Transcript No Slide Title

MANAGEMENT
AND COST
ACCOUNTING
SIXTH EDITION
COLIN DRURY
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2004 Colin Drury
Part Five:
Cost management and strategic management accounting
Chapter Twenty-two:
Cost management
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.1a
• Traditional management accounting control techniques tend to focus on
cost containment whereas cost management concentrates on cost
reduction.
• Traditional management accounting control techniques are routinely
applied on a continuous basis whereas cost management tends to be
applied on an ad hoc basis.
• Many of the approaches that fall within the area of cost management do
not rely exclusively on accounting techniques
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.1b
Life-cycle costing (LCC)
• Traditional management accounting procedures have focused primarily on the
manufacturing stage of a product ’s life cycle.
• LCC focuses on costs over the product ’s entire life cycle to determine whether
profits earned during the manufacturing phase will cover the costs incurred during
the pre-and post-manufacturing stages.
• A large proportion of a product ’s costs can be committed or ‘locked in ’during the
planning and design stage (see Figure 22.1 on sheet 22.2).
• Cost management can be most effectively exercised during the planning and
design stage.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.2
Figure 22.1 Cost committed and incurred during a products lifecycle
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.3a
Target costing
•
Focuses on managing costs during a product/service’s planning and design
phase.
•
Involves the following stages:
1. Determine the target price which customers will be prepared to pay for the
product.
2. Deduct a target profit margin from the target price to determine the target
cost.
3. Estimate the actual cost of the product.
4. If estimated actual cost exceeds the target cost investigate ways of driving
down the actual cost to the target cost.
•
Iterative process involving:
1. Tear-down analysis
2. Value analysis and functional analysis
•
It is important that target costing is supported by an accurate costing system
using appropriate cause-and-effect cost drivers.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.3b
Kaizen Costing
•
Kaizen costing is applied during manufacturing stage whereas target
costing is during planning stage.
•
Kaizen costing focuses on production processes whereas target costing
focuses on the product.
•
Kaizen costing aims to reduce costs of processes by a pre-specified
amount relying on employee empowerment.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.4 An example of target costing
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2004 Colin Drury
22.5a
Activity-based management (ABM)
•
Involves the following stages:
1. Identifying the major activities that take place in an organization.
2. Assigning costs to cost pools/cost centres for each activity.
3. Determining the cost driver for each activity.
•
Omits the fourth stage required for product costing ABC.
•
ABM focuses on managing the business on the basis of the activities that
make up the organization — by managing the activities costs are managed in
the long term.
•
Traditional control reports analyze costs by types of expenses for each
responsibility centre whereas ABM analyses costs by activities (See sheet
22.6 for an illustration).
•
Knowing the cost of activities is a catalyst for triggering action to become
competitive.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.5b
Activity-based management (ABM) - contd.
•
1.
2.
Activity cost information is useful for prioritizing thos activities that need to
be studied more closely. Activities can be classified:
As value-added or non-value-added.
According to a scale similar to that advocated by Kaplan and Cooper.
•
Activity-based systems can also be used to manage costs at the design stage
using behavioural drivers.
•
Surveys also suggest that many organizations use cost driver rates as
measures of cost efficiency
Example
Cost of purchasing activity = £100,000 Orders processed =10,000
Cost per order = £10 (Used for relative, trend and budget comparisons).
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.6
Example
Customer order processing activity
Traditional analysis (customer order processing
department)
Salaries
Stationery
Travel
Telephone
Depreciation of equipment
ABM analysis
Preparing quotations
Receiving customer orders
Assessing the credit-worthiness of customers
Expediting
Resolving customer problems
£000 ’s
320
40
140
40
40
580
120
190
100
80
90
580
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.7
Business process re-engineering (BPR)
•
A business process consists of a collection of activities that are linked together
in a co-ordinated manner to achieve a specific objective.
•
BPR involves examining business processes and making substantial changes
to how the organization operates by focusing on:
1.
2.
3.
Cost reduction
Simplification
Improved quality and enhanced customer satisfaction.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.7b
Cost of quality
•
Quality is now one of the key competitive variables.
•
Management accountants are now placing greater emphasis on the provision
of information relating to the cost of quality.
•
Cost of quality reports prepared periodically:
1. Prevention costs
2. Appraisal costs
3. Internal failure costs
4. External failure costs
•
Increasing attention is also being given to continuous improvement with the aim
of zero defects.
•
Non-financial measures and statistical quality control tools also play a key role
in improving quality and reducing internal and external failure costs.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.8a
Cost of quality report
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.8b
Cost of quality report (contd.)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.9a
Cost management and the value chain
• The value chain (see Fig.22.3 - slide 22.9b) is the linked set of value-creating
activities from supplier to customer.
• Objective is to perform value chain activities more efficiently and at a lower cost
than the competitors.
• Focus should be on each link in the chain from the customer ’s perspective.
• Critics claim that traditional management accounting starts too late and finishes
too soon in terms of the value chain.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.9b
Figure 22.3 The value chain
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.10a
Benchmarking
•
Objective is to improve key activities/processes
•
Compares key activites/processes with world-class best practices.
Environmental cost management
•
Becoming of increasing importance because:
1.
Environmental costs can represent a large proportion of operating costs in
some companies.
2.
Demands from society for companies to become environmentally friendly
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.10b

Information should be reported relating to the amount and categories of
environmental costs and their causes.

Proposed that an environmental cost report similar to a quality cost report
(see sheet 22.8) should be periodically produced that reports costs by the
following categories:

1.
Environmental protection costs
2.
Environmental appraisal costs
3.
Environmental internal failure costs
4.
Environmental external failure costs
Some companies have incorporated an environmental perspective within the
balanced scorecard.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.11a
Just-in-time systems
JIT seeks to achieve the following goals:
•
Elimination of non-value added activities
1.
2.
•
•
Many activities add cost but no value to the product
The aim of JIT is to convert raw materials to finished products with a lead time
equal to processing time.
Zero inventory
Zero defects
1.
Emphasis on preventative maintenance and doing the job right first time.
•
Batch sizes of one
The aim is to reduce set-up times, batch sizes and throughput times, thus minimizing
inventories.
•
•
Zero breakdowns
A 100% on-time delivery service
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
22.11b
Just-in-time systems contd.
•
JIT also involves a change in factory layout:
1.
2.
3.
Move from batch production to cellular flowlines of dissimilar machines (with
products grouped into families of similar products or components)
Pull systems (instead of a push system) used and material movements minimized.
Considered more beneficial to add to short-run idle time rather than adding to
inventory.
•
JIT purchasing arrangements:
•
More frequent deliveries of materials that immediately precede their use.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury