TOPIC 5

Strategic Management Accounting

Outline
⚫ Contemporary SMA techniques:
Just-in-Time (JIT) Manufacturing
Customer Profitability Analysis
Managing Time
Environmental Management Accounting

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Just-in-Time (JIT) Systems
⚫ JIT covers all aspects of the production process:
◦ JIT inventory and JIT production system
◦ JIT purchasing

⚫ JIT inventory system:

◦ Objective: to reduce/eliminate inventories at every stage of production,
from raw material to finished goods.
◦ Inventory is a major cause of non-value-added activities and cost.

⚫ JIT production system:

◦ A comprehensive system for controlling the flow of manufacturing in a
multi-stage production environment
◦ The underlying philosophy is the simplifying of the production process by
removing non-value-added activities.
Key Features of JIT System
⚫ A pull system: Production and inventory purchases are
pulled through the system, driven by the actual demands
of the final customer (JIT).

Vs

⚫ A push system: Goods are produced/purchased to meet

inventory requirements rather than to meet actual
customer demand (Conventional inventory management).
Key Features of JIT System

Purchasing plastic
pellets

Production Stage I
Plastic Moulding

Production Stage II
Assembly

Packaging

Sales of cheese
grater

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Key Features of JIT System
⚫ A pull method of coordinating production processes
⚫ Simplified production processes
⚫ Purchase of materials, and manufacture of sub-assemblies
and products in small lots
⚫ Quick and inexpensive setups of production machinery
⚫ High-quality levels for raw materials, components and
finished products
⚫ Effective preventative maintenance of equipment
⚫ Flexible work teams
JIT Purchasing
⚫ Reduces the number of suppliers
⚫ Long-term contracts with suppliers
⚫ Specifies quality standards in supplier contracts to reduce
need for inspection
⚫ Use of e-commerce to place orders, and provide supplier
on-line access to inventory files
Costs and Benefits of JIT
⚫ Costs of JIT
◦ Substantial investment to change production facilities to
minimise non-value-added activities
◦ An increase in the risk of inventory shortages and the
associated loss of production and sales

⚫ Benefits of JIT
◦ Savings in inventory-carrying and insurance costs
◦ Fewer losses due to spoilage, obsolescence and theft
◦ No opportunity costs of high inventory
◦ Eliminates non-value-added activities
◦ Meets customers’ needs more effectively
Managing Customers
⚫ Customer relationship management (CRM)
◦ Collecting and analysing data to understand individual
customers’ behaviour patterns and needs.
◦ May lead to improved customer service, customer
retention, new customers, more effective and efficient
marketing, increased sales and customer profitability.
⚫ E-commerce applications may allow customers to access
interactive web sites and initiate and complete transactions
over the internet.
Customer Profitability Analysis
⚫ Activity-based costing may be used.

⚫ Customer cost analysis

◦ Analysis of cost of products purchased by customers
and the costs of customer-driven activities.

⚫ Customer profitability analysis

◦ Cost of all activities used to support a customer and
compared with revenue generated by that customer.
Why Do We Need To Calculate
Customer Profitability?
⚫ To address a range of questions:
◦ Which customers generate the greatest profits? And
how do we retain them?
◦ Which customers generate the lowest profits? And how
can we make them more profitable?
◦ What types of customers should we focus on to
maximise profitability?
Customer Profitability and Costs
⚫ Three levels of customer-driven activities and costs
◦ Order level activities
◦ Customer level activities
◦ Market level activities

⚫ Customer performance measures

◦ Market share
◦ Customer retention
◦ Customer acquisition
◦ Customer satisfaction
◦ Customer profitability
Customer Performance Measures
Managing Time
⚫ Time dictates the rate at which products are produced
and revenue generated
⚫ Time determines how long resources are tied up in
processes, and unavailable for other uses
⚫ Time delays lead to inventory build-ups
⚫ Time to develop new products and delivering products to
customers may be key to innovation

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Time-based Management
⚫ Measures for developing new products and services:
◦ New product development time: time from
identification of initial concept to release of product to
the market.
◦ Break-even time (BET): the time from identification of
initial concept to when a product has generated
enough profit to pay back the original investment.
◦ Time taken to fulfil a customer’s order:
● Measures of customer response time, order receipt
time, production lead time (cycle time)
● Reliability in meeting scheduled delivery dates
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 Customer Response Time
Order is Order is Order is Order is Order is
placed received set up manufactur delivered
ed
Waitin Mfg.
g Time
Time
Receip Manufacturing Deliver
t Lead Time y
Time Time
Customer-Response Time

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Time Drivers
⚫ Time Driver is any factor in which a change in the
factor causes a change in the speed of an activity.

