Condensed notes used in preperation of the exam PDF

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Condensed notes used in preperation of the exam . Used these as my revision...

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TDABC cons: PROS Time-Driven ABC streamlines ABC analysis to deriving the cost per unit of capacity of resources Transparent and scalable that is easier to implement and update. Easy to transfer TDABC to different facilities or plants

• which are then linked to cost objects in cost equations of easily adapted complexity • requisite to the decision benefits arising from more detailed analysis (engineering, design, pricing etc) • The approach more cheaply allows greater granularity, reliability and flexibility of cost modelling -

Less data collection/time consuming

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More adjustable - Changes in cost driver rates are easily identifable – either changes in price of resources or efficiency of activities Takes into account for the fact that cost drivers ie employess don't operate at full capacity

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TDABC provides managers with meaningful cost and profitability information quickly and inexpensively

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TDABC is bottom up approach so more granular whereas ABC is top down time is a meaningful measure of capacity for many resources

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report their costs on an ongoing basis in a way that reveals both the costs of a business’s activities as well as the time spent on them. This can highlight the capacity of work which is being paid for but which isn’t producing anything (slack)

can help figure out minimum order quantity and prices

Overall, TDABC gives managers a better idea of the overall sacrifice (cost) made.  Once I understand the component parts of an activity and the cost of resources consumed to deliver activity in one particular way, it becomes more easily possible to consider alternative modes of delivery • Eliminate unnecessary process variations and processes that don’t add value • Improve resource capacity utilization • Deliver the right processes at the right locations • Match clinical skills to the process • Are resources operating at the “top of their license” • Speed up cycle time • Optimize over the full cycle of care • Capturing the payoffs (as seen by Boston Children Hospital Case study) CONS

Still doesn’t capture the full picture despite complexity –  R&D costs still don’t belong to existing products.  Needs to ensure it supports decision making (not random)

Like ABC, TDABC requires accurate data towards calculating  estimates, which may in turn be expensive, although Kaplan does state that precise estimates are not necessary. Overall, TDABC is more complex than other cost mea sures (TAC)

In terms of ciritical evaluation it is vital to remember however that the emphasis should be on supporting decision making (e.g. Banker et al 2008) in focussed areas, since adoption a fine grained bottom up analysis of everything would be hugely time consuming (e.g. , and given the legacy of time and motion studies and scientific management as a way to standardise and deskill likely cause stress and potentially undermine input data that must be contributed by those being controlled. Might also mention that whilst TDABC potentially reduces the cost of costing it must be supported by efforts to engage managers actually making decisions (could talk about healthcare and how difficult it can be to engage clinicians as an example, reference to Kaplan and Porter, 2011)

Davila and Wouters 2004: target costing Target costing is the cost at which the product/service must be made to be deliverable whilst offering the required attributesWhat does it lead to: moving cost management efforts from the production stage to the product development stage= larger profits because cost reduction advantages accrue from the first unit. Life cycle costing When is it effective? when product cost is very important to the success of the product (it is in ss) and when modelling cost behaviour at the organisational level is simples What are the cons? focuses attention on to cost drivers and away from revenue drivers (ie, time-to-market, technology, understanding customer needs), too time consuming, too linear and bureaucratic, too detailed. Remember: Willie Sutton Rule states that one's first choice should be to choose the most obvious route Other key concepts: Parallel cost management teams/ cost reduction specialists, Modular design for cost, Cost Management Strategy that runs through value chain, parts/process commonality, product platform planning Two challenges of designing new costs: First set of challenges is technology, time to market, and wealth of cost data that results in delays in cost analysis. The second set of challenges arises from complexities is assigning shared costs. These can include logistics, customer support etc.

McLaren et al 2016 EVA

(EVA) is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. EVA = NOPAT - (Invested Capital * WACC) Spending on R&D, consumer advertising, goodwill, restructuring expenses, for example, can be argued to yield benefits in the future and so EVA would want them capitalised on the balance sheet not expensed on the income statement

Pros •

It introduces the idea of balance sheet accountability to managers. used to only thinking about profit targets

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By investing only in projects that give a return higher than the cost of capital, managers actions should benefit their bonus payment, while being in line with corporate goals and shareholder expectations

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Synergy, Decentralised (each department has own goal/ aligns principle agent) however could be conflicting (Vyarderm)

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Tailored to individual organisation

Cons •

the most readily available ones are based on accounting not economic thought •

EVA is still not about cashflows (e.g. R&D is capitalised •

What about when assets such as goodwill are destroyed?

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Is all advertising an asset? Will all restructuring costs pay back?

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Also challenges of availability of balance sheet information at divisional and business unit level

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EVA as an absolute number brings advantages, but does make comparison of firms/divisions of different size challenging

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Perceived that its subjective as adjusted specifically to each company.

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EVA caused moral hazard (decentralised)

In this study, three case companies were chosen for analysis to analyse the impact of EVA The new philosophy brought about a change to the rules and routines within each firm Failures: Lack of speed in information generation, complexity and lack of user comprehension, flexibility in measurement and the lack of cohesion in EVA measurement and structural change. Required a process of simplification. problems of short-termism and

internally competitive behaviour. Only through processes of trial and error that efficient choices are made so, the ‘new’ technique can end up being a highly modified version of the original.

Bonus bank•

A portion of bonus earned in one period is held at risk of destruction of value in subsequent period

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Vyaderm

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Calculated bonus is a % of base pay times a performance multiplier based on EVA performance

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1+[(Actual improvement – Improvement goal) / Interval

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The payout rules determine how much of the calculated bonus the manager receives

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The calculated bonus is added to the balance of the bonus bank

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The payout is then the simple target bonus based on % of pay plus 50% of the remaining balance in the bank

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The bank cannot go overdrawn, so payment cannot exceed balance available

In this way, a portion of earned bonus is held at risk against future declines in performance

This can be problematic as could have high degree of downside risk out of individuals control and could continue being punished for years after loss. Compensation: -

It depends upon the nature of the person (e.g. career concerns) and the task (e.g. codifiable or inherently uncertain) Senior managers implementing such schemes must communicate directly and clearly to try and align “incentive structures” and people, since control is more social than technical in practice

Shank- SCM 1989 SCM is defined as the managerial use of cost information explicitly directed at one or more of the four stages of Strategic Management Cycle. The emergence of SCM results from a blending of three underlying themes that are each taken from the strategic management literature: Value Chain Analysis, Strategic Positioning Analysis, and Cost Drivers Analysis. SCM perspective is just more inclusive than the management accounting perspective.

Porter believes value accumulates along value chain Value chain analysis – value added is broader external concept w this approach Strategic position analysis – design of management system depends on the strategy (Ie cost leadership strategy or product differentiation) Cost driver analysis- Consider costs learning curves and multiple cost drivers, Structrual cost drivers, executional cost drivers. Not all cost drivers equally important at all times . Each cost driver requires different cost analysis. Challenge: external focus of analysis raises challenges over the availability and accuracy of data This process will need to be repeated as conditions change and so it must actually drive change to add value itself Difficult to separate structural and executional cost drivers

Ahrens and chapman 2004- embedding culture Main point is to distinguish between enabling and coercive management Enabling - Enabling control aims to work with the intelligence of others and leaves space for negotiation, interpretation, and learning. Decentralised and enables creativity towards agenda. Decentralised and where EVA fits. Decentralised control is more organic- removes hierarchies. Where EVA fits If coercive- centralised is more costly, inflexible, more administration involved. Pays off to have coercive control in a casino and money handling where theres lots of rules Kidder Peabody, Enron, Corillion Principles which underlie enabling management are: Repair, internal transparency (visibility of internal processes), global transparency (budgets are most common), flexibility. purely organic or mechanistic forms of organization are rarely found in practice

Paper includes research in restaurant chain and finds that- coercive and enabling go together. might enable one employee group while at the same time coercing another employee group Coercing transparency by mangers can lead to enabling TQM- total quality management- is a high-profile approach to product and service quality and customer satisfaction. Quality as defined by customer. Assumes quality can always be improved. Quality at every stage of value chain

Data

overwhelmed by too much data. Can be fuzzy? Concerns with effects of ai? Who owns it? Who is responsible and accountable? “fuzzy search” can sometimes be fault tolerant in ai – when algorithm is matching two databases and meaning the algorithm gives an output even though the input contains additional or missing information Fuzzy matching may also match smth proablistically rather than an exact match. Margin of error plus element of trust.

BUDGETING Libby and Lindsey 2010MCS/ to connect Strategy and Operations Control systems need to be designed to accept, understand and work with uncertainty

Budgeting pros • Budgets can be valuable tools for motivation, control & coordination: • They Find a balance between flexibility and control • Continuous budgets Budgeting issues: Top down: • Unrealistic budgets causes low employee motivation • Resent being held accountable for variances to budget • Defensiveness and damage to ‘team spirit’ • Ignores employees training and progression needs - not agile, flexible Short termism: • Meeting the target, but not beating it • Doing whatever it takes to make the target and/or bonus • Avoid risks so innovation & creativity is restricted • Competing against other divisions/units/depts • Spend the budget in a shorter time to 'prove' you need more next year Participative: not unified • Time consuming and bureaucratic • Managers may have too much power and manipulate data • Managers may budget below the real potential • Managers may not have the skills to participate Beyond budgeting: aims to abandon budgeting to establish a highly decentralized organizational system and adaptive set of management processes. Advantages of beyond budgeting: Delivery of faster services, better products, more collaborative, engaged stakeholders, adaptable

Libby and Lindsay respond to beyond budgeting by saying in practice manager like budgets. Grade given 70/100 Can be successful with communication, decentralized management culture, balance between flexibility and control, strong hr, enabling creativity, long-term culture

Kaplan and Norton (1996)- BSC

Management tool with balance between top down financial and non-financial objectives. 4 objectives: 1)Financial perspective 2)Customer perspective 3)Internal processes 4)Learning and growth perspective Measurement through KPIs. Can be leading and trailing. A strategy map is a simple graphic that shows a logical, cause-and-effect connection between strategic objectives. it is used to quickly communicate how value is created by the organization.

Pros BSC improves performance, communication, alignment through strategy maps. More closely aligned with long term vision and mission through KPIs. Highly flexible. Involves everyone in business so better for mission. Widely used. Links financial objectives w strategy and mission and improves business planning. Allows for feedback and learning. Organisational alignment creates synergies. Can help w sustainability Cons Could get too many KPIs. Need to balance 4 perspectives (not easy), senior management may be more concerned w financial performance (as linked to their salary), needs regular updating Scorecards can also be implemented personally and used to regard performance. Ie weighted average of different perspectives. Objectives/kpis

Sloan styles: pants, skirts, tops, jackets, and dresses. top 7 customers account for 90% of unit volume. 1994 SS lost $7 million in sales over night when lost one client The efforts to build back revenues involved expanding the sales force, increasing trade advertising, and hiring additional designers. The added fixed costs took a heavy toll on profits which also fell by $2 million versus 1993 branded merchandising requires a far greater investment in marketing and promotion than had originally been anticipated Gary wanted to do ABC profitability by order size for two product groups (jackets and tops) and for two specific customers (Nordstrom and Dillard 's) company overhead for 1998, broken down by major line items as shown in the monthly financial reports. The breakdown for 1997 was not materially different. Gary found this breakdown of overhead spending useless 1. Fixed versus variable costs. It is important to understand how cost per driver unit will change with changes in volume, either up or down. Very little cost is purely variable in the short-run, but virtually all cost is variable over a three to five year time frame. (are there economies of scale? , process/product commonality etc of fixed cost over long period 3-5yrs, design architecture ie buttons

or cotton or machienery. Therefore understand that some of these fixed ovhd could change long term) 2. Excess capacity is also a critical issue for understanding fixed costs per unit. The change in fixed cost per driver unit as volume changes is heavily influenced by the level of capacity utilization in each activity. "Bottleneck" analysis is a key issue here. Should conduct analysis into capacity 3. Finally, process efficiency can also be a major issue. Management must understand that if certain areas of the supply chain are not efficiently designed or managed, the current cost per driver unit is not useful for planning purposes. Such areas can reach a "bottleneck" condition prematurely, or can appear much more expensive than they need to be. (Link to new wine article. Management accounting should use more holistic perspective) ABC assumes employees work at full capacity. Cost driver rate skewed If low production then fixed cost per unit rly rly high so wanna try to “unbundle” costs as much as possible w ABC or TDABC) The analysis presented in Exhibit 8 is static, in the sense that none of these three issues has been fully explored.

Various things can increase cost (Paying late / Frequently changing orders / Intensive pre and post sales support / Requiring company to hold inventory (Kaplan 88) figure out what is increasing costs. 6 factories work for ss work. Only 6 months out the year at full capacity 75% or 50% capacity the rest of the year. Should operate at full capacity. Sewing process has not changed dramatically over 25 years. However transportation of inventory has improvement. 

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SS has a buy-to-order inventory policy. Trim is purchased in relatively small quantities and because only small parts of it are used it is very difficult to use efficiently. Because suppliers will have min purchase requirements with their orders then SS will have a lot of leftover fabric, which could be resolved by utilising common parts.

Seasonal business. Tops and trousers are stable. Jackets and skirts and dresses. If they figure out when which seasonal bit they are doing poorly in. Then maybe could consider, esepcialyy since spare capacity, if they could cheaply introduce a new product or manage cycle in order to match the customer demand. Ensure costs are enurred seasonally as well.

ABC in SS Costs were traced to products so customer service and admin costs, which aren’t really related to the products, were not included in the costs of each product but allocated afterwards.

cannot cherry pick only the “profitable” products and you should not necessarily just drop “unprofitable” products. “death spiral”. Keep if +ve contribution research into whether the transport was being utilised efficiently (e.g. can they ship small orders together?) (link to design/process Davila and wouters)

TDABC in SS Once I understand the component parts of an activity and the cost of resources consumed to deliver activity in one particular way, it becomes more easily possible to consider alternative modes of delivery • Eliminate unnecessary process variations and processes that don’t add value • Improve resource capacity utilization • Deliver the right processes at the right locations • Match clinical skills to the process • Are resources operating at the “top of their license” • Speed up cycle time • Optimize over the full cycle of care • alter some of the aspects of their business such as min order size, inventory, negotiation tactics etc. For example, minimum order size, reduced inventory of unprofitable predicts, promoted sales of high profit products, negotiated with customers either to reduce the demand for high-cost services or to reprice them and to offer incentives to its sales teams to increase the profits of their customers ie jacket and skirt, using the same cost driver but differ in weight and space required during shipment

activity “ship order to customer- Rather than assume a constant cost per order shipped, a company may wish to recognize the cost differences when an order is shipped in a full truck, in a less-than-truckload (LTL) shipment, using overnight express, or by a commercial carrier Gina and the Dulux Lamp:  Gina and the Dulux Lamp looks at and calculates EVC and lifecycl...