Chapter 13

1. Chapter 13 Controlling Costs in the Changing Workplace

2. Learning Objectives 1. What is open-book management and why does its adoption require changes in accounting methods and practices? 2. Why are games often used as the basis to teach and motivate open-book management concepts? C13

3. Continuing . . . Learning Objectives 3. Why is implementing open-book management more difficult in large organizations than in small organizations? 4. Why does business process reengineering cause radical changes in how firms execute processes? C13

4. Continuing . . . Learning Objectives 5. Why is throughput an important performance measure for organizations that apply the theory of constraints? 6. How does throughput accounting differ from variable cost accounting? C13

5. Continuing . . . Learning Objectives 7. How does value chain cost analysis create opportunities to achieve competitive advantages using concepts of interorganizational cost management? 8. What factors are driving the increased reliance on outsourcing; and what are the financial considerations of the outsourcing decision? C13

6. Continuing . . . Learning Objectives 9. Why are joint ventures and strategic alliances increasingly used by firms to exploit new market opportunities? 10. How are target costing and value engineering used to manage costs? In which life cycle stage are these tools used? C13

7. Continuing . . . Learning Objectives 11. What are the competitive forces that are driving decisions to downsize and restructure operations? 12. Why are operations of many firms becoming more diverse and how does the increasing diversity affect the roles of the firms’ accounting systems? C13

8. Open-Book Management Open-book managementis a philosophy about increasing a firm’s performance by involving all workers, and by ensuring that all workers have access to operational and financial information necessary to achieving performance improvements.

9. Games People Play Games make learning both fun and competitive while allowing for complex financial practices to be simplified.

10. Ten Common Principlesof Open-Book Management 1. Turn the management of a business into a game that employees can win. 2. Open the books and share financial and operating information with employees. 3. Teach the employees to understand the company’s financial statements. 4. Show employees how their work influences financial results. 5. Link nonfinancial measures to financial results. Tim Davis, “Open-Book Management: Its Promises and Pitfalls,” Organization Dynamics (Winter 1997), pp.. 6-20.

11. Ten Common Principlesof Open-Book Management 6. Target priority areas and empower employees to make improvements. 7. Review results together and keep employees accountable. Regularly hold performance review meetings. 8. Post results and celebrate successes. 9. Distribute bonus awards based on employee contributions to financial outcomes. 10. Share the ownership of the company with employees. Employee stock ownership plans (ESOPs) are routinely established in firms that practice open-book management. Tim Davis, “Open-Book Management: Its Promises and Pitfalls,” Organization Dynamics (Winter 1997), pp.. 6-20.

12. Open Book ManagementImplementation Challenges Characteristics of firms that are best suited to successful implementation include • small size • decentralized management • a history of employee empowerment • the presence of trust between employees and managers

13. Business Process Reengineering Business process reengineering (BPR) means examining processes to identify -- and then eliminate, reduce, or replace -- functions and processes that add little customer value to products or services.

14. Steps to Business Process Reengineering 1. Define the objectives of the BPR project. 2. Identify the processes that are to be reengineered. 3. Determine a baseline for measuring the success of the BPR project. 4. Identify the technology levers--these are the potential sources of innovation, increased quality, increased output, and decreased costs. 5. Develop initial prototypes of the reengineered process and then, through subsequent iterations, develop incremental improvements to the prototypes until satisfactory results are achieved. Yogesh Malhotra, “Business Process Redesign: An Overview,” 1996.

15. Theory of Constraints Thetheory of constraints (TOC) is management philosophy about focusing attention on the constraints (bottlenecks) that limit organizational achievements (such as maximization of profits) so that throughput can be maximized. In profit-oriented organization, throughput is the rate at which a company generates cash from selling products and services to customers.

16. Comparison of Variable Costingand Throughput Accounting VARIABLE COSTING THROUGHPUT ACCOUNTING Revenue Revenue - Direct Materials - Direct Materials - Direct Labor - Variable Overhead - Variable Overhead = Contribution Margin = Throughput - Fixed Expenses - Operating Expenses = Profit = Profit Eric Noreen, Debra Smith, and James T. Mackey, The Theory of Constraints and Its Implications for Management Accounting (Great Barrington, Mass.: North River Press, 1995), p. 14.

17. Value Chain A value chainis the set of all processes that convert materials into products and services for the final consumer. • Vertical integration is a measure of the extent to which the value chain resides within a single firm. • Outsourcing is contracting with outside vendors to provide necessary parts or services rather than producing them in-house.

18. Insource/Outsource Considerations Relevant quantitative factors: • Incremental production costs for each unit • Unit cost of purchasing from outside supplier • Availability of production capacity to manufacture components • Opportunity costs of using facilities for production rather than for other purposes • Availability of storage space for units and raw materials

19. Continuing . . . Insource/Outsource Considerations Relevant qualitative factors: • Relative net advantage given uncertainty of estimates • Reliability of source(s) of supply • Ability to assure quality when units are purchased from outside • Nature of the work to be subcontracted • Availability of suppliers

20. Continuing . . . Insource/Outsource Considerations Relevant qualitative factors: • Impact on customers and markets • Future bargaining position with supplier(s) • Perceptions regarding possible future price changes • Perceptions about current product prices • Strategic and competitive importance of component to long-run organizational success

21. Insource or Outsouce Cost Information *Of the $2.50 fixed factory overhead, only $1.00 is directly linked to production of the serving sets. This amount is related to the production supervisor's salary and could be avoided if the firm chose not to produce serving sets. The remaining $1.50 of fixed factory overhead is an allocated indirect (common) cost that would continue even if production of serving sets ceased.

22. Strategic Alliances Astrategic allianceis an agreement of two or more firms with complementary core competencies to jointly contribute to the value chain.

23. Interorganizational Cost Management Systems • Types of information that are commonly shared between suppliers and customers include: • Production cost data • Technological and engineering data • Research and design information • Cost reduction plans • Quality data • Target costing and value engineering information