Contrôle Interne Avancé-HEC Lausanne-2007/2008 1 CONTROLE INTERNE AVANCE Eric CAUVIN, PhD IAE Aix...

Contrôle Interne Avancé-HEC Lausanne-2007/2008

1

CONTROLE INTERNE AVANCE

Eric CAUVIN, PhD

IAE Aix en Provence


2

INTRODUCTION


3

Competitive Environment Evolution

70’s

Growth, Demand > Supply, Protected and stable

markets.

80’s…

Decrease in growth, Supply’s atomization, Worldwide markets.


4

Development of a Competitive Advantage

70’s

Generic strategies:

Cost leadership or Differentiation (quality).

00’s…

Combined strategies:

Cost leadership and Differentiation (quality, after-sale service, delay, etc.).


5

The Impact of Strategy’s Evolution on Firms

Technology

Increase in the diversity of products,

Increase in the fixed assets.

Organization

Horizontal structure, Increase in the support

functions, Increase in the complexity

of processes.


6

The Failure of Traditional Management Control Systems

Based on a vision of the firms as hierarchical,

Based on the assumption that the volume explains the costs’ behavior,

Based on the assumption that the performance is exclusively described by financial metrics.


7

INTRODUCTION: THE EVOLUTION OF STRATEGY


8

The Generic Strategies (1)

Cost/price advantage or a quality advantage: Volume strategies: offer a

very low price to very high price sensitive buyers… with a low concern for quality,

Premium strategies: enabled niche players to provide the highest quality… at a very high price.

Quality advantage

Cost advantage

A trade off – EITHER OR…

German carsRolex

MontBlanc

Asian carsTimex

Bic


9

The Generic Strategies (2)

The customer of 70’s and 80’s knew and did accept the association between quality and price: quality always costs, and cheaper always means lower quality,

His/her behavior was adapted to the generic strategies. The trade-off quality vs. cost was the right answer from most companies.


10

The Death of Generic Strategies…(1)

Unfortunately, while his/her demand for high quality kept increasing, his sensitivity to price increased spectacularly in the past ten years or so, and a new kind of customer appeared,

He/she is requesting now a higher quality at a lower price!


11

The Death of Generic Strategies…(2)

“Do it less expensive or you are fired,

Don’t do as well and you are fired.”Sony’s slogan, 2002.


12

The Combined Strategies (1)(Adapted from M.Montebello)

More sensitive

to quality?

Notsensitiveto quality

And moresensitiveto price?

Premium

Value

Sensitive to price

Volume

1980’s

2000’s

1970’s

A better qualitythan expectedin the marketfor a given

price.

YESYES

NO


13

The Combined Strategies (2)

Some companies understood this drastic change in the customer’s behavior: beyond IKEA, DELL,

Just think to the message that appeared a few years ago in the advertising of premium car makers: BMW, MERCEDES, SAAB, JAGUAR, etc.,

They started communicating on price!


14

The Combined Strategies (3)

When you speak about price to customer, you are thinking VALUE and not premium, just because premium buyers are not price sensitive.


15

Value Creation (Adapted from M.Montebello)

Examples of companies that did achieve a profitable growth through value can be found in IKEA, DELL, HOME DEPOT, DECATHLON, SAS, AMAZON.COM,

Instead of competing, they all chose to offer customers the product of high quality that they wished, at a competitive price, within the shortest possible time, and with an excellent service.

Price

Relative Perceived Quality

Indifference/You get w

hat you pay for

Premium

Value Creation

Value Destruction

Volume


16

BMW StrategyFrom: BMW Website, October 2003

“The BMW Group concentrates on selected premium segments in the automobile market. This means that it is the only multi-brand automobile manufacturer in the world that is not active in the mass market, i.e. the volume segments of the automobile market.The aim of the premium brand strategy is to achieve higher revenues per vehicle, on the basis of a high-value product substance and an unmistakable brand profile. The BMW Group pursues this premium brand strategy with the BMW and MINI brands, and, since January 1st, 2003, with ROLLS-ROYCE.”

For BMW, creating value for its customers in the form of luxury services and features is thus vital. This does not mean that keeping costs down is unimportant. Rather a hierarchy has been clearly established.

“The Company expects that in the next ten years, the premium segments of the automobile market will grow worldwide by around 50%. In contrast, the mass volume segments will increase by “just” 25% or so during the same period. The BMW Group is aiming to achieve profitable growth in the future too, and in that order of priority – ‘profitable’ followed by ‘growth’”.


17

How to Create a Sustainable Competitive Advantage?

Create value for customers!

“ Value is the price customers are willing to pay for. ” (Porter).

“ Value is defined and measured by price, quality, delay, safety, service, image of the company, etc.” (Ohmae).


18

How to Identify the Value Created?

Profit

Firm Infrastructure

Humain Resources Management

Technology Development

Procurement

Inbound Logistics Operations

Outbound Logistics

After-Sales

Primary Activities

Sup

port

ing

Act

ivit

ies

Mkg and

Sales


19

The Dynamic Strategies (1)

Generic Strategies vs. Dynamic Strategies.

Competitive advantage can be sustained in switching strategic emphasis between perceived product value and process cost reduction.


20

The Dynamic Strategies (2) (Adapted from Gilbert and Strebel, 1987)

Perceived Product Value

Low Delivered Cost

Break


21

INTRODUCTION: THE EVOLUTION OF THE COST ACCOUNTING SYSTEMS


22

The Structure of the Costs

0

10

20

30

40

50

60

D.L. I.C. D.M.

Technology changes, driven by the strategies’ evolution, impact on Management Control Systems because they modify the structure of the production costs.


23

The Cost Drivers… (Adapted from Shank, 1989)

The output volume?

“Structural” cost drivers: the strategic choices a firm makes.

“Executional” drivers are those determinants of a firm’s cost position which hinge on its ability to “execute” successfully.


24

Structural Cost Drivers (1) (Adapted from Shank, 1989)

Scale: how big an investment to make in manufacturing, in R&D and in marketing resources.

Scope: degree of vertical integration. Experience: how many times in the past the firm

has already done what it is doing again. Technology: what process technologies are used at

each step of the firm’s value chain. Complexity: how wide a line of products or

services to offer to customers.


25

Structural Cost Drivers (1) (Adapted from Shank, 1989)

Of the structural drivers, scale, scope and experience have received a large amount of attention from economists and strategists over the years. Of these three, only experience has drawn much interest from management accountants…

Recently, complexity has received the most attention among accountants (Kaplan, Cooper, etc.). Activity-Based Management deals with: Product diversity and complexity, Variation in production levels, Procedural complexity, Engineering change orders.


26

Executional Cost Drivers (2) (Adapted from Shank, 1989)

For example: Work force involvement, Total quality management, Capacity utilization, Plant layout efficiency, Product configuration, Exploiting linkages with suppliers and/or

customers, per the firm’s value chain.


27

Cost Accounting Systems and Strategy (1)

Functions

Activities Processes


28

Cost Accounting Systems and Strategy (2)

It is useful to think of an organization as a sequence of activities which output is a good or a service,

Each activity should contribute more to the ultimate value of the product that its cost.


29

Roots of the Competitive Advantage

Products

Attributes

Buying Criteria

Activities


30

Linkages Between the Value Chain and the Customers’ Buying Criteria

Activities

_________

Buying Criteria

Managing the

itineraries

Assigning the seats

Transporting Maintenance of the trains

Maintenance of the lines

Maintenance of the station

Train punctuality

X X X X

Seat availability

X X

Comfort in the in the trains and in the stations

X X


31

Cost Accounting Systems and Strategy

Measuring performance of the activities performed by a company,

Reducing the cost of the value chain.


32

THE TRADITIONNAL COST ACCOUNTING METHODS: THE

FRENCH METHOD


33

The Origins of the Method (1)

1927: the French employers’ organization (CEGOS) named Lieutenant-Colonel RIMAILHO (Graduate of the Ecole Polytechnique) as head of a committee charged with the design of a uniform-costing method for all industry sectors,

1928: the Homogeneous Sections Method (idea of Responsibility Accounting) was born and became widely diffused through education channels and its encouragement in the successive French Accounting Plan.


