Lec Slide of Prof. DR Zakaria Abas UUM

MANAGEMENT ACCOUNTING (BkBM 5023) MANAGEMENT ACCOUNTING AND CONTROL SYSTEM
Lecturer: Professor Dr Zakaria Abas

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How to MANAGE and CONTROL our ORGANIZATION !!
PREVIEW
1. 2. 3. 4. 5. 6. MANAGEMENT ACCOUNTING AND CONTROL SYSTEM (MACS)? MANAGEMENT ACCOUNTING AND ETHICAL CONDUCT ACTIVITY-BASED MANAGEMENT CUSTOMER ORIENTATION CROSS-FUNCTIONAL PERSPECTIVE TOTAL QUALITY MANAGEMENT
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Management Accounting and Control System (MACS)
Generates and uses information to help decision makers assess whether an organization is achieving its objectives A cost management system is one of the central performance measurement systems at the core of a larger entity known as a management accounting and control system
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MANAGEMENT ACCOUNTING SYSTEM

Management Accounting System is an integrated system. The following major modules serve for automating the accounting and management of different company activity facets: Staff/Organizational Structure Management Module Production Management Module Customer Relationship Module Revenues/Expenses Analysis Module Reporting Module Accounting Interfacing Module
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MANAGEMENT ACCOUNTING SYSTEM
The purpose of the management accounting is to provide full and trustworthy information necessary for making correct management decisions and plans. The management accounting reflects all factual expenses and revenues of the company, so a top manager can get a clear picture of the company operation and make reasonable decisions.
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Major Tasks The System Solves:

The MACSYS system automates the business processes, helps control the executive discipline, enables remote work with the information. Providing the efficient management tools Improving the executive discipline control Improving the labor productivity due to reduced document circulation time Accumulating the information for further use as a knowledge base Optimizing the business processes, automating the mechanism of their execution and control Formalizing document circulation processes
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Control In Management Accounting And Control
A set of:

Procedures Tools Performance measures Systems
Used by organizations to guide and motivate employees to achieve organizational objectives

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In Control
A system is in control if it is on the path to achieving its strategic objectives It is deemed out of control otherwise For the process of control to have meaning and credibility, the organization must have the knowledge and ability to correct situations that it identifies as out of control
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Management Accounting and Control Systems

The Cycle of Control Plan Execute Monitor
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Correct Evaluate
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organizations objectives, choosing activities to accomplish the objectives, and selecting measures to determine how well the objectives were met. Execution is implementing the plan. Monitoring is the process of measuring the systems current level of performance. 6/5/2013 10
Planning consists of developing an
Evaluation occurs when feedback about
the systems current level of performance is compared to the planned level. Correcting consists of taking the appropriate actions to return the system to an in-control state.
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Types of Control Systems
In the real world management often relies on different forms of behavioral control. What are the two most commonly used types of control? Task control Results control
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Task Control

What is task control? It is the process of finding ways to control human behavior so that a job is completed in a pre-specified manner. There are two categories of task control: Preventive control Monitoring
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Task Control
In preventive control much, if not all, of the discretion is taken out of performing a task. Monitoring means inspecting the work or behavior of employees while they are performing a task.
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Results Control
What is results control? It is the process of measuring employee performance against stated objectives. For results control to be effective, the organization must ... clearly define objectives which are then communicated, and design consistent performance 6/5/2013 15 measures.
Results Control
When is results control most effective? Organization members understand the organizations objectives and their contribution to those objectives. They have the knowledge and skill to respond to changing situations. The performance measurement system is designed to assess individual 6/5/2013 16 contributions.
Characteristics of Well-Designed MACS
A well-designed management accounting and control system should include behavioral and technical considerations.
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Embedding the organizations ethical code of conduct into MACS design Using a mix of short-term and longterm qualitative and quantitative performance measures (or the balanced scorecard approach) Empowering employees to be involved in decision making and MACS design
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Developing an appropriate incentive system to reward performance Companies whose MACS display these four characteristics subscribe to a world view of the role of management labeled the Human Resource Management Model.
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Human Resource Management Model of Motivation
How were people viewed by the scientific management school? People were viewed as finding work objectionable, having little knowledge to contribute to the organization, and motivated only by money.
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How were people viewed by the Human Relations Movement? People were viewed as having needs other than money. Employees wanted respect and discretion over jobs. They wanted to feel that they contributed something valuable to the 6/5/2013 21 organization.
What is the Human Resource
Management Model of Motivation?
It is the most contemporary management view of motivation. It is based on initiatives to improve the quality of working life. It introduces a high level of employee responsibility.
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How are people viewed by the Human Resources Model of Motivation? People do not find work objectionable. Employees want to participate in developing objectives and obtaining goals. They have a great deal of informational knowledge to contribute to the 6/5/2013 23 organization.

People are creative. They are responsible. Individuals are motivated both by financial and non-financial means of compensation. People desire opportunities to affect change.
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The Human Resource Model is used as the basis for presenting the four behavioral considerations in MACS design.
Empowering employees
Ethical code of conduct Mix of performance measures 6/5/2013
Incentive system
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Ethical Code of Conduct and MACS Design
First, a well-designed MACS should incorporate the principles of an organizations code of ethical conduct to guide and influence behavior and decision making. Ethics is a discipline that focuses on the investigation of standards of conduct and moral judgement.
Ethical code of conduct
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The ethical framework embedded in system design is important because it will influence the behavior of all users. Who is the key user group? managers Often managers are subjected to pressures to suspend their ethical judgement. 6/5/2013 27 What are examples of these pressures?

