Managerial Accounting

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Quality, Change and Emerging Business Model

Module 010: Quality, Change and Emerging

Business Models

Course Learning Outcomes:

At the end of this module, the student will be able to:
1. Differentiate traditional management from strategic management
models.
2. Understand the importance of quality processes.
3. Identify the principles of modern management.
4. Identify the emerging business models and practices.
5. Explain the concepts of total quality management.
6. Classify and give examples of quality costs.
7. Understand the effects of change in relation with managing.
8. Expound new terms on quality management.
9. Relate just-in-time system with quality-based management.
10. Understand the effects of technology to process management.
11. Expound the importance of benchmarking and product life cycle.
12. Critically identify the principal steps in activity-based management.
13. Identify the four perspectives of Balanced Scorecard.
14. Know what business process re-engineering is and its effects to the
dynamics of management.

Recent Developments and Emerging Business Models

The continuing advancement in technology and changes in management philosophy have
paved the way for the introduction of holistic management accounting systems used to
generate information for management decisions. These developments have brought into
the forefront the importance of strategic management accounting.
The following is a tabulation of some of the techniques used in the performance of strategic
management accounting functions:
ABC Activity-based costing ERP Enterprise resource planning
ABM Activity-based management EMA Environment management accounting
AMT Advanced manufacturing technology FMS Flexible manufacturing system
BPR Business process reengineering JIT Just in time
BS Balanced scorecard MRP Material requirements planning 1
CAD Computer-aided design MRP Manufacturing resource planning 2
2
CAE Computer-aided engineering PDCA Plan, do, check, act cycle
CAM Computer-aided manufacturing SMA Strategic management accounting

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CIM Computer-integrated manufacturing TQM Total quality management

SMA Management Philosophy Technology

Techniques TQM ABM JIT BPR Kaizen EMA BS AMT CIM
ABC √ √ √ √
Backflush √ √
costing
Benchmarking √ √ √ √ √ √ √ √
Boston √ √ √
consulting
group
Building √ √
blocks
Contingency √ √ √ √ √
theory
Customer √ √ √ √ √
profitability
analysis
Decision tree √ √
analysis
Direct product √ √ √
profitability
Expected √
value and
probabilities
Life cycle √ √ √ √ √ √
costing
Mckinsey 7S √ √ √
Monte Carlo √ √ √
analysis
Pareto’s law √ √ √ √ √ √ √
PDCA cycle √ √ √ √
Target costing √ √ √
Theory of √ √ √
constraints
Throughput √ √
costing
Value chain √ √ √ √ √ √ √
technology
FMS √ √ √ √ √ √ √ √
ERP √ √ √ √ √
CAD √ √ √ √ √ √
CAM √ √ √ √ √ √
MRP √ √ √ √ √ √ √
MRP 2 √ √ √ √ √ √ √
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Quality, Change and Emerging Business Model

The Modern Business Environment

Managing has tremendously changed in the last two decades. The influential developments
in technological revolution, especially in the fields of electronics, coupled with new and
more sophisticated needs and wants of customers have permanently refaced
organizational structures, standards, processes and practices. Meeting deadlines,
optimizing resources, increasing productivity and efficiency and creating innovative ideas
have predominantly characterized business dealings and managing. Business entities are
now more interdependent than ever and outsourcing has become an attractive alternative
of doing things. Employees are increasingly empowered, multi-skilled and are confidently
accepting more responsibility. Trust and openness characterize human and organizational
relations and teamwork is encouraged versus individuality. Labor cost becomes a lesser
component of total production cost as processes are reengineered while machines and
equipment play significant components in the manufacturing process. Products are
manufactured based on global standards as customers intelligently demand for more.
Superiority of goods and services redefines the meaning of the law of supply and demand.
New ideas are encouraged and continuous search for improvements and betterment is
institutionalized. A high profile battle against inefficiencies and waste is ongoing. Speed
and accuracy give meaning to quality and excellence.
The business world has reawakened and started its stride towards perfection. The listing of
comparative attributes between the old ways of managing and the new ways of managing
is provided on page 4.

What the Customer Says...is Quality!

Quality may be associated with durability, color, size, thickness, price, delivery response
time, relationship or any measure of satisfying customers’ needs. The business of industrial
and commercial companies is to satisfy wants, needs, desires and even vanity. Satisfying
customers’ needs means finding what the customer wants. Customers are treated not only
as rational but intelligent players in the market who know exactly what they need or want.
In the end, the customers make the decisions. Hence, a lot of options must be offered. This
makes the market competitive among several business producers who treat buyers as the
“market king.” This philosophy stresses servicing what the customer wants and not what a
seller can do.
The Customer says The Seller says Quality means
 Power  Durability  Power
 Fashionability  Safety  Fashionability
 Portability  Bigness  Portability
 Comfort  Price  Comfort

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  Precision  Usability  Precision
 Design  Color  Design
 Length  Thickness  Length
 Price  Excellent materials  Price

The Paradigm Shift…New Way of Thinking

The ability of the customer to fully exercise its right in the marketplace coupled with the
calculated consent of the seller to align its efforts with what the buyer wants and needs
have redefined management philosophies, thinking and ways of doing things. These new
management concepts have confidently swept corporate boards, executive offices,
operating departments and production floors that brought profound changes in the
business environment. These changes may be classified as to business relationships,
psychology of employees, handling of activities, application of methods and the emergence
of new management terms.
Apparently, there is a difference between what the customer wants and what the producer
offers. For, example, the customer says he needs power while the seller says the customer
needs durability. In such case, the customer’s need is not satisfied. A sale may have been
made, but the need or want is not met and on the next occasion, when customers are given
options by other sellers, they may jump ship to a new vendor. To meet quality, producers
and sellers must know how to listen to the customer. Listening is the first order of a
successful sale. Then, the management process is done backwards. Production processes
and systems, operational procedures and policies, strategies, and standards are established
in accordance with what the customer says.
According to the American Society for Quality Control (ASQC), quality is the “totality of
features and characteristics of a product made or a service performed according to
specifications, to satisfy customers at the time of purchase and during use.” The dimensions
of quality include performance, aesthetics, reliability, serviceability, finess for use,
perceived quality and conformance.

