Rejuvenating a Mature Business

The last two decades has seen a revolution in steering be theory and practice due to the ch exclusivelyenges of the competitive environment in the 1980s. Kaplan and Johnson (1987) identified the failings and obsolescence of existing greet and work measurement systems which led to re-examination of traditional cost accounting and management control systems. Conventional fiscal and management accounting methods see developed primarily as a result of corporate legislation in the 1930s forcing companies to provide extern each(prenominal)y published pecuniary accounts. counsel accounting is primarily foc partd as a decision making tool for running a line of reasoning, hence they require much flexibility. According to Kaplan management accounts submit gravel a subset of financial accounts and that they reflect more on the external rather than immanent requirements of the comp whatsoever. Most of the managerial decision-making and control systems in use in the late 1980s were de scribed by Johnson and Kaplan as stagnant.As a result, they went onto research in smart accounting systems raising the profile of internal accounting systems by use of financial and non-financial measures although their work was seen as controversial by Drury but is now considered of key importance to manufacturing industries aiming to become world class. This establish aims to discuss the ways in which new management accounting techniques can bring life into mature businesses, in particular those apply non-financial measures.Most companies motionlessness use the same cost accounting and management control systems that were developed decades ago in a competitive environment drastically different from today. These systems baffle major drawbacks described belowThey distort product cost i.e. absorption of production overheads into product cost for the purpose of stock valuation. The external financial reportage process was purely driving this allocation of overheads for stock valu ation.They do not produce the key non-financial data required for effective and efficient operations, hence they argon of little help to operating managers seeking to reduce costs and improve productivity.The data produced reflected on external reporting requirements far more than the reality of the new manufacturing environment.Failure to provide ideal product costs as they were distributed by simplistic and arbitrary measures usually direct labour establish.The short term remuneration pressures led to a decline in long term investment.These poorly designed or outdated systems can distort the realities of manufacturing exploit. As companies become more efficient by using new technologies, labour costs are accounting for a smaller proportion of a companys general cost, hence the allocation of overheads to labour hours will become irrelevant and counter-productive to the companys operations.The most enduring management accounting innovation was the return on investment (ROI) meas ure which provided an overall measure of the financial death penalty of each operating units or the entire company. The ROI, initially developed by Du Pont and General galvanic in the early 20th century, came about due to the excessive focus on achieving short-term financial performance. As ROI control was introduced, managers aimed to achieve good performance by making operating and investment decisions on developing new and better products/processes, increasing sales and reducing operating costs.But it later became bare that during hard times, when sales were decreasing and operating costs were increasing, ROI targets could still be achieved through financial entrepreneurship by reducing discretionary expenses and exploiting accounting conventions. The creation of wealth through these activities will not help companies survive as world-class competitors.Problems of ROI are only surfacing now because ofthe difference in size of organisations, changes in the competitive environme nt and the rapid movement of technologyless pressure for short-term financial performance in the last two decades authentic managers confirm little knowledge of their organisations technology hence they rely on creating value through accounting activitiesCooper and Kaplan introduce the Activity establish Costing ( alphabet) systems for manufacturing expenses as a replacement for traditional cost allocation systems. ABC is an internal accounting system designed to track overheads to cost units. ABC attempts to track overhead costs to units as accurately as possible hence the concept of the cost driver is essential to this system. A cost driver is a unit measure of a particular overhead that can be assigned to a user of that overhead.For example, in attempting to allocate administration overheads to products, the cost driver may be the number of invoices generated for that product. Hence the product generating most invoices will acquire the largest share of the administration overhe ad. There does not have to be one driver per overhead. There can be more drivers per overhead if they are relevant to the organisation. The ABC model is shown belowA more accurate means of allocating overheads means that product costs can now be more accurately assessed. ABC analysis allows companies to discover profitable products that have not been properly exploited because the correct costs had not been appreciated. If unit costs are based on budgeted energy rather than actual, ABC highlights excess capacity because only consumed capacity is allocated via cost drivers. Hence there is a now a measure of excess capacity. This takes away the focus of meeting budgets at all costs and instead focuses on unbroken improvement.Product costing is not the only use of ABC. By finding appropriate drivers and cost units, overheads can be assigned to anything that uses them. This allows sales and marketing costs to be assigned both to the products and customers. Traditional systems do not t ake