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Contrôle Interne Avancé-HEC Lausanne-2007/2008
1
CONTROLE INTERNE AVANCE
Eric CAUVIN, PhD
IAE Aix en Provence
Contrôle Interne Avancé-HEC Lausanne-2007/2008
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INTRODUCTION
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Competitive Environment Evolution
70’s
Growth, Demand > Supply, Protected and stable
markets.
80’s…
Decrease in growth, Supply’s atomization, Worldwide markets.
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Development of a Competitive Advantage
70’s
Generic strategies:
Cost leadership or Differentiation (quality).
00’s…
Combined strategies:
Cost leadership and Differentiation (quality, after-sale service, delay, etc.).
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The Impact of Strategy’s Evolution on Firms
Technology
Increase in the diversity of products,
Increase in the fixed assets.
Organization
Horizontal structure, Increase in the support
functions, Increase in the complexity
of processes.
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The Failure of Traditional Management Control Systems
Based on a vision of the firms as hierarchical,
Based on the assumption that the volume explains the costs’ behavior,
Based on the assumption that the performance is exclusively described by financial metrics.
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INTRODUCTION: THE EVOLUTION OF STRATEGY
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The Generic Strategies (1)
Cost/price advantage or a quality advantage: Volume strategies: offer a
very low price to very high price sensitive buyers… with a low concern for quality,
Premium strategies: enabled niche players to provide the highest quality… at a very high price.
Quality advantage
Cost advantage
A trade off – EITHER OR…
German carsRolex
MontBlanc
Asian carsTimex
Bic
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The Generic Strategies (2)
The customer of 70’s and 80’s knew and did accept the association between quality and price: quality always costs, and cheaper always means lower quality,
His/her behavior was adapted to the generic strategies. The trade-off quality vs. cost was the right answer from most companies.
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The Death of Generic Strategies…(1)
Unfortunately, while his/her demand for high quality kept increasing, his sensitivity to price increased spectacularly in the past ten years or so, and a new kind of customer appeared,
He/she is requesting now a higher quality at a lower price!
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The Death of Generic Strategies…(2)
“Do it less expensive or you are fired,
Don’t do as well and you are fired.”Sony’s slogan, 2002.
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The Combined Strategies (1)(Adapted from M.Montebello)
More sensitive
to quality?
Notsensitiveto quality
And moresensitiveto price?
Premium
Value
Sensitive to price
Volume
1980’s
2000’s
1970’s
A better qualitythan expectedin the marketfor a given
price.
YESYES
NO
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The Combined Strategies (2)
Some companies understood this drastic change in the customer’s behavior: beyond IKEA, DELL,
Just think to the message that appeared a few years ago in the advertising of premium car makers: BMW, MERCEDES, SAAB, JAGUAR, etc.,
They started communicating on price!
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The Combined Strategies (3)
When you speak about price to customer, you are thinking VALUE and not premium, just because premium buyers are not price sensitive.
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Value Creation (Adapted from M.Montebello)
Examples of companies that did achieve a profitable growth through value can be found in IKEA, DELL, HOME DEPOT, DECATHLON, SAS, AMAZON.COM,
Instead of competing, they all chose to offer customers the product of high quality that they wished, at a competitive price, within the shortest possible time, and with an excellent service.
Price
Relative Perceived Quality
Indifference/You get w
hat you pay for
Premium
Value Creation
Value Destruction
Volume
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BMW StrategyFrom: BMW Website, October 2003
“The BMW Group concentrates on selected premium segments in the automobile market. This means that it is the only multi-brand automobile manufacturer in the world that is not active in the mass market, i.e. the volume segments of the automobile market.The aim of the premium brand strategy is to achieve higher revenues per vehicle, on the basis of a high-value product substance and an unmistakable brand profile. The BMW Group pursues this premium brand strategy with the BMW and MINI brands, and, since January 1st, 2003, with ROLLS-ROYCE.”
For BMW, creating value for its customers in the form of luxury services and features is thus vital. This does not mean that keeping costs down is unimportant. Rather a hierarchy has been clearly established.
