1–Understandingprocessesandvaluecreation

• Usesofmanagementaccountinginformation:o Formulationandimplementationofstrategyo Continuousimprovemento Resourcemanagement

§ Planning–e.g.budgets§ Control–e.g.performancemeasures

o Costestimationo Performanceevaluation

• Managementaccounting:theprocessesandtechniquesthatfocuson the effective andefficient useof organisational resources, tosupportmanagersintheirtasksofenhancingbothcustomervalueandshareholdervalue

• Primarycustomervalues(QTC)areallinterrelatedo Cost:amountofresourcesconsumedinaprocesso Quality: degree to which a product/service meets

expectationso Time:twodimensions–durationandtimeliness

• Problem:therearetradeoffsbetweenQTC.• Secondarycustomervalues:

o Responsiveness(tochangingpatternofdemand)o Productivityo Linkages:interdependenciesbetweenactivitieso Innovativenessandempowermentofemployees

• Resources: inputsintoanorganisation’sproductionprocess. Canbefinancial,non-financial,tangibleandnon-tangible

• Process: a group of logically related activities, which whenperformedinsequentialorder,utilisetheresourcesofabusinesstoproduceadefiniteresult

• Fourobjectivesofprocessanalysis(UMPP)1. Understanding: divides the business into processes and

activitiesusingprocessmapping2. Monitoring: comparing with benchmarks or target using

statisticalprocesscontrol(SPC)3. Prioritising:decidewhichprocessesaremostcriticaltothe

business’survivalusingparetodiagram4. Problem solving: using root cause analysis and fishbone

diagram• Stepstoprocessanalysis:

1. Identify theprocessof interestusingvaluechainanalysisandbenchmarking

2. Chartexistingprocessinlogicalsequence

3. Evaluatetheprocess–areactivitiesintheprocess:

a. Valueadding(VA)ornon-valueadding(NVA)b. Efficient,effective,bothorneither?c. Valuableintermsoftime,costorquality?

4. Continuouslyimproveorre-engineerprocess• VA activity provides value that is essential to customer or is

essentialtosurvivingthebusiness.Consider:o Willremovalreduceserviceorhaveadetrimenteffect?o Isthecustomerwillingtopayforit?o Willitbringtheproduct/serviceclosertocompletion?

• NVAactivitydoesnotaddvalue to theproduct/service fromthecustomerandbusinessperspective

• NoteverythingcanbecategorisedasVAandNVAo E.g. Inspection – why do you need inspection? Is it to

identifydefectiveproduct?Regulatoryrequirement?PartorR&D?

• Efficiency: the ability of activities/processes to use the fewestpossibleresourcestomeetcustomerneeds.o Measure:resourceusage(outputtoinputratio)o E.g.numberofbooksprintedpermachine

• Effectiveness:abilityofaprocess/activitytomeetcustomerneedso Measure:degreeofgoalattainmento E.g.%ofdefectiveprintinMarch

• Tradeoff: more resources may be required to achieve a higherlevelofgoalattainment

• Goodmeasureiscomparable,specificandunderstandable

• Toolstoevaluatetheprocesso Rootcauseanalysis:identificationofthereasonforactivityo Fishboneanalysis:‘spine’statesprimaryproblemand‘ribs’

state main potential causes (e.g. machinery, material,method,labour,tools,money,environment)

o Statistical Process Control (SPC): used to understand,monitorandreducevariabilityinaprocess

o Paretodiagram:plotsthecausesofaproblemaccordingtothefrequencyoftheiroccurrence

§ Facilitatesprioritisation• (Process improvement) activity-based improvement efforts are

achievableby:o Activityelimination:removingNVAactivitieso Activityselection:choosinganactivitywiththelowestcosto Activity reduction: reducing resource consumed by the

existingactivityo Activity sharing: makes use of economies of scale by

choosinganactivitythatpermitssharingbetweendifferentproductsandservices

• Business process re-engineer: radical redesign ofmajor businessprocessestodramaticallyimprovecost,qualityanddeliveryo Generallyirreversibleandverycostlyo Initiatedbytopmanagemento Once-off

• Continuous improvement: smaller-scale, incrementalimprovementstoindividualpartsofaprocesso Reversibleo Initiatedandimplementedbyemployeeso Ongoing

• BPRandCIarenotmutuallyexclusive• Functional view: business is separated by departments or

functions• Processual view: focuses on business processes and activities

ratherthandepartmentsandfunctionso Preferred,duetointerdependenciesofactivitieso Littlecanbegainedbyimprovingoneactivity inabusiness

process

2–CostBasics

• Costs can be classified based on their behaviour patterns,traceability,controllability,valuechainandfunction

• Costbehaviourpatternso Variablecost:directlyaffectedbyactivitylevelo Fixedcost:donotvarywithactivitylevelo Step-fixedcost:fixedforacertainlevelbeforemovingupto

anewfixedlevelafteracertainamountofactivityo Semi-variablecost:havefixedandvariablecomponentso Curvilinear cost: costlyper activity at first andat theend,

butleveloutoverarelevantrangeinthemiddleo Engineeredcosts:havedefinedphysicalrelationshiptothe

levelofactivityo Committed costs: result from thebusiness’ basicneeds to

survive.Difficulttochangeintheshortterm.§ E.g. factory rent, depreciation of machinery,

managementsalarieso Discretionarycostsresultsfrommanagersdecidingtospent

aparticularamountofmoneyonapurpose§ E.g.R&D,advertisement

• Traceabilityo Direct costs can be traced back to a cost object in an

economicmannero Indirectcostscannot,e.g.factoryrent,security

• Controllabilityo Costscanbecontrollableanduncontrollable

• Purposeforcontrollabilityclassification:o Accountability – mangers should be held responsible for

coststheycancontrolorsignificantlyinfluenceo Performanceevaluationofmangerordepartmento Costcontrol

