ADVANCED

MANAGEMENT ACCOUNTING

Dr. Ronny Andesto, S.E., M.M

Program Magister Akuntansi Universitas Mercu Buana
2021
 COURSE # 03
USING
COST MANAGEMENT SYSTEMS
FOR EFFICIENCY
 AGENDA

❑ Introduction ;
❑ Activity-Based Management ;
❑ Quality Costing ;
❑ Just-In-Time Operation ;
❑ Lean Production & Accounting.
 THE INTRODUCTION

ABC SYSTEMS
INFORMATION

OPERATING STRATEGIC
ACTIVITY-BASED ACTIVITY-BASED
MANAGEMENT MANAGEMENT

ABC Information to Make ABC Information to Make

Tactical Decision Strategic Decision
(Operating Efficiency) (Long-term Profitability)
 THE ACTIVITY-BASED MANAGEMENT
What Is It ?

❑ ABM is a system-wide, integrated approach that focuses management’s

attention on activities with the objective of improving customer value and
the profit achieved by providing this value.
❑ The Cost Dimension of ABM provides cost information about resources,
activities, and cost objects of interests such as products, customers,
suppliers, and distribution channels. This dimension’s objective is
improving the accuracy of cost assignments. This dimension is useful for
product costing, strategic cost management, and tactical analysis.
❑ The Process Dimension of ABM provides information about what activities
are performed, why they are performed, and how well they are performed.
This dimension’s objective is cost reduction. This dimension provides the
ability to engage in and measure continuous improvement.
 THE ACTIVITY-BASED MANAGEMENT
ABM Model

Cost Dimension Assign Cost to Cost

Manages Activity to
Objects Accurately
Improve Efficiency
& Profitability Resources

Process Dimension

Driver Performance
Activities
Analysis Measurement

Why ? What ? How Well?

Cost
Objects
 PROCESS VALUE ANALYSIS (PVA)
What Is It? Objective & Model

PVA : What Is It ? & Objective

❑ The PVA is an approach that focuses on processes and activities and

emphasizes system-wide performance instead of individual performance.
❑ The PVA Objective is cost reduction along activity performed.

PVA Model

Driver Performance
Activities
Analysis Measurement

Why ? What ? How Well?

 PROCESS VALUE ANALYSIS (PVA)
Overview

❑ The PVA provides information about why work is done and how well it is
done.
❑ The PVA involves Driver Analysis, Activity Analysis, & Activity
Performance Measurement.
❑ It is this dimension that connects process volume analysis to the concept of
continuous improvement.
❑ A key element of activity-based control is activity analysis – the process of
identifying and describing a firm’s activities, assessing their value to the
organization, and selecting only those that are of value.
❑ Cost reduction is realized by decreasing, eliminating, selecting, and sharing
activities. Emphasis is placed on identifying non-value-added costs and
eliminating them. These costs are the result of unnecessary activities and
inefficiencies found in necessary activities.
 PROCESS VALUE ANALYSIS (PVA)
Driver Analysis

❑ Driver analysis is the effort expended to identify those factors that are the
root causes of activity costs. For example, an analysis may reveal that the
root cause of treating and disposing of toxic waste is product design. Once
the root cause is known, then action can be taken to improve the activity.
Specifically, creating a new product design may reduce or eliminate the cost
of treating and disposing of toxic waste.
❑ Often, several activities may have the same root cause. For example, the
costs of inspecting incoming components (output measure = number of
inspection hours) and reordering (output measure = number of reorders)
may both be caused by poor quality of purchased components. By working
with carefully selected suppliers to help them improve their product
quality, both activities may be improved..
 PROCESS VALUE ANALYSIS (PVA)
Driver Analysis End

❑ Typically, root causes are identified by asking one or more “why” questions.
❑ Example :
➢ Why are we inspecting incoming components? Answer: Because some
may be defective.
➢ Why are we reordering components? Answer: Because some
components are judged to be defective by the inspection.
➢ Why are some purchased components defective? Answer: Because our
suppliers are not providing reliable components.
❑ Once the answers to the why questions are obtained, then the answers to
“how” questions are possible. Example: How do we improve the quality of
incoming components? Answer: By selecting (or developing) suppliers that
provide higher-quality components.
❑ The why questions identify the root causes, and the how questions enable
management to identify ways to improve.
 PROCESS VALUE ANALYSIS (PVA)
Activity Analysis

❑ Activity Analysis is the process of identifying, describing, and evaluating

the activities an organization performs.