Traditional Management vs. Strategic Management

Point of Reference Traditional Management Strategic Management
Business relationship  independent companies  interdependent companies
 suppliers are evaluated as to
their reliability and
credibility
Employees  individualism  integration
 creative, innovative
 takes responsibility with
initiative
 endeavors self-education and
improvement
 empowered
 multi-skilled
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Quality, Change and Emerging Business Model

 participatory
 demands for ownership (e.g.,
process improvement,
equity)
 labor cost has become fixed
and has diminished in total
 labor cost is now a part of
factory overhead or is
integrated in account
entitled as conversion costs
Activities  input-output based  process based
 product-oriented  process-oriented
Methods  inspection is made at end  inspection is made before the
of the process process
 organizational structure is  lean and mean
hierarchal and functional organizational system,
 production is labor- system-based
intensive  production is technology-
 use of mechanical oriented
equipment and  use of electronic and
machineries mechanical equipment and
 emphasis on company- machineries
customer relations  emphasis on supplier-
(forward approach) company-customer relations
 less investment in capital (integrated approach)
expenditures  heavy investments in capital
 generally, lesser cost of expenditures
production in the short-  generally, lower cost of doing
run business in the long-run
Managerial terms  line and staff  process re-engineering
 job description  process value analysis
 product  kaizen (continuous
 standards improvements)
 lead time  benchmarking
 job order costing, process  just-in-time
costing  backflush costing
 convenience-based  life cycle costing
management  activity-based costing and
 convenience-based costing activity-based management
 financial measures  non-financial and non-
quantitative measures
 balanced scorecard
 theory of constraints

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Principles of Modern Management
Change, Technology and Quality
As aptly put by renaissance philosopher, “there are only three permanent things in this
world – death, taxes, and change.” Indeed, change is here to stay.
Change is the genesis of quality environment. Change is precipitated and exacerbated by
technological advancements in electronics, biogenetic engineering, physics and other fields
of modern science. Because of the incessant changes in the business environment, people
and customers have recreated their needs necessitating adjustments on the way businesses
are done. Change is triggered by technology germinated by inventions and discoveries,
which, in turn, are crafted by needs. There is change because a need is not yet satisfied and
to satisfy a need, quality becomes a necessity.
In this world of turbulent changes and awesome technological advancements, customer
satisfaction is more than ever the prime business objective of profit. In meeting
sophisticated customer demands, utmost efficiencies and productivity must be applied and
improved. Errors, wastes and delays must be eliminated and avoided and customer
relations are intensified to eradicate customer complaints. In this way, customers are
delighted!

Serve the Customer…The King!

Customers are classified as external or internal. External customers are outside users of the
organization’s products while internal customers refer to those within the organization to
which products or services are delivered. Along the process, departments serve either as
suppliers to, or customers of, other departments. For example, the timekeeping department
is the supplier of time tickets to the payroll department, which in turn is the supplier of
payroll register to the accounting department. Consequently, the accounting department is
the supplier of payroll vouchers to the cash department, which is the supplier of cash and
payroll sheets to employees.
Customers, both internal and external, should be satisfied as to their needs and wants. A
delay or inaccuracy in delivering an internal business service would create a bandwagon
effect in causing an ultimate delay in delivering a service to external customer. Delay is one
of the most vicious enemies of quality environment.

In Search of Excellence
Many of the principles applied in modern organizations are mentioned in the book “In
Search of Excellence” authored by Tom J. Peters, Price Watermann, et.al. published in 1982.
This writing is a product of years of research in identifying excellent companies and
investigating the reasons why they performed excellently over the past 2 decades. The
authors identified the following principles practiced by excellent companies:
 A bias for action
 Close to customer
 Autonomy and entrepreneurship
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Quality, Change and Emerging Business Model

 Productivity through people

 Hands-on, value-driven
 Stick to the knitting
 Simple form, lean staff
 Simultaneous lose-tight properties
Instituting quality cannot happen overnight. It follows strategic stages of events and
phasing that involves the whole aspects of integrated business operations and internal
dynamics. It takes time to develop a quality environment.

5 S’s
One of the principles used in instituting quality is the 5S that stands for Sorting out
(Equivalent Japanese term for Seisu), Systematic arrangement (Seiton), Spic and Span
(Seiso), Standardizing (Seiketsu), and Self-discipline (Shitsuko).
All of these 5S are designed to fight inefficiencies and install order and discipline, register
higher yield, create a friendly and creative organizational climate and find out the best way
to satisfy customer needs. Sorting out means classifying tasks and processes, classifying
physical resources according to use, sizes, locations, age, etc. Systematic arrangement
refers to instituting best scientific processes to effect best methods, procedures and
processes using the best technologies. Spic and span (or sweep) refers to cleaning not
only physically but also intrinsically. Standardizing measures performance and
expectations as to output, actions, attitude, and processes. Self-discipline is the stage of
internalizing all the 5S and making it a way of living, thereby enhancing human relations,
interrelations and approaches which define organizational climate, cultures, dreams, and
excellent results.

Quality Costs
If you want quality, pay for it!
Instituting quality environment in an organization involves the top management who will
then show the way towards the possibility of attaining quality. In the process of producing
quality products and services, conformance costs and non-conformance costs are incurred.
Conformance costs cover the costs of prevention and appraisal. Non-conformance costs
include the internal failure costs and external failure costs. The major sources and specific
activity costs of these quality costs are identified as shown below:
Conformance Costs Non-Conformance Costs
Prevention Costs Appraisal Costs Internal Failure External Failure
Costs Costs
 Design  Product testing  Repairs, rework,  Product
engineering  Statistical retooling warranty (e.g.,
 Suppliers quality control changes (i.e., recalls and
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 evaluation and costs incurred to replacements)
management correct errors,  Product liability
 Employee etc. before (i.e., costs
training delivery to incurred to
 Equipment customers) correct errors
maintenance after delivery is
program made to
customers)
 Lost CM
Specific examples Specific examples Specific examples Specific examples
of activity costs of activity costs of activity costs of activity costs
 Systems  Inspection and  Rework costs  Handling of
development tests of incoming such as labor, customer
 Quality materials, in- overhead, re- complaints
engineering process goods, inspection, and  Field services
 Quality training and finished retesting of  Warranty
 Quality goods reworked repairs and
circles/cells  Supervision of products replacements
 Supervision of inspection and  Downtimes (within and
prevention testing activities  Disposal of outside the
activities  Depreciation of defective warranty
 Quality data test equipment products period)
gathering  Maintenance of  Analysis of the  Product recalls
analysis and test equipment costs of defects  Liability arising
reporting  Supplies, utility  Re-entering of from defective
 Quality and other data in the products
improvement incidental costs system  Sales returns
projects in the testing Debugging of and allowances
 Quality technical area software errors related to
support to  Testing costs at quality
suppliers the customer problems
 Audits of the sites  Lost
effectiveness of contribution
the quality margin on lost
system sales related to
 System quality
development problems

The venues in which quality costs are incurred are tabulated below:
Suppliers Company Customers
Suppliers evaluation Design engineering External failure costs
Suppliers’ management
Employee training
Equipment maintenance program
Testing
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Quality, Change and Emerging Business Model

