chapter 13 controlling costs in the changing workplace
TRANSCRIPT
Chapter 13
Controlling Costs in the Changing Workplace
1. What is open-book management and why does
its adoption require changes in accounting
methods and practices?
2. Why are games often used as the basis to teach
and motivate open-book management concepts?
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Learning Objectives
3. Why is implementing open-book management
more difficult in large organizations than in
small organizations?
4. Why does business process reengineering cause
radical changes in how firms execute processes?
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Continuing . . . Learning Objectives
5. Why is throughput an important performance
measure for organizations that apply the theory
of constraints?
6. How does throughput accounting differ from
variable cost accounting?
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Continuing . . . Learning Objectives
7. How does value chain cost analysis create opportunities
to achieve competitive advantages using concepts of
interorganizational cost management?
8. What factors are driving the increased reliance on
outsourcing; and what are the financial considerations
of the outsourcing decision?
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Continuing . . . Learning Objectives
9. Why are joint ventures and strategic alliances
increasingly used by firms to exploit new market
opportunities?
10. How are target costing and value engineering used
to manage costs? In which life cycle stage are these
tools used?
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Continuing . . . Learning Objectives
11. What are the competitive forces that are driving
decisions to downsize and restructure operations?
12. Why are operations of many firms becoming more
diverse and how does the increasing diversity
affect the roles of the firms’ accounting systems?
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Continuing . . . Learning Objectives
Open-Book Management
Open-book management is a philosophy about increasing a firm’s performance by involving all workers, and by ensuring that all workers have access to operational and financial information necessary to achieving performance improvements.
Games People Play
Games make learning both fun and competitive while allowing for complex financial practices to be simplified.
Ten Common Principles
of Open-Book Management
1. Turn the management of a business into a game that employees can win.
2. Open the books and share financial and operating information with employees.
3. Teach the employees to understand the company’s financial statements.
4. Show employees how their work influences financial results.
5. Link nonfinancial measures to financial results.Tim Davis, “Open-Book Management: Its Promises and Pitfalls,” Organization Dynamics (Winter 1997), pp.. 6-20.
Ten Common Principles
of Open-Book Management6. Target priority areas and empower employees to make
improvements.
7. Review results together and keep employees accountable. Regularly hold performance review meetings.
8. Post results and celebrate successes.
9. Distribute bonus awards based on employee contributions to financial outcomes.
10. Share the ownership of the company with employees. Employee stock ownership plans (ESOPs) are routinely established in firms that practice open-book management.
Tim Davis, “Open-Book Management: Its Promises and Pitfalls,” Organization Dynamics (Winter 1997), pp.. 6-20.
Open Book Management
Implementation Challenges
Characteristics of firms that are best suited to successful implementation include– small size
– decentralized management
– a history of employee empowerment
– the presence of trust between employees and managers
Business Process Reengineering
Business process reengineering (BPR) means examining processes to identify -- and then eliminate, reduce, or replace -- functions and processes that add little customer value to products or services.
Steps to Business Process
Reengineering
1. Define the objectives of the BPR project.
2. Identify the processes that are to be reengineered.
3. Determine a baseline for measuring the success of the BPR project.
4. Identify the technology levers--these are the potential sources of innovation, increased quality, increased output, and decreased costs.
5. Develop initial prototypes of the reengineered process and then, through subsequent iterations, develop incremental improvements to the prototypes until satisfactory results are achieved.
Yogesh Malhotra, “Business Process Redesign: An Overview,” 1996.
Theory of Constraints
The theory of constraints (TOC) is management philosophy about focusing attention on the constraints (bottlenecks) that limit organizational achievements (such as maximization of profits) so that throughput can be maximized.
In profit-oriented organization, throughput is the rate at which a company generates cash from selling products and services to customers.
Comparison of Variable Costing
and Throughput Accounting
VARIABLE COSTING THROUGHPUT ACCOUNTING
Revenue Revenue
- Direct Materials - Direct Materials
- Direct Labor
- Variable Overhead - Variable Overhead
= Contribution Margin = Throughput
- Fixed Expenses - Operating Expenses
= Profit = Profit
Eric Noreen, Debra Smith, and James T. Mackey, The Theory of Constraints and Its Implications for Management Accounting (Great Barrington, Mass.: North River Press, 1995), p. 14.
Value Chain
A value chain is the set of all processes that convert materials into products and services for the final consumer.
• Vertical integration is a measure of the extent to which the value chain resides within a single firm.
• Outsourcing is contracting with outside vendors to provide necessary parts or services rather than producing them in-house.
Insource/Outsource Considerations
Relevant quantitative factors:• Incremental production costs for each unit• Unit cost of purchasing from outside supplier• Availability of production capacity to
manufacture components• Opportunity costs of using facilities for
production rather than for other purposes• Availability of storage space for units and raw
materials
Continuing . . .
Insource/Outsource Considerations
Relevant qualitative factors:• Relative net advantage given uncertainty of
estimates• Reliability of source(s) of supply• Ability to assure quality when units are
purchased from outside• Nature of the work to be subcontracted• Availability of suppliers
Continuing . . .
Insource/Outsource Considerations
Relevant qualitative factors:• Impact on customers and markets• Future bargaining position with supplier(s)• Perceptions regarding possible future price
changes• Perceptions about current product prices• Strategic and competitive importance of
component to long-run organizational success
Insource or Outsouce
Cost Information
Present Mfg. Relevant Mfg.Cost per Set Cost per Set
Direct materials $6.00 $6.00Direct labor 2.00 2.00Variable factory OH 4.00 4.00Fixed factory OH* 2.50 1.00 Total unit cost $14.50 $13.00
Quoted price from All-American $13.50
*Of the $2.50 fixed factory overhead, only $1.00 is directly linked to production of the serving sets. This amount is related to the production supervisor's salary and could be avoided if the firm chose not to produce serving sets. The remaining $1.50 of fixed factory overhead is an allocated indirect (common) cost that would continue even if production of serving sets ceased.
Strategic Alliances
A strategic alliance is an agreement of two or more firms with complementary core competencies to jointly contribute to the value chain.
Interorganizational Cost
Management Systems
Types of information that are commonly shared between suppliers and customers include:
•Production cost data•Technological and engineering data•Research and design information•Cost reduction plans•Quality data•Target costing and value engineering information