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Chapter 13
Controlling Costs in the
Changing Workplace
Learning Objectives
1. What is open-book management and why does
its adoption require changes in accounting
methods and practices?
2. Why are games often used as the basis to teach
and motivate open-book management
concepts?
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Continuing . . . Learning Objectives
3. Why is implementing open-book management
more difficult in large organizations than in
small organizations?
4. Why does business process reengineering cause
radical changes in how firms execute processes?
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Continuing . . . Learning Objectives
5. Why is throughput an important performance
measure for organizations that apply the theory
of constraints?
6. How does throughput accounting differ from
variable cost accounting?
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Continuing . . . Learning Objectives
7. How does value chain cost analysis create
opportunities to achieve competitive advantages
using concepts of interorganizational cost
management?
8. What factors are driving the increased reliance
on outsourcing; and what are the financial
considerations of the outsourcing decision?
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Continuing . . . Learning Objectives
9.
Why are joint ventures and strategic alliances
increasingly used by firms to exploit new
market opportunities?
10. How are target costing and value engineering
used to manage costs? In which life cycle
stage are these tools used?
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Continuing . . . Learning Objectives
11. What are the competitive forces that are
driving decisions to downsize and restructure
operations?
12. Why are operations of many firms becoming
more diverse and how does the increasing
diversity affect the roles of the firms’
accounting systems?
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Open-Book Management
Open-book management is a
philosophy about increasing a
firm’s performance by
involving all workers, and by
ensuring that all workers
have access to operational
and financial information
necessary to achieving
performance improvements.
Games People Play
Games make learning
both fun and
competitive while
allowing for complex
financial practices to
be simplified.
Ten Common Principles
of Open-Book Management
1. Turn the management of a business into a game that
employees can win.
2. Open the books and share financial and operating
information with employees.
3. Teach the employees to understand the company’s
financial statements.
4. Show employees how their work influences financial
results.
5. Link nonfinancial measures to financial results.
Tim Davis, “Open-Book Management: Its Promises and Pitfalls,” Organization
Dynamics (Winter 1997), pp.. 6-20.
Ten Common Principles
of Open-Book Management
6. Target priority areas and empower employees to make
improvements.
7. Review results together and keep employees accountable.
Regularly hold performance review meetings.
8. Post results and celebrate successes.
9. Distribute bonus awards based on employee contributions
to financial outcomes.
10. Share the ownership of the company with employees.
Employee stock ownership plans (ESOPs) are routinely
established in firms that practice open-book management.
Tim Davis, “Open-Book Management: Its Promises and Pitfalls,” Organization
Dynamics (Winter 1997), pp.. 6-20.
Open Book Management
Implementation Challenges
Characteristics of firms that
are best suited to successful
implementation include
– small size
– decentralized management
– a history of employee
empowerment
– the presence of trust between
employees and managers
Business Process Reengineering
Business process reengineering (BPR) means
examining processes to identify -- and then
eliminate, reduce, or replace -- functions and
processes that add little customer value to
products or services.
Steps to Business Process
Reengineering
1. Define the objectives of the BPR project.
2. Identify the processes that are to be reengineered.
3. Determine a baseline for measuring the success of the BPR
project.
4. Identify the technology levers--these are the potential
sources of innovation, increased quality, increased output,
and decreased costs.
5. Develop initial prototypes of the reengineered process and
then, through subsequent iterations, develop incremental
improvements to the prototypes until satisfactory results are
achieved.
Yogesh Malhotra, “Business Process Redesign: An Overview,” 1996.
Theory of Constraints
The theory of constraints (TOC) is management
philosophy about focusing attention on the
constraints (bottlenecks) that limit
organizational achievements (such as
maximization of profits) so that throughput can
be maximized.
In profit-oriented organization, throughput is the rate at
which a company generates cash from selling products
and services to customers.
Comparison of Variable Costing
and Throughput Accounting
VARIABLE COSTING
Revenue
- Direct Materials
- Direct Labor
- Variable Overhead
= Contribution Margin
- Fixed Expenses
= Profit
THROUGHPUT ACCOUNTING
-
Revenue
Direct Materials
- Variable Overhead
= Throughput
- Operating Expenses
= Profit
Eric Noreen, Debra Smith, and James T. Mackey, The Theory of Constraints and Its
Implications for Management Accounting (Great Barrington, Mass.: North River
Press, 1995), p. 14.
Value Chain
A value chain is the set of all processes that
convert materials into products and services for
the final consumer.
• Vertical integration is a measure of the extent to which
the value chain resides within a single firm.
• Outsourcing is contracting with outside vendors to
provide necessary parts or services rather than
producing them in-house.
Insource/Outsource Considerations
Relevant quantitative factors:
• Incremental production costs for each unit
• Unit cost of purchasing from outside supplier
• Availability of production capacity to
manufacture components
• Opportunity costs of using facilities for
production rather than for other purposes
• Availability of storage space for units and raw
materials
Continuing . . .
Insource/Outsource Considerations
Relevant qualitative factors:
• Relative net advantage given uncertainty of
estimates
• Reliability of source(s) of supply
• Ability to assure quality when units are
purchased from outside
• Nature of the work to be subcontracted
• Availability of suppliers
Continuing . . .
Insource/Outsource Considerations
Relevant qualitative factors:
• Impact on customers and markets
• Future bargaining position with supplier(s)
• Perceptions regarding possible future price
changes
• Perceptions about current product prices
• Strategic and competitive importance of
component to long-run organizational success
Insource or Outsouce
Cost Information
Direct materials
Direct labor
Variable factory OH
Fixed factory OH*
Total unit cost
Present Mfg.
Cost per Set
$6.00
2.00
4.00
2.50
$14.50
Quoted price from All-American
Relevant Mfg.
Cost per Set
$6.00
2.00
4.00
1.00
$13.00
$13.50
*Of the $2.50 fixed factory overhead, only $1.00 is directly linked to production of
the serving sets. This amount is related to the production supervisor's salary and
could be avoided if the firm chose not to produce serving sets. The remaining $1.50
of fixed factory overhead is an allocated indirect (common) cost that would continue
even if production of serving sets ceased.
Strategic Alliances
A strategic alliance is an
agreement of two or more firms
with complementary core
competencies to jointly
contribute to the value chain.
Interorganizational Cost
Management Systems
Types of information that are commonly shared
between suppliers and customers include:
•Production cost data
•Technological and engineering data
•Research and design information
•Cost reduction plans
•Quality data
•Target costing and value engineering information