Statistical quality controls

Internal failure costs

Conformance costs are those incurred in order to know what the customer wants,
producing the same and ensuring that the produce is in conformity with what the customer
wants. Conformance connotes precision and precision means an error-free environment.
The best way to avoid errors is to prevent them. Preventing errors should be done at the
very start. The best way to prevent an error is to cure it from the source. Quality says, “do it
right from the very first time.”
The original source of wants and needs is the customer. So, listen to what the customer
says and make a design based on it. Design has now become a very powerful tool in
manufacturing and in doing business. Designing is not the domain of only one person. The
process of designing should be participated by people from marketing, manufacturing,
distribution, finance, legal services, human resources, purchasing, supply chain, and
representatives from the customer chain. Once the design is done, suppliers are evaluated
as to their reliability and credibility, employees are trained, and equipment and
machineries are prepared, mounted, installed, and maintained.
Suppliers’ management refers to the careful selection of vendors to ensure that materials
will arrive on time and in accordance with specifications. This means cultivating long-term
relationships based on consistently meeting demands and schedules for long-term business
relationships. Employees shall be continuously trained to heighten awareness, give the best
technical preparation, improve self-esteem and self-respect, make them understand more
about people and organizational culture, and create an active, dynamic, well-motivated,
intelligent row of personnel. Employees must be involved in the problem solving at source.
Checking and inspecting of work is the responsibility of every employee, group,
department and supplier. Employees should be involved and empowered. Many companies
have restructured their production by forming manufacturing cells or work cells. In this set
up, employees learn how to work in a team and individual responsibility has been eclipsed
by team’s responsibility. Individualism has been overtaken by teamwork. Rewards and
recognition for quality improvement are grouped, oriented, and based on quality measures.
Equipment repairs are to be avoided. Repairs denote inefficiencies, machine downtimes,
and production disturbances. Errors should be avoided in the process. To avoid the
irritating occurrence of repairs, an efficient and effective equipment maintenance program
should be in place. Consequently, machines’ commercial use has been shortened,
maintenance spells machines utility and repairs shall be avoided along the way.
Inspection is done to detect conformance to established processes. In case where defects
are detected on a product before delivery to customers, internal failure costs will be
incurred. This cost includes the cost of repairs, tooling changes, and production downtimes.
Once the product is delivered and customers discover the defects or errors, an external
failure cost will be incurred. This cost includes product warranty costs, liability damages,
parts, and incremental costs of addressing and correcting the complaint.

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 There is an observed inverse relationship between conformance costs and non-
conformance costs. That is, if conformance cost is increased, the non-conformance cost
consequently decreases, and vice-versa.

Quality Costs
Quality costs are accumulated from the initial point of research and development through
customer servicing. Conformance and non-conformance cots are to be accumulated per
activity, batch, and plant. Normally, if conformance costs are given more budget, the costs
of non-conformance consequently decline.
Total quality cost is the sum of conformance (e.g., prevention and detection) and non-
conformance (or failure) costs. Increasing conformance costs would reduce non-
conformance costs. The object is to reduce the cost of errors and customer complaints and
dissatisfactions. As the failure costs start declining, efforts should be directed to
intensifying prevention costs than appraisal costs. Errors are less costly when prevented
rather than when detected.

Change and Managerial Lingo

There are two viewpoints of instituting quality environment in an organization. One is
business process re-engineering (BPR) and the other is kaizen (i.e., continuous
improvement). They are not exclusive from each other but are both applied in managing
change. BPR and kaizen have basic elements – process mapping and process value analysis.

Process Mapping and Process Value Analysis

Process mapping (i.e., input to output) lines up activities from the start to the end of a
process cycle to show the connections of different activities in completing a particular cycle
(e.g., production cycle, specific department or unit cycle). Process value analysis shows the
relevance of the interrelationships and interdependencies of the activities in a given
process to determine their usefulness, identifying possible areas where improvements
could be done, and creating options on how to make the process more relevant and
feasible.
In process value analysis, activities are classified as either value-added or non-value added.
Examples of activities measured in time are process time, move time, wait time, and
inspection time. Process time is a value-added activity while move time, wait time and
inspection time are non-value-added activities. Based on this, the Cycle Efficiency Rate is
determined as follows:

Manufacturing Cycle efficiency Rate = Process Time / Throughput time

Throughput time (or manufacturing time) is the sum of all activities from input to output
which includes process time, wait time, move time and inspection time.
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Illustration: Manufacturing Cycle Efficiency Rate

After analyzing and identifying the time spent in completing a production process, the
following were observed:
Wait time – from the time the order is placed to the
date the units are delivered and received 5.0 days
- from start of production to completion 7.0 days
Inspection time 2.5 days
Process time 3.0 days
Move time 2.5 days
What is the manufacturing cycle efficiency rate and the delivery cycle time?
Solutions/Discussions:
Manufacturing Cycle Efficiency Rate = Process Time / Throughput Time
= 3 days / 15 days
= 20%
Throughput time is 15 days (7 + 2.5 + 3 + 2.5).

Delivery cycle time = Throughput time + Suppliers’ lead time

= 15 days + 5 days
= 20 days

Business Process Re-Engineering

Process re-engineering is a macro approach to process improvement. It needs a new
paradigm (i.e., mental frame) of doing the process. Process re-engineering is revolutionary,
makes an overhaul of the process (i.e., paradigm shift), and definitely needs the
involvement of the top management. For example, a mental shift happens when the seller
listens before serving customers instead of assuming what they need. Such is the major
change in the way managers are conducting businesses now. Process re-engineering
creates new standards, beliefs, goals, practices, procedures, and systems of doing things.
The main writing on this topic is from Hammer and Champy’s Reengineering the
Corporation (1993) from which the following discussions are lifted:
Business Process Re-Engineering (BPR) is the fundamental rethinking and radical design of
business processes to achieve dramatic improvements in critical contemporary measures
such as cost, quality, service, and speed.
The key words here are fundamental, radical, dramatic, and process.
 Fundamental and radical mean that BPR starts by asking basic questions like “why
do we do what we do?’, without making any assumptions or looking back to what
has always been done in the past.
 Dramatic means that BPR should always achieve “quantum leaps in performance.”
Not just marginal incremental improvements.

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  A process is a collection of activities that takes one or more kinds of input and
creates an output. It is the processes that are subject to fundamental and radical
changes to achieve dramatic improvements. A re-engineered process has certain
characteristics:
 Often several jobs are combined into one.
 Workers often make decisions.
 The steps in the process are performed in a logical order.
 Work is performed where it makes most sense.
 Checks and control must be reduced and quality “built-in”
 One manager provides a single point of contact.
 The advantages of centralized and decentralized operations are combined.
According to Hammer, the principles of BPR are:
 Processes should be designed to achieve a desired outcome rather than focusing on
existing tasks.
 Personnel who use the output from a process should perform the process. For
example, a company could set up a database of approved suppliers. This would
allow personnel who actually require supplies to order from themselves, perhaps
using on-line technology, thereby eliminating the need for a separate purchasing
function.
 Information processing should be included in the work which produces the
information. This eliminates the differentiation between information gathering and
information processing.
 Geographically dispersed resources should be treated as if they are centralized. This
allows the benefits of centralization to be obtained, for example, economies of scale
through negotiation of supply contacts, without losing the benefits of
decentralization, such as flexibility and responsiveness.
 Parallel activities should be linked rather than integrated. This would involve, for
example, coordination between teams working on different aspects of a single
process.
 Doers should be allowed to be self-managing. The traditional distinction between
workers and managers can be abolished. Decision aids such as expert systems can
be provided where they are required.
 Information should be captured once at source.
Most business organizations that have adopted BPR have developed the following key
characteristics:
 Work units change from functional departments to process teams where team
members are expected to have multi-skills in handling the tasks needed in the team.
 Job enlargement and job enrichment where people do more as each team member is
responsible for results.
 People empowerment where team members are empowered to make decisions
relevant to the process.
 Performance measures concentrate on results rather than activities. Process teams
create value which is measurable.
 Flat organizations, rather than hierarchal, is prevalent where people work as a
whole team, recognizing team’s responsibility on the task at hand, resolving
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interdepartmental issues in a team’s level requiring less managerial intervention,

and allowing lines of communications to “naturally” develop around business
processes.
The emergence of business process re-engineering has given way to the importance of
value chain analysis where the interrelationship and interdependence of players in the
entire value creation network are emphasized. The link between different departments the
business and its relationships with external parties (i.e., suppliers, customers) are
recognized creating independence among them. Interdependence may be viewed as
follows:
 Pooled interdependence where each unit works independently of the others, subject
to achieving the overall goals of the enterprise.
 Sequential interdependence where there is a sequence (or a linked chain of
activities) with a start and end point. For example, the output of a preceding
department in an assembly line must be precise enough to serve as a valuable input
to this department of which output must be accurately fitting to the input need of
the next department.
 Reciprocal interdependence where the output of one department becomes the input
of another department whose output is also an input of the first department.
The significant changes caused by the introduction of BPR have reshaped some of the
fundamental processes in accountancy. Responsibility centers have been modified in
response to the layering of organizational structure, information becomes much more
detailed to identify the creations of values in each segment and activity, and new variances
are identified and developed explaining deviations of expectations from actual results. The
BPR has the following implications for the accounting systems:
ISSUE IMPLICATIONS
Performance measurement Key performance measures must be built
around processes not departments. This
may affect the design of responsibility
centers.
Reporting There is a need to identify the values being
added in each responsibility center and
process.
Activity Activity-based costing might be used to
model business processes.
Structure The complexity of the reporting system will
depend on the organizational structure.
Variance analysis New variances have been identified.

Kaizen
Kaizen is a Japanese term which refers to the process of continuously improving systems,
interrelationships, processes, set-ups, policies, and other details of activities.
Improvements are done not in a wholesale fashion but also in retail, piece by piece manner.
Improvements and betterments could be done in every d=facet of business operations, in
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 every department or unit, in every business dynamics and dealings. Small improvements
gained from different activities are powerful building blocks. As the saying goes, “a journey
to a thousand miles begins with a single step!”
Several methods are used in the objective of continuously improving processes. The Plan-
Do-Check-Act Cycle (PDCA) or the Deming Wheel is a “management by fact” or a
scientific approach to continuous improvement model based on a process-centered
approach. An interpretative PDCA matrix is shown below:
STEPS ACTIVITIES TECHNIQUES
Plan Studying the current process Process mapping, process value analysis

Collecting and analyzing data Fish-bone analysis, Pareto analysis,

to identify causes of problems histogram, scattergraph

Planning for improvement Regression analysis, statistical control

charts, linear and dynamic programming,
trend analysis, Taguchi quality loss
function, PERT/CPM, Gantt Chart, Learning
Curve Theory, Product Life Cycle, Theory of
Constraints, Activity-based management,
scoreboard approach

Deciding how to measure Benchmarking

improvements
Do Small-scale implementation Pilot testing
Check Determine what happened Results evaluation, variance analysis,
hypotheses testing
Act Experiment is successful. Plant-wide conversion

Experiment is unsuccessful. Go back to planning

Just-In-Time (JIT) Management

Speed Up the Manufacturing Cycle
The idea is very basic. Materials should arrive just-in-time they are needed in the
production process and the conversion process is completed just-in-time delivery to
customers is to be made. In short, materials storage and warehousing should be eliminated,
fished goods warehousing should be avoided, and the production process should be
expedited to its best performance without sacrificing accuracy. There are several
conditions in the successful implementation of a just-in-time inventory management,
namely:
Unqualified Support from Top Management
The concept of just-in-time management is too revolutionary to be handled by
middle and lower management. The greatest success factor in applying the JIT
system is a strong support from top management. Tis is needed as flow of goods,
machines, and activities is modified, allocation of substantial amount of financial
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resources as the initial stage of implementation is done, and a ground-zero

installation of organizational culture, attitude and work ethics are needed.
Use of electronic technology (i.e., electronic data interchange or even telephone calls)
and highly efficient lines of telecommunications in the integrated operating process
are greatly in use.
The application of JIT system is made easily possible by the advances in electronics
and telecommunications fields. As databases in production requirements and
scheduling are shared and communications between and among industries have
been dramatically shortened, the order lead time and suppliers’ delivery lead time
have continuously reduced, thereby reducing likewise the overall delivery cycle time
to customers. Suppliers are sometimes given a blanket purchase order in delivering
needed materials on time.

Retention and Maintenance of Reliable Suppliers

Companies who have undertaken the JIT system were forced to evaluate their
suppliers according to their reliability, dependability and fitness in an integrated
quality environment. In integrated quality environment, the suppliers (i.e., back-end)
and the customers (i.e., front-end) should also be managed to ensure accuracy and
timeliness of material inputs and in defining and designing specifications from
customers. Suppliers who cannot meet the standards demanded in a quality
environment are dropped and only those that have the capability to participate in a
quality process shall be retained and maintained.

Most Efficient Equipment and Machinery Maintenance Program

Equipment and machineries should always be on their top condition and
performance to avoid the unnecessary costs of production stoppages, downtimes,
repairs, and lost sales. In a quality production environment, if an equipment is
stopped due to repairs or human errors in the production line, the entire line and
connections of equipment are put in halt and the error or repair be corrected. If work
stoppages occurred on account of poor equipment performance, schedules are not
met, customers become dissatisfied, costs soar up, and business eventually fails. To
avoid this unwanted situation, equipment should always be maintained at its best.
Well-Trained, Responsible, and Quality-Oriented Personnel
Employees and personnel are empowered in a quality environment. They are given
the chance to improve their work processes on their best approaches, skills and
understanding and are also rewarded and recognized according to their performance
and skills. To do this, they are developed to work with others and extol human
relationships and interrelationships.
They are honed not only as individuals but as valuable members of a team. The team
is also called a manufacturing cell or work cell. The team is responsible in designing
its work flows, dealings with suppliers, dealings with freight forwarders, and meeting

Course Module
 customers’ demands. The team practices the musketeers’ principles of “one for all
and all for one.” The fault of a teammate is the fault and inadequacy of the team and
all its members. Employees are forced to be multi-skilled and do multi tasks. Along
the way, team standards, systems, processes, and socialization occur of which all
team members are expected to conform. Non-conformity results to delays,
inefficiencies, and poor yield.
It does not preclude, though, innovative suggestions and critical thinking with the
end in view of improving the process. Creative thinking and innovative suggestions
are highly encouraged, rewarded and recognized.

