Management Accounting

3.1 Introduction

In the old chapter, the treatments focused on developments in the constructs of quality direction, come oning from its original limited function of review to its present province as an built-in portion of concern scheme through strategic quality direction ( SQM ) . This chapter traces the parallel historical developments in cost and direction accounting from its traditional cost accounting phase to its current phase that addresses the demands of administrations runing in dynamic and competitory contexts and explores the acceptance of quality issues within the scope of direction accounting. The chapter commences with an overview of the historical developments in accounting that led to be and direction accounting. From this literature, an analytical model is put frontward to:

Discuss the major phases taking to the development in cost and direction accounting paying peculiar attending to the direction of quality at each phase ; and

Discuss the interface between direction accounting patterns and SS quality enterprise.

3.2 Historical DEVELOPMENTS IN ACCOUNTING

In its earliest signifier, accounting focused chiefly on proper mark maintaining and net income coverage ( Johnson, 1991 ) . Although these two maps continue to play a cardinal function in the accounting systems, accounting patterns have progressed to cover wider concern activities and applications such as the direction of quality enterprises ( IFAC, 1993 ) . Following these developments, Lenhardt and Colton ( 2000: 21 ) , analysed accounting patterns into three types:

Historical – uses cost information that has a historical or consequences perspective and whose intent is to enter what has happened in the past. Peoples outside the company who typically use such information, include bankers, shareholders, creditors, bondholders, regulators and taxing governments.

Real clip – uses cost information that has a current position and is utile to people and squads doing existent clip determinations about concern procedures.

Strategic – uses cost information that has a advanced, strategic position and is utile to those doing pricing and other strategic determinations about the company ‘s hereafter.

The 2nd position affecting existent clip patterns and their development is normally referred to as cost and direction accounting patterns. The literature has provided a figure of models to analyze the development of cost and direction accounting. Some of these authors have traced the development from its beginning ( Johnson, 1972 ; Chatfield, 1974 ; Chandler, 1977 ; Johnson and Kaplan, 1987 ) , while others have either looked at the state specific developments ( Bhimani ( 1996 ) and Dugdale and Jones ( 2003 ) for UK developments ; Virtanen et Al. ( 1996 ) for Finnish developments ; Scherrer ( 1996 ) for German developments ) , or the modern strategic direction accounting developments ( Lee, 1987 ; Luft, 1997 ; Srikanthan, 2004 ) . None of this literature has traced the developments at the interface between direction accounting and quality direction. The purpose of this chapter is to utilize an analytical model proposed by International Federation of Accountants ( IFAC ) to discourse the altering function of direction accounting and its interface with alterations in quality direction.

3.3 PROPOSED IFAC FRAMEWORK

IFAC ( 1998 ) in its Statement on Management Accounting Concepts analysed the development and alteration in direction accounting through the undermentioned four recognizable phases:

Phase 1 – Prior to 1950, the focal point was on cost finding and fiscal control, through the usage of budgeting and cost accounting engineerings ;

Phase 2 – By 1965, the focal point had shifted to the proviso of information for direction planning and control, through the usage of such engineerings as determination analysis and duty accounting ;

Phase 3 – By 1985, attending was focused on the decrease of waste in resources used in concern procedures, through the usage of procedure analysis and cost direction engineerings ;

Phase 4 – Beyond the mid-1980 ‘s attending had shifted to the coevals or creative activity of value through the effectual usage of resources, through the usage of engineerings, which examine the drivers of client value, stockholder value and organizational invention ( IFAC, 1998. parity. 7 ) .

Harmonizing to IFAC ( 1998. parity. 9 ) , ‘each phase of development represents version to a new set of conditions confronting administrations, by the soaking up, reshaping and add-on to the focal point and engineerings used antecedently ‘ . In Stages 1 and 2 the direction accounting developments focused on traditional proficient activities and the proviso of information ( IFAC, 1998. parities. 17 and 19 ) . During these phases, the information refering quality was non captured in the direction accounting literature ( Yasin et al. , 2005 ) . A critical displacement between Stage 2 and Stages 3 and 4 is the alteration in focal point from information proviso towards resources direction in the signifiers of waste decrease ( Stage 3 ) and value coevals or creative activity ( Stage 4 ) . This displacement promoted the widespread usage of quality oriented concern patterns and schemes ( Yasin et al. , 2005 ) . The subsequent subdivisions will analyze these developments with mention to IFAC ‘s four phases of development.

3.3.1 Phase 1: Cost finding and fiscal control

Between 1880 and mid-1920s rapid developments in cost accounting theories and techniques gave a existent drift to the growing of cost accounting. During this period rehearsing comptrollers and industrial applied scientists contributed widely to the development of cost accounting literature ( Littleton, 1933 ; Solomon, 1968 ) . Solomon ( 1968 ) referred to this period as the “ costing Renaissance ” . Initially cost accounting information was developed for the intent of merchandise costing and net income finding, but over clip this function evolved to include elements of planning, control and decision-making ( Solomon, 1968 ) . These major developments marked the footing for traditional cost direction accounting patterns ( Johnson and Kaplan, 1987 ) .

Merchandise costing and net income finding

Merchandise costing and net income finding has long been the map of cost accounting. Garner ( 1954 ) traced the development of merchandise costing and net income finding to the early ‘domestic ‘ structured system, under which the whole fabrication procedure was wholly under the control of the proprietors. Johnson and Kaplan ( 1987 ) noted that the proprietors of individual activity concerns created new accounting processs to command the end product from internal procedures. This attack was similar to the craftsmen ‘s quality development patterns discussed in the old chapter. In a ‘domestic ‘ structured system, the proprietors devised input cost steps such as stuffs cost and transition costs to enter the ‘price ‘ of end product from internal operations ( Johnson and Kaplan, 1987: 7 ) . Even in the early old ages, the proprietors of centrally controlled individual activity concerns held the sentiment that by efficaciously pull offing the costs of their internal concern procedures greater value could be achieved ( Johnson and Kaplan, 1987 ) . However, restrictions on cost accounting measuring restricted the range for quality cost measurings ( Johnson and Kaplan, 1987 ; Yasin et al. , 2005 ) .

With the oncoming of the industrial revolution internal administrative procedures were established to co-ordinate multiple production activities ; runing costs were generated to measure public presentation and luxuriant cost coverage mechanisms were devised, peculiarly for direct labor and stuffs ( Smith, 1995: 7 ) . For illustration, Johnson and Kaplan ( 1987 ) study that the development of an integrated dual entry cost accounting system helped direction supervise the efficiency of internal procedures and employee public presentation and later formed the footing for the development of a public presentation related wagess and incentive strategy. Despite the strong concern for commanding internal costs, quality cost measuring was non considered a portion of the direction accounting map. Alternatively, the implicit in rules of merchandise costing and net income finding provided the way for a broad organizational planning and control function ( Black and Edwards, 1979 ; Johnson and Kaplan, 1987 ) .

Planing and control

In the early 20th century, planning and control tools such as standard costing and discrepancy coverage were introduced as portion of the direction accounting map ( Solomon, 1968 ) . Standard bing formed an built-in portion of production planning, while discrepancy analysis was used for cost control. Solomon ( 1968 ) noted that the first mention to “ direction by exclusion ” was founded in Taylor ‘s celebrated paper on “ Shop Management ” that was closely linked to early quality control and that Taylor ‘s construct of standard procedures and standard operating clip ( clip and gesture survey ) was used as the footing for the development of standard costing. This demonstrates that the rules of standard costing are derived from Taylor ‘s scientific direction theory and thoughts of quality control discussed in Chapter 2. Therefore, even in the early portion of the 20th century there were indicants of a nexus between alteration direction schemes and direction accounting systems.

Another important development in Stage 1 was the development of concern budgeting techniques ( Black and Edwards, 1979 ; Johnson and Kaplan, 1987 ) . Business budgeting was founded on the rules of governmental budgeting processs used in England and US ( Black and Edwards, 1979 ) . In contrast to standard costing, a budgetary control system involves all the maps and sections in an administration. Despite including all maps and sections in the budgeting procedure, quality costs budgeting was non considered as a portion of the direction accounting map.

Short-run decision-making

The concluding development of early cost accounting information was the proviso of cost information for decision-making. Harmonizing to Johnson ( 1981 ) , in the early old ages transition costs were used for the intent of pricing determinations. In ulterior old ages, increased jobs with ‘price repairing ‘ created uncertainties in the back uping historical based cost accounting system ( Solomon, 1968 ) . Academicians observed the deficiency of relevancy of historical costs for future decision-making, which led to the development of a ‘modern ‘ cost accounting system aimed at bettering internal decision-making and control ( Black and Edwards, 1979 ) . The new cost information system emphasised that for effectual determination doing it is of import to separate variable costs from fixed costs, and relevant costs from irrelevant costs. Despite a displacement to a forward looking cost information system, the importance of mensurating quality costs or measuring the success of quality attempts was non mentioned in the direction accounting literature.

The categorization of costs into fixed and variable elements had deductions both for bettering the planning and control procedure and short-run decision-making ( Black and Edwards, 1979 ) . Any betterments in public presentation concentrated on commanding the variable elements of entire costs. Consequently, these developments increased the value of cost accounting information in three cardinal positions: 1 ) “ Co-ordination of Operations ” , 2 ) Performance Evaluation ” and 3 ) “ Decision -Making ” ( Black and Edwards, 1979: 16 ) . There was nevertheless, limited sharing of these functions with other concern maps within the administration ( Yasin, et al. , 2005 ) . As such, the issues and challenges of pull offing quality attempts continued to come on without aid from the cost accounting map or profession.

Overall, the traditional direction accounting tools and techniques developed in Stage 1 pursued fabrication and organizational aims. IFAC ( 1998. parity. 19 ) referred to this period of the development in direction accounting as a period of “ proficient ” activity necessary for the chase of organizational aims. The direction of quality remained the sole sphere of the quality direction staff, fabrication and production technology section forces and merchandise design and technology section forces ( IFAC, 1993. IMAP 5, parity. 29 ) . A closed system position of quality had small interaction with external elements such as providers and clients every bit good as the internal accounting subsystem ( Yasin et al. , 2005 ) .

As such quality information was neither captured by the accounting map, nor was it reported to the corporate quality direction entities throughout the administration ( Yasin et al. , 2005 ) . Hence, the direction accounting development in Stage 1 progressed frontward disregarding the developments of quality attempts. Possibly this absence of involvement in quality attempts can be attributed to two primary grounds ( Johnson and Kaplan, 1987 and Johnson, 1992 ) . First, the accounting profession after World War 1 stipulated stiff accounting regulations that prohibited the development of direction control systems for more effectual determination devising. Second, faculty members progressively encouraged the usage of fiscal accounting information for managerial decision-making, which closed the mentality of future directors to wider applications.

3.3.2 Phase 2: Passage to direction accounting

A displacement from cost accounting to direction accounting, which involved a displacement from proficient focussed activities to managerial centred duties, occurred chiefly in the fiftiess. Managerial centred duties relied largely on the proviso of information for more effectual planning and control determinations ; hence it contributed to the accounting information epoch ( IFAC, 1998 ) . Despite this information oriented attack, the accounting information system failed to capture information refering quality ( Yasin et al. , 2005 ) . Alternatively, to guarantee proper answerability in a multi-divisional organizational construction, “ duty Centres ” and “ duty accounting ” was developed, therefore supplying the drift for direction accounting to be applied to more complex countries like divisional pricing and long term planning and control determinations ( Anthony, 2003 ) .

Divisional pricing, long term planning and control determinations

In mid-1950s, the incorporation of vertically integrated multi-activity houses and multi-divisional construction changed the original map of direction accounting ( Johnson and Kaplan, 1987 ) . For illustration, a new focal point on “ duty accounting ” led to the development of transportation pricing policies such as market based pricing and cost plus pricing schemes every bit good as long term planning and control techniques ( Antony, 2003 ) . Johnson and Kaplan ( 1987 ) study that with the development of duty accounting, investing duties shifted from the market to exceed direction who were so accountable for decentralized divisional public presentations. Despite the major restructuring of duties, pull offing quality betterments continued to stay outside the sphere of the direction accounting map.

Another development in this phase was capital budgeting techniques. Capital budgeting techniques ab initio focused on accounting steps such as the payback period and return on investing ( ROI ) steps, but with the development of the clip value of money construct, discounted hard currency flow ( DCF ) methods such as NPV and IRR were introduced for measuring long term determinations ( Johnson and Kaplan, 1987 ) . During the same clip, GE Corporations pioneered and promoted the residuary income attack to get the better of some of the failings identified in the ROI step ( Johnson and Kaplan, 1987 ) . Today, these methods continue to play a critical function in the rating of capital outgo activities ( Smith, 1995 ) . The capital budgeting developments coincides with the scientific quality control developments and both had their beginnings in industry. Despite sharing a similar origin, merely capital budgeting developments gained acknowledgment in the direction accounting literature, while quality steps remained the concern of the non-accounting map ( Johnson and Kaplan, 1987 ; Morse, 1993 ) .

Overall, the direction accounting developments in Stage 2 continued to function the traditional cost accounting maps. Harmonizing to Martin ( 1997 ) , most companies used traditional cost accounting systems along with production control systems, nevertheless, these systems were non decently designed to capture or supervise the public presentation of quality enterprises. Albright and Roth ( 1992 ) add that early quality motion progressed frontward with really small aid from the accounting map. During this period, factory chiefs with proficient expertness carried out traditional quality review and control processs ( Bromwich and Bhimani, 1994 ) . Further, both the direction accounting and quality developments were linked to the plants of non-accounting professionals, like the industrial applied scientists and production applied scientists ( Littleton, 1933 ; Garner, 1954 ; Soloman, 1968 ; Flood, 1993 ) . Even so, quality direction concerns were ignored in the direction accounting literature. Johnson and Kaplan ( 1987 ) noted that despite considerable alterations in the nature of administrations and the dimension of international competition, there have been no major publications by practicians or faculty members depicting inventions such as quality enterprises in the direction accounting literature before 1980.

3.3.3 Phase 3: Nipponese influence and passage to SMA

By 1985, the direction accounting focal point on information proviso ( Stage 2 ) was revised in IFAC Stages 3 and 4, where information became an organizational resource, along with other organizational resources. The cardinal focal point in Stage 3 was the decrease in waste in resources used in concern procedures, through the usage of procedure analysis and cost direction engineerings ( IFAC, 1998. parity. 7 ) . Bromwich and Bhimani ( 1994 ) noted that the direction accounting developments during this period were largely promoted by Nipponese industries that adopted quality as their cardinal competitory tool. For case, the chase by Nipponese industries of strategic organizational aims, particularly in the country of cost decrease, formed the beginning of a new construct of strategic direction accounting ( SMA ) in the West ( Bromwich and Bhimani, 1994 ) . Further, a new focal point on waste decrease led to the development and the widespread acknowledgment of quality direction in the direction accounting literature ( Bromwich and Bhimani, 1994 ) .

The Nipponese administrations who dominated the universe in choice direction during this period, focused on three cardinal developments that changed production methods to run into consumer demands: 1 ) merely in clip stock list system ( JIT ) , 2 ) entire quality control and 3 ) computing machine integrated fabrication ( CIM ) systems ( Johnson and Kaplan 1987 ; Monden and Sakurai, 1989 ) . From a strategic position, these techniques were besides utilised by Nipponese top direction for mark costing exercisings which contributed to be direction through the accent on be aftering cost decreases from the design and development phases to fabrication ( Bromwich and Bhimani, 1994: 176 ) . Over clip, the successful application of these techniques by Nipponese industries triggered a global revolution in fabrication operations which resulted in a new way for best patterns in direction accounting ( Bromwich and Bhimani, 1994 ) . The subsequent subdivisions will supply a brief treatment on the three cardinal direction techniques developed by the Japanese.

