MANAGEMENT ACCOUNTING– ENTERPRISE PERFORMANCE 2 Management Accounting - Enterprise Performance Management

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  • MANAGEMENT ACCOUNTING –

    ENTERPRISE PERFORMANCE MANAGEMENT

    FINAL

    GROUP - IV PAPER - 15

    The Institute of Cost and Works Accountants of India 12, SUDDER STREET, KOLKATA - 700 016

  • First Edition : January 2008

    Revised Edition : March 2009

    Published by:

    Directorate of Studies The Institute of Cost and Works Accountants of India 12, SUDDER STREET, KOLKATA - 700 016

    Printed at : Repro India Limited, 50/2, TTC MIDC Industrial Area, Mahape, Navi Mumbai - 400 710, India

    Copyright of these Study Notes in reserved by the Institute of Cost and Works Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof.

    Reprint : June 2010 Second Reprint : May 2011

  • CONTENTS

    Page No.

    Study Note - 1

    1 Management Control System 1 1.1 Control System 2 1.2 Management Control System 5 1.3 Behavioural Implications of Control System 19

    Study Note - 2

    2 Operations Management 21 2.1 Operations Strategy - Overview 22 2.2 Strategies for Balancing Capacity and Demand (Capacity Management Strategies) 24 2.3 Strategies for Balancing Capacity and Demand 34 (Just in Time (JIT) and Lean Manufacturing) 2.4 Strategy for Capacity and Demand Management (Optimized Production Technology) 40 2.5 IT in Operations Management (Management Information System) 47 2.6 IT in Operations Management (Use of the Intranet in Information Management) 52 2.7 IT in Operations Management 58 (Manufacturing Resources Planning and Distribution Resources Planning) 2.8 IT in Operations Management (Enterprise Resource Planning (ERP) 67 2.9 Benchmarking and Benchtrending 69

    Study Note - 3

    3 Cost Planning and Analysis for Competitive Advantage 77 3.1 Quality Function Deployment 78 3.2 Value Analysis 86 3.3 Target Costing 96 3.4 Product Mix 101 3.5 Life Cycle Costing 104 3.6 Who is involved 105 3.7 The Methodology of LCC 106 3.8 Cost Breakdown Structure (CBS) 106 3.9 Cost Estimating 107 3.10 Discounting 107 3.11 Infl ation 108

  • 3.12 Other Issues 108 3.13 Sensitivity 108 3.14 Optimism bias 108 3.15 Contribution Approach 109 3.16 Break - Even Analysis 113 3.17 Learning Curve 119 3.18 Strategic Cost Management 126 3.19 Supply Chain Management 133 3.20 Marginal Costing 140 3.21 Decision Making 185 3.22 Decisions of Transfer Pricing and use of Costs in Pricing 209 3.23 Decisions Relating to Joint and By Products 227

    Study Note - 4

    4 Treatment of Uncertainty in Decision Making 241 4.1 Risk Management 242 4.2 Sensitivity Analysis 254 4.3 Probabilistic Models 257 4.4 Expected Value 259 4.5 Coeffi cient of Variation (CV) 260 4.6 Decision Tree Analysis 260 4.7 Mathematical/Statistical Applications to Managerial Problems 265 4.8 Quantitative Techniques used in Business Decisions (a) Linear Programming 275 (b) Assignment 278 (c) Transportation 287 (d) Simulation 302 (e) Life Cycle Costing & Replacement 314

    Study Note - 5

    5 Enterprise Performance Measurement System 317 5.1 Balanced Scorecard 318 5.2 Variance Analysis and Standard Costing 336

  • Study Note - 6

    6 Quality Management 365 6.1 Introduction 366 6.2 Total Quality Management 371 6.3 Quality Tools 373 6.4 Contemporary Development in Quality Management 392 6.5 Cost of Quality and Non-Quality 394 6.6 Practice of Continuous Improvement 399 6.7 External Quality Standards 412 6.8 Global Awards for Best Practices and Business Performance 420

    Bit Questions from all Chapters 425

  • .

