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Modern Business Environment

Modern Business Environment. Management Level – Paper P2 Advanced Managemen t Accounting. Lecture - 05. Vidya Rajawasam ACMA CGMA MBA. Modern Business Environment. In the previous lecture we have discussed Total Quality Management (TQM) Costs related to quality

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Modern Business Environment

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  1. Modern Business Environment Management Level – Paper P2 Advanced Management Accounting Lecture - 05 Vidya Rajawasam ACMA CGMA MBA

  2. Modern Business Environment In the previous lecture we have discussed • Total Quality Management (TQM) • Costs related to quality • Recognizing the importance of quality • Quality chains / Quality circles

  3. Modern Business Environment In this lecture we will discuss • Throughput accounting and theory of constraints. • Kaizen Costing • Business process re-engineering

  4. Modern Business Environment Throughput accounting ThroughputAccounting is a measurement and decision making tool introduced based on EliGoldratt’sTheory of Constraints (TOC). Throughput accounting treats directmaterial costs as the only variable cost, while all other costs are assumed to be fixed.

  5. Modern Business Environment Throughput accounting Measures

  6. Modern Business Environment Throughput accounting Throughput=Sales Revenue LessDirectMaterialcost This method changes the way an organization thinks about revenuerecognition, costs and profitability. Therefore changes the in figures can be used for betterdecision making.

  7. Modern Business Environment Throughput accounting The objective is to determine the factors which are preventing the achievement of higherthroughput. The constraint that prevents the achievement of higher throughput is called a bottleneck. A bottleneck can be a machinecapacity that limits the output of a production process.

  8. Modern Business Environment Throughput accounting The aim is to identify the bottlenecks and remove them or ensure that they are fully utilized at all times. The process involves following steps; 1.)Identify the bottlenecks related to the system. 2.)Decide how to exploit the bottlenecks 3.)Subordinate everything else to the decision in step 2.

  9. Modern Business Environment Throughput accounting The process involves following steps; 4.) Evaluate the systemsbottlenecks 5.) if bottlenecks has been broken, go back to step1. The management should focus on bottlenecks and decisions regarding the optimummix of products must be undertake.

  10. Modern Business Environment The constraints on throughput • Inadequately trained sales staff • Poor reputation for meeting deliverydates • Poor physicaldistribution system

  11. Modern Business Environment The constraints on throughput • Unreliable material supply, delivery and quality • Inadequate production resources • Inappropriate management accounting system.

  12. Modern Business Environment Throughput accounting Measures Throughput = Sales revenue less direct materials The directmaterialscost is the only cost that deemed to related to the output. All other costs, including directlabourdeemed to be fixed. These fixedcosts are called totalfixedcosts (TFC).

  13. Modern Business Environment Throughput accounting Measures The role of the accountant is to devicemeasures to achieve greater volume of throughput. He should alsofocus on financialeffects of bottlenecks. Various performancemeasures have been devised to measure the throughput.

  14. Modern Business Environment Throughput accounting Measures

  15. Modern Business Environment Kaizen Costing Kaizen is a Japanese word meaning continuousimprovement. It's made up of two characters in Japanese: kai, which means 'change,' and zen, which means 'good. Kaizencosting is the process of continualcostreduction that occurs after a product design has been completed and is now in production.

  16. Modern Business Environment Characteristics of Kaizen Costing • The organization should always seek for perfection although it is never achieved practically. Therefore, there should always be some scope for improving on current methods and procedures. The improvements should be sort at all times.

  17. Modern Business Environment Characteristics of Kaizen Costing • The improvements should be small and numerous rather than occasional. • The Costreduction targets are set and applied more frequently than standardcosting methods. In standard costing system, the targets are set annually or semi-annually. With regard to Kaizen costing, the said periods can be quarterly or monthly.

  18. Modern Business Environment Review MCQs What is true with regard to Kaizen costing? • Costing method only applicable to Asia. • Cost reduction targets are set and applied monthly. • Continuous improvement is part of the costing system. • A cost control system.

  19. Modern Business Environment Review MCQs What is true with regard to Kaizen costing? • Costing method only applicable to Asia. • Cost reduction targets are set and applied monthly. • Continuous improvement is part of the costing system. • A cost control system.

  20. Modern Business Environment Review MCQs The Constraints related to throughput approach? • Poorly trained sales staff • Unreliable material supplies • Inadequate production resources • Non of above

  21. Modern Business Environment Review MCQs The Constraints related to throughput approach? • Poorly trained sales staff • Unreliable material supplies • Inadequate production resources • Non of above

  22. Modern Business Environment Difference between Kaizen costing and standard costing (1) Kaizen costing; supports costreduction. _________________________________________________________________________________ Standard Costing; supports cost control (2) Kaizen costing; Implementation of Continuousimprovement targets focusing on target profits. ___________________________________ Standard costing; Variance analysis, actual Vs. standard , no profit targets

  23. Modern Business Environment Difference between Kaizen costing and standard costing (3) Kaizen costing; targetsare set monthly _________________________________________________________________________________ Standard Costing; targets are set annually (4) Kaizen costing; active cost reduction ___________________________________ Standard costing; meets standard cost performance.

  24. Modern Business Environment Difference between Kaizen costing and standard costing (5) Kaizen costing; Continuous improvement in manufacturing. _________________________________________________________________________________ Standard Costing; assumes current conditions of manufacturing. (6) Kaizen costing; Use Kaizen costing techniques ___________________________________ Standard costing; Use standard costing techniques.