• Responsibilitycentre:unit inanorganisationwherethemanagerisheldaccountableforactivitiesandperformance

• Valuechain–costscanbecategorisedas:o Upstreamo Manufacturingareaso Downstream

• Purposeforvaluechainclassification:o Analysecoststructureandstrategieso Measureperformance

• Functionmeanslookingatmanufacturingandnon-manufacturingcosts.Itinvolvesaspecificcostobject:o Directmaterial(DM):rawmaterialsusedintheproduction

process,whichappearonthefinalproductanditscostcanbetracedeconomically

o Direct labour (DL): any labour used to produce theproduct/service

o Manufacturing overhead (MOH): all costs other than DMandDLi.e.indirectmaterialsandindirectlabours

§ E.g.employeeovertimeandidletime• Primecosts=directmaterial+directlabour

o Majorcoststhatcanbeassociatedwiththeproduct• Conversioncosts=directlabour+manufacturingoverhead• Cost behaviour: relationship between a cost and the level of

activityorcostdriver.Itspurposesare:o Costestimationo Costmanagemento Costprediction

• Costdriver:anactivityorfactorthatcausescosts• Selectingthebestcostdrivers:

o Strongcorrelationbetweencostandcostdrivero Cost driver is easy and economical to measure (benefit

outweighscost)o Inputvsoutputmeasure:

§ Cost drivers for delivery cost – output measure(numberofdelivery)andinputmeasure(numberoflitresoffuel)

• Methodsofcostestimation–managerialjudgement,engineeringapproachandquantitativeanalysis

• Managerial judgement – managers estimate costs using theirexperience.Reliabilitydependsonabilityofmangers.

• Engineeringapproach–studyingtheprocessesthatresultcosts.o Uses time and motion studies – observing the steps

requiredandtimetakenbyemployeetoperformparticularactivities,toestimateacostfunction

§ Problem: is the data produced accurate? Willemployeeactdifferentwhenobserved

o Time-consumingandexpensiveo Usefulwhenthereisnoreliablepastdata

• Quantitative analysis: formal analysis of past data to identifyrelationshipbetweencostandactivities1. Scatterdiagram

Advantages:• Visualassessment• Highlightoutliers

Disadvantage:

• Judgement inselectingthe‘best’line

• Onlyonecostdriver

2. High-low method – observing the highest and lowestlevelsofactivitiestodevelopacostfunctionandestimatecosts

VC = cost of highest activity − cost of lowest activityvalue of highest activity − value of lowest activity

FixedcostàusehighestorlowestactivitylevelCostfunction=fixedcost+variablecost(quantityofactivity)

VC = 12 500 − 11 00022 000 − 8 000

= 0.11 km

FC = 12 500 − 0.11 22 000 = 10 080Cost = 10 080 + 0.11 km(highactivity)Cost=10120+0.11km(lowactivity)

o Advantages:§ Easytocompute§ Littledatarequired

o Disadvantages:§ Lessaccurate–only2datapointsareused§ Canbeaffectedbyoutliers§ Onlyconsideronecostdriver

3. Regression analysis: uses all observations to determinecostfunction§ Simple regression – estimate the relationship

between dependent variable (Y) and oneindependentvariable(X)

§ Multipleregression

• Evaluationoftheregressionanalysis1. Economicplausibility–doesitmakeeconomicsense?2. Goodness of fit – determine how well Y (cost object) is

predictedbyallX(costdriver/s)§ Adjusted R2 indicates % change in Y that is

explainedbyallchangeinallcostdrivers3. F-statistics – test the significance of the regression

equationasawhole§ Determine the probability that the relationship

betweenthecostandallcostdrivershasoccurredbychance

§ Statisticallysignificantifprobability<0.054. t-statistics – test the significance of each independent

variableintheregressionmodel§ Determine the probability that the relationship

betweeneachcostdriverandcosthasoccurredbychance

§ Statisticallysignificantifprobability<0.05• Issuesincostestimation

o Lackofknowledgeo Data

§ Missingdata§ Outliers§ Mismatchedtimeperiod§ Trade-offsinchoosingthetimeperiod(accuracyvs

timeliness)§ Allocated fixed costs – fixed costs are sometimes

allocatedonaperunitbasis§ Inflation

o Learningcurveo Low priority for high accuracy (cost-benefit principle) –

subjectivecostestimatesmaybegoodenough

3–OverheadCosts

• Indirect/OHcostscanbeclassifiedaso MOH:allothercostsotherthanDMandDL(thistopic)o Non-manufacturingoverhead(nexttopic)

§ Upstreamanddownstreamcosts

• (Technique2a)Networkdiagrams–displayprojectactivitiesasanetwork.Twotypes: