9 -1 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Management Accounting and
Control Systems for Strategic
Purposes: Assessing
Performance Over the
Entire Value Chain
Chapter 9
9 -2 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 1
Discuss the concept
of control.
9 -3 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Management Accounting
and Control Systems
uWhat is a management accounting and
control system?
uIt is a system that generates and uses
information to help decision makers assess
whether an organization is achieving its
objectives.
uA system is in control if it is on the path to
achieving its strategic objectives.
9 -4 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Management Accounting
and Control Systems
The Cycle of Control
Plan
Monitor Evaluate
Execute Correct
9 -5 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Management Accounting
and Control Systems
uPlanning consists of developing an
organization’s objectives, choosing
activities to accomplish the objectives,
and selecting measures to determine how
well the objectives were met.
uExecution is implementing the plan.
uMonitoring is the process of measuring the
system’s current level of performance.
9 -6 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Management Accounting
and Control Systems
uEvaluation occurs when feedback about
the system’s current level of performance
is compared to the planned level.
uCorrecting consists of taking the
appropriate actions to return the system
to an in-control state.
9 -7 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 2
Identify the characteristics of
well-designed management
accounting and control
systems (MACS).
9 -8 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Characteristics of Well
-Designed MACS
uA well-designed management accounting
and control system should include
behavioral and technical considerations.
uWhat are some behavioral considerations?
u Embedding the organization’s ethical code
of conduct into MACS design
9 -9 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Characteristics of Well
-Designed MACS
2 Using a mix of short- and long-term
qualitative and quantitative performance
measures
3 Empowering employees to be involved in
decision making and MACS design
4 Developing an appropriate incentive system
to reward performance
9 -10 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Characteristics of Well
-Designed MACS
uWhat are some technical considerations?
u Relevance of the information generated
u Scope of the system
9 -11 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Characteristics of Well
-Designed MACS
uThe relevance of the information is
measured by four characteristics:
Accurate
Timely Flexible
Consistent
9 -12 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Characteristics of
Well-Designed MACS
uThe scope of the system must be
comprehensive and include all activities
across the entire value chain.
u research, development, and engineering
u manufacturing
u customers
9 -13 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 3
Describe the total-life-cycle
costing approach to managing
product costs over the value
chain.
9 -14 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Total-Life-Cycle-Costing
uWhat is total-life-cycle costing?
uIt is the process of managing all costs along
the value chain.
uA TLCC system provides information for
managers to understand and manage costs
through a product’s design, development,
manufacturing, marketing, distribution,
maintenance, service, and disposal stages.
9 -15 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Total-Life-Cycle-Costing
RD&E
Cycle
Manufacturing
Cycle
Post Service
Cycle
9 -16 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Total-Life-Cycle-Costing
uWhat are the three stages of the research,
development, and engineering cycle?
u Market research
u Product design
u Product development
u80% to 85% of a product’s total life costs
are committed by decisions made in the
RD&E cycle.
9 -17 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Total-Life-Cycle-Costing
uWhat are committed costs?
uThese are costs that a company knows it
will have to incur at a future date.
uWhat are manufacturing cycle costs?
uThese are the costs incurred in the
production of the product.
uUsually at this stage there is not much
room for engineering flexibility.
9 -18 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Total-Life-Cycle-Costing
uWhen does the post-sale service and
disposal cycle begin?
uIt begins when the first unit produced is in
the hands of the customer.
9 -19 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Total-Life-Cycle-Costing
uWhat are the three stages of the service
cycle?
u Rapid growth
u Transition
u Maturity
9 -20 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Total-Life-Cycle-Costing
Traditional
Stages of the Accounting
Total life Cycle Focus
Post-Sale
$ Costs Research, Development, Manufacturing Service and
and Engineering Cycle Disposal
100%
80%
60%
40%
20%
0%
Cost Committed
Costs Incurred
9 -21 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 4
Explain target costing.
9 -22 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Target Costing
uWhat is target costing?
uIt 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.
9 -23 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Target Costing
RD&E
Cycle Manufacturing
Cycle
Post Service
CycleTarget Costing
9 -24 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Comparing Traditional Cost
Reduction to Target Costing
Traditional Cost Target
Reduction Costing
Market Research to Determine
Customer
Needs and
Price Points
Customer
Requirements
Product Specifications
9 -25 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Comparing Traditional Cost
Reduction to Target Costing
Traditional Cost Target
Reduction Costing
Target Selling Price
Target Product
Volume
Design
Target ProfitEngineering
Supplier Pricing
9 -26 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Comparing Traditional Cost
Reduction to Target Costing
Estimated Cost Target Cost
Desired
Profit
Margin
Value
Engineering
Supplier
Pricing
Pressure
Traditional Cost Target
Reduction Costing
9 -27 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Comparing Traditional Cost
Reduction to Target Costing
Manufacturing
Periodic Cost
Reduction
Continuous Cost
Reduction
Traditional Cost Target
Reduction Costing
9 -28 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Comparing Traditional Cost
Reduction to Target Costing
uUnder traditional costing, the profit margin
is the result of the difference between the
expected selling price and the estimated
production cost.
uPt = St – Ct
uThe cost-plus method is another traditional
approach.
