Managing costs and quality

Chapter 16Managing costs and quality16-1Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithOutlineCost managementActivity-based management (ABM)Business process re-engineering (BPR)Life cycle costing and budgetingTarget costingManaging throughputManaging qualityTotal quality management (TQM)16-2Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithCost managementContemporary management accounting systems include a range of tools and techniques that provide information for cost managementCost managementImprovement of an organisation’s cost effectiveness through understanding and managing the real causes of costMain focus is on cost reduction, but also on improving other aspects of performance such as quality and delivery16-3Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithConventional versus contemporary approachesDrivers of costConventional approach: managers control costs by bringing them into line with some predetermined goalContemporary approach: reduce costs by identifying waste and eliminating it through identifying the real cost driversStrategic perspectiveConventional approach: control costs within the organisationContemporary approach: cost management also concerned with achieving value for the customer16-4(cont.)Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithConventional versus contemporary approaches (cont.)Process perspectiveConventional approach: control costs by reporting results for responsibility centresContemporary approach: recognise that customers’ needs are met by processes which flow across the businessContemporary approaches includeActivity-based managementBusiness process re-engineeringLife cycle costingTarget costingThroughput accounting16-5Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithActivity-based management (ABM)Process of using information from activity-based costing to analyse activities, cost drivers and performance so that customer value and profitability are improvedCustomer valueThe value a customer places on particular features of a productAddresses the vertical view on the activity-based costing model16-6Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith16-7Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithUsing ABM to reduce costsIdentify the major opportunities for cost reductionDetermine the real causes of these costsDevelop a program to eliminate the causes (and therefore, the costs)Introduce new performance measures to monitor the effectiveness of cost reduction efforts16-8Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithIdentifying the major opportunities for cost reductionActivitiesThe units of work performedUndertake value analysisClassification of activitiesValue-added activitiesProvide essential value to the customer, or essential to the functioning of the businessNon-value-added activitiesDo not add value to a product or service from the customers’ perspective or for the business and, therefore, can be eliminated16-9Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithDetermining the real causes of non-value-added costsBuilding activities into processes Eliminating non-value-added activities requires a clear understanding of the way work is done in an organisationA series of activities that are linked together to achieve a specific objective Processes may cross the boundaries of responsibility centres, such as functional departmentsActivities in various processes may share common cost drivers and performance measures16-10Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Determining the real causes of non-value-added costs (cont.)Cost driver analysis Identification of root cause cost drivers for the major non-value-added activitiesAnalysis of root cause cost drivers of value-added activities may also lead to more efficient use of resources16-11Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithMeasuring performance in cost reductionActivity-based performance measures can be used to monitor the effectiveness of cost reduction effortsPerformance measures may reflect both costs and cost drivers Targets may be setCorrective actions taken when targets not achievedPerformance monitored over time 16-12Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithBusiness process re-engineering (BPR)The fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical areas of performance such as cost, quality and deliveryFocus is on strategic processesProcesses that focus on achieving a company’s business objectives and strategiesReorganise the way in which work is done by identifying and eliminating non-value-added activities16-13Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Business process re-engineering (cont.)Prepare a business process mapA flowchart of activitiesEstablish goalsBased on customer valueQuality, cost, delivery performanceReorganise work flowTo enable goals to be achievedImplement the programInvolves substantial change so careful implementation is required to minimise resistance to change and business disruption16-14Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithIs BPR the same as ABM?ABM focuses on incremental, continuous improvement of processesBusiness process re-engineering involves fundamental changes to the way processes are structuredBoth use activity analysis to identify processes and activities16-15Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithLife cycle costingAccumulate and manage costs over the life cycle of the productFour stages of the product life cycleProduct planning and initial concept designProduct design and developmentProduction Distribution and customer (logistic) support16-16Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithLife cycle budgetingInvolves estimating the expected costs and revenues for each year of the expected life of a productComparison between budgeted cost and revenue with actual costs and revenuesConsiders all relevant costs over the value chainUseful in product mix or pricing decisions16-17Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithManaging costs through a life cycle perspectiveConcepts of life cycle costing not widely used becauseThere is a lack of awareness, or uncertainty about how to calculate life cycle costsNot easy for products with longer lives as it is more difficult to assess Changes in consumer tastesImpact of competitors’ actionsEffects of inflation16-18Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith16-19Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithTarget costingA system of profit planning and cost management that determines the life cycle cost at which a proposed product must be produced to generate the desired level of profitIt is cost management technique, not a costing techniqueThe cost target for a product is driven by the need to sell the product at a certain market price and to achieve a target profit margin16-20Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith16-21Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe target costing processEstimate the target selling price based on market considerations, customer needs and expectations and competitor behaviourDetermine target profit margin and the target costIdentify the cost reduction objective – difference between the current product cost and target costReduce cost and enhance customer valueValue engineering to eliminate non-value adding elements in product designValue analysis of manufacturing processesWork with suppliers to reduce component/material costs16-22Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithTarget costing for cost managementIt is price ledFocuses on customer expectationsBased on principles of life cycle management, placing primary emphasis on managing downstream and manufacturing costsCross-functional– involving managers from across the value chain16-23Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithManaging throughputThe theory of constraintsFocuses on identifying and removing bottlenecks to improve the rate of throughputRecognises the rate of production is limited to the capacity of the constraints (or bottlenecks) that existThroughput accountingMeasures effects of bottlenecks and other operational decisions using measures of throughput, inventory and operating expenses16-24Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithManaging quality What is quality?Quality of designDegree to which a product’s design specifications meet customers’ expectationsQuality of conformanceDegree to which a product meets formal design specificationsA clear understanding of customer value is needed to provide customers with a high-quality product16-25Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithThe costs of qualityInternal failure costsIncurred when defective products or services are detected before they leave the firmExternal failure costsIncurred as a result of defective products or services being delivered to customersAppraisal costs Incurred to determine whether defects exist Prevention costsIncurred to prevent internal or external failures and to minimise appraisal activities16-26Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithUsing cost of quality informationHelps managers reduce cost and improve qualityPlaces a dollar figure on the costs of poor qualityHelps prioritise quality improvement programsHelps managers monitor the effects of the ‘quality effort’Helps identify the optimal level of quality for the firm16-27Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith16-28Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithTotal quality management (TQM) and a quality cultureTQM is a management approach that focuses on meeting customer requirements by achieving continuous improvement in goods or servicesTQM is Organisation-wideCustomer-drivenInvolves empowermentHas a process perspectiveIs supported by a quality management systemInvolves continuous improvement16-29Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith(cont.)Total quality management (TQM) and a quality culture (cont.)Six Sigma is a rigorous business improvement methodology that focuses on improving business processes through identifying and eliminating defectsOrganisations may achieve quality accreditation by meeting international ISO 9000 quality standardsSystems, quality documentation, process controls and delivery methods that a firm has in place to deliver quality goods and services May provide assurance to customers that a firm has high levels of qualityExpensive to implement and maintain16-30Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-SmithSummaryModern cost management techniques focus on identifying and managing the causes of costs and eliminating waste, while managing customer valueTechniques include ABM, BPR, life cycle costing, target costing and throughput accountingThe management of quality contributes to customer valueTQM, Six Sigma and ISO quality accreditation provide ways of developing and reinforcing a quality culture16-31Copyright  2009 McGraw-Hill Australia Pty Ltd PowerPoint Slides t/a Management Accounting 5e by Langfield-SmithPrepared by Kim Langfield-Smith