Contemporary Issues And The

Impact Of Technology On
Management Accounting
（ Topic 1)
Reasons for carrying inventory
1. To balance ordering or setup costs and carrying costs
2. Demand uncertainty
3. Machine failure
4. Defective parts
5. Unavailable parts
6. Late delivery of parts
7. Unreliable production processes
8. To take advantage of discounts
9. To hedge against future price increases
 Inventory Management
Costs related to holding & managing inventories

• Three types of inventory costs can be readily identified with

inventory:
(1)The cost of acquiring inventory.
(2)The cost of holding inventory.
(3)The cost of not having inventory on hand when needed.
 Inventory Management
Economic Order Quantity (EOQ)

TC = PD/Q + CQ/2
• TC = The total ordering (or setup) and carrying cost
• P = The cost of placing and receiving an order (or the
cost of setting up a production run)
• Q = The number of units ordered each time an order is
placed (or the lot size for production)
• D = The known annual demand
• C = The cost of carrying one unit of stock for one year
An EOQ Illustration
EOQ =  2DP/C
D = 25,000 units P = $40 per order

Q = 500 units C = $2 per unit

EOQ =  (2 x 25,000 x $40) / $2

EOQ =  1,000,000
EOQ = 1,000 units
 Traditional Production Systems

• Often described as “push systems.”

• Keep large inventories on hand
• Problems:
• Storage cost
• Hide quality
• Bottlenecks and obsolete products
• Solution: Lean Productions System

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Lean Production System

•Philosophy and a business strategy

•Primary goal is to eliminate waste and
cost
•Focus of JIT:
• Purchase raw materials just in time for
production
• Finish goods just in time for delivery

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“Just-in-Time” (JIT)
• Common characteristics
• Production occurs in self-contained cells
• Broad employee roles
• Small batches produced just in time –
“demand-pull system”
• Shortened setup times
• Shortened manufacturing cycle times
• Emphasis on quality
• Supply-chain management

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 Just In Time (JIT)

Receive customer Complete products

orders. just in time to
ship customers.
Schedule
production.

Receive materials Complete parts

just in time for just in time for
production. assembly into products.

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Drawbacks to Lean Production System
• Vulnerable when problems strike suppliers or
distributors

• Examples
• Delays in delivery
• Personnel problems – union strikes
• Shortage of parts due to recalled products
• Weather related issues

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 Just In Time (JIT) Consequences

Improved Reduced
plant layout inventory
Zero production
defects Flexible
Reduced
setup time workforce

JIT purchasing
Fewer, but more ultra reliable suppliers.
Frequent JIT deliveries in small lots.
Defect-free supplier deliveries.
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Benefits of Just In Time (JIT) System
Reduced Freed-up funds
inventory costs
Higher quality Greater customer
products satisfaction
Increased More rapid response
throughput to customer orders

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Accounting System Changes in Response
to JIT
• For control purposes, performance measures should coincide
with the goals of JIT
• Reducing throughput time is a primary
performance measurement for JIT
organisation.
• Team effort is important in JIT
environments, so performance measures
should reflect cooperative goals.

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Accounting System Changes in Response
to JIT
• Significantly reduced the number of accounting
transactions.
• There is less need to worry about valuing partially
completed products (WIP).

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Material Requirements Planning (MRP)
• The oldest manufacturing control system.
• MRP – is an operation management tool that uses a
computer to help manage materials & inventories.
• Components:
• Bills of materials (BOM)
• Master production schedule (MPS)
• Material requirement planning system (MRPS)
• Nowadays MRP/MRPII is embedded in ERP.

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Material Requirements Planning (MRP)

• Objectives of MRP:
• To ensure – right materials, in right quantities
and at right time are on hand

• Strength of MRP – ability to determine precisely the

feasibility of a schedule within capacity constraints

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 Master Production Schedule (MPS)
• MPS:
• Specifies what is to be made and when
• Must be in accordance with a production
plan (sets the overall level of output in
broad terms)
• Tells what is required to satisfy demand
and meet the production plan

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Management Accounting
Changes/Innovations
• Activity-based management
• Just in Time
• Total Quality Management
Activity-Based Management (ABM)
• ABM focuses on the activities incurred during the
production or performance process
=> improved the value received by a customer
& profit.
• ABM focuses on accountability for activities rather
than costs & emphasis the maximization of system-
wide performance instead of individual performance
=> global approach to control.
• In ABM – both financial & non-financial measures of
performance are important.

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Activity-Based Management - Concept
• Continuous improvement
• Activity analysis • Operational control
• Cost driver analysis • Performance evaluation
• Activity-based costing • Business process
reengineering

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Activity-Based Management (ABM)
• Activity analysis – primary component of ABM.
• Activity analysis => process of studying the activities
• Activity => repetitive action performed in fulfillment of
business functions
• Activity :
• Value-added (VA)
• Non-value-added (NVA)

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 Activity-Based Management (ABM)
• VA – increases significantly the value of the
product/services to the customers.
• VA are those:
• Necessary or required to meet customer
requirements or expectations;
• That enhance purchased materials of a product;
• That are critical steps and cannot be eliminated
in a business process;
• That are performed to resolve or eliminate
quality problems.
 Activity-Based Management (ABM)
• NVA – consumes time, resources, or space, but adds little in
satisfying customer needs.
• If eliminated, customer value or satisfaction remains
unchanged.
• NVA are those that:
• Can be eliminated without affecting the form, fit, or
function of the product/service;
• Begin with prefix “re” (such as rework or returned goods);
• Result in waste and add little or no value to the
product/service;
• Are performed due to a request of an unhappy or
dissatisfied customers;
• If given the option, you would prefer to do less of.
 Activity-Based Management (ABM)
VA NVA
Designing products X
Setting up X
Waiting X
Moving X
Processing X
Reworking X
Repairing X
Storing X
Inspecting X
Delivering product X
 Activity-Based Management (ABM)
• ABC/ABM helps manager understand the relationship between
the firm’s strategy & the activities & resources needed to put
strategy into place.
• Cost leadership (business strategy)
=> ABC/ABM is critical to this strategy.
• Identify value-enhancement opportunities
• Develop customer strategy
• Support a technology leadership strategy
• Establish a pricing strategy

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 Total Quality Management (TQM)
• TQM
=> All business functions are involved in a
process of continuous quality improvement
• Goals of TQM
=> Customer satisfaction
• TQM minimizes costs by maximizing quality.
• TQM focuses on continuous improvement and
satisfying customers.

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Total Quality Management (TQM)

Key success factors Continuous

Cost, quality, improvement
innovation
Customer
satisfaction

Total value Employee

chain analysis empowerment
Top priority

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Four Types of Quality Costs

1. Prevention costs – avoid poor quality goods or

services
• Employee training
• Improved materials
• Preventive maintenance
2. Appraisal costs – detect poor quality goods or
services
• Inspection throughout production
• Inspection of final product
• Product testing

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Four Types of Quality Costs
3. Internal failure costs – avoid poor quality goods
or services before delivery to customers
• Production loss caused by downtime
• Rejected product units
4. External failure costs – incurred after defective
product is delivered
• Lost profits from lost customers
• Warranty costs
• Service costs at customer sites
• Sales returns due to quality problems

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