AE27

Lesson 2

Management Accounting and

the Business Environment
LEARNING OBJECTIVES
After this lesson, you should be able to:

-Understand the expanding role of Management Accounting

-Be familiar with the major contemporary management techniques, such as:
JIT-Just in Time Theory of Constraints
TQM – Total Quality Life Cycle Costing
Management Computer-aided Design and
Process Re-engineering Manufacturing
Benchmarking Automation
Mass Customization E-Commerce
Balance Scorecard The Value Chain
ABC – Activity Based
Costing and Management
=Understand the changing world of management accountants
-Identify the current focus of management accounting
Changes in Business Environment include:
(1) an increase in global competition
(2) advances in manufacturing technologies
(3) advances in information technologies, the Internet and e commerce:
(4) a greater focus on the customer:
(5) new forms of management organization, and
(6) changes in the social, political, and cultural environment of business.
 Changing Business Environment
The change in the business environment in at least the
last two decades where organization have to transform
themselves to become more competitive, have profound
effect in the practice of management accounting. Of
particular importance are the changes in business,
especially the increase in global competition and the
changes in management techniques that have created the
need for a new, strategic approach to management and to
cost management. While many of the major
improvement tools used by managers overlap, they can
be classified into major programs or approaches also
referred to as Contemporary Management Techniques
which includes:
 1. Just In Time (JIT)
❑ It is the philosophy that
activities are undertaken only as
needed or demanded.
❑ JIT is a production system also
known as pull it-through
approach, it is a practice where
materials are purchased and
units are produced only when
needed
1. Just In Time (JIT)
The four characteristics of JIT are
1. Elimination of all activities that do not add value to the
product or service.
2. Commitment to a high level of quality.
3. Commitment to continuous improvement in the efficiency of
an activity.
4. Emphasis on simplifications and increased visibility to
identify activities that do not add value.
1. Just In Time (JIT)
The main benefits of JIT are as follows:
1. Working capital position is improved by recovery of funds that were tied
up in inventories.
2. Throughput time is reduced, resulting in greater potential production and
quicker response to customers.
3. Areas previously used to store inventories are released and are made
available for other more productive uses.
4. Lesser waste and more customer satisfaction are achieved because of
reduction in defect rates.
2. Total Quality Management (TQM)

TQM is a technique in which

management develops policies
and practices to ensure that the
firm's products and services
exceed customers expectations
2. Total Quality Management (TQM)
There is no perfect way to institute a TQM program, but these are
common key process for companies that uses TQM:
1. Listening to the needs of customers
2. Making products right the first time
3. Reducing defected products that must be reworked; and
4. Encouraging workers to continuously improve their production
process
2. Total Quality Management (TQM)

Two Major Characteristics of TQM

1. Focus on serving customers; and
2. Systematic problem solving using teams made up of front-line workers.

Total Quality Management (TQM), is a formal effort to improve quality throughout an

organization's value chain.
3. Process Reengineering
❑ Reengineering is a process for creating competitive
advantage in which a firm reorganizes its operating and
management functions, often with the result that jobs are
modified, combined, or eliminated.
❑ Reengineering is also defined 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.”
❑ Process Reengineering a more radical approach to
improvement than TQM.
Steps Used in Process Reengineering
4. Benchmarking
Benchmarking is the practice of
comparing business processes and performance
metrics to industry and best practices from
other companies. Dimensions typically
measured are quality, time and cost.

Benchmarking is a process by which a firm:

•Determines its critical success factors
•Studies the best practices of other firms
•Then implement improvements into the

firm’s process to match or beat the

performance of those competitors
5. Mass Customization
Mass customization is a management
technique in which marketing and
production processes are designed to
handle the increased variety that results
from delivering customized products and
services to customers.
The growth of mass customization is in
effect another indication increased
attention given to satisfying the customer.
6. Balanced Scorecard
• The name “balanced scorecard” comes from
the idea of looking at strategic measures in
addition to traditional financial measures to
get a more “balanced” view of performance.