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Time Drivers

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Environmental Management
Accounting (EMA)
⚫ Consists of environmentally-related management
accounting systems and practices.
◦ Life cycle costing,
◦ environmental cost accounting,
◦ environmental performance measures,
◦ assessment of environmental benefits,
◦ strategic planning for environmental management.

⚫ EMA techniques
◦ Financially-oriented EMA
◦ Physically-oriented EMA

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Financially-oriented EMA
⚫ Environmental costs
◦ Costs incurred to prevent, monitor and report
environmental impacts and the cost of failing to comply
with environmental regulations.
◦ Cost of waste management systems, environmental
training, legal activities and fines, record keeping and
reporting, cost of remediation of environmental impacts.
⚫ Environmental product costing
◦ Involves tracing direct and indirect environmental costs
to products.
◦ The cost of waste management, permits and fees,
recycling.
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Financially-oriented EMA (cont’d)
⚫ Environmental performance indicators
◦ Used to set targets, and monitor environmental
performance.
⚫ Environmentally-induced capital expenditure
◦ Driven by the desire to improve the organisation's
environmental impact, or to comply with environmental
regulations.
⚫ Environmentally-induced revenues
◦ Arise from positive environmental actions.
◦ Increased revenue from the sale of recycled materials,
from higher selling prices for greener products, increased
customer satisfaction, improved employee morale.

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Physically-oriented EMA
⚫ Techniques that focus on supplying information to
management that accounts for the organisation’s impact on
the natural environment.
◦ E.g.: Kilograms of noxious waste emissions, kilowatt
hours of electricity used, decibels of noise.
◦ Used for tactical decisions and capital expenditure
decisions.

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Environmental Management
Systems (EMS) and EMA
⚫ EMS - systems that organisations put in place to manage
their environmental performance.
◦ May include recycling systems, systems to monitor and
control levels of liquids, material and atmospheric
discharge and waste.
⚫ ISO 14001 is an international standard for EMA and its
audit.
⚫ EMS and adoption of ISO 14001 requires that
environmental performance be measured against policies,
objectives and targets

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Economic, Environmental and
Social Impacts
⚫ Economic and social impacts are difficult to identify and
measure, but may be substantial.
⚫ Future ecological and social impacts are not yet known
◦ Current work practices may have future environmental and
social consequences which we cannot predict.
⚫ Many costs and benefits are external to the organisation
◦ Difficult to detect and assess
⚫ Many costs and benefits are difficult to measure in
financial terms.

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Economic and Social Impacts

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Environmental Costs
⚫ The costs that an organisation incurs to prevent, monitor
and report environmental impacts.
◦ May extend into the future
⚫ US EPA defines 5 tiers of environmental costs:
◦ Private costs (tiers 1 to 4) and societal costs

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Environmental Costs (cont’d)

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Environmental Costs (cont’d)
⚫ Environmental costs can be analysed using the same
framework as used to analyse quality costs.
⚫ Prevention activities
◦ Solve environmental problems before they occur, or
turn problems into opportunities
◦ Costs of these activities are ‘investments’, as they
reduce the future outlays and provide long-term
benefits
⚫ Appraisal activities
◦ Monitor the levels of environmental impact
◦ Measures damage, inspects processes and products,
audits supplier performance
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Environmental Costs (cont’d)
⚫ Internal failure activities
◦ To correct breakdowns discovered in appraisal
activities
◦ Cost of cleaning the plant after spillage, cost of
occupational health and safety claims by employees
⚫ External failure activities
◦ Occur when resolution and remediation efforts fall
outside of the organisation’s management
◦ Cost of cleaning up polluted sites, fines for
environmental damage, lost profits associated with
damage to reputation
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Environmental Costs (cont’d)

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Environmental Costs (cont’d)

http://www.youtube.com/watch?feature=player_detailpage&v=p1KxC-S7QgA

http://www.youtube.com/watch?v=tmhiglxga-4&feature=player_detailpage

http://www.youtube.com/watch?feature=player_detailpage&v=WUTKZhTF_Ik
End of Lecture 5

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