM, BY HOW MUCH & WHY THEY ARE GAINING OR BEING BEATEN. COMPETITIVE INFORMATION IS AVAILABLE FROM PUBLIC SOURCES VIZ COMPANY ANNUAL REPORTS,
COST LEADERSHIP WHERE BY A FIRM AIMS TO BE THE LOWEST COST PRODUCER WITHIN THE INDUSTRY. THIS ENABLES IT TO COMPETE ON THE BASIS OF LOWER PRICES RATHER THAN PROVIDING UNIQUE PRODUCTS OR SERVICES. FACTORS LIKE ECONOMIES OF SCALE, ACCESS TO FAVORABLE RAW MATERIALS SOURCES & SUPERIOR TECHNOLOGY CONTRIBUTE TO GAINING THE COST ADVANTAGE DIFFERENTIATION- WHERE THE FIRM OFFERS PRODUCTS & SERVICE THAT ARE CONSIDERED BY CONSUMERS TO BE SUPERIOR & UNIQUE WHEN COMPARED TO ITS COMPETITORS FOCUS ON A NARROW SEGMENT OF THE MARKET THAT HAVE SPECIAL NEEDS THAT ARE POORLY SERVED BY OTHERS COMPETITORS IN THE INDUSTRY
2.
3.
MILES & SNOW DISTINGUISHED BETWEEN : DEFENDERS: - OPERATE IN STABLES AREAS, HAVE LIMITED PRODUCTS LINES & EMPLOY MASS PRODUCTION ROUTINE TECHNOLOGY.OPERATIONAL EFFICIENCY THROUGH COST, QUALITY & SERVICE LEADERSHIP ARE INHERENT FEATURES. PROSPECTORS: - COMPETE THROUGH NEW PRODUCT INNOVATIONS & MARKET DEVELOPMENT & ARE ON THE LOOKOUT FOR NEW MARKET OPPORTUNITIES. THE CHOICE OF ACCOUNTING TECHNIQUES DIFFERS WITH THE PRODUCT POSITIONING. PORTER (1980) SUGGESTS THAT TIGHT COST CONTROLS ARE MORE APPROPRIATE WHEN A COST LEADERSHIP STRATEGY IS FOLLOWED. SIMONS (1987) FOUND THAT BUSINESS UNITS THAT ADOPTED THE DEFENDERS STRATEGY PLACED MORE IMPORTANCE ON THE USE OF FINANCIAL MEASURES. PROSPECTOR FIRMS ON THE OTHER HAND PLACED IMPORTANCE ON FORECAST DATA & LESS EMPHASIS ON COST CONTROL.
HOW TWO COST LEADERSHIP AND DIFFERENTIATION REQUIRES DIFFERENT COST ANALYSIS PERSPECTIVE
PRODUCT DIFFERENTIATION ROLE OF STANDARD COSTS IN ASSESSING PERFORMANCE IMPORTANCE OF FLEXIBLE BUDGETS FOR MANUFACTURING COST CONTROL PERCEIVED IMPORTANCE OF MEETING BUDGETS MARKETING COST ANALYSIS PRODUCT COST AS AN INPUT FOR PRICING IMPORTANCE OF COMPETITOR COST ANALYSIS NOT VERY IMPORTANT COST LEADER SHIP VERY IMPORTANT
MODERATE TO LOW
HIGH TO VERY HIGH OFTEN NOT DONE AT ALL FORMALLY HIGH HIGH
SUPPLIER S
CUSTOME RS
R&D
DESIGN
PRODn
MKTG
DISTBn
CUSTOMER SERVICE
SHANK & GOVIND RANJAN (1992) ADVOCATE EVALUATION OF FIRMS VALUE CHAIN WITH THAT OF COMPETITORS: IDENTITY INDUSTRYS VALUE CHAIN & ALSO OF THE FIRM COSTS. REVENUES & ASSETS SHOULD THEN BE ASSIGNED TO ACTIVITIES TO ASCERTAIN THEIR VALUE DIAGNOSE THE COST DRIVERS REGULATING EACH VALUE ACTIVITY.
A.
TRADITIONAL MANAGEMENT ACCOUNTING CONTROL PROCEDURES HAVE FOCUSED PRIMARILY ON THE MANUFACTURING STAGE OF A PRODUCTS LIFE CYCLE. PRE MANUFACTURING COSTS LIKE R& D & DESIGN & POST MANUFACTURING ABANDONMENT & DISPOSAL COSTS ARE TREATED AS PERIOD COSTS& HENCE NOT INCLUDED IN PRODUCT COST CALCULATIONS. THE PRODUCT LIFE CYCLE SPANS THE TIME FROM INITIAL R&D ON THE PRODUCT TO WHEN THE CUSTOMER SERVICING & SUPPORT IS NO LONGER OFFERED TO THAT PRODUCT. FOR MOTOR VEHICLES IT MAY BE 12-15, YEARS FOR PHARMACEUTICALS IT MAY BE 15-20 YEARS. LIFE CYCLE COSTING ESTIMATES ACCUMULATES COSTS OVER A PRODUCTS ENTIRE LIFE CYCLE IN ORDER TO DETERMINE WHETHER THE PROFITS EARNED DURING THE MANUFACTURING PHASE WILL COVER THE COST INCURRED DURING PRE AND POST MANUFACTURING STAGES. LIFE CYCLE COSTING ENABLES THE MANAGEMENT TO UNDERSTAND THE COST CONSEQUENCES OF DEVELOPMENT & MARKETING A PRODUCT & IDENTIFY AREAS IN WHICH COST- REDUCTION EFFORTS ARE LIKELY TO BE MOST EFFECTIVE.
SELLING PRICE PACKAGE SALE QUANTITY IN UNITS LIFE CYCLE REVENUES R & D COST DESIGN COST PRODUCTION COST MARKETING COST DISTRIBUTION COST
ALTERNATE SCENARIOS A B 4,000 4,800 5,000 20,00,000 24,00,000 16,00,000 22,50,000 19,00,000 13,00,000 4,000 192,00,000 24,00,000 16,00,000 20,00,000 16,60,000 11,40,000 20,00,000
C 6000 2500 150,00,000 24,00,000 16,00,000 16,25,000 13,00,000 9,00,000 15,50,000 93,75,000
THE SELLING PRICE OF RS 4,800/PACKAGE MAXIMIZES THE LIFE CYCLE OPERATING INCOME .THE ABOVE EXAMPLE CONSIDERS THE
CUSTOMER SERVICE 23,00,000 COST TOTAL LIFE CYCLE COST 117,50,000 LIFE CYCLE 82,50,000 OPERATING INCOME
108,00,000 84,00,000
56,25,000
MANAGEMENT & ENVIRONMENTAL LAWS ENTAILING LARGE COSTS AT A DESIGN / R & D STAGE IS OTHER EXAMPLE. COMPAQ & APPLE HAVE INTRODUCED COSTLY RECYCLING PROGRAMS TO ENSURE NICKEL - CADMIUM BATTERIES THAT CAN LEAK HAZARDOUS CHEMICALS INTO THE SOIL ARE DISPOSED OFF IN AN ENVIRONMENTAL FRIENDLY WAY AT THE END OF THE BATTERIES LIFE. THE COSTS IMPACT NOT ONLY R & D DESIGN STAGES BUT ALSO AT THE CUSTOMER SERVICE STAGES.
TARGET COSTING
TARGET COSTING IS A CUSTOMER ORIENTED TECHNIQUES THAT IS WIDELY USED BY JAPANESE COMPANIES, & IS NOW BEING ADOPTED IN EUROPE & USA. IT INVOLVES FOUR STAGES: STAGE 1 DETERMINES TARGET PRICE WHICH THE CUSTOMERS WILL BE WILLING TO PAY FOR THE PRODUCT. THIS WILL INVOLVE MARKET RESEARCH TO FIND OUT THE CUSTOMERS PERCEIVED VALUE OF THE PRODUCERS BASED ON ITS FUNCTION & ATTRIBUTES, ITS DIFFERENTIATION VALUE RELATIVE TO COMPETING PRODUCTS & PRICE OF COMPETING PRODUCTS. STAGE 2 DEDUCT A TARGET PROFIT MARGIN FROM ITS TARGET PRICE TO DETERMINE THE TARGET COST. THIS DEPENDS ON THE PLANNED RETURN ON INVESTMENT FIR THE ORGANIZATION AS A WHOLE AS A PERCENT AGE OF SALES. STAGE 3 ESTIMATE THE ACTUAL COST OF THE PRODUCTION STAGE 4 IF ESTIMATED ACTUAL COST EXCEEDS THE TARGET COST; INVESTIGATE WAYS OF DRIVING DOWN THE ACTUAL COST TO THE TARGET COST.