“The Company expects that in the next ten years, the premium segments of the automobile market will grow worldwide by around 50%. In contrast, the mass volume segments will increase by “just” 25% or so during the same period. The BMW Group is aiming to achieve profitable growth in the future too, and in that order of priority – ‘profitable’ followed by ‘growth’”.
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How to Create a Sustainable Competitive Advantage?
Create value for customers!
“ Value is the price customers are willing to pay for. ” (Porter).
“ Value is defined and measured by price, quality, delay, safety, service, image of the company, etc.” (Ohmae).
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How to Identify the Value Created?
Profit
Firm Infrastructure
Humain Resources Management
Technology Development
Procurement
Inbound Logistics Operations
Outbound Logistics
After-Sales
Primary Activities
Sup
port
ing
Act
ivit
ies
Mkg and
Sales
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The Dynamic Strategies (1)
Generic Strategies vs. Dynamic Strategies.
Competitive advantage can be sustained in switching strategic emphasis between perceived product value and process cost reduction.
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The Dynamic Strategies (2) (Adapted from Gilbert and Strebel, 1987)
Perceived Product Value
Low Delivered Cost
Break
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INTRODUCTION: THE EVOLUTION OF THE COST ACCOUNTING SYSTEMS
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The Structure of the Costs
0
10
20
30
40
50
60
D.L. I.C. D.M.
Technology changes, driven by the strategies’ evolution, impact on Management Control Systems because they modify the structure of the production costs.
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The Cost Drivers… (Adapted from Shank, 1989)
The output volume?
“Structural” cost drivers: the strategic choices a firm makes.
“Executional” drivers are those determinants of a firm’s cost position which hinge on its ability to “execute” successfully.
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Structural Cost Drivers (1) (Adapted from Shank, 1989)
Scale: how big an investment to make in manufacturing, in R&D and in marketing resources.
Scope: degree of vertical integration. Experience: how many times in the past the firm
has already done what it is doing again. Technology: what process technologies are used at
each step of the firm’s value chain. Complexity: how wide a line of products or
services to offer to customers.
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Structural Cost Drivers (1) (Adapted from Shank, 1989)
Of the structural drivers, scale, scope and experience have received a large amount of attention from economists and strategists over the years. Of these three, only experience has drawn much interest from management accountants…
Recently, complexity has received the most attention among accountants (Kaplan, Cooper, etc.). Activity-Based Management deals with: Product diversity and complexity, Variation in production levels, Procedural complexity, Engineering change orders.
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Executional Cost Drivers (2) (Adapted from Shank, 1989)
For example: Work force involvement, Total quality management, Capacity utilization, Plant layout efficiency, Product configuration, Exploiting linkages with suppliers and/or
customers, per the firm’s value chain.
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Cost Accounting Systems and Strategy (1)
Functions
Activities Processes
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Cost Accounting Systems and Strategy (2)
It is useful to think of an organization as a sequence of activities which output is a good or a service,
Each activity should contribute more to the ultimate value of the product that its cost.
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Roots of the Competitive Advantage
Products
Attributes
Buying Criteria
Activities
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Linkages Between the Value Chain and the Customers’ Buying Criteria
Activities
_________
Buying Criteria
Managing the
itineraries
Assigning the seats
Transporting Maintenance of the trains
Maintenance of the lines
Maintenance of the station
Train punctuality
X X X X
Seat availability
X X
Comfort in the in the trains and in the stations
X X
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Cost Accounting Systems and Strategy
Measuring performance of the activities performed by a company,
Reducing the cost of the value chain.
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THE TRADITIONNAL COST ACCOUNTING METHODS: THE
FRENCH METHOD
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The Origins of the Method (1)
1927: the French employers’ organization (CEGOS) named Lieutenant-Colonel RIMAILHO (Graduate of the Ecole Polytechnique) as head of a committee charged with the design of a uniform-costing method for all industry sectors,
1928: the Homogeneous Sections Method (idea of Responsibility Accounting) was born and became widely diffused through education channels and its encouragement in the successive French Accounting Plan.
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The Origins of the Method (2)
The model was directly inspired by the experiments undertaken within the military manufacturing plants since the beginning of the 20th century because they were regularly blamed for overly high production costs and unfair competition with regard to the private sector.
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The Purpose of the Method
Assigning the costs, Computing the cost of a product (coût de
revient) (production cost + distribution cost),
Setting selling prices, Valuating inventories.
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Cost Accounting vs. Financial Accounting
Distinction between financial accounting and cost accounting: Monism vs. Dualism,
The task of financial accounting is to report costs by their inherent nature (e.g. depreciation costs); the job of cost accounting is to assign costs to departments or to products.
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Main Characteristics…
A full costing method, A two stages method, A functional vision of the firm, A vision of the resources: direct costs vs.
indirect cost.
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Main Principle: a Two-Stage Method…(1)
Labor
Raw Materials
Machines
Product # 3
Product # 2
Product # 1
Workshop A
Workshop B
Workshop C
Understanding how the resources are consumed and who consumes them…
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Main Principle: a Two-Stage Method…(2)
Resources
Direct resources Indirect resources
Cost objects (product, service, customer, etc.)
Directly allocated
Functions
Repartition
Allocation
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Main Principle: a Two-Stage Method…(3)
Indirect resources
A B C A B C A B C
Stage # 1
Purchasing
Stage # 2
Manufacturing
Stage # 3
Distribution
Product # X
Resources are gradually consumed…
PurchasingCost
ProductionCost
Final Cost
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Stage 1: How to Choose the Sections?
The sections are those defined by H.Fayol at the beginning of the 20th century,
The sections must be homogeneous. A section is homogeneous when it is characterized by one activity only or when the resources the different activities consume vary according to the same criteria or rate (called Unité d’œuvre).
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Stage 2: The Indirect Costs are Allocated to the Sections: The Primary
Repartition When the sections are defined, the resources they have used for the period are allocated. There are two alternatives:
The resources are directly allocated (for example, the depreciation cost of a machine used exclusively by a section),
The resources are allocated using a rate (for example, the rent of a building shared by several sections; the resource can be allocated to the different sections using the “square feet”).
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The Nature of the Sections (1)
The method distinguishes two types of section: The main section: when the section’s output is
physical (materials purchased, products manufactured, products sold, etc.),
The auxiliary section: when the section purpose is to support the main sections (maintenance, etc.),
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The Nature of the Sections (2)
Because: it is difficult to find a link
between an auxiliary section and a product,
it is hard to measure the activity of an auxiliary section (what is the best rate to measure the activity of an administrative section?).
The resources used by the auxiliary sections are re-allocated to the main sections.
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Stage 3: The Indirect Costs Used by the Auxiliary Sections are Allocated to the
Main Sections: The Secondary Repartition The indirect costs used by the Auxiliary
Sections are allocated to the Main Sections proportionally to their support,
Rates are used to measure the relationship between the different sections.
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Stage 4: The Choice of the Unités d’Oeuvre (Overhead Rate)
Company chooses U/O: which reflects the section’s activity (or output), which is more correlated with the variation of
the indirect costs. It’s the way to allocate resources to the cost
objects, This overhead rate is also a performance
measure of the section.
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Example of U/O
Purchasing Section: Kilos of Material Purchased,
Workshop: Number of Direct Labor Hours or Number of Machine Hours,
Distribution Section: $1,000 of Sales.
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Stage 5: The Indirect Costs Repartition Table
The Indirect Costs Repartition Table is the summary of the 4 previous stages,
It gives: The Primary Repartition: the indirect cost of
each sections (main and auxiliary), The Secondary Repartition: the repartition of
the auxiliary sections to the main sections, The U/O for each main section.
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Indirect Costs Repartition Table Example (1)
Sections Purchasing Manufacturing Sales
Maintenance 20% 60% 20%
Computer Service 40% 30% 30%
The Merlin Co. organization is based on 2 auxiliary sections (Maintenance and Computer Service) and 3 main sections (Purchasing, Manufacturing and Sales). The repartition of the auxiliary sections is the following:
For the activity of April, the General Ledger gives the following primary repartition:
Sections Maintenance Computer Service
Purchasing Manufacturing Sales
Costs 1,000 2,000 5,000 8,000 4,000
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Indirect Costs Repartition Table Example (2)
To manufacture its two products A and B, Merlin uses two materials X and Y.
For April, Merlin purchased 100 kg of X and 500 kg of Y. Merlin consumed 300 machine hours for producing A and 700 for producing B. Finally, Merlin sold 10,000 A (@ $1,000/unit) and 20,000 B (@ $500/unit).
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Indirect Costs Repartition Table Example (In K$) (3)
Elements Auxiliary Sections Main Sections
Total Maintenance Computer service
Purchasing Manufacturing Sales
20,000 1,000 2,000 5,000 8,000 4,000
Repartition of the auxiliary
sections
(1,000)
(2,000)
200
800
600
600
200
600
20,000 0 0 6,000 9,200 4,800
U/O
Kg of material
purchased
Number of machine hours
Sales
(in K$)
Number of U/O 600 1,000 20,000
Cost of the U/O $10 $9.2 $0.24
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The Use of the U/O
In our example, Product A will bear $2,760 of Manufacturing Indirect costs ($9.2 x 300) and Product B will bear $6,440 ($9.2 x 700).
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Stage 6: The Cost Calculation
The model is analytical: it is based on a cost hierarchy.
Roughly, there are 3 steps: Calculating the cost of the material purchased, Calculating the cost of the products, Calculating the cost of the products sold.
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The Inventories
Material Purchasing
Material Inventory
Production
ProductInventory
Distribution
PurchasingIndirect
Cost
ManufacturingIndirect
Cost + Direct Labor
DistributionIndirect
Cost
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Beginning Inventory 1/1: 100 x $8
Purchase 1/5: 300 x $10
Purchase 1/28: 300 x $9
$800
$3,000
$2,700
Consumption 1/8: 200 x ?
WAC: (800 + 2,000)/400 = $9.5
200 x $9.5 = $1,900
FIFO: (100 x $8) + (100 x $10)
(100 x $8) + (100 x $10) = $1,800
Two Methods Allowed in France: The Weighted Average Cost and the FIFO
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CRITICAL PERSPECTIVES OF THE TRADITIONNAL COST ACCOUNTING
METHOD
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Strengths of the method
It is a full cost method which can help managers to measure the profitability of a cost object (product, service, customer, etc.),
It is a two stage method. The behavior of the costs is explained in each section using several different overhead rates (unité d’œuvre).
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Weaknesses of the method (1)
The Homogeneous Sections process is relevant but the assumptions it is based on are today invalidated,
Indeed, in 1930:
The share of the indirect resources in the production cost was small,
The share of the auxiliary sections in the total resources of the firm was small,
The organization of the firms was functional, hierarchical,
The behavior of the costs could be explained by the volume (“You can have your Ford T in any color you want, so long as it is black”),
The production capacity was used in full.
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Weaknesses of the method (2)
It is based on a functional vision of the firm. Today, companies’ organization tend to become “flatter”, based on processes, projects, etc.
Project Managers need information to make decisions and to control,
The traditional costing method does not enable Managers to control their activity because the information disclosed are too aggregated.
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Weaknesses of the method (3)
It is based on the assumption of the section’s homogeneity. But often the sections are too aggregated. They regroup several activities which cost behave differently.
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Weaknesses of the method (4)
Section # 1: Purchasing
Activities:•To deal with the suppliers,•To order,•To manage the references.
$100,000
$500,000
$100,000
U/O: one Kg purchased U/O for the period: 70 000
When the Section # 1 purchases one kg of material, the indirect cost of purchasing is $10. The consumption of all the resources in the section is
expected varying according to the same rate: the Kg purchased.