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2 3 4
Requests to tailor information to favor particular individuals or groups Pleas to falsify reports or test results Solicitations for confidential information Pressures to ignore a questionable unethical practice
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What should system designers do? They should attempt to ensure the following: The organization has formulated, implemented, and communicated to all employees a comprehensive code of ethics.
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All employees understand the code of ethics and the boundary systems that constrain behavior. System exists, in which employees have confidence, to detect and report violations of the organizations code of ethics.
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Hierarchy of Ethical Principles

Legal Rules Societal Norms Professional Memberships
Organizational or Group Norms

Personal Norms
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How can organizations reduce ethical conflicts? by maintaining a hierarchical order of authority by the way the chief executive and other senior managers behave and conduct business
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What are some common ethical conflicts? between the law and the organizations code of ethics between the organizations practiced code of ethics and common societal expectations between the individuals set of personal and professional ethics and the organizations code of ethics
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between the organizations stated and practiced values Faced with a true conflict, the individual has several choices. What are some of these choices? Point out discrepancies to a superior and refuse to act unethically.
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2
Point out discrepancies to a superior and act unethically. Take the discrepancy to a mediator in the organization, if one exists. Work with respected leaders in the organization to change the discrepancy. Go outside the organization to publicly resolve the issue.
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Go outside the organization anonymously to resolve the issue. Resign and go public to resolve the issue. Resign and remain silent. Do nothing, and hope that the problem will go away.
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Elements of an Effective Ethical Control System
To promote ethical decision making, management should implement an ethical control system. What is an ethical control system? It is a system that reinforces the ethical responsibility of all of the firms employees.
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Elements of an Effective Ethical Control System
What are the elements of an effective ethical control system? A statement of the organizations values A clear statement of the employees ethical responsibilities Training to help employees identify and deal with ethical dilemmas
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Steps in Making an Ethical Decision

Gather Facts
Evaluate Alternatives Make Decision

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Decision Model for Resolving Ethical Issues

Determine the Facts: What, Who, Where When, How Define the Ethical Issue
Identify Major Principles, Rules, Values

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Decision Model for Resolving Ethical Issues

Specify the Alternatives Compare Values and Alternatives
Make Your Decision

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Assess the Consequences
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1 2
What are some technical considerations? Relevance of the information generated Scope of the system
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The relevance of the information is measured by four characteristics:
Accurate
Consistent
Timely
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Flexible
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Characteristics of Relevant Information (1 of 2)
Accurate
Inaccurate information is not useful for decision making because it is misleading Accurate information that is available too late is of no use for decision making The MACS must be designed so that the results of performance measurement are fed back to the appropriate units in the most expedient way possible
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Timely
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Relevant Information (2 of 2)
Consistent
The language used and the technical methods of producing management accounting information do not conflict within various parts of an organization MACS designers must allow employees to use the systems available information in a flexible manner so they can customize its application for local decisions If flexibility is not possible, an employees motivation to make the best decision may be lessened for the decision at hand, especially if different units engage 6/5/2013 in different types of activities
Flexible
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The scope of the system must be comprehensive and include all activities across the entire value chain. research, development, and engineering manufacturing customers
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The Value Chain

Feedback-Internal and external customers
Inputs
Staff Equipment Facilities Materials Services Technology
Processes
1 3 5 2 4
Outputs
Services Goods
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Feedback-Information on performance
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Scope Of The System
Must be comprehensive and include all activities across the entire value chain of the organization If the MACS measures and assesses performance in only the actual production process, it ignores the performance of:

Suppliers Design activities Postproduction activities associated with products
Without a comprehensive set of information, managers can only make limited decisions
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The Value Chain (1 of 2)
A sequence of activities that should contribute more to the ultimate value of the product than to its cost All products flow through the value chain:

Begins with research, development, and engineering Moves through manufacturing Continues on to customers Customers may require service and will either consume the product dispose of it after it has served its intended purpose
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The Value Chain (2 of 2)
The value chain may be divided into cycles, which correspond to different cost control approaches
Research, Development & Engineering Cycle Manufacturing Cycle

Post-Sale Service and Disposal Cycle
Target Costing & Value Engineering Kaizen Costing
Total-LifeCycle Costing Environmental Costing Benchmarking
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Transfers at Cost
About half of the major companies in the world transfer items at cost.
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Transfers at Cost
What are some examples? Full cost plus a profit markup Variable costs Standard costs
Actual costs
Full cost
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
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Total-Life-Cycle Costing (1 of 4)
Total-life-cycle costing (TLCC) is the name of the process of managing all costs along the value chain TLCC is also known as managing costs from the cradle to the grave
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A TLCC system provides information for managers to understand and manage costs through a products stages of:
Design Development Manufacturing Marketing Distribution Maintenance Service Disposal
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Deciding how to allocate resources over the life cycle usually is an iterative process
Initially a company may decide to spend more on design to reduce the costs of upstream costs, such as manufacturing, and service-related costs At a later time, the company may determine how to reduce those initial design costs of new products
Opportunity costs play a heightened role in a totallife-cycle cost perspective
It is possible to develop only a limited number of products over a particular time period
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Numerous life-cycle concepts have emerged in various functional areas of business A TLCC perspective integrates the concepts so that they can be understood in their entirety From the manufacturers perspective, total-lifecycle product costing integrates these functional life-cycle concepts:

Research, development, and engineering Manufacturing Post-sale service and disposal 6/5/2013
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Total-Life-Cycle-Costing
Stages of the Total life Cycle $ Costs Research, Development, and Engineering Cycle 100% Cost Committed 80% 60%
Costs Incurred
Traditional Accounting Focus Post-Sale Manufacturing Service and Disposal
40%
20% 0%
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Research, Development, And Engineering (RD&E) Cycle

The RD&E Cycle has three stages: Market research
Emerging customer needs are assessed and ideas are generated for new products
Product design
Scientists and engineers develop the technical aspects of products
Product development
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Cost Control in the RD&E Cycle
By some estimates, 80% to 85% of a products total life costs are committed by decisions made in the RD&E cycle
Committed costs are those that a company knows it will have to incur at a future date An additional dollar spent on activities that occur during this cycle can save at least $8 to $10 on manufacturing and post-manufacturing activities: Design changes Service costs
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Decisions made in this cycle are critical
Where does the business get its competitive advantage?