Merely in clip ( JIT ) stock list system

JIT was originally developed at the Toyota car works and has been designed to cut down the degrees of natural stuffs and work in procedure stock lists ( Johnson and Kaplan, 1987 ) . The debut of JIT had significant effects on accounting ( McWatters et al. , 2001 ) as important elements of conventional stuff cost accounting became excess and were replaced by modern techniques, such as back-flush accounting, and a cost benefit attack statement was used to supervise the JIT system ( Drury, 2000 ) . The JIT system provides existent clip information in non-financial footings, and this therefore led to the extended used of non-financial indexs in Japan ( Bromwich and Bhimani, 1994 ) . The quality criterions implemented under JIT focal point on the decrease of non-value adding activities, such as the decrease of stock list storage and retention costs, which are elements closely linked to modern quality direction enterprises that besides had important deductions for direction accounting ( Bromwich and Bhimani, 1994 ) .

Entire quality control

In the 1970ss, Nipponese companies adopted entire quality control, a doctrine aimed at zero defects ( Johnson and Kaplan, 1987 ) . In this attack, quality was built into the design phase and merchandises were produced in conformity with the design specification. Harmonizing to Johnson and Kaplan ( 1987 ) companies implementing zero defect plans, worked closely with providers to guarantee defect free points were delivered therefore, extinguishing the demand for incoming review. To measure the success of quality enterprises, quality cost were analysed into conformity ( bar, and assessment costs ) and non-conformance costs ( internal failure and external failure costs ) and these developments were later incorporated in direction accounting text editions ( Drury, 2000 ) .

Computer integrated fabrication ( CIM ) system

The development of new direction patterns such as JIT and entire quality control finally led to the increased usage of digital computing machine production engineering that has non gone unnoticed by the direction accounting map ( Johnson and Kaplan, 1987 ) . Harmonizing to Johnson and Kaplan ( 1987 ) , computing machine integrated engineering enabled greater fabricating flexibleness with improved quality and dependability. A decently implemented CIM system should be closely linked with other systems in the administration. For illustration, in an administration, CIM is ab initio linked to the design phase by a system referred to as computing machine assisted design, and this system is so linked to a computing machine aided fabrication system ( McWatters et al. , 2001 ) . The impact of extended fabrication mechanization and engineering has revolutionised the manner administrations operate. These alterations, which were adopted with the purpose of accomplishing entire quality control in the production map, were incorporated as a portion of the direction accounting map ( Bromwich and Bhimani, 1994 ) .

Overall, the direction accounting developments from Stage 3 onwards began back uping the direction of strategic quality attempts. During this period, concern administrations found it necessary to broaden their accent from an efficiency-only based orientation to an orientation that integrates efficiency and quality to accomplish organizational effectivity ( Yasin, et al. , 2005: 323 ) . As discussed in Chapter 2, the station World War diminution of American endeavor fight and public presentation were attributed to the failure of direction accounting patterns to accommodate to the demands of the “ new ” endeavor that included the planning and control of quality concerns ( Johnson and Kaplan, 1987 ) . Consequently, the National Association of Accountants, now the Institute of Management Accountants, influenced by Nipponese inventions, published a monograph in 1987, that was designed to present comptrollers to quality issues, and this later led to quality direction being officially recognised as a important portion of direction accounting map ( Morse et al. , 1987 ) . The IMA besides worked closely with the American Society of Quality to print a volume on quality based cost direction that promoted a customer-oriented attack to direction coverage ( Atkinson et al. , 1994 ; Smith, 1995 ) .

3.3.4 Phase 4: Widespread usage of SMA patterns

Harmonizing to IFAC ( 1998. parity. 32 ) , direction accounting developments in Stage 4 were largely concern with the effectual usage of organizational resources, and this involved back uping strategic placement, and developing or accommodating the direction schemes necessary for organizational success and endurance. From a strategic point of position, Srikanthan ( 2004 ) notes that SMA techniques gained widespread acknowledgment in the direction accounting literature, as a tool for better resource direction and value coevals. The direction accounting developments during this period were strongly influenced by emerging strategic direction patterns such as value based direction, and quality direction ( McWatters et al. , 2001 ) . Srikanthan ( 2004 ) adds that many techniques developed during this period focused on turn toing the critical success factors needed for a concern to obtain sustainable competitory advantage in its markets. Hence, the major component that distinguishes SMA from old accounting patterns is the acceptance of advanced schemes that emphasise external organizational factors such as planetary competition ( Ward, 1985 ) .

SMA techniques

The SMA techniques are influenced by both external factors and internal procedures ( Srikanthan, 2004 ) . The former techniques include life rhythm costing, benchmarking, supply concatenation direction and strategic quality direction enterprises. While the latter include value concatenation direction, theory of restraints, procedure direction, activity based direction, and the development of an integrated or balanced public presentation measuring system. In recent old ages, the widespread application of SMA techniques has extended the boundaries of direction accounting patterns across other disciplinary countries ( Bromwich and Bhimani, 1994 ; IFAC, 1998 ) . Hence, Otley ( 2001: 259 ) suggested that research in direction accounting should switch from its accounting beginnings to integrate “ the direction back into direction accounting ” .

Previous literature besides suggests that most SMA techniques tend to overlap in their applications. For case, life rhythm costing was introduced as a selling scheme, whereby all phases ( planing to marketing ) in providing a merchandise were analysed, and benchmarked with prima rivals utilizing rival analysis ( McWatters et al. , 2001 ) . Similarly, from a quality direction perspective the value concatenation analysis and internal benchmarking procedures helped houses place their degree of public presentation for each concern activity ( Chiang, 2002 ) , while a balanced public presentation measuring system is used to show the nexus between productiveness, quality, and net incomes ( Harrington, 1996 ) . Along this line of statement, Kaplan and Norton ‘s ( 1992 ) balanced scorecard attack has been extremely recommended to measure quality enterprises such as TQM ( Talwar, 1993 ) and SS ( Phadnis, 2003 ) .

More late, procedure direction and activity based cost direction have been found to hold a important influence on the success of TQM and SS quality enterprises ( Talwar, 1993 ; Hammer, 2002 ) . Benner and Tushman ( 2003 ) added that procedure direction, which is a derivative of the value concatenation direction attack, has been the focal point of quality direction applications since the 1980s. Similarly, Ishikawa ( 1984 ) Deming ( 1986 ) and Juran ( 1989 ) proposed process direction patterns as a key to the successful deployment of quality direction enterprises. Along this line of treatment, Breyfogle III ( 2003 ) claims that SS may utilize the ABCM system to track the drivers of possible concern procedure betterment chances along the value concatenation. ABCM focuses on analyzing concern procedure activities, with the purpose of seeking chances for cost decrease, which are characteristics attributed to TQM and SS quality enterprises. By analyzing activities along the value concatenation, ABCM seeks to better the value received by the clients and this finally impacted positively on clients and the net incomes ( Turney, 1992 ; Glad and Becker, 1995 ) .

Overall the direction accounting developments in Stage 4 show a close nexus with choice direction enterprises. In the 1880ss, TQM was incorporated into direction accounting literature as a new cost decrease technique that is aimed at extinguishing non-value adding costs in mainly production activities ( McWatter, et al. , 2001 ) . Smith ( 1995 ) claims that TQM provides a vehicle for the accounting map to accomplish control, uninterrupted betterment and maximal efficiency by guaranting that all of the procedures carried out by that map are in control. In 1993, IFAC produced its first statement on quality ( ‘Managing Quality Improvements ‘ ) that recognised that TQM was an built-in portion of direction accounting map in many states.