9 -29 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Comparing Traditional Cost
Reduction to Target Costing
uUnder the cost-plus method the selling
price is the sum of the expected product
cost and the expected profit margin.
uScp = Ccp + Pcp
9 -30 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Comparing Traditional Cost
Reduction to Target Costing
uUnder target costing, the target profit
margin results from a long-run profit
analysis often based on return on sales.
uThe target cost is the difference between
the target selling price and the target profit
margin.
uCtc = Stc – Ptc
9 -31 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Concerns About Target Costing
uWhat are some potential problems in
implementing target costing?
u Conflict can arise between parties involved
in the process.
u Employees may experience burnout due to
pressure.
u Development time may increase.
9 -32 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 5
Explain Kaizen costing.
9 -33 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Kaizen
uWhat is Kaizen?
uIt is a Japanese term for making
improvements to a process through small,
incremental amounts rather than through
large innovations.
9 -34 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Kaizen Costing
uWhat is Kaizen Costing?
uIt 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.
uThe target-reduction rate is the ratio of the
target reduction amount to the cost base.
9 -35 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Kaizen Costing
Manufacturing
Cycle
RD&E Cycle
Post Service
CycleKaizen Costing
9 -36 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
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
Kaizen Costing
1. Cost-reduction
system concept
2. Assumes
continuous
improvements in
manufacturing
3. Goal is to achieve
cost reduction
standards
9 -37 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Comparing Traditional Cost
Reduction to Kaizen Costing
Standard Costing
Techniques
1. Standards are set
annually or semi-
annually
2. Variance analysis
involves comparing
actual to standard
costs
3. Investigation occurs
when standards are
not met
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
9 -38 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Comparing Traditional Cost
Reduction to Kaizen Costing
Who has the best knowledge to reduce costs?
Standard Costing
Managers and
engineers develop
standards
Kaizen Costing
Workers are closest
to the process and
thus know best
9 -39 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Concerns About Kaizen Costing
uWhat is a concern about Kaizen Costing?
uThe system places enormous pressure on
employees to reduce every conceivable
cost.
uWhat is a cost-sustaining period?
uIt is a period that allows employees to learn
new procedures before Kaizen targets are
imposed.
9 -40 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 6
Discuss environmental
costing issues.
9 -41 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Environmental Costing
uPerhaps the best way to control and reduce
environmental costs is to use activity-based
costing.
uEnvironmental costs fall into two
categories:
u Explicit
u Implicit
9 -42 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Environmental Costing
uWhat are some examples of explicit costs?
u direct costs to modify technology and
processes
u costs of cleanup and disposal
u costs of permits to operate a facility
u fines levied by government agencies
u litigation fees
9 -43 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Environmental Costing
uWhat are some examples of implicit costs?
u administration and legal counsel
u employee education and awareness
u loss of goodwill if environmental disasters
occur
9 -44 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Learning Objective 7
Understand the process
of benchmarking the
best practices of other
organizations.
9 -45 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
Benchmarking
uWhat is benchmarking?
uIt is an organization’s search for
implementation of the best way of doing
something as practiced by another
organization.
uThe benchmarking process consists of five
stages.
9 -46 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Benchmarking Process
uStage 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
9 -47 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Benchmarking Process
uStage 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
9 -48 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Benchmarking Process
uStage 2 (cont’d.)
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
9 -49 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Benchmarking Process
uStage 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
9 -50 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Benchmarking Process
uStage 4
Information Gathering and Sharing Methods
Factors to Consider
Type of benchmarking information:
Product
Functional (process)
Strategic (includes management
accounting methods)
9 -51 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Benchmarking Process
uStage 4 (cont’d.)
Information Gathering and Sharing Methods
Factors to Consider
Method of Information Collection:
Unilateral
Cooperative:
Database
Indirect/third party
Group
9 -52 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Benchmarking Process
uStage 4 (cont’d.)
Information Gathering and Sharing Methods
Factors to Consider
Determine performance measures
Determine the benchmarking performance gap
in relation to performance measures
9 -53 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
The Benchmarking Process
uStage 5
Taking Action to Meet or Exceed the
Benchmark
Factors to Consider
Comparisons of performance measures
are made
9 -54 2001 Prentice Hall Business Publishing Management Accounting, 3/E, Atkinson, Banker, Kaplan, and Young
End of Chapter 9