The technological specification of its product/service? Product/ Service Technology The way an Organization produces its products and services?
The way an Organization positions itself in its market?
Marketing Operations
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Manufacturing Cycle
After the RD&E cycle, the company begins the manufacturing cycle
Costs are incurred in the production of the product This is where product costing traditionally plays its biggest role
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Cost Control in the Manufacturing Cycle
Operations management methods help to reduce manufacturing life-cycle product costs
Facilities layout Just-in-time manufacturing
Companies have begun to use management accounting methods such as activity-based cost management to identify and reduce nonvalue-added activities in an effort to reduce costs in the manufacturing cycle
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Post-sale Service & Disposal Cycle
This cycle overlaps the manufacturing cycle The service cycle begins once the first unit of a product is in the hands of the customer Disposal occurs at the end of a products life and lasts until the customer retires the final unit of a product The costs for service and disposal are committed in the RD&E stage
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The Service Cycle
The service cycle typically consists of three stages: Rapid growth
From the first time the product is shipped to the growth stage of its sales From the peak of sales to the peak in the service cycle From the peak in the service cycle to the time of the last shipment made to a customer
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Transition
Maturity
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The Disposal Cycle
Disposal occurs at the end of a products life and lasts until the customer retires the final unit of a product Disposal costs often include those associated with eliminating any harmful effects associated with the end of a products useful life Products whose disposal could involve harmful effects to the environment, such as nuclear waste or toxic chemicals, often incur very high costs
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Life-Cycle Costs
The following table illustrates four types of products and the percentage of life-cycle costs incurred in each cycle
Combat Jets
Commercial Aircraft
Nuclear Missiles
Computer Software
RD&E Manufacturing Service & Disposal Average Years in Life Cycle
21% 45% 34%
20% 40% 40%
20% 60% 20%
75%* * 25%
30
25
2 to 25
* For computer software, RD&E and manufacturing are often tied directly together
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3 Main Elements The strategic focus

The business activity The transformation process Greater value
Cash !!
Value !!
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Element 1: The Business Activity
The utmost concerns are:

PROFIT PROFITABILITY
REVENUE > PROFIT THRU: 1. EXPAND MARKET PROFIT COST 2. INCREASE PRICE
> PROFITABILITY THRU:

COST REDUCTION
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Profitability
3 Price to Sell
Some Profit
Cost to Produce
Bigger Profit
1
2 1
Cost + Profit = Price
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Cost Reduction
Price to Sell
Some Profit
Cost to Produce
3 2
Bigger Profit
Price - Cost = Profit
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Target Costing

What is target costing? It is a cost planning method used during the RD&E cycle that focuses on reducing costs for products that require discrete manufacturing processes and reasonably short product life cycle.
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Target Costing
A method of profit planning and cost management that focuses on products with discrete manufacturing processes Its goal is to design costs out of products in the RD&E stage of a products total life cycle
It is a relevant example of:

Rather than trying to reduce costs during the manufacturing stage
How a well-designed MACS can be used for strategic purposes How critical it is for organizations to have a system in place that considers performance measurement across the entire value chain
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Target Costing
RD&E Cycle
Manufacturing Cycle
Target Costing
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The Traditional Method
Begins with market research into customer requirements followed by product specification Companies engage in product design and engineering and obtain prices from suppliers Product cost is not a significant factor in product design at this stage After the engineers and designers have determined product design, they estimate cost Product designers do not attempt to achieve a particular cost target If the estimated cost is considered to be too high, then it may be necessary to modify the product design
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Comparing Traditional Cost Reduction to Target Costing

Traditional Cost Reduction Target Costing
Market Research to Determine
Customer Requirements
Customer Needs and Price Points
Product Specifications
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Design
Target Selling Price Target Product Volume Target Profit
Engineering Supplier Pricing

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Estimated Cost
Target Cost
Desired Profit Margin

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Value Engineering
Supplier Pricing Pressure

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Manufacturing
Periodic Cost Reduction