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Weaknesses of the method (5)
The traditional costing method uses overhead rates related to the volume. It is not always the best criteria to explain the costs behavior.
Purchasing Section Amount
Total resources
U/O
Number of U/O
Cost of U/O
$1,000
Number of Kg purchased
100Kg
$10
If the company wishes to reduce its costs of purchasing, it has to purchase less raw materials…
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Weaknesses of the method (6)
So, the information the Homogeneous Sections Method provides is not always relevant: it doesn’t enable to identify the right measures to reduce the costs,
But, the information is not either reliable. The most famous pathology is the Cross-Subsidization: the products manufactured in large quantity subsidize the customized products… because the overhead rates used are based on the volume.
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The Cross-Subsidization Pathology
Standardized, using a simple technology,
made in large quantity.
The products/clients which are:
The products/clients which are:
Customized,using a sophisticated
technology,made in small quantity.
Subsidize
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Cross-Susidization (1)
Production of 1 batch of 5 kgs Production of 5 batches of 1 kgDirect Material Cost: $50/kg
Indirect Costs : $2,000
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Cross-Susidization (2)
Traditional cost accounting: allocation of indirect costs based on the material’s weight.
Cost: $250/kg Cost: $250/kg
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Cross-Subsidization (3)
Elements Customer A Customer B
Turnover 1 000 1 000
Production costs (650) (700)
Indirect costs of the Sales Section: 250 (allocated in proportion to the turnover)
(125) (125)
Profit 225 175
Which customer do you prefer to work with?
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Cross-Subsidization (4)
Elements Customer A Customer B
Number of visits to customer
Number of orders
Number of deliveries
Number of invoice lines
Term for payment
18
20
25
350
90 days
7
10
10
40
30 days
How to measure the complexity to manage the Customer A?
The allocation of the sales indirect resources in proportion to the turnover soothes the cost difference of the two customers.
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Weaknesses of the method (7)
Today the auxiliary sections (R&D, Customer service, Human Resources Management, etc.) become more and more important in the creation of a competitive advantage,
The traditional costing method does not focus on the performance of these sections.
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Weaknesses of the method (8)
The method does not take into account the distinction between the fixed and the variable costs,
A new version was developed to measure the impact of the level of activity on the fixed costs: the Rational Allocation of the Fixed Costs (l’Imputation Rationnelle des Charges Fixes).
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Problem (1)
Seven Company makes and sells one product. The monthly fixed costs are: $6,000. The variable cost per unit is $50.
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Problem (2)
Elements March April May
Number of products sold 100 120 80
Variable costs 5,000 6,000 4,000
Fixed costs 6,000 6,000 6,000
Total costs 11,000 12,000 10,000
Cost per unit $110 $100 $125
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Problem (3)
Assume that Seven Company makes and sells two products with the same structure (the same fixed costs). The indirect fixed costs are allocated to the products based on the number of products.
Variable costs per unit: A = $30 B = $40
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Problem (4)
Elements March April May
# of products A 50 50 50
# of products B 50 70 30
Total 100 120 80
Total costs 9,500 10,300 8,700
Fixed costs per product 60 50 75
Unit cost/A 90 80 105
Unit cost/B 100 90 115
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Problem (5)
Product A has the same activity all along the period. Nevertheless, its unit cost varies. This variation should be bore only by the product B which is the cause of this phenomenon.
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Observation (1)
Production cost per unit
= Variable Cost per unit + Fixed Costs/N
N = quantity produced (activity) If the activity is rather stable, the production cost
is stable, If the activity changes strongly, the production
cost per unit will vary. The variation will depend on the amount of the fixed costs.
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Observation (2)
The information is not reliable: The activity’s variation can hide other effects
(price, productivity), The variation of the production cost makes
price difficult to set.
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Observation (3)
Fixed costs are two-part: The first part, the standard activity, has to be
allocated to the products, The second part, the over-activity or the under-
activity, has to be allocated to the activity’s variation.