TARGET COSTING
THE ADVANTAGE OF ADOPTING TARGET COSTING IS THAT IT IS DEPLOYED DURING A PRODUCTS DESIGN & PLANNING STAGE, THEREBY HAVING A MAXIMUM IMPACT IN DETERMING THE LEVEL OF LOCKED IN COSTS. TARGET COST -ILLUSTRATION THE DIGITAL ELECTRONIC COMPANY IS I N THE PROCESS OF INTRODUCING A NEW STATE OF THE ART DIGITAL VIDEO. CUSTOMER SURVEY & COMPETITOR ANALYSIS HAS LEAD TO PROJECTED LIFE TIME SALES 300,000 UNITS LIFE CYCLE VOLUME AT THE TARGET PRICE, & A PROFIT VOLUME MARGIN AT 30% OF PROPOSED SELLING PRICE AS TARGET $800 FOLLOWS: SELLING PRICE
TARGET PROFIT MARGIN (30% OF PRICE) TARGET COST(800-240) PROJECTED COST $240 $560 $700
SINCE PROJECTED COST IS MUCH HIGHER THAN THE TARGET COST, AN INTENSIVE TARGET COSTING EXERCISE HAS BROUGHT DOWN THE TOTAL COST FROM $700 TO $555 AGAINST THE ABOVE TARGET OF $560. THE ANALYSIS OF THE PROJECTED COST BEFORE & AFTER THE TARGET COSTING EXERCISE IS AS FOLLOWS:
BEFORE
$ MANUFACTURING COST DIRECT MATERIAL (PARTS) DIRECT LABOUR DIRECT MACHINING COST ORDERING AND RECEIVING QUALITY ASSURANCE REWORK ENGINEERING DESIGN NON MANUFACTURING COST MARKETING DISTRIBUTION AFTER SALES SERVICE & WARRANTY 390 100 20 8 60 15 10
AFTER
$ 325 80 20 2 50 6 8
603
491
40 30 27
97 700
25 20 19
64 555
BEFORE 80 150
AFTER 40 100
200
150
$24,00,0 $ 00 6,00,000 8 $2
PER UNIT
QUALITY ASSURANCE THE CAMERA WILL BE EASIER TO TEST RESULTING IN 10 HRS/ CAMERA AGAINST 12 HOURS EARLIER. SAVING PER CAMERA = 2HRS X $5/HRS = $10. REWORK: PAST EXPERIENCE WITH MANUFACTURING SIMILAR PRODUCT SUGGEST THAT 10% OF THE OUTPUT WILL REQUIRE RE WORK I.E 30,000 CAMERAS WILL REQUIRE REWORK OVER THE LIFE CYCLE AT A COST OF $150 PER REWORKED CAMERA UNIT THUS THE PROJECTED COST WAS $15/ UNIT. AFTER THE EXERCISE THE PREDICTED COST WILL BE 5% AT A COST OF $120 PER REWORKED CAMERA REDUCING THE COST TO $6/UNIT
$10
NO. OF PARTS SIMPLIFIED DESIGN , PARTS STANDARDIZATION & VALUE ENGINEERING ACTIVITIES HAVE ENABLED NUMBERS OF PARTS TO BE REDUCED TO 40 OTHERS PLANNED PROCESS IMPROVEMENTS, INCORPORATING THE ACTIVITY BASED COSTING SYSTEM ENABLED PREDICTED MARKETING, DISTRIBUTION & AFTER SALES SERVICE COSTS TO BE REDUCED.