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Continuous Cost Reduction

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Under traditional costing, the profit margin is the result of the difference between the expected selling price and the estimated production cost. Pt = St Ct The cost-plus method is another traditional approach.
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Under the cost-plus method the selling price is the sum of the expected product cost and the expected profit margin. Scp = Ccp + Pcp
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Under target costing, the target profit margin results from a long-run profit analysis often based on return on sales. The target cost is the difference between the target selling price and the target profit margin. Ctc = Stc Ptc
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Concerns About Target Costing
What are some potential problems in implementing target costing? Conflict can arise between parties involved in the process. Employees may experience burnout due to pressure. Development time may increase.
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The Target Costing Method (1 of 5)
Both the sequence of steps and the way of thinking about determining product costs differ significantly from traditional costing Although the initial steps appear similar to traditional costing, there are some notable differences: First, marketing research under target costing is not a single event as it often is with the traditional approach
While customer input is obtained early in the marketing research process, it is also collected continually throughout the target costing process
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Second, much more time is spent at the product specification and design stage To minimize design changes during the manufacturing process when it is far more expensive to implement Third, the total-life-cycle concept is used by making it a key goal to minimize the cost of ownership of a product over its useful life Not only are costs such as the initial purchase price considered, but also the costs of operating, maintaining, and disposing of the product
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After these initial steps, the target costing process becomes even more distinctive Determining a target selling price and target product volume depends on the companys perceived value of the product to the customer The target profit margin results from a long-run profit analysis, often based on return on sales
The target cost is the difference between the target selling price and the target profit margin
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Return on sales is the most widely used measure because it can be linked most closely to profitability for each product
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Once the target cost has been set, the company must determine target costs for each component The value engineering process includes examination of each component of a product to determine whether it is possible to reduce costs while maintaining functionality and performance
In some cases, product design may change, materials used in production may need replacing, or manufacturing processes may require redesign
Several iterations usually are needed before it is possible to determine the final target cost
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Two other differences characterize the process First, cross-functional teams made up of individuals representing the entire value chain guide the process throughout
From both inside and outside the organization
A second difference is that suppliers play a critical role in making target costing work
If there is a need to reduce the cost of specific components, firms will ask their suppliers to find ways to reduce costs
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Element 2 : The Transformation Process
4 core elements are:
MAN
METHOD
Man Method Materials MATERIALS MACHINES Machine Which takes place in a specific environment (E)
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Reengineering Process
Strategic directive Customer requirements data Benchmark data Goals & specifications for process performance Baseline analysis
Design principle s
High Level Process Map
Innovative ideas
Key performance measures
Detailed process map
Model validation
Pilot study of new design
Full-scale implementation
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Element 3 : The Value
The value equation:

Value = T + F + Q + I + C + $
Through 3 approaches:

Operational Excellence Customer Intimacy Service Leadership
$$$
$ $
Value
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Kaizen

What is Kaizen? It is a Japanese term for making improvements to a process through small, incremental amounts rather than through large innovations.
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Kaizen Costing

What is Kaizen Costing? It is a planning method used during the manufacturing cycle with an emphasis on reducing variable costs in one period below the costs in a base period. The target-reduction rate is the ratio of the target reduction amount to the cost base.
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Kaizen Costing (1 of 2)
Similar to target costing in its costreduction mission However, it focuses on reducing costs during the manufacturing stage of the total life cycle of a product Kaizen is the Japanese term for making improvements to a process through small, incremental amounts rather than through large innovations 6/5/2013 93
Kaizen Costing (2 of 2)
Kaizen costings goal is to ensure that actual production costs are less than the prior year cost Kaizens goals are reasonable
The product is already in the manufacturing process, thus it is difficult and costly to make large changes to reduce costs
It is tied to the profit-planning system If the cost of disruptions to production are greater than the savings due to kaizen costing, then it will not be applied
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Kaizen Costing
Manufacturing Cycle
RD&E Cycle
Kaizen Costing
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Post Service Cycle

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Example From Auto Plant (1 of 2)

An annual budgeted profit target is allocated to each plant Each automobile has a predetermined cost base, which is equal to the actual cost of that automobile in the previous year All cost reductions use this cost base as their starting point The targeted cost reduction is the amount the cost base must be reduced to reach the profit target
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Example From Auto Plant (2 of 2)

The target reduction rate is the ratio of the target reduction amount to the cost base This rate is applied over time to all variable costs
Then management makes comparisons of actual reduction amounts across all variable costs to the pre-established targeted reduction amounts If differences exist, variances for the plant are determined 6/5/2013
Results in specific target reduction amounts for materials, parts, direct and indirect labor, and other variable costs
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Concerns About Kaizen Costing
The system places enormous pressure on employees to reduce every conceivable cost
Some Japanese automobile companies use a grace period just before a new model is introduced This cost-sustainment period provides employees with the opportunity to learn any new procedures before the company imposes kaizen targets on them
Kaizen costing leads to incremental rather than radical process improvements
This can cause myopia as management tends to focus on the details rather than the overall system
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Comparing Traditional Cost Reduction to Kaizen Costing

Standard Costing
1. Cost-control system concept 2. Assumes stability in current manufacturing process 3. Goal is to meet cost performance standards
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Kaizen Costing
1. Cost-reduction system concept 2. Assumes continuous improvements in manufacturing 3. Goal is to achieve cost reduction standards
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Kaizen Costing Techniques
1. Cost reduction targets are set and applied monthly 2. Variance analysis involves target Kaizen costs versus actual cost reduction amounts 3. Investigation occurs when target reductions are not attained
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Standard Costing Techniques

1. Standards are set annually or semiannually 2. Variance analysis involves comparing actual to standard costs 3. Investigation occurs when standards are not6/5/2013 met
Competitive Priorities
Price Quality Time Flexibility (Innovation)

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Who has the best knowledge to reduce costs?
Standard Costing
Managers and engineers develop standards
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Kaizen Costing
Workers are closest to the process and thus know best
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Concerns About Kaizen Costing

What is a concern about Kaizen Costing? The system places enormous pressure on employees to reduce every conceivable cost. What is a cost-sustaining period? It is a period that allows employees to learn new procedures before Kaizen targets are imposed.
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Confused or does it make sense?
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Customer Expectations
Performance Features Reliability Conformance Durability Serviceability Aesthetics
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Supply Chain Management

