Here is Part of the Problem. Which managerial accounting system should we use?

1

Copyright © 2010, SAS Institute Inc. All rights reserved.

1

Standard Costing, Project Accounting, Job Order Costing, Economic Value Added TM, Balanced Scorecard, Activity Based Costing, Intellectual Capital, Performance Pyramid, Business Excellence Model, Customer Profitability, Strategic Management Accounting, Strategic Cost Management, Supply Chain Costing, Cash Flow Return on Investment, Business Models, Target Costing, Kaizen Costing, Lean Accounting, Life Cycle Costing, Value Added Analysis, Process Costing, Time-based Activity Based Costing, Value engineering, Stock Options, Micro Profit Centres, Quality Costing, Non-value Added Cost, Human capital, Resource Consumption Accounting, Structural Capital, Relationship Capital, Brand Value, Total Cost of Ownership, Throughput Accounting, Triple Bottom Line, Beyond Budgeting, Risk-adjusted Return on Capital at Risk ……

Here is Part of the Problem.Which managerial accounting system should we use?

2


2

Standard Costing, Project Accounting, Job Order Costing, Economic Value Added TM, Balanced Scorecard, Activity Based Costing, Intellectual Capital, Performance Pyramid, Business Excellence Model, Customer Profitability, Strategic Management Accounting, Strategic Cost Management, Supply Chain Costing, Cash Flow Return on Investment, Business Models, Target Costing, Kaizen Costing, Lean Accounting, Life Cycle Costing, Value Added Analysis, Process Costing, Time-based Activity Based Costing, Value engineering, Stock Options, Micro Profit Centres, Quality Costing, Non-value Added Cost, Human capital, Resource Consumption Accounting, Structural Capital, Relationship Capital, Brand Value, Total Cost of Ownership, Throughput Accounting, Triple Bottom Line, Beyond Budgeting, Risk-adjusted Return on Capital at Risk ……

Here is Part of the Problem.Which managerial accounting system should we use?

Even most cost accountants

do not understand what

the differences are !

3


ACCOUNTING

Managerial Accounting

Financial and Tax Accounting(external reporting)

Cost Measurement Cost Uses(decision support)

Collecting cost dataAssigning expense

data into costs

Concepts, assumptions

& issues

Methods,Attributes

Control(feedback)

Reporting & analysis Planning (predictive)

Budgeting

Financial Operational,Quality

AccountabilitySegmented

profit analysis

financial operational

SCORECARDS,PERFORMANCE MEASURES

Managing capacity

Managing demand

QUOTATIONS (PRICING),

WHAT-IF ANALYSIS

Financial OperationalVariance analysis

Accounting Taxonomy

Economic

4


Management Accounting Framework ACCOUNTING


Financial and Tax Accounting(external reporting)

Cost Measurement Cost Uses(decision support)

Collecting cost data Assigning cost data

Concepts, assumptions

& issues

Methods,Attributes

Control(feedback)

Reporting & analysis Planning (predictive)

Budgeting

Financial Operational,Quality

Responsibility & Accountability

Segmented profit

analysis


PERFORMANCEMEASUREMENT

Managing capacity

Managing demand

QUOTATIONS (PRICING),WHAT-IF ANALYSIS,

BUDGETS

Financial OperationalVariance analysis

A

B

C

D

E

Economic

5


Cost Measurement / Collecting Cost Data

Cost Measurement

Assigning CostsCollecting Cost Data


1. Resource drivers (timesheets, storyboarding)2. activity dictionary3. activity drivers4. activity driver rates (actual vs. standard)5. output quantities6. Direct costs: labor routings7. Direct costs: bill of materials

1. Payroll / wages2. general ledger3. purchase price

A

Economic measurements

1. Cost of capital2. Capital preservation allowance3. Long-term sustainable vs.

specific period expenditures

6


Cost Measurement / Assigning Costs

Cost measurement

Collecting cost data Assigning costs

Concepts, assumptions, & issues Assignment methods

Period costing Non-period costing1. Fixed vs. Variable (“viscosity”)2. sunk costs / depreciation3. variability / linearity4. planning horizon5. update frequency6. level of aggregation7. causality (and effect)8. full absorption costing9. machine vs. labor intensity10. precision vs. accuracy vs.

……..relevancy11. GAAP (regul.) vs. ABC/M12. historical vs. replacement

1. Project accounting2. job order costing3. process accounting4. throughput accounting5. kaizan accounting6. standard costing7. activity based costing8. activity based management9. supply chain costing10. constraint based costing;11. total available profit (TAP)12. feature based costing13. parametric cost modeling

1. Life cycle costing2. target costing3. product phase-in & out/4. attributes

B

7


Cost Uses / Control (feedback)

operational

1. Productivity analysis2. capital investment realized benefits tracking3. unused capacity identification4. unitized cost-of-outputs trends5. cost of quality (TQM) six sigma & SPC & ISO9000)6. Benchmarking

Financial (spending)

Developing Budgets (planning)

1. Traditional2. activity-based budgeting

Variance analysis(actual vs. plan )

Budget-responsibility center accounting

Standard cost of:---direct materials---direct labor

Control (feedback)

Cost Uses

Assessment(insights & learning)

Planning(predictive)

C

8


Cost Uses / Assessment

Cost Uses

Control(feedback) Assessment

(insights & learning)

Planning(predictive)

Responsibility & Accountability Segmented & Multi-dimensional ...Profit Contribution Analysis

1. Products / service lines2. direct product profitability (DPP)3. shared services / joint service agreements4. total cost of ownership (TCO)5. dealer profitability6. channel profitability7. customer profitability8. break-even analysis