34

The Origins of the Method (2)

The model was directly inspired by the experiments undertaken within the military manufacturing plants since the beginning of the 20th century because they were regularly blamed for overly high production costs and unfair competition with regard to the private sector.


35

The Purpose of the Method

Assigning the costs, Computing the cost of a product (coût de

revient) (production cost + distribution cost),

Setting selling prices, Valuating inventories.


36

Cost Accounting vs. Financial Accounting

Distinction between financial accounting and cost accounting: Monism vs. Dualism,

The task of financial accounting is to report costs by their inherent nature (e.g. depreciation costs); the job of cost accounting is to assign costs to departments or to products.


37

Main Characteristics…

A full costing method, A two stages method, A functional vision of the firm, A vision of the resources: direct costs vs.

indirect cost.


38

Main Principle: a Two-Stage Method…(1)

Labor

Raw Materials

Machines

Product # 3

Product # 2

Product # 1

Workshop A

Workshop B

Workshop C

Understanding how the resources are consumed and who consumes them…


39


Resources

Direct resources Indirect resources

Cost objects (product, service, customer, etc.)

Directly allocated

Functions

Repartition

Allocation


40


Indirect resources

A B C A B C A B C

Stage # 1

Purchasing

Stage # 2

Manufacturing

Stage # 3

Distribution

Product # X

Resources are gradually consumed…

PurchasingCost

ProductionCost

Final Cost


41

Stage 1: How to Choose the Sections?

The sections are those defined by H.Fayol at the beginning of the 20th century,

The sections must be homogeneous. A section is homogeneous when it is characterized by one activity only or when the resources the different activities consume vary according to the same criteria or rate (called Unité d’œuvre).


42

Stage 2: The Indirect Costs are Allocated to the Sections: The Primary

Repartition When the sections are defined, the resources they have used for the period are allocated. There are two alternatives:

The resources are directly allocated (for example, the depreciation cost of a machine used exclusively by a section),

The resources are allocated using a rate (for example, the rent of a building shared by several sections; the resource can be allocated to the different sections using the “square feet”).


43

The Nature of the Sections (1)

The method distinguishes two types of section: The main section: when the section’s output is

physical (materials purchased, products manufactured, products sold, etc.),

The auxiliary section: when the section purpose is to support the main sections (maintenance, etc.),


44

The Nature of the Sections (2)

Because: it is difficult to find a link

between an auxiliary section and a product,

it is hard to measure the activity of an auxiliary section (what is the best rate to measure the activity of an administrative section?).

The resources used by the auxiliary sections are re-allocated to the main sections.


45

Stage 3: The Indirect Costs Used by the Auxiliary Sections are Allocated to the

Main Sections: The Secondary Repartition The indirect costs used by the Auxiliary

Sections are allocated to the Main Sections proportionally to their support,

Rates are used to measure the relationship between the different sections.


46

Stage 4: The Choice of the Unités d’Oeuvre (Overhead Rate)

Company chooses U/O: which reflects the section’s activity (or output), which is more correlated with the variation of

the indirect costs. It’s the way to allocate resources to the cost

objects, This overhead rate is also a performance

measure of the section.


47

Example of U/O

Purchasing Section: Kilos of Material Purchased,

Workshop: Number of Direct Labor Hours or Number of Machine Hours,

Distribution Section: $1,000 of Sales.


48

Stage 5: The Indirect Costs Repartition Table

The Indirect Costs Repartition Table is the summary of the 4 previous stages,

It gives: The Primary Repartition: the indirect cost of

each sections (main and auxiliary), The Secondary Repartition: the repartition of

the auxiliary sections to the main sections, The U/O for each main section.