KAIZEN COSTING
USED BY JAPANESE ORGANIZATIONS, KAIZEN COSTING RELIES HEAVILY ON EMPLOYEE EMPOWERMENT WORKERS ARE GIVEN RESPONSIBILITY TO IMPROVE PROCESSES & REDUCE COSTS. WORKERS ARE ASSUMED TO HAVE SUPERIOR KNOWLEDGE ABOUT HOW TO IMPROVE THE MANUFACTURING PROCESSES & ARE LIKELY TO HAVE GREATER INSIGHT INTO HOW THE COSTS CAN BE REDUCED. THE ARM OF KAIZEN COSTING IS TO REDUCE THE COST OF COMPONENTS & PRODUCTS BY A PRE SPECIFIED AMOUNT. EACH PLANT IS ASSIGNED A TARGET COST REDUCTION RATIO & THIS IS APPLIED TO THE PREVIOUS YEARS ACTUAL COSTS TO DETERMINE THE TARGET COST REDUCTION. THE TERM KAIZEN IS THE JAPANESE TERM FOR MAKING IMPROVEMENTS TO A PROCESS THROUGH SMALL INCREMENTAL AMOUNTS RATHER THAN THROUGH LARGE INNOVATIONS. THE MAJOR DIFFERENCE BETWEEN TARGET COSTING & KAIZEN COSTING IS THAT TARGET COSTING IS APPLIED DURING THE DESIGN STAGE WHEREAS KAIZEN COSTING IS A APPLIED DURING THE MANUFACTURING STAGE OF THE PRODUCT LIFE CYCLE THE POTENTIAL COST REDUCTIONS ARE SMALLER IN KAIZEN BECAUSE THE PRODUCTS ARE ALREADY IN THE MANUFACTURING STAGES AND A SIGNIFICANT PROPORTION OF ALL COSTS WILL HAVE BECOME LOCKED IN.UNLIKE TARGET COSTING KAIZEN IS NOT ACCOMPANIED BY A SET OF TECHNIQUES OR PROCEDURES THAT ARE AUTOMATICALLY APPLIED TO ACHIEVE THE COST REDUCTION.
ELIMINATION OF NON VALUE ADDED ACTIVITIES ANYTHING THAT DOES NOT ADD VALUE TO A PRODUCT IS WASTE. THE LEAD OR CYCLE TIME INVOLVED IN MANUFACTURING & SELLING A PRODUCT CONSISTS OF PROCESS TIME, INSPECTION TIME , MOVE TIME , QUEUE TIME & STORAGE TIME. OF THESE FIVE ITEMS ONLY PROCESS TIME ACTUALLY ADDS VALUE TO THE PRODUCT. OTHER ACTIVITIES ADD COST BUT NO VALUE.
FACTORY LAYOUT
JIT IMPLEMENTATION ENTAILS MOVING AWAY FROM BATCH PRODUCTION FUNCTIONAL LAYOUT TOWARDS PRODUCT LAYOUT USING FLOW LINES. WITH FUNCTIONAL PLANT LAYOUT PRODUCT PASSES THROUGH A NUMBER OF SPECIALIST DEPARTMENTS THAT NORMALLY CONTAIN A GROUP OF SIMILAR MACHINES. BATCH SIZE IS LARGE TO MINIMIZE THE SET UPTIME. BATCHES MOVE VIA DIFFERENT & COMPLEX ROUTES THROUGH VARIOUS DEPARTMENTS TRAVELLING OVER MUCH OVER THE FACTORY FLOOR BEFORE THEY ARE COMPLETED ENTAILING WAITING TIME AT VARIOUS STATIONS. TO DETERMINE THE PROGRESS MADE ON INDIVIDUAL BATCHES DETAILED COST ACCUMULATION RECORDS IS NECESSARY TO TRACK WIP OVERALL RESULT HIGH WIP + LONG MANUFACTURING CYCLE TIME. THE JIT SOLUTION IS TO REORGANIZE THE PRODUCTION PROCESS BY DIVIDING THE MANY DIFFERENT PRODUCTS THAT THE ORGANIZATION MAKES INTO FAMILIES OF SIMILAR PRODUCTS OR COMPONENTS. ALL OF THE PRODUCTS OF A PARTICULAR GROUP WILL HAVE SIMILAR PRODUCTION REQUIREMENTS & ROUTING. THE PRODUCTION LAYOUT THUS RESEMBLES A MINI FACTORY