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Management Accounting Notes

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Toyota - brake failure even though standards were followed, the standards weren't revised - RIGID

Shree Renuka Sugars Ltd. 'turned around every single one of its sick leased units, creating viability out of a liability.'

Boeing o Reached the point where between 70% and 80% of the costs assigned to the final cost objectives of a manufacturing or engineering line organisations were allocations from common overhead pools
 'Because technology related costs were buried in overhead, this approach tended to move the dollars from areas with higher technology costs into units with the larger direct labour elements.' o Now...
 'we are moving from a functional enterprise to one organised around product processes.'
 'But it's the direct, measurable, cause-and-effect link back to the business unit's products that was missing.'
 'Today, the organisation can exercise significant influence and control over the costs it incurs.'
 'the business manager has a much broader sphere of influence in which to exercise control and make improvements within the business unit.'
 'business units need to understand their cost drivers to increase product quality, cut costs, improve customer response time and so on.'
 'process accounting supports other concepts in our continuous process improvement strategy, including total accountability, responsibility and control; flexibility; and total cost tied to customer value.'

In absorption costing, fixed production costs are treated as part of the product cost, and it is the product cost which is the basis for the valuation of stocks. o Under marginal costing, the fixed production cost is not included in the product cost, but is treated instead as a period cost.
 So it is written off in the period in which it arises, and is not included within any stock valuation. o 'Some would claim that the use of ABC is attempting to bridge the gap between the use of a variable cost/contribution approach at one extreme, and full absorption costing at the other.'

Bourne o Criticisms of the budgeting process
 Time consuming and costly
 Constrain responsiveness and flexibility - often a barrier to change
 Rarely strategically focused and often contradictory
 Add little value, especially given the time required to prepare them
 Concentrate on cost reduction not value creation
 Strengthen vertical command and control
 Do not reflect the emerging network structures that organisations are adopting
 Encourage 'gaming'
 Developed and updated too infrequently
 Based on unsupported assumptions and guesswork
 Reinforce departmental barriers rather than encourage knowledge sharing
 Make people feel undervalued o Suggests some necessary underlying principles
 Have an external focus

o o

o o o


'targets are linked to external benchmarks, not past performance, and the incentives are deliberately separated from budgeting.' o May eliminate some of the gaming Explicitly focused on strategy

Having and maintaining competitive advantage Invest in IT systems which generate a common set of numbers throughout the company Use explicit forecasting models, separate from their financial management systems

Improves flexibility and response speed Put their efforts into managing future results, not explaining past performance

Many non-financial 'real change will be unachievable without a high degree of trust.'

Bunce 'the only way the inherent contradictions of the budgeting process can be resolved is by scrapping it altogether.' 'beyond budgeting - principles for adaptive performance management'
 Process principles

Set aspirational goals aimed at continuous improvement, not fixed annual targets

Reward shared success

Make planning a continuous and inclusive process, not an annual event

Base controls on relative key performance indicators

Make resources available as needed, not through annual budget allocations

Co-ordinate cross-company interactions dynamically, not through annual planning cycles
 Leadership principles

Focus everyone on improving customer outcomes, not on meeting internal targets

Create a network of teams accountable for results, not centralised hierarchies

Champion success as winning in the market place, not meeting internal targets

Give teams the freedom and capability to act

Base governance on clear values and boundaries, not detailed rules and budgets

Promote open and shared information Lyne & Dugdale 'In practice, recommendations to go 'beyond budgeting' often involve virtually abandoning budgeting.' Suggests 'there seems to be no widespread dissatisfaction with traditional budgeting. Instead, managers generally see budgets as important, especially for planning, control and evaluation.' 'while traditional budgeting is now more likely to be combined with increased use of non-financial indicators, its demise seems unlikely.' Marginson & Ogden 'Budgeting stifles trust and empowerment, according to its critics, which in turn stifles innovation.'

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