49

Indirect Costs Repartition Table Example (1)

Sections Purchasing Manufacturing Sales

Maintenance 20% 60% 20%

Computer Service 40% 30% 30%

The Merlin Co. organization is based on 2 auxiliary sections (Maintenance and Computer Service) and 3 main sections (Purchasing, Manufacturing and Sales). The repartition of the auxiliary sections is the following:

For the activity of April, the General Ledger gives the following primary repartition:

Sections Maintenance Computer Service

Purchasing Manufacturing Sales

Costs 1,000 2,000 5,000 8,000 4,000


50

Indirect Costs Repartition Table Example (2)

To manufacture its two products A and B, Merlin uses two materials X and Y.

For April, Merlin purchased 100 kg of X and 500 kg of Y. Merlin consumed 300 machine hours for producing A and 700 for producing B. Finally, Merlin sold 10,000 A (@ $1,000/unit) and 20,000 B (@ $500/unit).


51

Indirect Costs Repartition Table Example (In K$) (3)

Elements Auxiliary Sections Main Sections

Total Maintenance Computer service

Purchasing Manufacturing Sales

20,000 1,000 2,000 5,000 8,000 4,000

Repartition of the auxiliary

sections

(1,000)

(2,000)

200

800

600

600

200

600

20,000 0 0 6,000 9,200 4,800

U/O

Kg of material

purchased

Number of machine hours

Sales

(in K$)

Number of U/O 600 1,000 20,000

Cost of the U/O $10 $9.2 $0.24


52

The Use of the U/O

In our example, Product A will bear $2,760 of Manufacturing Indirect costs ($9.2 x 300) and Product B will bear $6,440 ($9.2 x 700).


53

Stage 6: The Cost Calculation

The model is analytical: it is based on a cost hierarchy.

Roughly, there are 3 steps: Calculating the cost of the material purchased, Calculating the cost of the products, Calculating the cost of the products sold.


54

The Inventories

Material Purchasing

Material Inventory

Production

ProductInventory

Distribution

PurchasingIndirect

Cost

ManufacturingIndirect

Cost + Direct Labor

DistributionIndirect

Cost


55

Beginning Inventory 1/1: 100 x $8

Purchase 1/5: 300 x $10

Purchase 1/28: 300 x $9

$800

$3,000

$2,700

Consumption 1/8: 200 x ?

WAC: (800 + 2,000)/400 = $9.5

200 x $9.5 = $1,900

FIFO: (100 x $8) + (100 x $10)

(100 x $8) + (100 x $10) = $1,800

Two Methods Allowed in France: The Weighted Average Cost and the FIFO


56

CRITICAL PERSPECTIVES OF THE TRADITIONNAL COST ACCOUNTING

METHOD


57

Strengths of the method

It is a full cost method which can help managers to measure the profitability of a cost object (product, service, customer, etc.),

It is a two stage method. The behavior of the costs is explained in each section using several different overhead rates (unité d’œuvre).


58

Weaknesses of the method (1)

The Homogeneous Sections process is relevant but the assumptions it is based on are today invalidated,

Indeed, in 1930:

The share of the indirect resources in the production cost was small,

The share of the auxiliary sections in the total resources of the firm was small,

The organization of the firms was functional, hierarchical,

The behavior of the costs could be explained by the volume (“You can have your Ford T in any color you want, so long as it is black”),

The production capacity was used in full.


59


It is based on a functional vision of the firm. Today, companies’ organization tend to become “flatter”, based on processes, projects, etc.

Project Managers need information to make decisions and to control,

The traditional costing method does not enable Managers to control their activity because the information disclosed are too aggregated.


60


It is based on the assumption of the section’s homogeneity. But often the sections are too aggregated. They regroup several activities which cost behave differently.


61


Section # 1: Purchasing

Activities:•To deal with the suppliers,•To order,•To manage the references.

$100,000

$500,000

$100,000

U/O: one Kg purchased U/O for the period: 70 000

When the Section # 1 purchases one kg of material, the indirect cost of purchasing is $10. The consumption of all the resources in the section is

expected varying according to the same rate: the Kg purchased.


62


The traditional costing method uses overhead rates related to the volume. It is not always the best criteria to explain the costs behavior.