Financial Operational

1. Risk management2. Economic value added (EVA)3. shareholder value added (SVA)4. cash flow5. RONA6. ROI7. inventory valuation

1. Benchmarking2. best practices / lean3. cost driver analysis4. throughput $ velocity5. attributes analysis / value-

added analysis6. cost of quality (COQ)7. environmental costing

WEIGHTED SCORECARD(performance measures)

D

9


Cost Uses / Planning (Predictive)

Cost Uses

Control(feedback)

Assessment (insights & learning) Planning

(predictive)

Managing Capacity

(Supply resources)Managing Demand

(Outputs & Cost Receivers)

1. Unused capacity management2. make vs. buy (outsourcing)3. activity based budgeting (ABB)4. capital budgeting (allocation)5. target costing (design for manuf.)6. business process reengineering7. supply chain management8. efficient consumer response (ECR)9. discrete-event simulation10. Theory of Constraints (TOC)11. manpower levels

Rationalizing & repositioning

Influencingdemand

1. Pricing strategies2. transfer pricing3. quoted delivery lead times4. customer order rules5. bundled services

1. Strategic planning2. Sourcing mix3. product offerings4. service offering5. channel strategy6. customer mix

QUOTING CUSTOMER ORDERS COST FORECASTING (what-if analysis)

Budgeting(see control)

E

10


ACCOUNTING

Financial Accounting

Cost Measurement


Cost AccountingFinancial Reporting

regulatory compliance

Cost Reporting & Analysis

(feedback on performance)

Decision Support/ Cost Planning

•[e.g., GAAP, IFRS]•Costs of goods sold•Inventory valuation

• Spending vs. budget variance analysis • Profitability reporting• Process analysis (e.g., lean, benchmarking, COQ)• Performance measures• Learning; corrective actions

• Fully absorbed & incremental pricing• Driver-based budgeting & rolling financial forecasts• What-if analysis• Product, channel & customer rationalization• Outsourcing & make vs. buy analysis

History FutureLow value-add Modest value-add High value-add

Source data capture(transactions /bookkeeping)

Non-financial data capture

The Domain of Costing

Tax Accounting

Source: “A Costing Levels Continuum Maturity Model” by Gary Cokins published by the International Federation of Accountants, 2010

11


Most organizations are typically at lower levels of maturity in adopting progressive managerial accounting practices, methods and systems.

International Federation of Accountants Report

Evaluating the Costing Journey: A Costing Levels Continuum Maturity Model

By Gary Cokins, SAS

12Copyright © 2010 SAS Institute Inc. All rights reserved.

1D1D

Leve

l #

2D2D 3D3D4D4D

5D5D

6D6D7D7D

8D8D

Blind

ProcessVisibility

Output Visibility

Improved Output

Information/ Approximate

Accuracy

Improved Treatmentof Indirect

Costs

CustomerDemandSensitive

UnusedCapacity

Aware

(1) Descriptive ContinuumEXPENSE TRACKING, COST REPORTING

and CONSUMPTION RATES

(2) Predictive ContinuumDEMAND DRIVEN PLANNING with

CAPACITY SENSITIVITY

bookkeepingprocess and

Lean accountingDirect costs

without (3) and with (4) support coststo output groups

Push Activity-Based costing(ABC);

Product costsStandard

costing to individual outputs;

Project acct;Job ordercosting

Level 6D with Channel andcustomerprofitabilityReporting;

Cost-to-serve

Unused capacity costs (estimated)

Costing Continuum / Levels of Maturity(most companies are Level 4D and 1P)



Leve

l #







2P2P

3P3P4P4P

5P5PPull

Activity-based

ResourcePlanning

Time-drivenABC

ResourceConsumptionAccounting

Simulation

(ABRP);Forecast driver quantities X unit consumption rates;

Driver based budgeting

(TDABC);Forecast driver quantities X time consumption rates;

Direct cost focus;

Repetitive work conditions

(RCA);Level 2P with proportional costing at direct and support depts.

Ultimate in consumption rates;

1P1P

%G/L acct.

Incremental


1D1D

Leve

l #

2D2D 3D3D4D4D

5D5D

6D6D7D7D

8D8D

Blind

ProcessVisibility

Output Visibility

Improved Output

Information/ Approximate

Accuracy

Improved Treatmentof Indirect

Costs

CustomerDemandSensitive

UnusedCapacity

Aware





bookkeepingprocess and

Lean accountingDirect costs

without (3) and with (4) support coststo output groups

Push Activity-Based costing(ABC);

Product costsStandard

costing to individual outputs;

Project acct;Job ordercosting

Level 6D with Channel andcustomerprofitabilityReporting;

Cost-to-serve

Unused capacity costs (estimated)



2P2P

3P3P4P4P

5P5PPull

Activity-based

ResourcePlanning

Time-drivenABC

ResourceConsumptionAccounting

Simulation

(ABRP);Forecast driver quantities X unit consumption rates;

Driver based budgeting

(TDABC);Forecast driver quantities X time consumption rates;

Direct cost focus;

Repetitive work conditions

(RCA);Level 2P with proportional costing at direct and support depts.

Ultimate in consumption rates;

1P1P

%G/L acct.

Incremental


16


Hierarchical Objectives

High Profitability

LowCosts

Low UnitCosts

High Throughput

Less Variability

High Utilization

LowInventory

QualityProduct

HighSales

Many products

Fast Response

MoreVariability

High Inventory

LowUtilization

ShortCycle Times

High CustomerService

Source: Dr. Nico Vandaele; Katholieke Universeit Leuven

17


Financial and Operational Flows

Source: Dr. Nico Vandaele; Katholieke Universeit Leuven

Documents

Here is Part of the Problem. Which managerial accounting system should we use?