• The BSC suggests that we examine an

organization from four different perspectives
to help develop objectives, measures (KPIs),
targets, and initiatives relative to those views.
 Four Perspectives of the Balanced Scorecard
• Financial Perspective: views an organization’s
financial performance and the use of financial
resources.
• Customer/Stakeholder: views organizational
performance from the perspective of the customer or
key stakeholders the organization is designed to serve
• Internal Process: views the quality and efficiency of
an organization’s performance related to the product,
services, or other key business processes
• Organizational Capacity (or Learning & Growth):
views human capital, infrastructure, technology,
culture, and other capacities that are key to
breakthrough performance
7. Activity-based Costing Management

Activity-based costing (ABC) • Activity-based management (ABM)

is used to improve the uses activity analysis to improve
accuracy of cost analysis by operational control and
improving the tracing of costs management control.
to products or to individual
customers.
• This management approach aims to
improve the value of a products or
services to customers and increase
the firm’s profit. ( Cabrera )
8. Theory of Constraints
Theory of Constraints
Theory of Constraints
9. Life Cycle Costing
Life Cycle Costing – is a management
techniques to identify and monitor costs of a
product throughout its life cycle.
It consists of all steps from product design
and purchase of raw materials to delivery and
service of the finished products

The Steps Include:

1. Research and Development
2. Product design
3. Manufacturing, inspecting, packaging
and warehousing
4. Marketing
5. Sales and Service
10. Target Costing
11. Computer-Aided Design and Manufacturing

Computer-aided design (CAD) is the use

of computers in product development,
analysis, and design modification to
improve the quality and performance of
the product.

Computer-aided manufacturing (CAM)

is the use of computers to plan,
implement, and control production
12. Automation
Flexible manufacturing system
Computer – integrated Manufacturing
• A flexible manufacturing system
(FMS) is a production method that is • Computer-integrated manufacturing (CIM)
designed to easily adapt to changes in is the manufacturing approach of
the type and quantity of the product using computers to control entire
being manufactured. Machines and production process. This integration allows
computerized systems can be individual processes to exchange
configured to manufacture a variety information with each
of parts and handle changing levels of part. Manufacturing can be faster and less
production. error-prone by the integration
of computers.
13. E-Commerce
A number of internet-based companies have emerged and been proven successful
in last decade. This ECommerce business model adopted by Amazon.com and
eBay has also attracted many investors to pursue the use of Internet in conducting
business.
Another example, Alibaba Group Holding Limited, Lazada, Shopee, Zalora and
etc.

It is a business model that lets firms and individuals buy and sell things over the
internet.
14. Value Chain
A value chain is a business model that describes the full range of activities
needed to create a product or service. For companies that produce goods, a
value chain comprises the steps that involve bringing a product from
conception to distribution, and everything in between—such as procuring
raw materials, manufacturing functions, and marketing activities.
Current Focus of Management Accounting
The design of a management accounting system should be guided by the
challenges facing managers. There are at least four themes common to many
companies, namely:
(1) customer focus theme,
(2) value-chain and supply chain analysis,
(3) key success factors (i.e., cost and efficiency, quality, time and innovation),
and
(4) continuous improvement and benchmarking
1. Focus on the Customer
🞂 To succeed in this era, customer value is a key focus that businesses of
all types must be concerned with.

🞂 The value of product or service to the customer is affected by such

diverse attributes as product price, quality, functionality, user-
friendliness, customer vice, warranty and maintenance cost.

Two General Strategies:

1. Cost Leadership
2. Superior product through differentation
2. Value Chain and Supply Chain Analysis
❑ Value chain refers to the sequence of business functions in which
usefulness is added to the products or services of a company. The term
value refers to the increase in the usefulness of the product or service and
as a result its value to the customer.
❑ Internal value chain is the set of activities required to design, develop,

produce, market and deliver products or services to customers. If customer

values are emphasized, managers are forced to determine which activities
in the value chain are important to customers. A management accounting
system should track information about a wide variety of activities that span
the internal value chain.
2. Value Chain and Supply Chain Analysis
3. Key Success Factors
Cross Functional Teams

A cross-functional approach to management is crucial in managing the time to

market. Cross-functional managerial teams bring together production and
operations managers, marketing managers, purchasing and material handling
specialists, design engineers, quality management personnel, and managerial
accountants to focus their varied expertise and experience on virtually all
management issues. If products are to be designed and manufactured with the
Customers' needs in mind, a cross-functional approach is crucial.
3. Key Success Factors
Computer-Integrated Manufacturing

Manufacturing processes over a long period of time has evolved from labor intensive
methods to more automated processes, in which most of the work is accomplished
by machines. This trend continues today, as computer-integrated manufacturing (or
CIM) systems become more common. A CIM process Tuy automated, with
computers controlling the entire production process. in CiM systems, the types of
posts incurred by the manufacturer are quite different from those in traditional
manufacturing environments. Using computers to control equipment, including
robots, generally increases the flexibility and accuracy of the production process.
However, the use of state-of-the-art equipment and computer control systems may
help firms meet the challenge of global competition, but they also have a significant
effect on the composition of product costs.
The Changing World of the Management
Accountant
Current Focus of Management Accounting

Focus on the customer

Value chain and supply analysis