More late, SS ‘s consequence on clients, costs and bottom -line public presentation necessarily necessitate a direction accounting input. For illustration, Breyfogle III ( 2003 ) asserted that SS methodological analysis through techniques like the theory of restraints will do houses to abandon their traditional cost direction accounting steps for more dynamic steps that focus on throughput, stock list and operating disbursals every bit good as promote a information driven determination attack. By using a information driven determination attack, SS interfaces with a figure of direction accounting patterns and this relationship will be examined in the following subdivision.

3.4 THE INTERFACE BETWEEN MANAGEMENT ACCOUNTING AND SS

The implicit in foundation of SS methodological analysis is the perceptual experience that the administration is made of procedures and sub-processes/activities that drive concern public presentation, and this attack is demonstrated by the usage of several direction accounting patterns developed within Stage 4 of the development in direction accounting. The subsequent subdivisions will analyze the literature and discourse the significance of utilizing the following cardinal direction accounting patterns with SS and the function they should play within the SS led DMAIC procedure:

3.4.1 Process direction and supply/value concatenation direction

Process direction, like SS enterprises, focal points on the cardinal drivers of concern public presentation foregrounding the mutualities that define, enable or restrain an administration ‘s possible ( IMA, 2000. parity. 16 ) . By following the DMAIC procedure, SS administrations emphasise the flow of concern activities and attempts and their linkage to high executing value concatenation procedure activities ( Hammer, 2002 ) . Hammer ( 2002 ) adds that by positioning SS under the procedure direction umbrella, companies used a structured attack to public presentation betterment that is centred on the disciplined design and careful executing of a company ‘s end-to-end concern procedures, and this attack benefited SS administrations. Other SS authors have voiced similar positions. For case, Swinney ( 2000 ) claims that a decently executed procedure direction coupled with the DMAIC procedure can ensue in enormous additions for administrations. Similarly, Averboukh ( 2002 ) reported positive consequences from deploying procedure direction with SS.

Further, procedure direction has besides been recognised as a primary enabler for the execution and direction of an integrated supply concatenation, which is a cardinal characteristic of SS methodological analysis ( Schiegel and Smith, 2005 ) . Dasgupta ( 2003 ) noted that SS methodological analysis adopts supply/value concatenation direction rules to guarantee the effectual and efficient usage of organizational resources. Trent ( 2001 ) argues that providers invited to be portion of the SS value concatenation analysis procedure can actively reexamine client specifications and supply thoughts to the purchasers on stuffs and procedure betterment chances. By making so, houses have been able to salvage resources, and finally monetary value their merchandises more competitively without impacting their client quality ( Trent, 2001 ) . Weigang ( 2005 ) claims that the significance of pull offing non-value adding activities at all organizational degrees and in all concern processes with the cardinal purpose of bettering bottom-line consequences, gained greater acknowledgment merely after the debut of the SS methodological analysis.

3.4.2 ABCM and benchmarking

ABCM system is recognised as an extension to treat direction pattern. The underlying foundation of ABCM systems is the perceptual experience that activities transform resources driven by the procedure into end products ( Bromwich and Bhimani, 1994 ) and this is a position strongly observed by SS administrations when aiming undertaking betterments. For case Gupta ( 2004 ) and Breyfogle III ( 2003 ) claim that the usage of ABCM for procedure activities offers the added flexibleness of uniting costs with procedure activities to prioritize procedure betterment chances and besides enables SS administrations to quantify the return on investing for procedure alterations. Further, utilizing SS as an illustration, Cokins ( 2003 ) showed that the integrating of ABCM and cost of quality could supply fact based informations for administrations to larn, concentrate and take necessary actions.

In a recent SS survey, Chiang ( 2002 ) noted that procedure direction in healthcare administrations involved the combined application of activity-based direction and internal benchmarking processs, which he referred to as activity based benchmarking. Chiang added that activity based benchmarking for health care procedures involve three stairss:

analyzing procedure flow and placing major activities,

taking the appropriate measuring of resource ingestion for benchmarking,

placing the best procedure and pattern for benchmarks.

The benchmarking technique is frequently used in define, step and analyse stages of SS on the footing of distinguishable comparings like: competitory benchmarking ; strategic benchmarking ; and internal benchmarking ( Harry and Schroeder, 2000 ) . Competitive benchmarking evaluates the house ‘s place within its industry, while strategic benchmarking sets a way for the administration by mention to universe category pattern and internal benchmarking relates to outdo patterns within the administration ( Stroud, 2006 ) .

3.4.3 Balanced scorecard ( BSC ) attack

Besides benchmarking, SS practicians have repeatedly stressed the importance of holding appropriate measurement systems in topographic point for successful SS enterprises. Gupta ( 2004 ) and Phadnis ( 2003 ) advocate the usage of a balanced scorecard ( BSC ) type of attack for the choice of undertakings, as this will guarantee that the undertaking meets both client and concern demands. Pyzdek ( 2004 ) claims that Kaplan and Norton ‘s ( 1992 ) BSC attack helps SS administrations maintain a holistic position by supplying a concise show of public presentation prosodies in four countries that correspond to the major stakeholders.

Overall, the reappraisal has shown that SS interfaces with several SMA developments. Despite SS ‘s relationship with direction accounting patterns, SS has received small attending from direction accounting research workers. CIMA ( 2004 ) has late encouraged research workers to set about fieldwork and instance surveies, which demonstrate the linkages between public presentation measuring systems and SS and besides other analytical engineerings that support direction procedures. Therefore, there is a timely demand for researching SS quality enterprises in a direction accounting context, peculiarly given that quality direction forms an built-in portion of the direction accounting map and that direction comptrollers have an of import function to suit the alterations by planing new measurement systems to mensurate and measure concern public presentation ( Lee, 1987 ; Bromwich and Bhimani, 1994 ) .

3.5 SUMMARY OF Chapter

This chapter has reviewed the altering function of direction accounting, and identified that direction accounting ‘s concern with quality issues has come comparatively late in the map ‘s development. Indeed it was non until the eightiess that quality direction techniques, such as TQM, were considered to be an built-in portion of the direction accounting map. The alteration arose from a displacement “ off from information proviso ” towards ‘resource direction ‘ schemes which was occasioned by an accent on cost decrease reflecting international competitory force per unit areas from globalization and Nipponese advanced programmes like JIT, TQM, and CIM. A important part to this displacement was the close coaction between IMA and the ASQ that resulted in acknowledgment that formalised quality direction was a important portion of the direction accounting map and this besides promoted a client oriented attack to direction coverage.

Subsequently development focused on strategic issues, and these developments coincided with the development of SMA which involved many techniques, such as benchmarking, ABC/M, value concatenation direction, procedure direction, integrated PMSs and the BSC attack, that were an built-in portion of SS and other modern quality enterprises. From a PMS position, the subdivision besides notes that the CIMA among other issues has called on research workers to show the linkage between PMSs and SS. SS ‘s nexus with PMSs and the involvement shown by CIMA on this capable affair fits the demands in research inquiry two that examines the association between PMSs alteration and SS. The reappraisal has besides shown that in the modern position of quality, the most of import part from accounting is a new focal point on uninterrupted procedure betterment enterprises, informations aggregation and measuring. This development fits closely to research inquiry three that explores the function of direction comptrollers in SS execution procedure.

Given SS ‘s relationship with direction accounting patterns and in peculiar with the PMS, the following chapter will develop the literature on the cardinal research issues associating to SS methodological analysis that have been identified in the current and predating chapter.

