UNIVERSITI SAINS

MALAYSIA
School of Management
ACW 472 – MANAGEMENT ACCOUNTING AND CONTROL
– Week 5 & 6 lectures
By : Amirul Shah Md Shahbudin, PhD
2 The Development of
Management Control Revisited
 Robert Anthony’s definition and
distinction of the term management
control against strategic planning and
operational control (1965)

 The birth of industrial age in the 1970s

Automation
Mass production
Made in Japan products

Amirul Shah Md Shahbudin, PhD

3 Strategic Management
Accounting

 Strategic Management Accounting (SMA):

 The provision and analysis of management accounting data

about a business and its competitors for use in developing and
monitoring the business strategy
(Kenneth Simmonds, 1981)

 …is an approach to management accounting that explicitly

highlights strategic issues and concerns. It sets management
accounting in broader context in which financial information is
used to developed superior strategies as a means of achieving
sustainable competitive advantage.

(R. M. S. Wilson, 1995)

Amirul Shah Md Shahbudin, PhD

 4 Conventional vs. SMA
 Conventional characteristics  Strategic characteristics

 Historical  Prospective
 Single entity  Relative
 Single period  Multiple
 Single decision  Sequences, patterns
 Introspective  Outward-looking
 Manufacturing focus  Competitive focus
 Existing activities  Possibilities
 Reactive  Proactive
 Programmed  Non-programmed
 Overlooks linkages  Embrace linkages
 Data orientation  Information orientation
 Based on existing systems  Unconstrained by existing systems
 Built on conventions
 Ignores conventions

(Wilson and Chua, 1993, pg. 530)

Amirul Shah Md Shahbudin, PhD

SMA Model
5 Tomkins and Carr, 1996

Analyse Analyse
Customer Requirements Precision by Competitors
Market &
Competitor
Analysis
Identify Desired Identify Desired
Product / Service Attributtes Company Attributes

VALUE CHAIN ANALYSIS

Support Service

In-bound Internal Out-bound Marketing

Chain Value Distributions
Logistics Operations Logistics & Selling
Analysis

Break Down Into

ACTIVITIES

Identify Attribute [ Including Cost ]

Drivers

YES
Can We Deliver All Required Attributes at
INVEST
Desired Probe Level
Cost & Attribute
NO
Driver Analysis
Cost Reduction - Attribute Improvement
( Waste Removal, COQ, TQM, etc )

Re-engineer the Value Chain

( Higher Level Cost / Attribute Drivers )

Amirul Shah Md Shahbudin, PhD

6 JUST-IN-TIME (JIT): Definition

 Is a demand-pull manufacturing system

that requires goods to be pulled through
the system by present demand.
 How does JIT differ from traditional
inventory management?
 A JIT system arranges with suppliers to deliver
parts & materials just in time for production
rather than on a specified predetermined
schedule.

Amirul Shah Md Shahbudin, PhD

7 COMPARING TRADITIONAL & JIT
INVENTORY MANAGEMENT
JIT
Pull-through system
Insignificant inventories
Small supplier base
Long-term supplier contracts
Cellular structure
Multi-skilled labor
Decentralized services
High employee involvement
Facilitating management
style
Total quality control
Direct tracing dominates
costing
Amirul Shah Md Shahbudin, PhD
TRADITIONAL
Push-through system
Significant inventories
Large supplier base
Short-term supplier contracts
Departmental structure
Specialized labor
Centralized services
Low employee involvement
Supervisory management
style
Acceptable quality level
Driver tracing dominates
costing
8 JIT: Strategic Objectives

 Increase profits
 Improve competitive position by:

Controlling costs
Improving delivery performance
Improving quality

Amirul Shah Md Shahbudin, PhD

9 JIT: Inventory Management
Features

JIT manages inventory through

Devising basic features that differ from

traditional inventory systems
Controlling setup & carrying costs
Managing due-date performance
Avoiding shutdown & achieving process
reliability

Amirul Shah Md Shahbudin, PhD

10 BASIC FEATURES OF JIT

 Grouping to empower employees

 Emphasizing quality through total quality control (TQC)

 Tracing rather than allocating overhead

 Maintaining low inventory levels

 Changing plant layout to manufacturing cells

Amirul Shah Md Shahbudin, PhD

11 JIT SETUP & CARRYING COSTS

JIT uses new strategies to reduce & control

setup and carrying costs of inventory

Long-term contracts with close relationship

to suppliers
Continuous replenishment of inventory
EDI using computers to manage inventory
orders
JIT II has supplier on-site full time

Amirul Shah Md Shahbudin, PhD

12 AVOIDING SHUTDOWNS: JIT

Shutdowns are caused by:

Machine failure
Defective material or sub-assembly
Unavailability of material or sub-assembly

JIT response
Total preventive maintenance
Total quality control (TQC)
Using the Kanban system

Amirul Shah Md Shahbudin, PhD

13 LIMITATIONS OF JIT

 Time is required to build sound relations

with suppliers
 Workers experience stress in changing
over to JIT
 Production may be interrupted because
of absence of inventory supply buffer
 May place current sales at risk to
achieve assurance of future sales

Amirul Shah Md Shahbudin, PhD

14 CONSTRAINT: Definition

 Is the limitation of resources or product demand.

 Theory of constraints (TOC) focuses on 3 measures of

organizational performance:
 Throughput: rate of generating money through
sales
 Inventory: money spent turning materials into
throughput
 Operating expenses: money spent turning
inventory into throughput
 How does throughput work?
 Increasing throughput minimizes inventory & decreases
operating expenses.

Amirul Shah Md Shahbudin, PhD

15 BASIC CONCEPTS: TOC

 TOC suggests that constraints (and

thereby inventory) are best managed
through

Having better, higher quality products

Having lower prices
Being responsive
 On-time delivery

 Shorter lead time

Amirul Shah Md Shahbudin, PhD

16 TOC STEPS

1. Identify constraints

2. Exploit binding constraints

3. Subordinate everything to decision made in #2

above

4. Elevate binding constraints

5. Repeat process

Amirul Shah Md Shahbudin, PhD

17 Michael Porter – Harvard
Business School
 Contribution in strategy formulation and implementation
 Premised on two fundamental questions:
1. How attractive is the profitability in different industries (long term)
 The threat of new entrants
 The threat of substitute products or services
 The rivalry amongst existing organizations within the industry
 The bargaining power of suppliers
 The bargaining power of consumers

2. What is the firm’s relative position within its industry

 Cost leadership
 economies of scale
 tight control cost
 Differentiation
 image
 dealer network
 technology
 Focus

(Porter, 1980)
Amirul Shah Md Shahbudin, PhD
18 Porter’s Value Chain Analysis

Amirul Shah Md Shahbudin, PhD

19 Robert Simons – Harvard
Business School
His work has been on the interface between
Strategic Management and Management Control

Definition of MCS:
The formal, information based routines and procedures
managers use to maintain or alter patterns in
organisational activities
Based on Miles and Snow (1978) strategic typologies:
 Prospector
 Defender
 Analyser
 Reactor

Amirul Shah Md Shahbudin, PhD

20 Simons’ Initial Conceptual
Framework
 Limited attention of managers because they
(the managers) lack both time and the
capacity to process all the information
available
 Strategic uncertainties that the managers
have to monitor themselves to achieve the
business objectives
 Interactive MCS
 Organisational learning that describes the way
in which organisations use knowledge to
improve the fit between organisation and the
environment

(Simons, 1990)

Amirul Shah Md Shahbudin, PhD

21 Controlling Business Strategy

Belief Boundary
System System

Core Risks to
Values Be Avoided

Business
Strategy

Critical
Strategic
Performance
Uncertainties
Variable

Interactive Diagnostics
Control Control
System System
Figure 1.2 Controlling Business Strategy : Key Variables
to Be Analyzed
Amirul Shah Md Shahbudin, PhD
22 Levers of Control

 Beliefs System- formal systems used by top managers to

define, communicate and reinforce the basic values, purpose
and direction for the organization. Analysis of core values
influences the design of the beliefs system i.e. mission
statements, credos
 Boundary system- formal systems used by top managers to
establish explicit limits and rules, which must be respected.
Analysis of risks to be avoided influences the design of the
boundary system i.e. codes of business conduct, strategic
planning system
 Diagnostic control systems- formal feedback systems used to
monitor organizational outcomes and correct deviations from
preset standards of performance. Analysis of critical
performance variables influences the design of diagnostic
systems i.e. business plans and budgets
 Interactive control systems- formal systems used by top
managers to regularly and personally involve themselves in the
decision activities of subordinates. Analysis of strategic
uncertainties influences the design of interactive systems i.e.
regular formal and informal feedback mechanisms
(Simons, 1994, pp. 170-171)

Amirul Shah Md Shahbudin, PhD

23 Levers of Control (Tuomela,
2005)

Amirul Shah Md Shahbudin, PhD

24 Shank and Govindarajan’s
Strategic Cost Management (SCM)

 SCM’s definition:

The managerial use of cost information

explicitly directed at one or more of the
four stages of the strategic management
cycle. It is explicit attention to the
strategic management context that
distinguishes SCM from managerial
accounting

(Shank and Govindarajan, 1989)