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The Rational Allocation of the Fixed Costs (1)
This operation is done proportionally to the actual activity compare to the standard activity: Allocated Fixed Costs
= Fixed Costs x Actual Activity/Standard Activity
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The Rational Allocation of the Fixed Costs (2)
Elements March April May
Total costs 11,000 12,000 10,000
# of products 100 120 80
Allocation Rational Ratio 1 1.2 0.8
Allocated Fixed Costs 6,000 7,200 4,800
Product costs 11,000 13,200 8,800
Product costs per unit 110 110 110
Cost of activity’s variation 0 (1,200) 1,200
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The Rational Allocation of the Fixed Costs: Advantages (1)
The method enables to emphasize the under-activity. In May Seven Company has to deal with an under-activity which costs $1,200. Each “Special Order” accepted at a price lower than the standard cost ($110) but higher than the variable cost ($50), will reduce the cost of under-activity.
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The Rational Allocation of the Fixed Costs: Advantages (2)
On the long-term, under-activity or over-activity level, shows the objectives the company has to reach regarding its structure. If Seven performs an average over-activity of 25 products per month, the over-activity earnings can be assessed: (6,000 x 125/100) – 6,000 = 1,500.
1,500 is the amount Seven can invest monthly to fit its structure to its activity without reducing its profitability.
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The Rational Allocation of the Fixed Costs: Drawbacks
To implement the Rational Allocation of the Fixed Costs company has to set the level of the Standard Activity.
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ACTIVITY-BASED MANAGEMENT
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Activity-Based Costing
The Value Chain: the competitiveness of activities or processes a company performs, impacts on the competitiveness of products it does.
The ZBB: like in the ZBB, ABC’s purpose is to identify the causality effect between the activities a company performs and the resources it uses.
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ABC Defines the Company as a Set of Tasks, Activities and Processes
Selecting the suppliers
Ordering
Managing the references
Reviewing the invoices
Controling the deliveries
“Purchases Management” Process
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ABC Method Focuses on Value Added Activities
Activities
Purchasing Warehouse Workshop #1
Workshop #2
R&D Shipping Sales
•Managing products’ quality• Managing inventories• Managing shipping
X
X X
X X X
X
X
X
Functions
Value added activities are mainly cross-functional. The purpose of ABC method is to emphasize these activities.
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Activity
Task Activity Process
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Tasks, Activities, Processes
Tasks Activities Process
Receiving the purchase order
Reviewing
Recording the operation
Reviewing
Recording the operation
Receiving the delivery advice
Editing the invoice
Receiving the payment
Reviewing
Recording the operation
Depositing the check
Approving the sales
Invoicing
Recording the payment
Administrative Management of the Sales
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ABC: the Company as a Flow of Activities
Designed, manufactured and sold products are the output of internal value added activities or non-value added
activities for the customer.
Activity #1 Activity #2 Activity #3 Product
Purchasing the spare parts
Controlling the spare parts
Setting up the production
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ABC Method
Resources
Activities
Cost Objects (product, customer, etc.)
Resourcecost
drivers
Activitycost
drivers
Costs Calculation
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Activity Drivers: Example
The Purchasing Department of Roth Watch Company performs an activity Receiving the Orders. Roth company chose # of references as Activity Driver. The Department currently manages 7 references:
2 cases (round and square), 3 faces (blue, black and white), 2 glasses (round and square).
In April RWC received: 1,000 cases
800 round ones, 200 square ones.
500 faces 100 blue ones, 300 black ones, 100 white ones.
400 glasses 300 round ones, 100 square ones.
The monthly cost of the activity Receiving the Orders is $70,000.
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Stage 1: The Fixed Cost of the Driver
Elements Receiving the Orders
Resources used
Driver
Driver Type
Fixed Cost of the driver
$70,000
# of References
7
$10,000
Whatever the type of reference, cases (round or square), faces (blue, black or white), glasses (round or square), RWC spends
$10,000 for each of one.