Northwest Missouri State University 51-646-40 – Managerial Accounting January 12 – February 14, 2013 – St. Joseph site Instructor: Dr. R. WoodOffice: Colden Hall 2100 (Maryville campus) Telephone: 562-1759e-mail: wood@nwmissouri. edu Secretary: 562-1835 COURSE DESCRIPTION: A graduate level course in the principles and theory of managerial and cost accounting information. The course firsts develops an understanding of the concepts and procedures for a topical area and then through questions, problems, and case readings applies them.

The major topical areas include the role of accounting information to management, cost concepts, cost behavior, costing systems, budgeting, allocation, relevant costs, variances, capital budgeting, planning and control. TEXT: Managerial Accounting, Fourth Edition (2010), James Jiambalvo, Wiley, ISBN # 978-0-470-33334-1 Textbooks can be ordered through, http://www. nwmissouri. bncollege. com the Bearcat bookstore (660. 562. 1246), Amazon, or other online vendor. ARTICLE READINGS: In addition to the textbook there are required article readings.

These are listed in the syllabus and at the eCompanion site under the “Articles by Chapter” heading or in the webliography. Alternatively the articles may be found at most any University library, the full reference is given in the syllabus and online. eCOMPANION SITE: The site is primarily organized by chapter. Each chapter lists the assigned review questions and problems along with their solutions, PowerPoint slides, additional problems for selected topics, and readings for some articles. Other article readings are found under the Webliography tab.

A copy of the daily schedule and general syllabus items is also at the site. OPTIONAL MATERIALS: http://www. wiley. com/college/jiambalvo (click on the “Student Companion Site” link) the site offers PowerPoint slides for each chapter, review questions and quizzes. Availability is not guaranteed, it is subject to Wiley Publishing. COURSE OBJECTIVES: The course is designed to add understanding of management information needs, develop managerial accounting concepts, and the application of managerial accounting methods.

The use of accounting data in aiding, planning, control, and decision making and its relationship to the management function is of primary importance. In addition the student will understand many of the various accounting analysis procedures available to management as well as their limitations. Upon completion of the course the student should have a broad understanding of the concepts and practice of managerial accounting, and how it aids managers in manufacturing and service environments. ATTENDANCE: Successful completion of this course requires regular class attendance, especially in this short and condensed schedule.

It is the student’s responsibility to obtain any information missed in class from other students, including any announcements that may affect the schedule. Lectures, discussion, announcements, or assigned material will not be repeated for the benefit of absent students. Missing four classes or half the contact hours, whichever comes first, will result in a grade reduction of one letter grade, missing five classes will result in administrative withdrawal from the course or a grade of “F” as appropriate. Northwest Missouri State University 51-646 – Managerial Accounting

PREPARATION and PARTICIPATION: Preparation for class is reading all chapter and article readings prior to class, you will obtain more and contribute more to class discussion. Assigned questions, exercises, and problems are optional in that they will not be collected, however it is expected that they will be completed, they are for your benefit and will help on exams. Assignments will be reviewed in class as time permits and when requested by the student. Cases or articles will be collected and graded as noted below. Students will also be called on to participate in discussing questions, roblems, cases, and readings. GRADE DETERMINATION: 90- 100AMidterm Exam45% 80 -89BFinal Exam45% 70 –79CCollected Cases or Articles10% below70D (Failure)Total100% EXAMS: Two closed book exams will be given will be given over the chapters and material covered. The exams will cover the text (chapters, questions, problems, and cases), additional readings, any handouts, and class discussion. MAKE-UP EXAMS: No tests will be repeated for the benefit of absent students unless there is evidence of sufficient weight in the instructor’s judgment to merit it.

Extenuating circumstances must be verifiable with an independent source. In no case will an exam be repeated if the student fails to notify the instructor or department secretary in advance of the absence. WRITTEN CASE REPORTS: A total of two cases and/or articles will be collected and are due immediately after class discussion, they will not be accepted afterwards. It must provide a description of the case or article, the major issues of concern to management, answer the questions in the case or article, and when appropriate provide resolution to the problem(s) in the case or article.

Note that the daily schedule also has additional questions for some cases. The length of the report is determined by the case or article, but should not exceed four pages. It must be typed using standard margins and type, and/or a (Excel) spreadsheet as appropriate. Cases for collection will be assigned as the semester progresses but will come from those denoted with a double asterisk (**). DISABILITY ACCOMODATIONMS: Students in this course who need disability accommodations/modifications should present a copy of their official Northwest accommodation letter from the LAP/S Committee to the instructor uring private office hours as early in the term as possible. Additional information can be found in the “Services for Students with Disabilities” brochure available at the Student Services Center or online at www. nwmissouri. edu/swd. ACADEMIC DISHONESTY: Per University and departmental policy, academic dishonesty will result in failure and dismissal from the course and possible dismissal from the University. A more detailed description of the policy is in the graduate catalog and in the last page of the syllabus. IMPORTANT DATES: Class meetings; Saturday – January 12, 26, February 9

Thursday – January 17, 31, February 14 51-646 – Managerial Accounting August 4 – September 6 2012 Daily Schedule The schedule will likely change some as the semester progresses to accommodate for class discussion and unforeseen changes. For each day the chapters to be discussed, homework and case discussion points are listed. Half-way and at the end of the course there will be an exam. Cases denoted with a double asterisk “**” may be collected and counted towards the grade. At the eCompanion site some article readings are under the chapter tab and others are linked through the webliography as noted.

January 12, Saturday 9-5 pm Q=Question, Ex = Exercise, Pr = Problem CH 1: Managerial Accounting In The Information Age; Q 1, 3, 4, 5, 7, 8, 9 Case: 1-1 Local 635 Case 1-2 Boswell Plumbing Products CH 2: Job-Order Costing For Manufacturing And Service Companies; Q 1- 10 Ex 12 Pr 1 Case: 2-1 Brixton Surgical Devices (additional question: How are costs allocated to the product such that producing more units would result in more of overhead being buried in inventory? ) Case 2-3 Dupage Powder Coating CH 3: Process Costing; Q 1, 4, 5, 6, 10 Pr 2, 3, 8 and supplement (online) Case: 3-1 Tech-Tonic Sports Drink

January 17, Thursday 6-10 pm CH 5: Variable Costing Q 1 – 5, 9, 10 Ex 4, 5 Pr 4, 12, 15 CH 6: Cost Allocation And Activity-Based Costing (and handout on service department allocation) Q 2, 5, 6, 7, 9 Pr 1, 5, 6, 12, 16 Case: 6-1 Eastside Medical Testing** Devices (additional question: Why or why not is Eastside better or worse off economically if they keep Nuclear Systems business at existing prices? ) * Estrin, T. J. Kantor, and D. Albers, “Is ABC Suitable for Your Company? ” Management Accounting, April, 1994: 40-45. * Tatikonda, D. O’Brien, and R.

Tatikonda, “Succeeding with 80/20,” Management Accounting, February, 1999: 40-44. January 26, Saturday 9-5 pm Complete our discussion of chapter 6 CH 4: Cost-Volume-Profit Analysis (and appendix on regression); Q 1, 3, 4, 6-10 Pr 2, 3, 4, 12, 15, 17 Case: 4-3 Krog’s Metalfab, Inc. ** (Additional requirement: estimate the lost profit using three methods or variations in the data used, one of which must be simple regression. ) CH 8: Pricing Decisions, Analyzing Customer Profitability, and Activity-Based Pricing Q 1, 2, 3, 5, 6, 9, 10 Ex 6, 9 Pr 3, 4, 9 Shim, E. , and E. Sudit, “How Manufacturers Price Products,” Management Accounting, February, 1995: 37-39. Midterm (chps 1, 2, 3, 5, 6) starting at about 2:30 pm January 31, Thursday 6-10 pm CH 9: Capital Budgeting And Other Long-Run Decisions (Including Appendix A, B), and handout (online); Q 4, 6, 7, 8, 10 Ex 7, 11, 13, 14, 15, 18 Case 9-2 Sergo Games** (Case clarification: use NPV analysis for each option; additional requirement: identify four qualitative considerations that would impact the decision) * Shank, J. and V.