  • Management Control Systems

    STUDY NOTE - 1

    This Study Note includes:

    • Control Systems

    • Management Control System

    • Behavioural Implications of Control System

  • 2

    Management Accounting - Enterprise Performance Management

    1.1 Control Systems

    The term control is used in management parlance in a cybernetic sense, that is to say, as a self-regulating mechanism with the following sequence of actions:

    1. Planning

    2. Execution

    3. Comparison of achievement with plan

    4. Assessment of deviations, if any

    5. Corrective action to bring back performance in conformity with the plan.

    The basic elements of a central system are the following 1. A control object or variable to be controlled

    2. A detector or scanning sub-system

    3. A comparator/Assessor

    4. An effecter or action taking subsystem

    Control Object

    A control object is the variable of the systems behavior chosen for monitoring and control. The choice of the control object is the most important consideration in studying and designing a control system. Variations in the status of control object i.e., its behavior become the stimuli which trigger the functioning of the control system. Without these variations the system has no reasons for existence.

    Detector

    The detector tracks the performance and can be visualised as a scanning system and it feeds on information. In fact the detector is another name for Management Information System(MIS).

    Comparator/Assessor

    The output of the scanning system constitutes the energizing input of the comparator. Its function is to compare deviation of the control object from the pre-determined standard or norm the deviation become input to the activating system.

    Effecter

    The effecter is a true decision maker. It evaluates alternative course of corrective action in the light of the signifi cance of the deviations transmitted by the comparator. On the basis of this comparison, the systems output is classifi ed as being in control. If out of control it initiates corrective action.

    Communication Network

    These are devices that transmit information between the detector and the assessor and between the assessor and the effecter.

    Mr. Stafford Beer has given three principles governing control functions in cybernetic system.

    1. In implicit controllers there is CONTINUOUS AND AUTOMATIC COMPARISON of some behavioral characteristic of the system against a standard. Further there is CONTINUOUS AND AUTOMATIC FEEDBACK of corrective action.

  • 3

    Management Control System

    2. In implicit controllers control is SYNONYMOUS WITH COMMUNICATION. Control is achieved as a result of transmission of information. Thus to be in control is to communicate. Control and communication are two sides of the same coin.

    3. In implicit controllers, variables are brought back into control IN THE ACT OF AND BY THE ACT of going out of control.

    Example: The cybernetic paradigm of the control process can be diagrammatically represented as underThe term cybernetics is derived from the Greek word “Kybernetes” which means ‘steersman’. A steersman is a person who directs a ship and corrects deviations from planned course of action as they occur.

    Factual Premises

    Value Premises

    Comparator Feedback

    Goals Environment

    Effecter

    Behavior choice

    Preception

    A pressure cooker is a good example of self-regulatory control system. When the pressure in the cooking vessel rises above the set limit, the ‘weight’ lifts up to let out the extra pressure out of the vents on the top of the lid till the pressure stabilizes at the set limit. Thus in the pressure cooker control is automatic.

    Organisations function by and through people. Hence, unlike mechanistic systems, control system in organization have to contend with behavior of diverse personalities and thus management control is not automatic. Further goal congruence requires the coordination of groups of people in the organization.

    System

    A system is a set of objects

    together with their relationships between the objects

    and between their attributes

    related to each other

    and to their environment.

    ‘So as to form a whole’

    Schoderbek, Schoderbek, & Kefalas

    Objects : Objects are elements of a system. There are three kinds of objects Inputs Processes & Outputs

    Behaviour Repertoire

  • 4

    Management Accounting - Enterprise Performance Management

    Elements of a System

    Input Process Output

    Relationships

    Relationships are the bonds that link the objects together. They can be one of the three following categories.

    Relationship Between Objects in a System

    Symbiotic Synergistic Redundant

    Parasitic Mutualistic

    Symbiotic Relationship is one in which the connected systems cannot function alone. The symbiotic relationship between a parasite and a plant is unipolar, to the extent that the parasite cannot live without the plant – parasitic symbiosis. However the Symbiosis Relationship between the production & sales sub- system is bipolar – no production, no sales – no sales, no production – Mutualistic Symbiosis.

    Synergistic Relationship adds substantially to the systems performance Synergistic Relationship are those in which the cooperative action of semi-independent sub-systems taken together produces a total output greater than the sum of their outputs taken independently. A convenient expression of synergy is to say “2 + 2 = 5”

    Redundant Relationships are those that duplicate other relationships. There are back-up relationships that increase system’s reliability but at greater expense.

    Example: Stepney tyre in a car

    Attributes

    Attributes are properties of both Objects a

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