Effective and Efficient Design Department

Design defines what needs to be done. It clearly articulates what the customer wants.
It is the cornerstone of a quality product. Design means precision and accuracy. It
encourages involvement of customers and suppliers.

Use of Statistical Quality Control Techniques

Monitoring quality process needs models and tools to identify conformance and
deviations. Statistical control techniques serve as an early warning device that
releases managers’ adrenalin to urgently attend to a problem potential or possible
problem. Examples of statistical controls are linear programming, regression
analysis, PERT/CPM, Gantt Chart, graphs, Pareto rule and fish-bone analysis. These
statistical control techniques are primarily preventive in nature.

Improving Plant Layout

As employees ae given the authority to improve their work processes, production
layout is changed from a functional, separate-oriented production process into an
integrated production process. Equipment are not arranged according to their
similarity of output but on their process relationship with other equipment.
Machines and equipment are now arranged in an input to output involvement. These
machines are used and maintained by responsible employees who are accountable in
their production output and machine performance. This is one of the changes created
by work cells.
JIT and Velocity
Manufacturing velocity refers to the speed with which units or tasks are processed in a
system. In an industry characterized by high technology, shortening product life cycles, and
continuous improvement, the quickness of response time to customer spells success to
survival and survival to failure.
For example, if there are 4,000 units in a given process at a given time and the process
produces 1,000 units a day, how long will it take a unit to complete. The answer is 4 days
(i.e., 4,000 units / 1,000 units a day).

Manufacturing velocity = No. of units in a process / Production rate

 Managerial Accounting
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Quality, Change and Emerging Business Model

To reduce the manufacturing process or increase the velocity, the number of units in
process should be reduced or the number of units produced per day should be increased.
To illustrate further, consider the ordinal data of 4,000 units in process and 1,000 units
produced a day, let us assume that the in-process is reduced by 40%. Then, the velocity
shall be:
Before After
In-process 4,000 units 2,400 units = (4,000 x 60%)
Production rate per day 1,000 units 1,000 units
Manufacturing velocity
(4,000 units/1,000 units a day) 4 days
(2,400 units/1,000 units a day) 2.4 days
The manufacturing velocity has been reduced by 1.6 days (i.e., 4 days – 2.4 days). In
addition, the in-process inventory is significantly reduced which means savings in carrying
costs but may have consequent increase in ordering costs. One way to increase
manufacturing velocity is by increasing the production rate which is other concern of the
JIT system.
The costing system used in the JIT philosophy is backflush costing.

Activity-Based Management
The application of the activity-based costing (ABC) has been magnified into a full-blown
management philosophy known as the activity-based management. The terms activity-
based management and activity-based cost management (ABCM) are used to describe the
cost management of ABC.
The keystone of ABM system is the management of activities. Activities comprise processes
which are to be analyzed and redefined in accordance with the objective of greater
customer satisfaction. Each activity is to be tested as to its significance in the newly defined
process. It is to this reason that activities are grouped as to either value-added or non-
value-added.
Keplan, et.al. in Management Accounting defines ABM as “the management process that
uses the information provided by the activity-based cost analysis to improve organizational
profitability. Activity-based management (ABM) involves performing activities more
efficiently, eliminating the need to perform certain activities that do not add value to
customers, improving the design of products, and developing better relationships to
customers and suppliers. The goal of ABM is enable customer needs to be satisfied while
making fewer demands on organizational resources.”

The ABM Process

1. Identify the activities
Course Module
 In activity-based management, processes are mapped and analyzed. The activities
comprising a process are identified and classified as to either value-added or non-value-
added. Value-added activities are those where customers are willing to pay for it. If
customers are not willing to pay for an activity in the process of ordering and receiving
the goods or services, then such is a non-value-added activity.
An activity uses time and costs. The classification of business activities as to tie is
categorized as follows:
 Process time (i.e., production time, performance time) in which the actual
transformation of materials and other production input are made to produce the
ordered goods or services.
 Inspection time where errors, inefficiencies, and breakdowns are monitored,
reported, and remedied.
 Wait time (i.e., idle time, storage time) where men, machines, materials, and money
are held in inertia either in a standstill or waiting fashion without creating value in
the production of goods or services.
 Move time (i.e., transfer time) where men, materials and other factors of
production are moved from one place to another without necessarily contributing to
the quality of the goods or services to be delivered.
Process time is the only value-added activity. The three other time, i.e., inspection, wait,
and move time, are non-value added activities. Non-value-added activities ought to be
eliminated or reduce to their possible minimum exposure and cost. Value-added
activities should also be reduced to their optimum time and costs. The objective of ABM
is to enable customer needs to be satisfied while making lower demands for
organizational resources.

2. Determine the cost drivers

Cost drivers are activities that trigger the incurrence or non-incurrence of costs or these
are the activities that drive the incurrence or non-incurrence of costs. The control and
management of the cost drivers would mean the control or management of costs.
Cost drivers may be classified according to their relationship to activities in the
production process. First, a production plant is to be provided. Second, a product is to
be produced. Third, a production batch may be ordered. Fourth, machine, materials,
men and other inputs of actual production process are needed. Along this line, the
mapping of the cost drivers may be as follows:

Classification Necessity of Cause of Cost Drivers Types of

Costs Costs Costs
Production Supports the Production Square footage Plant
level, overall operations, occupied depreciation
organizational production operations Costs of assets Insurance
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Quality, Change and Emerging Business Model

level or environment and general Square meter Security

facility level environment Kilowatt hours Electricity
Product level Supports a Development Design hours Design
or process product type , production Testing hours Testing
level or a process or Advertising Advertising
acquisition of occurrences
goods or
services
Batch level Once for each Batch Setup hours Setups
batch production, Materials move Transfer
produced scheduling, Orders processedOrder
resources processing
transfers and handling
No. of engineering Engineering
change orders change
orders
No. of materials Materials
handling handling
Design hours Design
changes
Inspection hours Inspection
Unit level Once for each Consumption DLH Direct labor
unit of direct Units of materials Direct
produced resources materials
3. Set the operational control environment
Managers should have a clear understanding of the activities they handle, where the
costs are incurred and for what purpose.
Costs should then be accumulated not by functional occurrences but by activity
groupings and influences. It is in this mode of information collection and reporting that
a manager would know his breakeven point, contribution margin, the process in
preparing budgets, and decide whether to accept or reject special sales order, make or
buy a part, drop or continue an organizational segment, and such other similar business
decisions.
The decisions to be made should also be in line with the evaluation models, standards,
and bases where manager’s performance would be evaluated.
4. Set the evaluation platforms
Managers ought to be assessed as to how they use their authorities, do their
assignments, deliver results, and perform their duties in accord with the overall goal of
enhancing shareholders’ value.
Area of Evaluation Explanation Evaluation Measures
Volume It refers to the number of Manufacturing velocity,
units produced or services service velocity,

Course Module
 rendered indicating the manufacturing cycle, and
capacity utilization and partial productivity rates
throughput time. It may also
refer to speed in producing
goods or delivering services
and the number of times the
same goods or services are
delivered in a period (e.g., a
year)
Time It indicates the ability of the Manufacturing cycle
manager to eliminate or efficiency, throughput
reduce non-value-added time
activities resulting to quicker
response time to customers’
orders leading to to
customer satisfaction
Quality This relates to the level by Number of or percentage
which customers’ orders, in terms of customer
wants, and needs are complaints, late deliveries,
satisfied by receiving repeat sales returns, repeat
orders or initiating orders orders, new orders, etc.
from new customers. Quality
may also be manifested by
customers responses such as
return orders and
complaints.
Cost Financial measures such as Cost driver rates such as
in terms of cost per driver per set-up, per number of
should be established to parts, per order processes,
assess financial effectiveness etc.
and to properly
communicate to managers
on possible techniques of
managing activity costs.
5. Set the culture for continuous improvements
Once the environment has been converted into the ABM systems, people should be
encouraged continuously to identify areas and suggest possible mechanisms for
improvements for greater customer satisfaction. Processes should be continuously
analyzed and mapped out, activities should be carefully managed and controlled, and
chains and linkage should be improved to increase productivity, savings, speed in
response time, and systems accuracy, all in the name of increasing shareholders’ value.

Other Issues
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21
Quality, Change and Emerging Business Model

ABM also integrates into its systems the principles of benchmarking, business process re-
engineering, customer profitability analysis, and pricing and product mix decisions using
activity-based costing.
Benchmarking is a process where standards (i.e., marks) are set at the current level of the
highest performance, also known as “best-in-class practices”, analyzing the strategies and
techniques employed for such performance, developing models for the adoption or
improvement of such benchmarked strategies, and executing plans to meet and beat the
standards set.
Business process re-engineering is a strategic model of redefining the processes applied to
shorten business cycle time, improve the accuracy of meeting customer orders and
specifications, and create customer’s value.
Customer profitability analysis is a technique of understanding and analyzing the
contribution of each customer or group of customers to the overall profitability of an
enterprise. Profitability can vary widely between different customers because various
overhead costs are, to some extent, variable or customer-driven.
Regular and special pricing decisions need accurate costing system to set a competitive and
strategic pricing. This normally influences the decision of the customer whether to place an
order or not.
Product-mix decisions also need an accurate report as to the profitability performance of
each product. This would give critical information as to the mxing of products to optimize
returns.

Problems with ABM

Organizational Fitness
Setting ABM in motion needs the right organizational culture. The organization should be
prepared to the point where men are ready to accept and adjust to the new way of doing
things. Resistance should be minimized, misunderstanding should be cleared, and
acceptance of the new system should be in place. Benefits over the systems should be
communicated across responsibility lines and systems should be easy to execute to
encourage use and good results.
People should be thoroughly trained to the philosophy, principles, processes, management,
and expected results to encourage fitness and applicability

Benefits Over Costs

The installation of ABM entails cost, a cash outlay. The benefits to be derived from the new
system should be clearly identified and measured. The benefits to be received from the
ABM must exceed the cost of system development, installation, adjustment, operation, and
maintenance to firmly justify its use.

Illustration: Customer Order Processing Activity

Course Module
JKL Company has been collecting and reporting data along the functional lines of business
activities. It is entertaining the benefits of activity-based management and has started
accumulating data in this respect. The following data have been provided with respect to
the customer processing activities:

 Activities and identified activity drivers

Activity Drivers
Preparation Receipt Assessment of Expedition Resolution Total
of of customer of orders of
quotations customer creditworthiness customer
orders problems
DLH 0.2 0.2 0.3 0.1 0.2 1.0
No. of 25 20 5 50
letters
processe
d
No. of 5 3 2 10
travel
orders
No. of 2 3 3 2 5 15
telephone
calls
Machine 1 0.2 0.8 1 1 4
hours

 Related costs are assembled per traditional accounts and subsequently allocated based
on their activity drivers, as follows:
Costs Allocation
Activities Preparatio Receipt Assessment of Expeditio Resolutio Totals OH Rate
Functional n of of customer n of n of per
Expenses quotations custome creditworthine orders customer Driver
r orders ss problems
Salaries P2,000 P2,000 P3,000 P1,000 P2,000 P10,00 P10,000
0 per DLH
Stationery 4,000 3,200 800 8,000 P160 per
letter
processe
d
Travel 1,500 1,500 1,000 5,000 P500 per
travel
order
Telephone 500 750 750 500 1,250 3,750 P250 per
telephon
e call
Equipment 3,000 600 2,400 3,000 3,000 12,000 P3,000
depreciatio per
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23
Quality, Change and Emerging Business Model

n machine
hour
Totals 9,500 3,350 11,850 6,000 8,050 38,750
No. of units 10,000 10,000 10,000 10,000 10,000 10,000
sold

Required:
1. Present a comparative tabulation of costs using the traditional costing system and the
activity-based costing system.
2. Determine the new cost per activity driver and the new product cost per unit after the
non-value-added activities are eliminated.
Solutions/Discussions:
1. The financial data above may be presented, with respect to traditional costing and
activity-based costing, as follows:
Traditional Analysis ABC Analysis
Salaries P10,000 Preparation of quotations P9,500
Stationery 8,000 Receipt of customer orders 3,350
Travel 5,000 Assessment of customer creditworthiness 11,850
Telephone 3,750 Expedition of orders 6,000
Equipment 12,000 Resolution of customer problems 8,050
depreciation
Total P38,750 Total P38,750

2. The new activity cost per driver and the product cost per unit are as follows:
Activity Drivers
Preparation Receipt Assessment of Expedition Resolution Total
of of customer of orders of
quotations customer creditworthiness customer
orders problems
DLH 0.2 0.2 0.1 0.2 1.0
No. of 25 25
letters
processe
d
No. of
travel
orders
No. of 2 2 5 9
telephone
calls
Machine 1 0.2 1 1 3.2

Course Module
 hours

Costs Allocation
Activities Preparatio Receipt Assessment of Expeditio Resolutio Totals OH Rate
Functional n of of customer n of n of per
Expenses quotations custome creditworthine orders customer Driver
r orders ss problems
Salaries P2,857 P2,857 P1,429 P2,857 P10,00 P14,286
0 per DLH
Stationery 8,000 8,000 P320 per
letter
processe
d
Travel
Telephone 833 833 2,084 3,750 P416.67
per
telephon
e call
Equipment 3,750 750 3,750 3,750 12,000 P3,750
depreciatio per
n machine
hour
Totals 15,440 3,607 6,012 8,691 33,750
No. of units 10,000 10,000 10,000 10,000 10,000
sold
Activity P1,544 P3,607 P6,012 P8,691 P3,375
cost per
unit

Balanced Scorecard
Introduction
First, there must be a goal. Second, there must be a strategy. Then, there must be a
balanced scorecard.