Step 1 : What activities are performed ?

Step 2 : How many people to perform activities?

ACTIVITY
ANALYSIS
Step 3 : How many time & resource required ?

Step 4 : What are activities add value ?

 PROCESS VALUE ANALYSIS (PVA)
What Are Activities Add Value ?

ACTIVITIES

Value-Added Activities : Non-Value-Added Activities :

❑ Mandate Value-Added Activities; ❑ Reordering part and rework due
❑ Discretionary Activities : to defective part.
a. Activities produces a change ❑ Scheduling;
of state. ❑ Moving;
b. The change of state was not ❑ Waiting;
achievable by preceding ❑ Inspecting;
activities. ❑ Storing.
c. The activity enable other
activities to be performed.
 COST REDUCTION (EFFICIENCY)
THROUGH ACTIVITY MANAGEMENT

❑ Activity Elimination. This way focuses on eliminating non-value-added

activities.
❑ Activity Selection. This way involves choosing among various sets of
activities that are caused by competing strategies. Different strategies cause
different activities. Different product design strategies, for example, can
require significantly different activities.
❑ Activity Reduction. This way focus on decreases the time and resources
required by an activity. This approach should be aimed primarily at
improving the efficiency of necessary activities or act as a short-term
strategy for moving non-value-added activities toward the point of
elimination.
❑ Activity Sharing. This way focuses on increases the efficiency of necessary
activities by using economies of scale. Specifically, the quantity of the cost
driver is increased without increasing the total cost of the activity itself.
 PROCESS VALUE ANALYSIS (PVA)
Activities Performance Measurement

❑ Activity performance measurement is designed to assess how well an

activity was performed and the results achieved. Measures of activity
performance are both financial and nonfinancial and center on three major
dimensions : Efficiency, Quality, Time.

❑ Efficiency : Concerned with the relationship of activity outputs to activity

inputs. For example, activity efficiency is improved by producing the same
activity output with less inputs. Costs trending downward is evidence that
activity efficiency is improving.

❑ Quality : Concerned with doing the activity right the first time it is
performed. If the activity output is defective, then the activity may need to
be repeated, causing unnecessary cost and reduction in efficiency.

❑ The time : Concerned with cycle time and velocity.

 COSTS OF QUALITY
Definition & Category

❑ Costs of Quality are the costs that exist because poor quality may or does
exist.

❑ Category of quality cost :

1. Prevention costs : Costs that incurred to prevent poor quality in the

products or services being produced.
2. Appraisal costs : Cost that incurred to determine whether products
and services are conforming to their requirements or customer needs.
3. Internal failure costs : Cost that incurred because products and
services do not conform to specifications or customer needs. This
nonconformance is detected prior to being shipped or delivered to
outside parties.
4. External failure costs : Cost that incurred because products and
services fail to conform to requirements or satisfy customer needs after
being delivered to customers.
 COSTS OF QUALITY
Examples of Quality Cost by Category
 COSTS OF QUALITY
Examples of Quality Cost Report
 HIDDEN QUALITY COST
Method for Estimating & Illustration

❑ Multiplier Method
Total external failure cost = k (measured external failure costs)
where k is the multiplier effect. The value of k is based on experience.
For example, Westinghouse Electric reports a value of k between 3 and 4. Thus,
if the measured external failure costs are $3 million, the actual external failure
costs are between $9 million and $12 million. Including hidden costs in assessing
the amount of external failure costs allows management to more accurately
determine the level of resource spending for prevention and appraisal activities.
Specifically, with an increase in failure costs, we would expect management to
increase its investment in control costs.

❑ Market Research Method

Formal market research methods are used to assess the effect of poor quality on
sales and market share. Customer surveys and interviews with members of a
company’s sales force can provide significant insights into the magnitude of a
company’s hidden costs. Market research results can be used to project future
profit losses attributable to poor quality.
 HIDDEN QUALITY COST
Method for Estimating & Illustration End

❑ Taquchi Quality Loss Function (Taguchi QLF)

L (y) = k (y - T)2 k = c / d2
y = actual value of characteristics
T = target value of characteristic
k = proportionality constant which is dependent upon the cost structure
of the process of the organization

k = c / d2
c = loss associated with produced at the limit, assuming the loss at target
is zero.
d = distance from target value to specification limit.
 JUST-IN-TIME

❑ JIT is a demand-pull system whose objective is to eliminate waste by producing

a product only when it is needed and only in the quantities demanded by
customers.

❑ Many firms have adopted a JIT manufacturing approach. The overall thrust of
JIT manufacturing is supplying a product that is needed, when it is needed, and
in the quantity that is needed. JIT manufacturing emphasizes continuous
improvement and the elimination of waste.

❑ Successful implementation of JIT policies tends to reduce work-in-process

inventories to insignificant levels. Furthermore, manufacturing in a JIT firm is
usually structured so that process costing can be used to determine product
costs. Essentially, work cells are created that produce a product or subassembly
from start to finish.

❑ Costs are collected by cell for a period of time, and output for the cell is
measured for the same period. Unit costs are computed by dividing the costs of
the period by output of the period (following the process-costing principle).
 LEAN MANUFACTURING
Concepts & Benefits

❑ Lean Manufacturing : An operating approach designed to eliminate waste

and maximize customer value. It is characterized by delivering the right
product, in the right quantity, with the right quality (zero-defect), at the
exact time the customer needs it and at the lowest possible cost.

❑ Lean Manufacturing System : A cost reduction strategy that redefines the

activities performed within an organization.

❑ Lean Manufacturing Systems related to Cost Leadership Strategy.

❑ Five Principles of Lean Thinking :

➢ Precisely specify value by each particular product.
➢ Identify the “value stream.”
➢ Make value flow without interruption.
➢ Let the customer pull value from the producer.
➢ Pursue perfection.
 LEAN MANUFACTURING
Concepts & Benefits End

❑ Lean Manufacturing Systems allow managers to eliminate waste, reduce

costs, and become more efficient. Firms that implement lean manufacturing
systems are pursuing a cost reduction strategy by redefining the activities
performed within an organization. Cost reduction is directly related to cost
leadership. Lean manufacturing adds value by reducing waste. Successful
implementation of lean manufacturing has brought about significant
improvements, such as better quality, increased productivity, reduced lead
times, major reductions in inventories, reduced setup times, lower
manufacturing costs, and increased production rates.
 LEAN ACCOUNTING
Concepts

❑ Lean accounting is an approach designed to support and encourage lean

manufacturing.
❑ Lean Accounting organizes costs according to the value chain and collects
both financial and nonfinancial information.
❑ The objective of Lean Accounting is to provide financial statements that
better reflect overall performance, using both financial and nonfinancial
information.
❑ When company moving to a value-stream-based lean manufacturing
system, changes in both product-costing and operational control
approaches are needed.
❑ Major characteristics of lean accounting are Simplicity and Compatibility.
❑ Typical lean accounting approaches are average costing, value stream cost
reporting, and the heavy use of nonfinancial measures for operational
control.
 LEAN ACCOUNTING
Concepts End

❑ The average product cost is the total value stream cost of period divided by
the units shipped of the period.
❑ Value stream costing reports the actual revenues and actual costs on a
weekly basis (for each value stream).
❑ The lean control system uses a Box Scorecard that compares operational,
capacity, and financial metrics with prior week performances and with a
future desired state..
 LEAN ACCOUNTING
Implementation

❑ See Appendix in Chapter 16, pp. 577-580, Hansen, Mowen, Guan (2009),
Cost Management : Accounting & Control, Six Edition.