Purchasing Section Amount

Total resources

U/O

Number of U/O

Cost of U/O

$1,000

Number of Kg purchased

100Kg

$10

If the company wishes to reduce its costs of purchasing, it has to purchase less raw materials…


63


So, the information the Homogeneous Sections Method provides is not always relevant: it doesn’t enable to identify the right measures to reduce the costs,

But, the information is not either reliable. The most famous pathology is the Cross-Subsidization: the products manufactured in large quantity subsidize the customized products… because the overhead rates used are based on the volume.


64

The Cross-Subsidization Pathology

Standardized, using a simple technology,

made in large quantity.

The products/clients which are:

The products/clients which are:

Customized,using a sophisticated

technology,made in small quantity.

Subsidize


65

Cross-Susidization (1)

Production of 1 batch of 5 kgs Production of 5 batches of 1 kgDirect Material Cost: $50/kg

Indirect Costs : $2,000


66

Cross-Susidization (2)

Traditional cost accounting: allocation of indirect costs based on the material’s weight.

Cost: $250/kg Cost: $250/kg


67

Cross-Subsidization (3)

Elements Customer A Customer B

Turnover 1 000 1 000

Production costs (650) (700)

Indirect costs of the Sales Section: 250 (allocated in proportion to the turnover)

(125) (125)

Profit 225 175

Which customer do you prefer to work with?


68

Cross-Subsidization (4)

Elements Customer A Customer B

Number of visits to customer

Number of orders

Number of deliveries

Number of invoice lines

Term for payment

18

20

25

350

90 days

7

10

10

40

30 days

How to measure the complexity to manage the Customer A?

The allocation of the sales indirect resources in proportion to the turnover soothes the cost difference of the two customers.


69


Today the auxiliary sections (R&D, Customer service, Human Resources Management, etc.) become more and more important in the creation of a competitive advantage,

The traditional costing method does not focus on the performance of these sections.


70


The method does not take into account the distinction between the fixed and the variable costs,

A new version was developed to measure the impact of the level of activity on the fixed costs: the Rational Allocation of the Fixed Costs (l’Imputation Rationnelle des Charges Fixes).


71

Problem (1)

Seven Company makes and sells one product. The monthly fixed costs are: $6,000. The variable cost per unit is $50.


72

Problem (2)

Elements March April May

Number of products sold 100 120 80

Variable costs 5,000 6,000 4,000

Fixed costs 6,000 6,000 6,000

Total costs 11,000 12,000 10,000

Cost per unit $110 $100 $125


73

Problem (3)

Assume that Seven Company makes and sells two products with the same structure (the same fixed costs). The indirect fixed costs are allocated to the products based on the number of products.

Variable costs per unit: A = $30 B = $40


74

Problem (4)


# of products A 50 50 50

# of products B 50 70 30

Total 100 120 80

Total costs 9,500 10,300 8,700

Fixed costs per product 60 50 75

Unit cost/A 90 80 105

Unit cost/B 100 90 115


75

Problem (5)

Product A has the same activity all along the period. Nevertheless, its unit cost varies. This variation should be bore only by the product B which is the cause of this phenomenon.


76

Observation (1)

Production cost per unit

= Variable Cost per unit + Fixed Costs/N

N = quantity produced (activity) If the activity is rather stable, the production cost

is stable, If the activity changes strongly, the production

cost per unit will vary. The variation will depend on the amount of the fixed costs.


77

Observation (2)

The information is not reliable: The activity’s variation can hide other effects

(price, productivity), The variation of the production cost makes

price difficult to set.


78

Observation (3)

Fixed costs are two-part: The first part, the standard activity, has to be

allocated to the products, The second part, the over-activity or the under-

activity, has to be allocated to the activity’s variation.