Guvindarajan, “Strategic Cost Analysis of Technological Investments,” Sloan Management Review, Fall 1992: 39-51. CH 10: Budgetary Planning And Control; Q 4, 7, 9, 10 Pr 3, 4 * Hope, Jeremy, and R. Fraser, “Who Needs Budgets? ” Harvard Business Review, February, 2003: 108-115. Webliography** * Fisher, J, L. Maines, S. Peffer, and G. Sprinkle, “Using Budgets for Performance Evaluation: Effects of Resource Allocation and Horizontal Information Asymmetry on Budget Proposals, Budget Slack, and Performance,” The Accounting Review, Vol. 7, No. 4 October 2002: 847-865. Webliography. February 9, Saturday 9-5 pm Continuation of Chapter 10 discussion CH 11: Standard Costs and Variance Analysis (including the appendix) and supplement (online) Q 4, 5, 6, 7, 9 Ex 13 Pr 5, 15 Case: 11-1 Jackson Sound Case: 11-2 Champion Industries CH 12: Decentralization and Performance Evaluation (include the appendix on transfer pricing); Q 1, 2, 7, 9, 10 Ex 6, 7, 8, 10 Pr. 8 Case: 12-1 Home Value Stores * Lipe, M. G. and S.

Salterio. “The Balanced Scorecard: Judgment Effects of Common and Unique Performance Measures,” The Accounting Review, July, 2000, 283-298. Webliography. * Ittner, C. , D. Larcker, and M. Meyer, “Subjectivity and the Weighing of Performance Measures: Evidence from a Balanced Scorecard” The Accounting Review, July, 2003, 725-758. Webliography. February 14, Thursday 6-10 pm Review as requested Final exam (chps. 4, 8, 9, 10, 11, 12 or chapters/material covered since the mid-term)

In characterizing the different international business forms available, Bartlett and Ghoshal (1989) have made a distinction between global, international, transnational and multinational organizations. Wax’s organizational structure can be described as an integrated network structure, with resources, decisions, and responsibilities being dispersed and specialized, but interdependent. Each of the different local units makes differentiated contributions to Wax’s worldwide operations, and its strategic advantage derives from the ability to achieve worldwide competitiveness, local responsiveness, and global innovation simultaneously.

As such, it can be typified as a transnational (Bartlett and Goshal, 1989). Pelmutter has made a distinction between ethnocentric, polycentric, heterarchical, and geocentric organizations (Hedlund, 1986, p. 9-35). Using Pelmutter’s typology, Wax’s organizational structure can be described as a heterarchy (or network) (as opposed to a mother/daughter, divisional, or matrix structure), with the role of its various subsidiaries being to make local contributions to the firm’s local as well as global strategies.

Its strategic advantage can be described as deriving from the flexibility in the worldwide market that its structure affords. As such, using Pelmutter’s classification, the form of decentralization at Wax can be described as heterachical rather than ethnocentric, polycentric, or geocentric (Hedlund, 1986, p. 9-35). References: Hedlund, G. 1986. “The hypermodern MNC – A heterarchy? ” Human Resource Management, Vol. 25 1986, No. 1, pp. 9–35. Bartlett, C. A. and Ghoshal, S. 1989. Managing across borders: The transnational solution.

Boston. Q. 2: Explicate how a management accounting system could enable the Salvation Army to respond to the la? cit? requirements. Specify how resource allocation could be accounted for: Cost control is a central component of management accounting. Using techniques such as lifecycle costing and activity-based costing, the Salvation Army will be able to “identify, measure, analyze, accumulate, prepare, interpret, and communicate” the proper costs relating to key activities such as social work and evangelism (CIMA, 2009).

In this regard, the management accounting system will help to provide a proper perspective on costs, thus helping to rein in costs and improve cost transparency. This will help the organization to meet its goals more appropriately (for example, getting a proper handle on costs would help it reach more people with soup, soap and salvation), while enhancing transparency and accountability in the way it uses its resources (Lucey, 2003).

The establishment of an effective management accounting system (underpinned by a modern management information system) will yield a more accurate and precise platform for the “identification, measurement, analysis, accumulation, preparation, interpretation, and communication” of information (CIMA, 2009). This in turn will aid and drastically help improve the operational and financial performance of the organization, given that both operational and financial decisions will be made on the basis of such information. Given that management accounting is forward-looking, it will facilitate forecasting and planning (Lucey, 2003).

Such a management accounting system will help to identify risks that may hinder the organization from meeting its goals (for example, a likelihood of reduced donor funds), and towards this end, will facilitate the implementation of risk management strategies to avert the risks and help the Salvation Army meet its objectives (Lucey, 2003). Resource allocation must ensure a balance between the organization’s social and spiritual goals. Towards this end, a proper determination of the resources required by each of these two departments must be made, priorities ranked, and matched to the resources available.

Qualified accountants must be given the independence and authority to draw the organization’s financial statements, which must be audited by external and independent auditors such as those from the Ministry of Social Services (given that the Salvation Army is also a charity) (Chadwick, 1993). References: Chadwick, L. 1993. Management accounting. Routledge. ISBN 0415070848, 9780415070843 Chartered Institute of Management Accountants (CIMA). 2009. Official terminology. Lucey, T. 2003. Management accounting. Continuum. ISBN 0826463606, 9780826463609.

The customer from whom receivables or book debts have to be collected in future are called Trade debtor and represent the firm’s claim on assets. Receivables management, also termed credit management, deals with the formulation of credit policy, in terms of liberal or restrictive, concerning credit standard and credit period, the discount offered for early payment and the 156 collection policy Ana procedures undertaken It does so In suns a way Tanat together these policy variables determine an optimal level of investment in receivables where the return on that investment is maximum to the firm.

The credit period extended by business firm usually ranges from 15 to 60 days. When goods are sold on credit, finished goods get converted into accounts receivable (trade debtors) in the books of the seller. In the books of the rye, the obligation arising from credit purchase is represented as accounts payable (trade creditors). “Accounts receivable is the total of all credit extended by a firm to its customer. ” A firm’s investment in account receivable depends upon how much it sells on credit and how long it takes to collect receivable.

Accounts receivable (or sundry debtors) constitute the 3rd most important assets category for business firm after plant and equipment and inventories and also constitute the 2nd most important current assets category for business firm after inventories. Poor management of accounts receivables are: neglect of arioso overdue account, sharp rise in the bad debt expense, and the collection of debts expense and taking the discount by customers even though they pay after the discount date and even after the net date.

Since accounts receivable represent a sizable investment on the part of most firms in the case of public enterprises in India it forms 16 to 20 per cent of current assets. Efficient management of these accounts can provide considerable saving to the firm. 157 Factors involving in Receivable management: The terms of credit granted to customers deemed creditworthy. 2. The policies and practices of the firm in determining which customers are to be granted credit. 3. The paying practices of credit customers. 4. The vigor of the sellers, collection policies and practice. 5. The volume of credit sales.

Goals of Receivable Management The basic goal of credit management is to maximize the value of the firm by achieving a trade off between the liquidity (risk and profitability). The purpose of credit management is not to maximize sales, nor to minimize the risk of bad debt. If the objective were to maximize sales, then the firm would sell on credit to all. On the contrary, if minimization of bad debt risk were the aim, then the firm old not sell on credit to anyone. In fact, the firm should manage its credit in such a way that sales are expanded to an extent to which risk remains within an acceptable limit.