Goal
A goal is an abstract expression of the enterprise’s desired state of affairs or things to
accomplish. An enterprise goal may be expressed in many ways, such as to be the leading
provider of technology, the best producer of appropriately skilled manpower, the most
efficient distributor of health products, or the least-cost provider of retail services. In
business terms, all of these goals should be geared towards an enterprise’s objective of
increasing shareholders’ value and wealth. This means that the goal should be translated
into financial terms. To accomplish it while minimizing business risk, a managerial
planning and controlling process should be in place before actions are to undertaken. This
forces the development and selection of appropriate strategy to materialize the enterprise
goals.

Strategy
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25
Quality, Change and Emerging Business Model

Strategy may be developed by zeroing-on in the income statement of an enterprise or on its

balance sheet or statement of cash flows. If the enterprise focuses on its income statement,
its strategy may be “product differentiation” or “cost leadership.” Other strategies are
“confrontational strategy” and quick-response strategy.”
Product differentiation relates to producing products where the enterprise can dictate
leadership through branding, unique customer service, strategic pricing, technology
orientation, and product innovations. This strategy normally applies in a technology-driven
market, high-end market, and other markets where buyers have more than adequate
economic power to subscribe to the products offered.
Cost leadership relates to the enterprise’s awareness and efforts to reduce its costs and
expenses through means and measures that would result to the least possible cost of
producing goods and services. This may be done through employment of skilled and
productive personnel, efficient machines, effective alignment of duties and rewards
systems, and properly maintaining beneficial business relationships with suppliers,
customers, and government regulators.
Strategy describes how an organization matches its own capabilities with the opportunities
in the marketplace to accomplish its overall objectives. In developing a strategy, industry
analysis should be focused with respect to competitors, potential entrants into the market,
equivalent products, bargaining power of customers, and bargaining power of input
suppliers.

Balanced Scorecard (BS)

Once the strategy is developed, the next step is to operationalize it. This is where the
importance of balanced scorecard comes into play.
Balanced scorecard is a system used to effectively communicate strategies into concrete
terms to all personnel of the organization, identify key success areas to focus the attention
of all members in the organization, and critically link series of performance measures to
monitor the ongoing series of successes and failures in the implementation of strategies on
the road towards the achievement of corporate goals.
Balanced scorecard comes in after the business strategy is developed or chosen. It is not
used to find or invent strategy nor it is a tool in selecting a strategy.

The BS Philosophy
The objective of business activities is always to maximize the owners’ wealth. This means
measuring the performance of the enterprise in terms of money. In the process of doing so,
there are activities that need to be performed. Te need of the customer must be identified,
the internal resources of the enterprise must be harnessed, and the long-term capability of
the enterprise to sustain its business must be in place.
The Balanced Scorecard has four (4) important perspectives of performance that need to
be measured as indicators of enterprise success. These perspectives are customer

Course Module
perspective, internal business perspective, innovation and learning perspective, and
financial perspective.
A tabulation of the frouping of those important perspectives and activities, together with
their inherent business goals, is shown below:
The Balanced Scorecard
Success Perspectives Activities Goals
Indicators
Lead activities Customer This involves knowing what the Satisfy the
customer really wants and customer’s wants
serving what the customer wants. and needs.
This process includes listening to
customers, making design to fit
what the customer wants,
showing prototype to confirm
what he really wants, and
delivering the goods or services
on the date the customer wanted
it to be.
Internal This measures the capability of Tap the most
business the enterprise to deliver what the fitting and
customer wants at the least cost economical
of doing business possible. In this resources
category includes the use of available.
production variables such as
machines, men, money and
materials in order to create,
produce, make or in any way
obtain the goods or services
wanted by the customer.
Production variables should
always be on their top operating
conditions, free from repairs,
errors, absences, wastages and
other forms of system
inefficiencies which would result
to lower productivity ratios.
Innovation This indicates the capability of Sustain the
and learning the enterprise to generate new capability of the
knowledge, systems, techniques, enterprise to meet
patents, inventions, methods, and future customer
processes that would contribute demands through
to better business performance in the acquisition of
terms of meeting at its best new skills and the
customer wants and improving development of
internal processes for greater new products at
market share or lower business the best business
 Managerial Accounting
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Quality, Change and Emerging Business Model

costs. environment
possible.
Lag activities Financial This measures the ability of the Optimize the use of
enterprise to use money and money and owners’
other enterprise resources to wealth.
generate money and other
expressions of wealth. This
involves the areas of investment
risk, financing risk, operating risk,
and general business risk which
have always the potential of
diluting the wealth of the owners.
The customer, internal business processes, and learning and growth perspectives are
considered leading activities because they are the initial and required activities to be done
to generate revenues, incur costs, derive profit, and increase the enterprise’s wealth. In
short, they lead in generating financial performance.
The BS philosophy basically says that if an enterprise precisely identifies and delivers the
needs and wants of a customer then he will be satisfied and would make repeat order or
would encourage others to make the same orders resulting to greater revenues. In the act
of delivering the precise goods or services, organizational resources would be used, and the
enterprise must organize and see to it that these resources are on their top operating
conditions, best coordination, engaging the best production operating systems to
accurately produce the goods and services at the least cost possible. In the long range, the
enterprise should endeavor to generate new systems, processes, and technology to
continuously improve the business environment, offer new products, and stay alive in the
competition. All of these are done in the name of increasing business wealth.
For each of the four (4) perspectives used in the balanced scorecard philosophy,
performance indicators are to be established to monitor and measure operating and
financial success, such as those shown in the box below:
Perspectives Goals Measures
Customer New product Percentage of sales from new products
Responsive supply On-time delivery (as defined by
customer)
Preferred supplier Share of key account’s purchases
Ranking by key accounts
Customer partnership Number of cooperative engineering
efforts
Other measures: market share,
customer retention percentage, time
taken to fulfill customer requests,
hours of customer training for using
the product
Internal business Technology capability Manufacturing configuration vs.
competition
Course Module
 Manufacturing excellence Cycle time, unit cost, yield
Design productivity Silicon efficiency, engineering
efficiency
New product introduction Actual introduction schedule vs. plan
Other measures: set-up time,
manufacturing downtime, yield-defect
rates
Innovation and Technology leadership Time to develop next generation of
learning products
Manufacturing learning Process time to maturity
Product focus Percentage of products that equal 80%
sales
Time to market New product introduction vs.
competition
Other measures: new product
development time, number of new
patents, employee education and skill
level, employee satisfaction scores,
employee turnover rates, information
systems availability, percentage of
processes with advanced controls
Financial Survive Cash flows
Succeed Monthly sales growth and operating
income by division
Prosper Increase market share and ROI
Other measures: operating income,
revenue growth, cost reduction in
some areas, return on investment

Benchmarking
Benchmarking is basically standard-setting and standard-getting. The idea is to identify the
best practices in the organization and make it as the benchmark (e.g., standards) for others
to emulate. Best practices could be adapted, modified, or may serve as mark or record for
others to beat. The goal is to always be the winner. A benchmark could either be financial
or non-financial in nature, internal or external in source. The benchmarking process does
not end within the company. Best practices are identified within the industry, country, or
internationally to emulate and, eventually, to overtake.
Benchmarking process creates benchmarking teams who are responsible in identifying
benchmark and guiding people in the process of beating the benchmarks.