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Stage 2: The Cost Allocated
Driver Fixed Cost Quantity Cost Allocated
References
Round cases
Square cases
Blue faces
Black faces
White faces
Round glasses
Square glasses
10,000
10,000
10,000
10,000
10,000
10,000
10,000
800
200
100
300
100
300
100
$12.5
$50
$100
$33.33
$100
$33.33
$100
The Cost Allocated is the cost of the Driver References used to calculate the production costs. It is the cost RWC spent to manage each
reference taking into account the quantities purchased.
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The Aggregation of Activities
ABC is often perceived as a complex method because of the quantity of activities a company performs (200 or 300 activities is an average),
In order to simplify its ABC model a company can decide to “gather” its activities in Cost Pools according to 3 different criteria: Process aggregation: gathering activities in processes, Function aggregation: gathering activities in function, Activity cost driver aggregation: gathering activities
which activity cost drivers are identical.
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The Aggregation of Activities: Example (1)
Activity Activity Cost Driver
Recording the purchases # of references, # of suppliers
Managing the purchases # of references, # of suppliers
Receiving the deliveries # of deliveries
Handling the material # of batches
Setting up the production # of batches
Assembling # of direct labor hours
Finishing # of direct labor hours
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The Aggregation of Activities: Example (2)
Cost Pools
ReferencesManagement
DeliveriesManagement
BatchesManagement
DLH Management
Reference Delivery Batch DLH
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ABC: an Evolution
The traditional costing method The company is viewed as a set of
aggregated sections:e.g. Purchasing
Products consume resources:e.g. Supervisor’s salary is allocated to Product X
Indirect costs are allocated based on “volume” rates:
e.g. Number of direct labor hours
The ABC method Company is viewed as a set of disaggregated
activities:e.g. Selecting the suppliers, Ordering,Reviewing invoices
Activities use resources, products use activities:e.g. Supervisor’s salary is a cost,If 50% of his time is spent to control the production department,Then, if Product X uses 10 minutes of the supervisor’s control activity,The relevant ratio is charged to Product X.
Activities’ cost is allocated based on rates reflecting the complexity of production processes:
e.g. Number of components, Batch size.
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Challenges for Cost Accounting (1)
Probably the “ideal” method doesn’t exist… The cost is just an opinion… The point is not only the method but the
purpose and the assumptions it is based on.
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Challenges for Cost Accounting (2)
Companies implementing costing methods have to design their cost system according to the purpose (pricing, cost reduction, etc.) and have to better involve all the people,
Costing methods are too often built for manufacturing industry,
Service industry is probably one of tomorrow’s challenges.
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Matching Costs Analysis and Strategy
Strategy focuses on the creation of a competitive advantage based on value added activities.
ABC explains costs’ causes based on internal activities performed by the company.
Value Creation ProcessActivities Price
=Utility Function
Production Cost Activities Production Process
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ABM: a Revolution
Cost
Value
Price
Management Accounting fields discloses relevant information to make strategic decisions.
Strategic Decisions fields based on managerial information.
Activity-Based Management discloses information to make decisions.
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From Cost Management to Value Management
The firm’s performance is based on its ability to create value by using the least amount of resources,
Managerial Accounting has to take into account cost and value,
ABC enables to identify: Value added activities, Non-value added activities,
In order to optimize the ratio cost/value.
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ABM Method (1)
Resources
Activities
Objects
Costs CalculationRemoving the
non-value addedactivities
Managingthe activities’performance
Activities Management
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ABM Method (2)
Processes’ improvement is the key to improve
the products.
To increase the value provided to the customers: what activities should the company perform?
To increase the profitability of the processes: how activities should be performed?
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ABM Method (3)
To wonder for each activity if it adds value
or not.
To remove non-value added activities,
To reduce costs and to improve performance of the value added activities.
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Management of the Value Added Activities
Activity: Assembling a product $100,000
Activity driver: # of spare parts 4
Performance measures: # of assembling errors, assembling time, etc.
2, 5/1,000,
12 minutes/product, …
Cost driver $25,000
Objective: changing the product’s design to reduce the number of spare parts.
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Activity-Based Management
Managing the activities,
Rather than
Focusing on the costs.A new management “philosophy” that
implies: