Session 7/Week 8 - Accounting, innovation & strategic planning Flashcards
1st revolution (1900-1940s) in shaping management accounting: Taylorism
aka “scientific management”. One of the first global schools of thought which have significantly influenced the ways in which acct. was practiced.
- developed by Frederik W. Taylor
Principles
1. Focuses on ways to optimise the production process by separating thought and process (PRODUCTION vs METHODS department; workers vs managers)
2. Measured workflows closely, eg. carrying of pig-iron
3. Piecework pay
- Motivate productive workers w/ increased pay
Managerial accounting fulfilled an important function in enabling scientific management:
* Made deviations from previously established benchmarks visible
* Enabled the IDENTIFICATION of SEPARABLE tasks {to find the most efficient method of production. Taylorism breaks down processes into basic steps, also contributes to dehumanisation}
* Enabled STANDARDISATION across activities
- key for employees to follow to achieve consistent quality -> high profits
Taylorism was adopted (and adapted) in many countries for organising production, eg. McDonald’s but also harshly CRITICISED.
1. DEHUMANISING (humans considered as machines)
2. Inhibiting quality and INNOVATION (local knowledge discarded)
- employees are only following the “one best way”
3. Hardly transferable (requires SPECIFIC employees)
- employees are highly productive at ONE JOB
2nd revolution (1950s-1980s) in shaping management accounting: Toyotism
Founded in Toyota.
1. In contrast to Taylorism, Toyotism does not consider workers as something similar to machines, but as resources that could be MANAGED and BEHAVIOURALLY ENGINEERED so that they gradually enhance their EXPERTISE and capacity
- but led to inefficiencies where conglomerates were not specialising & doing sth really well (leads to 3rd revolution of strategic turn)
2. Depends on a culture of labour-management cooperation, multi-skilling and cross divisional problem solving
3. Often associated with the creation of a specific ORGANISATIONAL CULTURE as a requirement for long-term success
4. Japanese employees and managers had a STRICT WORK ETHIC to cultivate the spirit of cooperation
5. Concessions such as employment security, seniority-based wage systems, twice-yearly bonuses, or regular promotion from the shop- floor to senior management tied to the organizational bonuses schemes
3rd revolution (1990-today) in shaping management accounting: The ‘strategic turn’
At the beginning of the 21st century, the focus is shifted to prioritise STRATEGIC THINKING and to adapt all organisational activities to the STRATEGIC GOALS formulated. (specialising in doing 1 thing really well)
Porter’s five forces & 3 consequences on strategy formulation
- Threat of new entrants (vertical pressure)
- Rivalry among existing firms (all other forces pushing on this)
- Determinants of supplier power (horizontal)
- Determinants of buyer power (horizontal)
- Threat of substitute products (vertical)
- Positioning where the forces are weakest
- Exploiting changes in the forces
- Reshaping the forces
3 definitions of Strategic management accounting (SMA)
- capture information on factors EXTERNAL to the firm (CIMA, 2000)
- capture FORWARD-LOOKING information by looking beyond the next accounting period
- capture internal financial info + BOTH financial and non-financial information about the environment in which the firm is operating (Lord, 2007)
Traditional MA techniques focus on the financial information (NPV, IRR, payback method, ARR) & strategy is an afterthought, something to be aligned to.
> SMA starts from strategy & supported by calculations
Business plans
eg. Apple 1981 case, Caribbean Internet Cafe case
- A written description of your business’s future, a document that tells what you plan to do and how you plan to do it
- inherently strategic by summarising the resources needed by which a defined course of action will be carried out {acct. comes after mapping}
- should contain both qualitative and quantitative as well as financial and non-financial information
1. Formulate business strategy
2. Situate the strategy with STRATEGIC ANALYSIS, eg. SWOT analysis, Porter’s 5 forces (qualitative analysis)
- Support with QUANTITATIVE ANALYSIS
^links traditional MA techniques to strategy making
- Break-even analysis where costs = revenues
- Contribution margin analysis
- Cost-volume profit analysis (break-even point where contribution = fixed costs. CVP analysis helps visualise scale issues)
- Discounted cash-flow analysis (allow to take into account both capital investment & time value of money) - SCENARIO/SENSITIVITY analysis
- Test robustness of results of a model/system under uncertainty by reviewing critical VARIABLES
» to better understand the relationships between input & output variables
eg. for CiC case, no. of customer visits
Life-cycle costing & limitation
*forward-looking aspect of SMA
- Can be a solution to the problem of costing INTANGIBLE ASSETS, as the immediate results of any investment in intangible assets cannot directly be observed but materialize (if at all) in the LONG TERM
- relies on traditional costing techniques but attempts to EXTEND the TIME-HORIZON and capture more cost-elements both before and after the MARKET CYCLE, ie. showing the DYNAMIC over TIME
^market cycle represents only a small portion of the entire product life cycle
~ Thus, the FULL SET of REVENUES and COSTS associated with each product becomes VISIBLE.
~ INTERRELATIONSHIPS among business function cost categories are highlighted,
eg. companies that cut back their R&D and product-design costs may experience major increases in customer-service costs in subsequent years. (BHDR)
Limitation: Powerful tool but there is often considerable OVERLAP between product cycles, eg. how to attribute salary costs
> should only be considered in COMBINATION with other costing systems and taken as a form of VISUALISING
eg. to set prices to cover a larger cost structure
Balanced scorecard
*SMA technique that captures the non-financial elements of the biz
eg. Apple example, Chipset example
- Captures and manages innovation
- 4 perspectives from which to choose measures
» Financial, Customer, Internal business processes (what biz processes to excel at to satisfy shareholders & customers), Learning & growth (to achieve vision) - Set a few critical performance TARGETS to COMPARE performance against; should be directly linked to the OVERALL strategy of an org.
» targets can be industry benchmarks
eg. Apple
Biz strategy to bring the best user experience to its customers through its innovative hardware, software & services.
- Sales revenue, shareholder value
- Market share, customer satisfaction
- Employee satisfaction survey, no. of certified SALESPERSONS
- Core competencies, possibly no. of patents
eg. Chipset has a cost leadership strategy
1. To reduce costs, it needs to improve QUALITY + redesign its delivery system,
ie. improving its BUSINESS PROCESSES
» Financial perspective -> operating profit, revenue growth
» Customer perspective -> increase customer satisfaction, increase market share
» IBP perspective -> improve quality + reduce delivery time
» L&G perspective -> increase % employees trained, employee satisfaction survey to ensure aligning employee & org. goals
Life-cycle costing - examples of costs at each stage
eg. iPhone example, Fjalar example
iPhone
1. Pre-market costs
- consultant fees for market analysis, legal costs for patents/trademark registration, R&D (fixed cost of engineers’ salaries, product testing equipment)
2. Market cycle costs
- inventory cost (fixed facility costs, warehouse staff salary), DIRECT MATERIALS, DIRECT LABOUR, depreciation, maintenance, operating costs (electricity, water)
3. Disposal costs
- After-sales service
- recycling costs (also to build brand image of protecting environment + take the old phones out of circulation to build market for next iPhone model), disposal of unsold products (shipping), WARRANTY costs (repair, damages)
*Marketing costs in between Pre-market & Market cycle costs
Fjalar example (a computer software company)
R&D, design costs, production costs, marketing costs, distribution costs, CUSTOMER SERVICE costs
Why is ABC considered an SMA technique that captures the non-financial elements of the business?
eg. Foxconn case, Colombo Frozen Yogurt case
ABC focuses on non-financial ACTIVITY DRIVERS but converts them to financial numbers
Reference: 4 examples of SMA techniques
Roslender and Hart, 2003
1. Target costing
2. Life-cycle costing
3. Customer profitability analysis
4. Activity-based management