Thus to achieve the goal of maximizing the value, the firm should manage its trade credit. The efficient and effective credit management does help to expand sales and can prove to be an effective tool of marketing. It helps to retain old customers and win new customers. Well administrated credit means profitable credit accounts. The objectives of receivable management is to promote sales and profits until that point is reached where the 158 turn on investment is further funding of receivables is less than the cost of funds raised to finance that additional credit.

Granting of credit and its management involve costs. To maximize the value of the firm, these costs must be controlled. These thus include the credit administration expanses, b/d losses and opportunity costs of the funds tied up in receivable. The aim of credit management should be to regulate and control these costs, not to eliminate them altogether. The cost can be reduced to zero, if no credit is granted. But the profit foregone on the expected volume of sales arising due to the extension of credit. Debtors involve funds, which have an opportunity cost.

Therefore, the investment in receivables or debtors should be optimized. Extending liberal credit pushes sales and thus results in higher profitability but the increasing investment in debtors results in increasing cost. Thus a trade off should be sought between cost and benefits to bring investment in debtors at an optimum level. Of course the level of debtors, to a great extent is influenced by external factors such as industry norms, level of business activity, seasonal factors and the degree of completion. But there are a lot of internal factors include arms, standards, limits and collection procedures.

The internal factors should be well administered to optimize the investment in debtors. 159 Credit Management In order that the credit sales are properly managed it is necessary to determine following factors: Credit Policy Credit Evaluation of Individual Buyers Credit Sanction Decisions Control and Monitoring of Receivables The first stage of credit sales is to decide policy in which most important variable is whether credit sales should be made or not and if yes to what extent I. E. What percentage of sales should be done on cash and what percentage on credit.

The discussion with cement companies marketing and finance© department clearly suggest that the credit policy is more dependent upon market forces and less on company specially in periods when there is excessive competition which has happened a number of times in the history of cement industry after decontrol and nutcrackers nave Eden Trace to prove cereal IT teeny wanted Dull utilization AT capacity. If in the market there is practice of providing credit, those companies who do not fall in line have lower sales and so lower utilization of instilled capacity.

The management has to weigh whether it would avoid risk of realization and problem of arranging funds for larger sales on credit or decide for reduced capacity utilization thereby resulting in higher cost per tone of cement produced. 160 Actually the policy should be based on cost benefit analysis of these factors but often policy is decided without detailed calculations. In actual practice when one waits to push sales the marketing department pressurize the management to provide liberal credit to buyers to realize sales targets.

Credit Rating The second virtual point of credit policy is to whom to give credit and whom it should be denied. Whether it should be given to everyone or on selective basis? As per standards one can workout impact of credit sales on profits by following formulae: AP=AS -B, AS in the above formula AP = Change in profit AS = Change in sales V = Ratio of variable cost to sales K = Cost of capital I. E. Interest cost of credit AY = Increase in receivables investment B = Bad debts ratio on additional sales The change in profits (AP) is dependent upon ratio of variable cost and fixed cost and change in sales.

The figure is worked out by deducting variable cost from sales I. E. Sales minus variable cost is change in profits. The above formula appears to be very simple but for policy purposes it requires that policy maker should be able to estimate precisely the impact of credit on sales value, the 161 variable cost and bad debts besides the cost of capital. In practice besides the cost of capital, it is very difficult to measure extent of increase in sales as a result of credit and it is only broad estimate of sales department.

Similarly, it is very difficult if not impossible to workout likely bad debts. The variable cost can be worked out with great precision if proper costing system is maintained. Because of difficulties in notifying various variables in the formulae often credit policy is decided without working details on prevailing market conditions and the need of the company to push sales at a point of time. It has been by various companies that no details are worked. The credit period is the time length for which seller agrees to provide credit to the buyers.

It varies according to the practice of trade and varies between 15 to 60 days. In some cases for an early payment pre-agreed discount is given to induce buyer make an early payment. For late payment in the agreement there is provision for interest payment by buyer. If credit is given for longer period it induces to push up sales but this is true only when one provides longer period credit than competitors. The customer-distributor, dealer, consumers is attracted to a firm who provides longer period credit.

The impact of credit on profits and sales can be worked out from the following formula: AS AS The various components are as under : 162 A Change in profit A S= Change in sales A Change in investments receivables V= Ratio of variable cost to sales K= Cost of giving credit b= bad debits ratio to increased credit The discussion with the industry suggests that they rarely take decision on period of credit based on formula. It is market conditions and practices in the trade, which decides the period of credit and hardly any calculations of cost are done. In practice it is marketing department whose advice plays an important and deciding role.

In the period when sales have to be pushed up more credit is provided and there is no uniform policy overtime. During rainy season Oily- Seep. ) when demand is generally slack more liberal credit is granted than rest of the year. Further, when stocks accumulate due to sluggish sales, producers accept the terms of their customers and traders bout the period of credit but when market conditions are tight, the seller becomes more strict in providing credit. Optimum Credit Policy Credit policy refers to those decision variables that influence the amount of trade credit I. . The investment in receivables. The firm’s investment in receivable are affected by general economic conditions, industry norms, pace of technological change, competition etc. Though the firm has no control on these factors, yet they have a great impact on it and it can certainly influence the level of trade credit through its 163 cereal policy Walton toner constraints Imposed externally. I en purpose AT any commercial enterprise is the earning of profit. Credit itself is utilized to increase sales, but sales must return a profit.

Further, whenever some external factors change, the firm can accordingly adopt its credit policy. R. J. Chambers says, “The responsibility to administer credit and collection policies may be assigned to a financial executive or marketing executive or both of them Jointly depending upon the original structure and the objectives of the firm. ” Different types of credit policy are: Loose or Expansive Credit Policy- Firms following this policy tend to sell on credit to customers very liberally. Credits are granted even to those whose credit worthiness is not proved, not known and are doubtful.

Advantages of Loose or Expansive Credit Policy: Increase in Sales (higher sales), Increase in profit (higher profit), Disadvantages of Loose or Expansive Credit Policy: Heavy bad/debts. Problem of liquidity Increase in cost of credit management. Tight or Restrictive Credit Policy- Firms following this policy are very selective in extending credit. They sell on credit, only to those customers who had proved credit worthiness. Advantages of Tight of Restrictive Credit Policy: Minimize cost. Minimize chances of bad debts. 64 Higher sales in long run. Higher profit in long run.

Do not pose the serious problem of liquidity. Disadvantages of Tight or Restrictive Credit Policy: Restrict Sales. Restrict Profit Margin. Benefits of Credit Extension: Increases the sales of the firm. Makes the credit policy liberal. Increase the profits of the firm I en market value AT ten Tells snare would roles Cost of Credit Extension: Bad debt losses Production and selling cost. Administrative expenses. Cash discounts and opportunity cost. Cost Benefit Trade off Profitability 165 Aspects of Credit Policy: Credit terms Credit Period Cash Discounts Credit Standard Collection policy or collection efforts.

Credit terms – The stipulations under which the Tall sells on cereal to Its customers are called alt terms. (a) Credit Period – The time duration for which credit is extended to the customers is referred to as credit period. It is the length of time for customers under which they are allowed to pay for their purchases. It is generally varies between 15-60 days. When a firm does not extend any credit the credit period would obviously be zero. It is generally stated in terms of a net date, for example, if firm allows 30 days of credit with no account to induce early payments credit then its credit terms are stated at ‘net 30’.

Usually the credit period of the firm is governed by industry norms, but firms can extend credit for longer duration to stimulate sales. If the firm’s bad debts build up, it may tighten up its credit policy as against the industry norms. According to Martin H. Swished, “Credit period is the duration of time for which trade credit is extended. During this period the overdue amount must be paid by the customer. The length of credit period directly affects the volume of investment in receivables and indirectly the net worth of the company.