FOR EACH PRODUCT FAMILY, BASED ON FLOW LINE PRINCIPLES FOR EACH PRODUCT LINE THE MACHINES ARE PLACED CLOSE TOGETHER IN THE ORDER OF WHICH THEY ARE REQUIRED BY THE GROUPS OF PRODUCT TO BE PROCESSED . ITEMS IN EACH PRODUCT FAMILY CAN NOW MOVE, ONE AT A TIME FROM PROCESS TO PROCESS MORE EASILY, THUS REDUCING WIP & MANUFACTURING LEAD TIMES. OPERATORS ARE TRAINED TO OPERATE ALL MACHINES ON THE LINE & UNDERTAKE ROUTINE PREVENTIVE MAINTENANCE. ANY WORKER CAN STOP THE PRODUCTION LINE IF A PROBLEM ARISES. THE EMPHASIS IS ON EMPLOYEE EMPOWERMENT, TRUST AND RESPONSIBILITY. THE PRODUCING CELL CANNOT RUN THE PARTS UNTIL AUTHORIZED TO DO SO. THE PULL SYSTEM IS IMPLEMENTED BY MONITORING CONSUMPTION OF PARTS AT EACH OPERATION STAGE & USING VARIOUS TYPES OF VISIBLE SIGNALING SYSTEMS (KNOWN AS KANABS)
ILLUSTRATION
TO ILLUSTRATION HOW THE SYSTEM WORKS CONSIDER THREE MACHINES FORMING PARTS OF A CELL. PARTS ARE FIRST PROCESSED AT MACHINE A, FURTHER PROCESSED BY MACHINE B& PRODUCTION IS COMPLETED ON MACHINE C. KANBANS ARE LOCATED BETWEEN THE MACHINES. AS LONG AS THE KANBAN CONTAINER IS NOT FULL, THE WORKER AT MACHINES A CONTINUOUS TO PRODUCE PARTS PLACING THEM IN THE KANBAN CONTAINER. WHEN THE CONTAINER IS FULL THE WORKER STOPS PRODUCING & RECOMMENCES WHEN A PART HAS BEEN REMOVED FROM THE CONTAINER BY THE WORKER OPERATING MACHINE B. A SIMILAR PROCESS APPLIES TO WORKERS OF THE MACHINE B & C WITH A PULL SYSTEM, PROBLEMS ARISING IN ANY PART OF THE SYSTEM WILL IMMEDIATELY HALT THE PRODUCTION LINE BECAUSE WORK CENTERS AT THE EARLIER STAGES WILL NOT RECEIVE THE PULL SIGNAL. THUS ATTENTION IS DRAWN IMMEDIATE TO PRODUCTION PROBLEMS SO THAT APPROPRIATE REMEDIAL ACTION CAN BE TAKEN.
IN PURCHASING THE JIT TECHNIQUE AIMS AT DELIVERY OF MATERIALS PRECEDING THEIR USE. BY ARRANGING WITH SUPPLIERS FOR MORE FREQUENT DELIVERIES, STOCKS CAN BE CUT TO A MINIMUM. CONSIDERABLE SAVINGS IN THE MATERIAL HANDLING EXPENSES CAN BE OBTAINED BY REQUIRING SUPPLIERS TO INSPECT MATERIALS BEFORE THEIR DELIVERY & GUARANTEEING THEIR QUALITY. THIS IMPROVED SERVICE CAN BE OBTAINED BY GIVING MORE BUSINESS TO FEWER SUPPLIERS & PLACING LONG TERM PURCHASING ORDERS. BEING ASSURED OF LONG TERM SALES, THE SUPPLIERS CAN PLAN TO MEET THIS DEMAND OF QUALITY ASSURANCE. COMPANIES THAT HAVE IMPLEMENTED JIT PURCHASING TECHNIQUES CLAIM ACHIEVING THE FOLLOWING BENEFITS: REDUCED INVESTMENTS IN RAW MATERIALS & WIP SAVING IN FACTORY SPACE. LARGE QUANTITY DISCOUNT. TIME SAVING BECAUSE OF NEGOTIATING WITH FEWER SUPPLIERS. REDUCTION IN PAPER WORK ARISING FROM ISSUING BLANKET LONG TERM ORDERS TO FEWER SUPPLIER, RATHER THAN INDIVIDUAL PURCHASE ORDERS TO MANY SUPPLIERS.