Amirul Shah Md Shahbudin, PhD

25 The Four Stages of Business
Management Cycle

 Formulating strategies
 Communicating those strategies
throughout the organisation
 Developing and carrying out tactics to
implement the strategies
 Developing and implementing controls
to monitor the success of the
implementation steps and hence the
success in meeting the strategic
objectives
Amirul Shah Md Shahbudin, PhD
26 SCM’s Model

Silvaculture and
timber farming

A
Logging and
chipping
B
C
Pulp
Manufacturing

Paper
D Manufacturing

Converting
operations
G

Distribution F

End-use customer

Amirul Shah Md Shahbudin, PhD

27 Strategic Cost Management Model (An
Alternative Approach) (Kumar & Nagpal,
2012)

Amirul Shah Md Shahbudin, PhD

 28 Balanced Scorecard History

Measurement Alignment Enterprise wide

& Reporting & Communication Strategic

Management
1992 1996 2000

Articles in Harvard Business Review: Acceptance and Acclaim:

 “The Balanced Scorecard — Measures that  “The Balanced Scorecard” is
Drive Performance” January - February 1992 translated into 18 languages
 “Putting the Balanced Scorecard to Work”  Selected by Harvard Business
September - October 1993 Review as one of the “most
important management practices
 “Using the Balanced Scorecard as
of the past 75 years.“
a Strategic Management System” January -
February 1996

2000
1996

Amirul Shah Md Shahbudin, PhD

29 Balanced Scorecard (1992)
Financial Perspective

GOALS MEASURES

Survive Cash Flow

Succeed Quarterly sales growth &

operating income by
division

Prosper Increased market share &

ROE

Customer Perspective Internal Business

Perspective

GOALS MEASURES GOALS MEASURES

New % of sales from new Technology Manufacturing versus

products product geometry capability competition
Responsive On-time delivery Mfg. Cycle time, unit cost,
supply excellence yield
Preferred Share of key accounts’ Design Silicon efficiency
supplier purchases productivity Engineering effic iency
Customer Number of co-operative New Actual introduction schedule
partnership engineering efforts product versus plan
Introduction

Innovation & Learning

Perspective

GOALS MEASURES

Technology Time to develop next gen.

leadership

Manufacturing Process time to maturity

Product % of products that equal

Focus 80% sales

Amirul Shah Md Shahbudin, PhD

30 Balanced Scorecard (1996)

Amirul Shah Md Shahbudin, PhD

31 Balanced Scorecards
Innovations (https://www.b2bframeworks.com/balanced-scorecard)

Amirul Shah Md Shahbudin, PhD

32 Balanced Scorecard Innovations
(Lucianetti, 2010)

Amirul Shah Md Shahbudin, PhD

33 Four Barriers to Strategic Plan
Deployment

1. Vision and Strategy not actionable

2. Strategy not linked to Division/Team Goals

3. Strategy not linked to Resource Allocation

4. Feedback is Tactical, not Strategic

Amirul Shah Md Shahbudin, PhD

34 Pareto Analysis

 Joseph M. Juran (1940s)

 Vilfredo Pareto – Observed that 80 % of the Italians income

go to the 20 % of the population
 80/20 Rule
 This is also known as the vital few and the trivial many.

Amirul Shah Md Shahbudin, PhD

35 Pareto Analysis: Continued

 The 80/20 rule can be applied to almost

anything:

 80% of customer complaints arise from 20% of your

products or services.
 80% of delays in schedule arise from 20% of the
possible causes of the delays.
 20% of your products or services account for 80%
of your profit.
 20% of your sales-force produces 80% of your
company revenues.
 20% of a systems defects cause 80% of its
problems.

Amirul Shah Md Shahbudin, PhD

36 Steps in Identification of Causes
using the Pareto Analysis
 Seven steps to identifying the important causes
using Pareto Analysis :
 Form a table listing the causes and their frequency as a
percentage.
 Arrange the rows in the decreasing order of importance
of the causes, i.e. the most important cause first.
 Add a cumulative percentage column to the table.
 Plot with causes on x-axis and cumulative percentage
on y-axis.
 Join the above points to form a curve.
 Plot (on the same graph) a bar graph with causes on x-
axis and percent frequency on y-axis.
 Draw a line at 80% on y-axis parallel to x-axis. Then drop
the line at the point of intersection with the curve on x-
axis. This point on the x-axis separates the important
causes on the left and less important causes on the right.

Amirul Shah Md Shahbudin, PhD

37 Pareto Diagram

 Pareto Diagram

Amirul Shah Md Shahbudin, PhD

38

THE END

Amirul Shah Md Shahbudin, PhD