79

The Rational Allocation of the Fixed Costs (1)

This operation is done proportionally to the actual activity compare to the standard activity: Allocated Fixed Costs

= Fixed Costs x Actual Activity/Standard Activity


80

The Rational Allocation of the Fixed Costs (2)


Total costs 11,000 12,000 10,000

# of products 100 120 80

Allocation Rational Ratio 1 1.2 0.8

Allocated Fixed Costs 6,000 7,200 4,800

Product costs 11,000 13,200 8,800

Product costs per unit 110 110 110

Cost of activity’s variation 0 (1,200) 1,200


81

The Rational Allocation of the Fixed Costs: Advantages (1)

The method enables to emphasize the under-activity. In May Seven Company has to deal with an under-activity which costs $1,200. Each “Special Order” accepted at a price lower than the standard cost ($110) but higher than the variable cost ($50), will reduce the cost of under-activity.


82

The Rational Allocation of the Fixed Costs: Advantages (2)

On the long-term, under-activity or over-activity level, shows the objectives the company has to reach regarding its structure. If Seven performs an average over-activity of 25 products per month, the over-activity earnings can be assessed: (6,000 x 125/100) – 6,000 = 1,500.

1,500 is the amount Seven can invest monthly to fit its structure to its activity without reducing its profitability.


83

The Rational Allocation of the Fixed Costs: Drawbacks

To implement the Rational Allocation of the Fixed Costs company has to set the level of the Standard Activity.


84

ACTIVITY-BASED MANAGEMENT


85

Activity-Based Costing

The Value Chain: the competitiveness of activities or processes a company performs, impacts on the competitiveness of products it does.

The ZBB: like in the ZBB, ABC’s purpose is to identify the causality effect between the activities a company performs and the resources it uses.


86

ABC Defines the Company as a Set of Tasks, Activities and Processes

Selecting the suppliers

Ordering

Managing the references

Reviewing the invoices

Controling the deliveries

“Purchases Management” Process


87

ABC Method Focuses on Value Added Activities

Activities

Purchasing Warehouse Workshop #1

Workshop #2

R&D Shipping Sales

•Managing products’ quality• Managing inventories• Managing shipping

X

X X

X X X

X

X

X

Functions

Value added activities are mainly cross-functional. The purpose of ABC method is to emphasize these activities.


88

Activity

Task Activity Process


89

Tasks, Activities, Processes

Tasks Activities Process

Receiving the purchase order

Reviewing

Recording the operation

Reviewing


Receiving the delivery advice

Editing the invoice

Receiving the payment

Reviewing


Depositing the check

Approving the sales

Invoicing

Recording the payment

Administrative Management of the Sales


90

ABC: the Company as a Flow of Activities

Designed, manufactured and sold products are the output of internal value added activities or non-value added

activities for the customer.

Activity #1 Activity #2 Activity #3 Product

Purchasing the spare parts

Controlling the spare parts

Setting up the production


91

ABC Method

Resources

Activities

Cost Objects (product, customer, etc.)

Resourcecost

drivers

Activitycost

drivers

Costs Calculation


92

Activity Drivers: Example

The Purchasing Department of Roth Watch Company performs an activity Receiving the Orders. Roth company chose # of references as Activity Driver. The Department currently manages 7 references:

2 cases (round and square), 3 faces (blue, black and white), 2 glasses (round and square).

In April RWC received: 1,000 cases

800 round ones, 200 square ones.

500 faces 100 blue ones, 300 black ones, 100 white ones.

400 glasses 300 round ones, 100 square ones.

The monthly cost of the activity Receiving the Orders is $70,000.


93

Stage 1: The Fixed Cost of the Driver

Elements Receiving the Orders

Resources used

Driver

Driver Type

Fixed Cost of the driver

$70,000

# of References

7

$10,000

Whatever the type of reference, cases (round or square), faces (blue, black or white), glasses (round or square), RWC spends

$10,000 for each of one.


94

Stage 2: The Cost Allocated

Driver Fixed Cost Quantity Cost Allocated

References

Round cases

Square cases

Blue faces

Black faces

White faces

Round glasses

Square glasses

10,000

10,000

10,000

10,000

10,000

10,000

10,000

800

200

100

300

100

300

100

$12.5

$50

$100

$33.33

$100

$33.33

$100

The Cost Allocated is the cost of the Driver References used to calculate the production costs. It is the cost RWC spent to manage each

reference taking into account the quantities purchased.