Advanced manufacturing Technology (AMT)

The increasing sophistications in the market place have also redefined manufacturing
processes. The shortening of the product life cycle, the use of the flexibility manufacturing
system, the presence of robotics and automatic production technology, computer-aided
 Managerial Accounting
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Quality, Change and Emerging Business Model

manufacturing and computer-aided design, and a wide array of manufacturing equipment

have made manufacturing more responsive to unique customer demands and orders.

Computer-Aided Manufacturing
Computer integrated manufacturing (CIM) uses a high level automated manufacturing
system. It is a holistic approach of dealing with the production process from the design
stage to post-sales services with heavy application of electronic technology, automation,
and robotics. It has the advantages of flexibility, integration, and synergism.
CIM involves designing products using computer-aided design (CAD), testing design using
computer-aided engineering (CAE), manufacturing products using computer-aided
manufacturing (CAM), and integrating all components with a computerized information
system.

Materials Requirements Planning

Materials Requirements Planning (MRP) is an inventory technique with heavy use of
technology but is more limited than CIM. It uses simulation as to the number, class, and
timing of materials needed in a given production, in each location. These analyses are done
in relation with bills of materials, inventory levels, and process of production. The timing of
deliveries is vital to avoid delays. One has to input only in the computer system the number
of units to be manufactured and the computer generates a materials requirements schedule
and tells in advance the feasibility of producing the product. When inventory levels are not
enough, a purchase order is automatically processed. MRP uses an MPS, master production
schedule, which is a statement of anticipated manufacturing schedule to selected items for
selected periods.

Manufacturing Resource Planning 2

MRP-2 integrates all facets of a manufacturing business, including production, sales,
inventories, schedules, and cash flows. MRP-2 is an extension of MRP. Scheduling of
activities is not only focused on materials requirements but extends to sales and cash flows.

Enterprise Resource Planning

It is an organization-wide planning technique of managing resources through the use of
computerized system. Organizational resources such as men, money, information,
distribution networks, marketing, engineering, and policies are interlinked and are
connected with suppliers and customers.

Pareto’s Law
Course Module
In the nineteenth century, an Italian economist, Vilfredo Pareto, observed that 80% of the
wealth of Milan is owned by 20% of its citizens. In the 1950s, Joseph Juran, a pioneering
business and industrial quality guru, observed a few causes of poor quality usually
accounted for most of the quality problems. His observation jived with the 80-20 analysis
of Pareto. Since then many researchers and analysts discovered that in many social,
educational, medical, business, and other fields of research observed data tend to cluster
with about 80% of the observations account for the 20% explanations of the situations or it
is the other way around, that about 20% of the observations explain the 80% occurrences
of the situation.
Pareto’s law has found its use in inventory management, customer profitability analysis,
human resources promotions standards, problem identification, and many more.

Contingency Theory
Contingency theory in management accounting simply states that the design of the
accounting information system depends on the need of the management using it.
To illustrate the use of contingency theory in management accounting, let us consider the
following:
JKL Corporation has been producing three products in the last five years with almost
no competition in the rubber industry. Out of this business environment, the
management has been casually receiving monthly operating reports with
consolidated totals of all its products. In the last two quarters, XYZ Corporation,
another company, has entered the market, vigorously promoted its product, and
prices while gaining significant market share along the way. These developments
prompted JKL Corporation management to instruct the management accountant to
make a detail analysis of the costing of each product, provide operating results on a
per product basis, and submit reports on a weekly basis.
This clearly exemplifies how management information needs change in relation to the
dynamics of business environment.
Emmanuel, Otley, and Merchant, on their book Accounting for Management Control have
identified the following major factors observed to have been affecting the design of
management accounting systems:
 The environment
 Its degree of predictability
 The degree of competition faced
 The number of different product markets faced
 The degree of hostility exhibited by competing organizations
 Organizational structure
 Size
 Interdependence of parts
 Degree of decentralization
 Availability of resources
 Technology
 The nature of the production process
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Quality, Change and Emerging Business Model

 The routineness/complexity of the production process

 How well the relationship between ends (finished output) and means
(production process) is understood
 The amount of variety or complexity in each that has to be performed
There have been many reservations as the integrity of using the contingency theory in
management accounting but it is evidently true that there is not one best way of designing
an organization or its accounting system, otherwise all successful organizations, and their
accounting systems, would be identical.

Mckinsey 7S Model
The Mckinsey 7S Model describes the link between the organization’s behavior and the
behavior of the individuals within it. There are three (3) hard elements and four (4) soft
elements of business behavior.
Elements 7S Comments
Hard elements Structure The formal division of tasks in the organization and
the hierarchy of authority from the most senior to
junior.
Strategy How the organization outperforms its competitors, if
it is a business, or how it intends to achieve its
objectives. This is linked to shared values.
Systems These include the technical systems of accounting,
personnel, management information, and so forth.
These are linked to the skills of the staff.
Soft elements Style It refers to the corporate culture which is the shared
assumptions, ways of working, attitudes, and beliefs.
Shared values These are guiding beliefs of people in the organization
as why it exists (e.g., people in the hospital seek to
save lives).
Staff The people in the organization
Skills It refers to those things the organization does well.
The hard elements are easily quantified and defined, and dealt with facts and rules. All
elements, both hard and soft, must pull in the same direction for the organization to be
effective.
The use of this model would have strong implications to the management accounting
systems and processes employed by the enterprise.

References and Supplementary Materials

Books and Journals
1. Rodelio S. Roque (2016). Management Advisory Services. CM Recto, Manila. GIC
Enterprises and Co., Inc.
2. Leonardo E. Aliling, Ma. Flordeliza L. Anastacio (2015). Management Accounting 1.
856 Nicanor Reyes, Sr. St., CM Recto Avenue, Manila. Rex Book Store, Inc.
Course Module
3. Franklin T. Agamata (2019). Management Services. Certs Publications. Agdao, Davao
City, Philippines
4. Ray H. Garrison, Eric W. Noreen, Peter C. Brewer, 16 th ed. Managerial Accounting. The
McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York

Online Supplementary Reading Materials

1. https://www.cgma.org/content/dam/cgma/resources/reports/
downloadabledocuments/cgma-bus-model-fullreport-051817.pdf
2. https://www.hbs.edu/faculty/Publication%20Files/15-089_afa7e1c9-40d2-486d-
9bd4-b8ea71de9058.pdf
3. https://asq.org/quality-resources/cost-of-quality
4. https://en.wikipedia.org/wiki/Strategic_management
5. https://www.balancedscorecard.org/BSC-Basics/About-the-balanced-scorecard