into account costs generated by customers. For organisations interested with customer focus, ABC will give valuable insights into customer behaviour. The other benefits of using ABC are its focus on continuous improvement, its measurement of activities at the process level, its provision of accurate cost data including those generated by the customers, and it is geared for the medium term (3-5 years).An extension of ABC is Activity Based Management (ABM), where using the cost drivers, a deeper understanding of the process is enabled. By measuring activity and costs, ABM has a system to monitor continuous improvement and manages a business from a process perspective rather than a departmental one. Therefore it can make decisions based on accurate process level information.A greater understanding of factors critical to the success of manufacturing organisations is needed. Accounting researchers can play a critical role in this effort by attempting to develop non-financial measures of manufacturing performance like pure tone, productivity, inventory innovation and workforce . A particular challenge is to de-emphasise focus on short-term financial measures and develop indicators that are more consistent with long-term competitiveness and profitability. The challenge of improving a firms manufacturing performance is particularly relevant to managerial accountants as they are hypothetical to provide information for planning and decision making. Therefore, measurement systems for todays manufacturing operations must consider the following non-financial indicators of manufacturing performanceQuality is emerging as perhaps the most important factor if companies are trying to excel as world-class competitors. U.S. firms typically inspect quality into products whereas Japanese manufacturing is dedicated to eliminating all product defects. Quality is planned and thought into the product at all stages of manufacture including design and supplier specifications. Furth er commitment is required in prepare employees, maintenance of equipment and integrating with suppliers. With this embedded into the processes the goal of achieving zero defects can be achieved. Executives claim that manufacturing costs decrease as quality increases thus a continuous drive to reduce product defects will enhance the long run productivity of the production process .Managers tend to use the economic order total (EOQ) model which helps in determining the cost balance between an additional set-up (for a new production run or change of product) to the cost of attribute inventory. If set-up costs could be driven to zero and by just-in-time inventory control systems implementation firms would hold less inventory and raw materials. These would result to lesser costs in holding material that has no value being added to it.In addition, reducing uncertainties in deliveries from suppliers through close co-ordination can enable factories to run without any raw materials in sto ck. Reducing machine breakdowns also contributes significantly toward reducing work-in-process (WIP). Thus by investing in information systems and integrating with suppliers, inventory costs can be reduced significantly and accurate information on the companys manufacturing performance can be obtained.Productivity measures for manufacturing performance have not yet been considered as part of the information that will help managers in decision making and control activities. These measures should be a supplement to financial measures that highlight improvements. Developing new productivity measures would thus be a fruitful field for accountants.There are companies present whose competitive strategy is based on the introduction of new products with unique characteristics, rather than producing mature products with lower costs. These companies will only succeed if their products are introduced at the right time and have features that are desired by their customers. Companies that are fo rced to produce these products on existing line, due to lack of space, will have to directly monitor the performance, quality and delivery and disregard traditional measurements which put an emphasis on efficiency.The attitudes, skills and morale of employees are important if companies are to succeed in achieving their goals. Investing in skills training, conducting surveys of employee attitudes etc by human resources are all critical if employees are to share company goals.It is clear from the above indicators of manufacturing performance that non-financial measures are essential in rejuvenating mature businesses to become world-class. Executives are also aware that traditional accounting measures like ROI can give misleading information on continuous improvement and innovation which current competitive environments demand. Managers want a balanced presentation of both financial and operational measures which led Kaplan and Norton to devise a balanced scorecard that incorporated bo th such measurements. The scorecard aids the building of a comprehensive picture of the companys health and effectiveness in achieving its goals.The balanced scorecard includes financial measures that produces results on actions already taken and is complemented by operational measures on customer satisfaction, internal business processes, innovation and learning activities. It is these operational measures that will fuel the performance of future financial measures. The balanced scorecard yields several benefits, including the ability to bridge the gap between objectives of high level executives and those of front-line workers whose performance is ultimately responsible for reach the companys goals. Rather than focusing on short-term financial results, which can blind management to internal efficiency and lead to continued tax income losses, chief executives can benefit by using the balanced scorecard as a strategic management system for translating strategy into action at all lev els of the enterprise.