A long credit period may blast sales but it also 166 increase investment in receivables and lowers the quality of trade credit. ” Cash Discounts – It is the another aspect of credit terms. Many firms offer to grant cash discount to their customers in order to induce them to pay their bill early. The cash discount terms indicate the rate of discount and the period for which discount has been offered. If a customer does not avail this offer, he is expected to make the payment by the net date. In the words of Martin H. Sudden “Cash Discount prevents debtors from using trade credit as a source of Working

Capital. ” Liberalizing the cash discount policy may mean that the discount percentage is increased and or the discount period is lengthened. Such an action tends to enhance sales (because the discount is regarded as price reduction), reduce the average collection period (as customers pay promptly). Cash Discount is a premium on payment of debts before due date and not a compensation for the so – called prompt payment. Credit Standard – The credit standard followed by the firm has an impact of sales and receivables. The sales and receivables level are likely to be high, if the credit

Accounting concepts: Accounting is the language of business.

Accounting information has to be suitably recorded classified, summarised and presented. Accountants adopt the following concepts in recording of accounts 1. Business Entity concept The business unit is treated as a separate and distinct from the persons who owe it.Hence business transactions must be kept completely separate from the private affairs of the owner this concept enables the owner top ascertain the picture of a business. 2. Going concern concept It is assumed that the business will exist for the future and transactions are recorded from this point of view. A firm is said to be a going concern when there is neither the intention nor the necessity to wind up its operation.

In other words, it continues to operation at its present scale in foreseeable future. 3. Money Measurement Concept All transactions are expressed and interpreted in terms of money.Accounting records only those transaction, which are being expressed in monetary terms through quantitative records are also kept. 4. Accounting period concept A business is assumed to continue indefinitely. In order to ascertain the state of affairs of the business at different intervals we have to choose the intervals for ascertaining the financial position and operational results at each such interval, which is known as accounting period.

5. Dual Aspect concept Each transaction has two aspects. 1) Debit aspect. 2) Credit aspect. If a business has acquired an asset it must have result,There has been a profit leading to an increase in the amount that the business owes to the proprietor Accounting Principles: The double entry system of accounting is based on a set of principle which is called generally accepted accounting principles. It incorporates the consensus at a particular time as to: •Which economic resources and obligations should be recorded as assets and liabilities by financial accounting, •Which changes in assets and liabilities should be recorded •When these changes are to be recorded, •How the assets and liabilities and changes in them should be measured, •What information should be disclosed and Which financial statement should be prepared. Q .

2 Pass Journal entries for the following transactions. Solution: Journal DateParticulars LfDebitCredit Cash A/C Dr To capital A/C (Being Madan invested in business) Purchase A/c Dr To cash A/C (Being credit purchases) Drawing A/C Dr To cash A/C (Being cash withdrawn for personal use) Purchase A/C Dr To cash A/C (Being cash purchase)Wages A/C Dr To cash A/C (Being wages paid)70000 14000 3000 12000 5000 70000 14000 3000 12000 5000 Q. 3Explain the various types of errors disclosed by trial balance Ans: Those errors that can be disclosed by trial balance can easily be located. As soon as the trial balance does not tally, the accountant can proceed to find out the spots where the errors might have been committed. The total amount of difference in the trial balance is temporarily transferred to a “Suspense Account “so that it can be mitigated as and when the error get rectified.Therefore the suspense account get debited or credited as the case may be on rectification of these types of error. The following are errors: a) Posting a wrong amount; This mistake may occur while posting an entry from subsidiary book to ledger.

b) Posting to the wrong side of an account: This error is committed while posting entries from subsidiary book to ledger. c) Wrong totalling: Both under casting and over casting are detected by trial balance. if any account is wrongly totalled, it gets reflected in the trial balance. ) Omitting to post an entry from subsidiary book to ledger: If an entry made in the subsidiary book does not get posted to ledger, the trial balance does not tally. e)Omission of an account altogether from being I shown in trial balance. f) Posting an amount to a correct account more than once; This result is imbalance in trial balance. g) Posting an item to the same side of two different ledger accounts: If two accounts are debited/credited for the same transaction, this type of error occurs.

Q. 4 From the following balances extracted from trail balance, prepare trading Account. Solution: The closing stock at the end of the period is Rs. 6000 TRADING ACCOUNT FOR THE YEAR ENDING—— Dr Particulars Rs Cr Particulars Rs To stock on 1-1-200470700 To purchase 102000 (-) Returns Outwards 3000 99000By sales 250000 (-)Returns Inwards 3000 247000 To carriage inwards5000By closing stock56000 To import duty6000 To clearing charges7000 To Royalty10000 To Fire Insurance2000 To Wages8000 To Gas,electricity,water4000 To GROSS PROFIT91300 TOTAL303000TOTAL303000 Q. 5Differentiate Financial Accounting and management accounting. Ans: S. NoBasis of differenceFinancial accountingManagement Accounting 1.

. 3. 4. 5. 6. Object Nature Subject matter Compulsion Precision ReportingTo record various transaction in order to know the financial position. It is helpful to share holders, creditors, bankers etc.

It is mainly concerned with the historical data. It is concerned with assessing the results of the whole business. It is compulsory in certain undertakings Actual figures are recorded and there is no room for using approximate figures It is prepared to find out profitability and financial position of the concern. It is useful for outsiders. To help the management in formulating policies and plans.It deals with the projection of data for the future. It deals separately with different units, Department and cost centres.

It is not compulsory No employee is given to actual figures. the approximate figures are more useful than the exact figures It is only for internal use. Q. 6 Following is the Balance sheet of M/s Srinivas Ltd. you are required to prepare a fund flow statement.

Mr.. Pad had been the management services director of the fruit puree division of his corporation. W/ professional experience gained from various industries, his technical expertise was undoubtedly quite valuable to the corporation. He, however, has personal attitudes w/c created a wall of hostility between him & his staff and the rest of the senior managers of his dolls. For one thing, Mr.. Pad did not see any point in laughing at a joke w/c he did not consider funny. Fortunately, his standard to “funny” was in the line of erudite humor, w/c even the other directors found too deep for reflection. Neither did he believe in attempting to gain the drift of others if only to gain rapport w/ them. He insisted in being his own person regardless of what others believe. It was, also, rare for him to concede to anything. This attitude was compounded by his difficulty in expressing his thoughts especially when it came to Justifying himself.

This caused misunderstandings between him and others w/c further aggravated his win negative perception of others as well as their negative perception of him. He could not give allowances for differences In his attitude w/ those of others. Ad those who differed from him, In one sense, were treated w/ a degree of coldness. He was aware of his social deficiencies, but, according to him he simply could not be what he was not. He often mentioned that it was already very hard for him to change his ways. Outside the work place, though, Mr..Pad tried hard to be friendly w/ his staff. And, while he showed concern for their professional training, he himself could not seem to be at ease in relating to them in the workplace. It was as if he was afraid that friendship would curtail his authority. At this time, a new problem solving system was being Inculcated throughout the corporation. To show his concern for his staff, he made them the first trainees on the system. The system was designed to enable a group to Identify a problem and recommend a solution throughout the various stages of the system.

The group was placed under he guidance of training assistants from the personnel directorate ensuring the objectivity of results. The exercise w/ his staff identified three difficulties in their workplace, one of which concerned Mr.. Pad. The recommended solution was to replace him. Needless to say, this put top management in a dilemma. Mr.. Pad was an officer of the company, and to continue to attract talent to officers, his tenure had to be protected. Besides, the problem focused on Mr.. Pad’s personality. How exactly does one correct that?

He had already attended Dale Carnage’s course. On the other hand, faith In the system they were endorsing was being put to the test. If they could not support Its results now, how could they expect anyone to believe Its merits?

Study Guides:

1. Describe the personality of Mr.. Pad. How Is this reflected In his communication style?

2. How was this style affected his relationship w/ his associates and Defend your stand.

3. What implication does the case have on management policies and practices on hiring and developing workers and staff?