Develops cooperative, mutually beneficial, long-term relationships between buyers and suppliers As trust develops between buyer and supplier, decisions about how to resolve cost reduction problems can be made with shared information about each others operations
The buyer may expend resources to train the suppliers employees in some aspect of the business A supplier may assign one of its employees to work with the buyer to understand a new product
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Concerns About Target Costing

Some studies of target costing in Japan indicate that there are potential problems in implementing the system
Especially if focusing on meeting the target cost diverts attention away from the other elements of overall company goals
Companies may find it possible to manage many of these factors Organizations interested in using the target costing process should be aware of them before attempting to adopt it
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Examples of Problems (1 of 2)
Conflicts can arise between various parties involved in the target costing process
Excessive pressure on subcontractors and suppliers to conform to a schedule and reduce costs can lead to alienation and/or failure of the subcontractor Design engineers may become upset when other parts of the organization are not cost conscious They argue that they exert much effort to squeeze pennies out of the cost of a product while other parts of the organization (administration, marketing, distribution) are wasting dollars 108
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Examples of Problems (2 of 2)
Employees in many Japanese companies working under target costing goals experience burnout due to the pressure to meet the target cost
Burnout is particularly evident in design engineers
Development time may increase because of repeated value engineering cycles to reduce costs
May lead to the product coming late to market For some types of products, being six months late may be far more costly than having small cost overruns
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Environmental Costing
Environmental remediation, compliance, and management have become critical aspects of many businesses All parts of the value chain, and their costs, are affected by environmental issues Environmental costing involves:
Selecting suppliers whose philosophy and practice in dealing with the environment matches the buyers Disposing of waste products during the production process Addressing post-sale service and disposal issues
These issues are being incorporated into cost management systems and overall MACS design
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Controlling Environmental Costs

Only when managers and employees become aware of how the activities in which they engage create environmental costs will they be able to control and reduce them
The activities that cause environmental costs have to be identified The costs associated with the activities have to be determined These costs must be assigned to the most appropriate products, distribution channels, and customers
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Types of Environmental Costs

Environmental costs fall into two categories:
Explicit costs The direct costs of modifying technology and processes, costs of cleanup and disposal, costs of permits to operate a facility, fines levied by government agencies, and litigation fees Implicit costs More closely tied to the infrastructure required to monitor environmental issues These costs are usually administration and legal counsel, employee education and awareness, and the loss of goodwill if environmental disasters occur 6/5/2013 112
Deming Chain Reaction

Improve quality Costs decrease Productivity improves Increase market share with better quality and lower prices
Stay in business
Provide jobs and more jobs
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The Pyramid Of Excellence
Vision Values
The WHERE The WAY The WHAT
Value-creating objectives Management Systems

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The HOW
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The Pyramid Of Excellence

The WHERE
This is the vision of where you want to be in the future

The WAY Our values are the way, that by living them day to day will keep us on track. The WHAT This is the value creating objectives which basically says that everything the company does will be grouped in 3 broad objectives (Customers, employees and owners) that are fundamental for the long term success of the company. The HOW
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This is the basic management system which everything else rests on.
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To be a World Class Organization

Four elements need to be developed:
1.
2. 3. 4.
Making every one responsible for quality Flexibility Just in time Managing people differently
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Operational Excellence : Best Practices CPI 6 Focus on:

Cost reduction Optimization Productivity Efficiency
5s
ims
JIT
LEAN TPM
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CHANGE
ISO 9001:2000
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bsc BPR
Best Practice Jigsaw
Organization Strategy
Technology
Quality
People Practices Benchmarking Leadership
Customer Focus
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Adopted from Leading the Way, AMC 1994
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Why best practices
Companies focus on cheaper, faster and better product / services to continuously improve their profit and for long term survival. Those who develop best practices within their organizations enjoy high profit in the short run as well as in the long run.
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Roadmap for managing Business Process Quality

Initiate BPM Select
Processes Identify owners and teams
Phase One Planning Process Definition Customer needs and process flow Process Measurement Process Analysis Process Design/redesign
Phase Two Transfer Planning for implementation problems Improvement action planning Plan deployment
Phase Three Operational Management Process quality control Process quality improvement Periodic process review and assessment
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5S & Visual management..
Sort (Organize)
Distinguish between What Is and What Is Not needed

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Visual management..
Visual Displays and Visual Controls

Visual Displays
Communicate important information, but do not control what people or machines do.
TOOLS
Visual Controls
Communicate information and build controls into the work place and process so that activities are performed according to standards.
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Benchmarking
A way for organizations to gather information regarding the best practices of others Often highly cost effective, by: Avoiding the mistakes that other companies have made Not reinventing a process or method that others have already developed and tested Selecting appropriate benchmarking partners is a critical aspect of the process The process typically consists of five stages
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Benchmarking
What is benchmarking? It is an organizations search for implementation of the best way of doing something as practiced by another organization.
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The Benchmarking Process
Stage 1
Internal Study and Preliminarily Competitive Analyses
Factors to Consider:
Preliminary internal and external competitive analysis Determine key areas for study Determine scope and significance of the study
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Stage 1
Internal study and preliminary competitive analyses