  25. Modern Business Environment Business Process re-engineering Business process re-engineering (BPR) focuses on making far reaching one off changes to improve operations or processes. This method contrasts sharply with continuous improvement philosophy.

  26. Modern Business Environment Business Process re-engineering Michael Hammer & James Champydefine BPR as the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance such as cost, quality, service and speed of response.

  27. Modern Business Environment

  28. Modern Business Environment Five stages of implementation • BUSINESS VISION AND OBJECTIVES The BPR objectives should be clearly defined and measurable. Whether the goal is reducing costs, improving quality of product, or increasing efficiency, the framework for what needs to be achieved should be in line with the company’s vision and mission.

  29. Modern Business Environment Five stages of implementation • IDENTIFICATION OF PROCESSES TO BE REDESIGNED Once clear goals are set, all processes needs to be studied and identified that require improvements. Should include the processes that have direct impact on the company’s output and inefficient processes. This identification makes the difference between BPR success and failure.

  30. Modern Business Environment Five stages of implementation • UNDERSTAND AND MEASURE EXISTING PROCESSES. It is important to understand and measure the processes against a baseline. Are they taking too much time to complete? Is the quality of the outcome being compromised? Each process must be judged against industrystandards or ethically obtained competitor bestpractices.

  31. Modern Business Environment Five stages of implementation • INFORMATION SYSTEM AND TECHNOLOGY CAPABILITIES An efficient and relevant IT system is essential. Without such, it is not possible to keep a check on all factors affecting the change. Before setting out on BPR activities, it is vital to set in place information systems that can deal with the magnitude of the change.

  32. Modern Business Environment Five stages of implementation • DESIGN & BUILD THE NEW PROTOTYPE A process failure at a testing stage should never be implemented at a larger scale. BPR projects fail more often due to inability to identify and accept any limitations at the testing stage. Some of the factors are; management’s attitude towards the newway of work, employees’  outlook towards the change.

  33. Modern Business Environment BPR Examples • Hallmark The company used to spend 3years in bringing newproducts to the market. With more demand in niche markets identified, company executives were convinced that the product development process needed to be redesigned. Using re-engineering, the goal was set to change cycle time to oneyear.

  34. Modern Business Environment BPR Examples • Hallmark To their surprise, they discovered that two thirds of the product cycle was spent on planning and conceptualizing the card, rather than on printing and productionrework as had previously been thought.

  35. Modern Business Environment BPR Examples • Hallmark The concept spent 90% time waiting for a creative staffer to complete a new iteration till it was eventually finalized. In 1991, a new line of cards was brought to market in 8months, ahead of schedule, by creating a crossfunctionalteam for product development.

  36. Modern Business Environment BPR Examples • Taco Bell The company re-imagined their business processes by focusing more on the retailservice aspect and centralizing the manufacturing area. The K-Minus program was created and the meat, corn shells, beans, lettuce, cheese and tomatoes for their restaurants were now prepared in central commissaries outside the restaurant.

  37. Modern Business Environment BPR Examples • Taco Bell At the restaurants, the preparedingredients are assembled when ordered by a customer. Better employee morale, increased qualitycontrol, fewer accidents and injuries, biggersavings and moretime for focusing on customerrequirementsare some of the successes of the newway of work.

  38. Modern Business Environment BPR Examples • Taco Bell With the newchanges, the company has gone from being a $500 million company in 1982 to a $3 billion company (Early 1990s).

  39. Modern Business Environment Successful implementation of BPR • Customer needs are considered as the highestpriorityand this vision is used to appropriatelydirect business practices. • There are costadvantages to be achieved that help the organization become more competitive in its industry

  40. Modern Business Environment Successful implementation of BPR • A strategicview of all operationalprocesses is taken with relevant questions being asked about the established way of work and how it can be developed over the long term into more efficientbusinesspractices • There is a realdesire to simplify the way of work by objectively assessing all activities and tasks and eliminating any that addlessvalue and more complexity

  41. Modern Business Environment Successful implementation of BPR • There is a willingness to look beyondtasks and traditionalfunctionalboundaries with focus outcomes. Through this, entireprocesses can be eliminated or amalgamated into fewer but more relevant and powerfulprocesses throughout the organization.

  42. Competitor Analysis Review MCQs What is the true statement related to business process re-engineering ? • Does not consider vision and mission of the firm in the analysis. • A continuous improvement philosophy. • A marginal costing method. • Non of the above

  43. Competitor Analysis Review MCQs What is the true statement related to business process re-engineering ? • Does not consider vision and mission of the firm in the analysis. • A continuous improvement philosophy. • A marginal costing method. • Non of the above

  44. Competitor Analysis Review MCQs A successful implementation of BPR processes include following ? • Identification of customer needs are considered as one of highest priorities. • Identification of market conditions. • Identification of supplier pricing strategies. • Non of the above

  45. Competitor Analysis Review MCQs A successful implementation of BPR processes include following ? • Identification of customer needs are considered as one of highest priorities. • Identification of market conditions. • Identification of supplier pricing strategies. • Non of the above

  46. Competitive Advantage Lecture Summary We have discussed the • Throughput accounting and theory of constraints. • Kaizen Costing • Business process re-engineering

  47. Modern Business Environment Management Level – Paper P2 Advanced Management Accounting Lecture - 05 Vidya Rajawasam ACMA CGMA MBA

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