95

The Aggregation of Activities

ABC is often perceived as a complex method because of the quantity of activities a company performs (200 or 300 activities is an average),

In order to simplify its ABC model a company can decide to “gather” its activities in Cost Pools according to 3 different criteria: Process aggregation: gathering activities in processes, Function aggregation: gathering activities in function, Activity cost driver aggregation: gathering activities

which activity cost drivers are identical.


96

The Aggregation of Activities: Example (1)

Activity Activity Cost Driver

Recording the purchases # of references, # of suppliers

Managing the purchases # of references, # of suppliers

Receiving the deliveries # of deliveries

Handling the material # of batches

Setting up the production # of batches

Assembling # of direct labor hours

Finishing # of direct labor hours


97

The Aggregation of Activities: Example (2)

Cost Pools

ReferencesManagement

DeliveriesManagement

BatchesManagement

DLH Management

Reference Delivery Batch DLH


98

ABC: an Evolution

The traditional costing method The company is viewed as a set of

aggregated sections:e.g. Purchasing

Products consume resources:e.g. Supervisor’s salary is allocated to Product X

Indirect costs are allocated based on “volume” rates:

e.g. Number of direct labor hours

The ABC method Company is viewed as a set of disaggregated

activities:e.g. Selecting the suppliers, Ordering,Reviewing invoices

Activities use resources, products use activities:e.g. Supervisor’s salary is a cost,If 50% of his time is spent to control the production department,Then, if Product X uses 10 minutes of the supervisor’s control activity,The relevant ratio is charged to Product X.

Activities’ cost is allocated based on rates reflecting the complexity of production processes:

e.g. Number of components, Batch size.


99

Challenges for Cost Accounting (1)

Probably the “ideal” method doesn’t exist… The cost is just an opinion… The point is not only the method but the

purpose and the assumptions it is based on.


100

Challenges for Cost Accounting (2)

Companies implementing costing methods have to design their cost system according to the purpose (pricing, cost reduction, etc.) and have to better involve all the people,

Costing methods are too often built for manufacturing industry,

Service industry is probably one of tomorrow’s challenges.


101

Matching Costs Analysis and Strategy

Strategy focuses on the creation of a competitive advantage based on value added activities.

ABC explains costs’ causes based on internal activities performed by the company.

Value Creation ProcessActivities Price

=Utility Function

Production Cost Activities Production Process


102

ABM: a Revolution

Cost

Value

Price

Management Accounting fields discloses relevant information to make strategic decisions.

Strategic Decisions fields based on managerial information.

Activity-Based Management discloses information to make decisions.


103

From Cost Management to Value Management

The firm’s performance is based on its ability to create value by using the least amount of resources,

Managerial Accounting has to take into account cost and value,

ABC enables to identify: Value added activities, Non-value added activities,

In order to optimize the ratio cost/value.


104

ABM Method (1)

Resources

Activities

Objects

Costs CalculationRemoving the

non-value addedactivities

Managingthe activities’performance

Activities Management


105

ABM Method (2)

Processes’ improvement is the key to improve

the products.

To increase the value provided to the customers: what activities should the company perform?

To increase the profitability of the processes: how activities should be performed?


106

ABM Method (3)

To wonder for each activity if it adds value

or not.

To remove non-value added activities,

To reduce costs and to improve performance of the value added activities.


107

Management of the Value Added Activities

Activity: Assembling a product $100,000

Activity driver: # of spare parts 4

Performance measures: # of assembling errors, assembling time, etc.

2, 5/1,000,

12 minutes/product, …

Cost driver $25,000

Objective: changing the product’s design to reduce the number of spare parts.


108

Activity-Based Management

Managing the activities,

Rather than

Focusing on the costs.A new management “philosophy” that

implies:

Contrôle Interne Avancé-HEC Lausanne-2007/2008 1 CONTROLE INTERNE AVANCE Eric CAUVIN, PhD IAE Aix...

Documents

Transcript of Contrôle Interne Avancé-HEC Lausanne-2007/2008 1 CONTROLE INTERNE AVANCE Eric CAUVIN, PhD IAE Aix...