These analyses are not limited to companies in a single industry

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The organization decides which key areas to benchmark for study Then the company determines how it currently performs on these dimensions by initiating Preliminary internal competitive analysis Preliminary external competitive analyses Both types of analyses will determine the scope and significance of the study for each area
Stage 2
Developing Long-Term Commitment to the Benchmarking Project and Coalescing the Benchmarking Teams
Factors to Consider
Develop Long-Term Commitment to the Benchmarking Project: Gain senior management support Develop a clear set of objectives Empower employees to make change
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Stage 2 (1 of 2)
Developing long-term commitment to the benchmarking project and coalescing the benchmarking team Because significant organizational change can take several years, the level of commitment to benchmarking has to be long term rather than short term Long-term commitment requires Obtaining the support of senior management to give the benchmarking team the authority to spearhead the changes Developing a clear set of objectives to guide the benchmarking effort Empowering employees to make change
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Stage 2 (2 of 2)
The benchmarking team should include individuals from all functional areas in the organization An experienced coordinator is usually necessary to organize the team and develop training in benchmarking methods Lack of training often will lead to the failure of the implementation
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Stage 2 (contd.)
Developing Long-Term Commitment to the Benchmarking Project and Coalescing the Benchmarking Teams
Factors to Consider
Coalescing the Benchmarking Team:

Use an experienced coordinator Train employees 6/5/2013
130
Stage 3
Identify Benchmarking Partners
Factors to Consider
Size of partners Number of partners Relative position of the partners within and across industries Degree of trust among partners 6/5/2013
131
Stage 3 (1 of 3)
Identifying benchmarking partnerswilling participants who know the process Some critical factors are as follows: Size of the partners
Will depend on the specific activity or method being benchmarked For example, if an organization wants to understand how a huge organization with several divisions coordinates its suppliers, then it would probably seek an organization of similar size Size is not always an important factor
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Stage 3 (2 of 3)
Number of partners
Useful for an organization to consider a wide array of benchmarking partners Must be aware that as the number of partners increases, so do issues of coordination, timeliness, and concern over proprietary information disclosure Researchers argue that todays changing business environment is likely to encourage firms to have a larger number of participants Increased competition and technological progress in information processing increases benchmarking benefits relative to costs
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Stage 3 (3 of 3)
Relative position of the partners within and across industries Newcomers and those whose performance has declined are more likely to seek a wider variety of benchmarking partners than those who are established industry leaders Those who are industry leaders may benchmark because of their commitment to continuous improvement Degree of trust among partners Developing trust among partners is critical to obtaining truthful and timely information Most organizations operate on a quid pro quo basis, with the understanding that both organizations will obtain information they can use
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Stage 4
Information Gathering and Sharing Methods
Factors to Consider
Type of benchmarking information:
Product Functional (process) Strategic (includes management accounting methods) 6/5/2013
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Stage 4 (contd.)
Information Gathering and Sharing Methods Factors to Consider Method of Information Collection: Unilateral Cooperative: Database Indirect/third party Group 6/5/2013
136
Stage 4 (contd.)
Information Gathering and Sharing Methods
Factors to Consider
Determine performance measures Determine the benchmarking performance gap in relation to performance measures
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Stage 4
Information gathering and sharing methods Two related dimensions emerge from the literature:
Type of information that benchmarking organizations collect There are three broad classes of information on which firms interested in benchmarking can focus: product, functional (process), and strategic benchmarking Methods of information collection There are two major methods of information collection for benchmarking, unilateral and cooperative
6/5/2013 138
Stage 5
Taking Action to Meet or Exceed the Benchmark Factors to Consider

Comparisons of performance measures are made
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139
Stage 5
Taking action to meet or exceed the benchmark

The organization takes action and begins to change After implementing the change, the organization makes comparisons to the specific performance measures selected The decision may be to perform better than the benchmark to be more competitive The implementation stage is perhaps the most difficult stage of the benchmarking process, as the buy-in of members is critical for success
6/5/2013 140
Benchmarking
How do we compare with the rest of the industry and with the best in the industry Seeking out ideas and experiences from those who have undertaken similar activities within the past and determining which of these practices are relevant to an organizations situation. 6/5/2013 141
The Faces of Resistance

Not Enough Time
Anger Attack Silence Withdrawal Intellectualizing
Endless Questions
Going Through the Motions
Confusion Just don't (want to) get it Ignore It Deny It Glorify the Past
Details.. Details.. Details
(False Agreement)
Are you one of them?? 6/5/2013
142
CHANGE
Phases of a change process
Continuous Improvement
Successful CHANGE
Implementation
Strategic Planning
Customers Need
Awareness
Desire
Knowledge
Ability
Reinforcement
Phases of change
6/5/2013 143
Turning Strategic Intent Into An Annual Operating Plan

Vision, Mission, Priorities 3-5 Year Goals & Strategies Annual Objectives and Vital Few Actions
Policy Deployment
CORPORATE PRIORITIES
CUSTOMER SATISFACTION EMPLOYEE MOTIVATION AND SATISFACTION MARKET SHARE RETURN ON ASSETS
Setting Direction
Deployment
Cascade Objectives and AgreeVital Few Actions
Implementation
Management Process
6/5/2013
Regular Review Annual Diagnosis
144
Right for our times
6/5/2013
145
The starting point of all achievement is desire. Keep this constantly in mind. Weak desire brings weak results, just as a small amount of fire makes a small amount of heat
6/5/2013
146
The purpose of learning is growth
Mortimer Adler
6/5/2013
147
The approach
Outcomes and processes: An improvement cycle
Assess Outcomes
Where do I need to improve?
Examine processes
What should I do differently?
Improve processes
Implement actions
Achieve better Outcomes
See improvements to results

148
6/5/2013
Understand the Balanced Scorecard and its applications.
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149
Using a Mix of Performance Measures
What is the second major behavioral characteristic of a well designed MACS? Using a mix of short-term and longterm qualitative and quantitative performance measures (or the Mix of performance balance scorecard approach)
measures
150
6/5/2013
Occasionally, employees are so motivated to achieve a single goal that they engage in dysfunctional behavior. What are some examples of dysfunctional behavior? gaming data falsification
151
6/5/2013
The traditional focus of performance measures has been on quantitative financial measures. What are some quantitative nonfinancial measures? Cycle
Time Market Share Schedule Adherence Customer Retention
152
Yield
6/5/2013
Organizations can design performance measurement systems that encourage a desired behavior. Multiple performance measures should reflect the complexities of the work environment and the variety of contributions that employees make.
153
6/5/2013
The Balanced Scorecard

What is the balanced scorecard? It is the first systematic attempt to design a performance measurement system that translates an organizations strategy into clear objectives, measures, targets, and initiatives. It integrates the measures used across organizations.
154
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The Balanced Scorecard

The Balanced Scorecard is A conceptual framework for translating an organisations vision into a set of performance indicators distributed among four perspectives: Financial, Customer, Internal Business Processes, and Learning and Growth
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155
Using the Balanced Scorecard Indicators are maintained to Measure an organisations progress toward achieving its vision Measure the long term drivers of success
6/5/2013
156
The Balanced Scorecard indictors monitor
Current performance (finance, customer satisfaction, and business process results)
Efforts to improve processes, motivate and educate employees, and enhance information systemsits ability to learn and improve
157
6/5/2013
>>> Executing Strategy Using the Balanced Scorecard

Balanced Scorecard Perspectives
The Balanced Scorecard converts strategy into an integrated system, defined across four business perspectives.
-Financial -Customer -Internal -Learning & Growth

Things that the Organization delivers. Things that the Organization does.
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158
The Four Perspectives of the Balanced Scorecard

How do customers see us
Financial Goals Measures
How do we look to shareholders
What must we excel at
Customer Goals Measures Vision and Strategy
Internal Business Goals Measures
Innovation & Learning Goals

6/5/2013
Measures
Can we continue to improve and create value 159

Four Business perspectives
The Strategy
Financial
Objectives
The Balanced Scorecard converts strategy into an integrated system defined across four business perspectives.
Financial Perspective Measures Targets
To satisfy our shareholders, what financial objectives must we accomplish?
Profitability Growth Shareholder Value
Customer
Objectives
Customer Perspective Measures Targets
To achieve our financial objectives, what customer needs must we serve?
Image Service Price / Cost
Internal
To satisfy our customers, and shareholders, in which internal business processes must we excel?
Objectives Cycle Time Quality Productivity
Internal Perspective Measures Targets Initiatives
Learning & Growth

Objectives
Learning & Growth Perspective
Measures
Targets
Initiatives
To achieve our goals, how must our organisation learn and 6/5/2013 innovate?
Market Innovation Continuous Learning Intellectual Assets
160
Financial
40%
Customer
Customer Retention Customer satisfaction
20% Executive Scorecard
ROE greater than Cost of Capital Increase earnings per margin
Vision & 20% Learning & Growth Strategy Internal Process 20%
Meet target revenue % from new products & target rollout date Reduce unit cost Reduce Cycle time
Financial
Net profit vs Budget
10%
Customer
Customer Retention Customer satisfaction
40% Employee Scorecard
Vision & 40%Learning & Growth

Meet target revenue % from new products & target rollout date
6/5/2013
Strategy
Internal Process 10%

161
Increase gross margin on old product Increase net margin

Four Business perspectives
The Four BSC Perspectives Defined
Financial Perspective
1. The economic model of key levers driving financial performance
Return on Investment Revenue Strategy Productivity Strategy
Source of Growth
Sources of Productivity
2. The identification of targeted customer segments and their value proposition 3. The process-focused view of the business using the value chain
Customer Perspective
Product Service Relationship Image Reputation
Internal Perspective
Build the Brand Make the Sale Deliver the Product Service Exceptionally
4. The intangible assets necessary to drive performance 6/5/2013
Learning & Growth Perspective

Human Capital
Information Capital
Organisation Capital
162

Balanced Scorecard Use of Strategic Themes
Strategic Objectives From A Theme Through A Set Of Cause And Effect Relationship
Add and Retain Theme
Maximize Profit Financial Perspective Grow Revenue
Customer Perspective
Add and Retain High Value and High Potential Customers
Internal Perspective
Maximize Reliability
Develop/Execute Effective Marketing Programs
Develop Superior Service Capability
Learning Perspective 6/5/2013
Attract and Retain Key Players
Increase Managerial and Functional skills
Continue to develop OFS Culture 163
Final Thought
The strategy underlies the Balanced Scorecard; the Scorecard is measuring but it is not the strategy.
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164
Empowering Employees to be Involved in MACS Design

What is the third major behavioral characteristic of a well designed MACS? It is empowering employees to be involved in decision making and MACS design.
Empowering employees
6/5/2013 165
Empowering Employees to be Involved in MACS Design

Empowering employees requires two essential elements: 1 Allowing employees to participate in decision making 2 Ensuring that they understand the information they are using and generating
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166
Overview Approach
Organizations Short and Long Term Strategies
Vision 20092020
Objectives
Measures
2008
Objectives
Initiatives
2007
Objectives
Measures Initiatives
2006
Objectives Measures Initiatives
Measures Initiatives
2005
6/5/2013 Mission
Goals
Objectives
Measures
167 Initiatives
Link Rewards to Results

Choices of Responsibility Centers and Incentives
Motivational Criteria
Goal Congruence
Managerial Effort
Performance Measures
Rewards
Feedback Feedback
6/5/2013 168
ASSESSMENT PROCESS
REWARD/ RECOGNITION VISION/ MISSION
PERFORMANCE
APPRAISAL
ASSESSMENT PROCESS
GOALS
PERFORMANCE MEASUREMENT
STRATEGIES/ TARGETS
6/5/2013
169
Link Rewards to Results

Research shows that the more objective the measures of performance, the more likely the manager will provide effort. Thus accounting measures, which provide relatively objective evaluations of performance, are important.
6/5/2013
170
Developing Appropriate Incentive Systems

What is the fourth major behavioral characteristic of a well designed MACS? Developing an appropriate incentive system to reward performance.
Incentive system
6/5/2013
171
Developing Appropriate Incentive Systems

What are intrinsic rewards? They are those rewards that come from within an individual. They reflect satisfaction from doing the job. What are extrinsic rewards? They are rewards that one person provides to another to recognize a job well done.
6/5/2013 172
Agency Theory
Economists describe the formal choices of performance measures and rewards as agency theory. Employment contracts will trade off three factors: 1 Cost of measuring performance
2 Incentive 3 Risk
2002 Prentice Hall Business Publishing, Introduction to Management Accounting 12/e, Horngren/Sundem/Stratton
10 - 173
Performance Measurement and Reward System

There
are six attributes of a measurement system that must be in place to motivate desired performance. Employees must understand their job. Designers of the performance measurement system must make a careful choice about whether it measures employees inputs or outputs.
10 -174
2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young

3
The elements of performance that the performance measurement system monitors and rewards should reflect the organizations critical success factors. The reward system must set clear standards for performance that employees accept.
10 -175

5
The measurement system must be calibrated so that it can accurately assess performance. In certain situations the reward system should reward group rather than individual performance.
10 -176

What
is incentive compensation? It is a reward system that provides monetary (extrinsic) rewards based on measured results. It is a pay-for-performance system that bases rewards on achieving or exceeding some measured performance.
10 -177
Types of Incentive Compensation
Cash bonus Profit sharing Gainsharing Stock Options
10 -178

What
is a cash bonus? It is a payment of cash based on some measured performance. It is also called a lump-sum reward, pay for performance, and merit pay. What is profit sharing? It is a cash bonus that reflects the organizations, or an organization units, reported profit.
10 -179

What
is Gainsharing? It is a system for distributing cash bonuses from a pool when the total amount available is a function of performance relative to some target. What are the three most widely used Gainsharing programs?
10 -180

1
Improshare (Improved Productivity Sharing) Scalon plan: Base Ratio = Payroll costs Value of goods or service Rucker Standard = Payroll costs Production value
10 -181

What
is a stock option? It is a right to purchase a stated number of the organizations shares at a stipulated price (the option price).
10 -182
NO PAIN NO GAIN!
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Q&A SESSION
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184
THANK YOU
6/5/2013
185

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MANAGEMENT ACCOUNTING (BkBM 5023) MANAGEMENT ACCOUNTING AND CONTROL SYSTEM

Lecturer: Professor Dr Zakaria Abas

How to MANAGE and CONTROL our ORGANIZATION !!

Management Accounting and Control System (MACS)

MANAGEMENT ACCOUNTING SYSTEM

MANAGEMENT ACCOUNTING SYSTEM

Major Tasks The System Solves:

Control In Management Accounting And Control

Procedures Tools Performance measures Systems

Used by organizations to guide and motivate employees to achieve organizational objectives

Management Accounting and Control Systems

Management Accounting and Control Systems

Planning consists of developing an

Management Accounting and Control Systems

Evaluation occurs when feedback about

Types of Control Systems

Characteristics of Well-Designed MACS

Characteristics of Well-Designed MACS

Characteristics of Well-Designed MACS

Human Resource Management Model of Motivation

Human Resource Management Model of Motivation

Human Resource Management Model of Motivation

What is the Human Resource

Management Model of Motivation?

Human Resource Management Model of Motivation

Human Resource Management Model of Motivation

Human Resource Management Model of Motivation

Ethical code of conduct Mix of performance measures 6/5/2013

Ethical Code of Conduct and MACS Design

Ethical Code of Conduct and MACS Design

Ethical Code of Conduct and MACS Design

Ethical Code of Conduct and MACS Design

Ethical Code of Conduct and MACS Design

Ethical Code of Conduct and MACS Design

Hierarchy of Ethical Principles

Organizational or Group Norms

Ethical Code of Conduct and MACS Design

Ethical Code of Conduct and MACS Design

Ethical Code of Conduct and MACS Design

Ethical Code of Conduct and MACS Design

Ethical Code of Conduct and MACS Design

Elements of an Effective Ethical Control System

Elements of an Effective Ethical Control System

Steps in Making an Ethical Decision

Evaluate Alternatives Make Decision

Decision Model for Resolving Ethical Issues

Identify Major Principles, Rules, Values

Decision Model for Resolving Ethical Issues

Make Your Decision

Assess the Consequences

Characteristics of Well-Designed MACS

Characteristics of Well-Designed MACS

The relevance of the information is measured by four characteristics:

Characteristics of Relevant Information (1 of 2)

Characteristics of Well-Designed MACS

The Value Chain

Scope Of The System

Suppliers Design activities Postproduction activities associated with products

The Value Chain (1 of 2)

The Value Chain (2 of 2)

Research, Development & Engineering Cycle Manufacturing Cycle

Target Costing & Value Engineering Kaizen Costing

Total-LifeCycle Costing Environmental Costing Benchmarking