A C T A U N I V E R S I T A T I S L O D Z I E N S I S
FO LIA O EC O N O M IC A 173, 2004
Česlovas Christauskas*, Alfreda Sapkauskiene**
C O ST M AN AG EM ENT SYSTEM : PE R FO R M A N C E M E A SU R E M E N T
Abstract. Existing standards of manufacturing developm ent in the W est are p o o r and the potential to improve value-adding capability and reduce waste is substantial. A cost management system requires a comm itment from the top m anagem ent o f the com pany, involvement o f its workers a t all levels, and the establishment o f a self-perpetuating system of im provem ent that will help im prove value-added activities and decrease non-value added activities. It may begin with activity based costing, but a comprehensive system will also include activity-based m anagement, total quality managem ent, Just-in-Tim e system and process im provem ent. Such a system will help the com pany in meeting global com petition now and in the future with emphasis on continuous implem entation.
The organisation o f the future will invariably be forced to take a m ore involved account o f all forms o f organisational energy, yet it is difficult to see how a single unit o f measure, such as m onetary values, can cater for all these needs, although obviously standard measures such as return on investment will still be used. An effective cost m anagem ent system helps in good managem ent and control of costs. However, it also assists in the attainm ent of operational excellence by providing timely and reliable inform ation for m anagem ent use.
1. Introduction
F or m any years we have been brainwashed into thinking that financial perform ance m easurement and control is the only legitimate or correct way to appraise business efficiency, guide development and meet m arket needs. Yet this universal planning, control and capital investment tool conceals com ponent flaws within its mechanism which obscure a true com pany evaluation, especially when used to direct m anufacturing industry. Throughout history m onetary control has been the universal standard unit o f measure, which reported com pany profitability and perform ance in the m arketplace.
* K aunas University o f Technology, Economics and M anagem ent Faculty, A ccounting D epartm ent; ceslovas.christauskas@ evf.ktu.lt
** K aunas University o f Technology, Economics and M anagem ent Faculty, A ccounting D epartm ent; alfreda.sapkauskiene@ ktu.lt
By using this m onetary link it has been possible to decide whether investment could be justified, a product was m ade obsolete, or return on capital was acceptable, or so we thought. U nfortunately we m ust now adm it that our financial planning and control systems, with their origins in an uncompetitive era, can no longer cope with m arket dem ands and the speed o f change driven by international com petition in the 1990s. In fact some parts are no longer appropriate as we try to measure a benefit or cost by unrelated criteria while much-needed value-adding improvement cannot be justified.
In recent years a widespread, yet belated, true acceptance of just-in-time m anufacturing, lean production and total quality concepts has led to com ponents o f the financial control and reporting mechanism being ques tioned. Weaknesses have begun to appear as the pace of change accelerated. M anagers who had improved the competitive position o f a com pany by reducing throughput time, stock or reject rates found cost accountants unable to record the impact, a comm on problem for those m aking the transition to the Just-in-Time (JIT) environm ent ( K a p l a n 1983). Yet, innovations such as activity based costing do not provide viable alternative solutions since both activity and non-value adding activity cause cost in the organisation ( C o o p e r 1990).
The purpose of cost m anagement system of com pany is to help maximise its profits - now and in the future. To achieve this goal, the com pany has to meet or beat the com petition not only today, but to continuously improve itself in future. Therefore, it should devise a cost m anagem ent system that would lead to the achievement of two m ajor objectives: global competition and continuous improvement. A cost m anagement system requires a com m itm ent from the top m anagem ent o f the company, involvement o f its workers at all levels, and the establishments of a self-perpetuating system o f improvement that will help improve value-added activities and decrease non-value added activities. It may begin with activity based costing, but a comprehensive system will also include activity-based management, total quality management, just-in- time system and process improvement.
In this article, therefore, the authors aim to present an overview of the cost m anagem ent system and its various com ponents, which helps in good m anagem ent and control o f costs.
2. Performance measurement/cost accounting
A total dependence on financial performance m easurem ents has a disas trous result in helping executives direct com pany and product strategy because it is com m on practice in m anufacturing organisations to use m onetary feedback, in isolation, to control and direct a wide range of activities. Even those organisations which have transform ed their m
anufac-turing perform ance by using Just-in-Time m ethods, etc., still, in m ost cases, attem pt to measure the benefits using obsolete m ethods o f financial ac counting. There is usually no m easure of value-adding capability, future potential or current levels o f waste, yet decisions regarding expansion, whether to m ake products obsolete, the strength or competitiveness of a product range and even the future o f an entire com pany, are often based on these financial data. These figures, used in isolation, record results but do not adequately analyse the potential for im provement.
Standard costing systems have been criticised for many years, and not without good cause, for they fail to give true relevance to many cost drivers. Some of these weaknesses have been eliminated by adopting activity based costing, but this is only seen as a partial solution, attacking one part of the problem.
3. Cost management system
The term “cost m anagem ent” is not a well-defined term. It builds on both cost accounting and m anagem ent accounting, but goes beyond the two. Brinker (1996) defines it as “ a set o f techniques and m ethods for controlling and improving a com pany’s activities and processes, its products and services.” The purpose o f the cost m anagem ent system of a com pany is to help maximise its profits - now and in the future.
Figure 1 presents the model of the cost m anagem ent system. Achievement of the objectives m entioned above will require:
A. Establishm ent of self-perpetuating system of improvement; B. Com m itm ent o f top m anagement;
C. Involvement o f workers.
4. Self-perpetuating system of improvement
Figure 2 shows the model o f a Self-Perpetuating System o f Im provem ent (SPSI). It indicates two goals o f SPSI:
• T o continuously improve value added activities;
• To continuously decrease non-value added activities, (see Fig. 2).
Fig. 2. A Self-Perpetuating System o f Im provem ent (Agrawal et al. 1998)
Im proving value added activities and reducing non-value added activities is a never-ending process. The com pany m ust establish a system th at will be perpetually involved in the achievement of these goals. Furtherm ore, the analysis o f activities should cover the entire value chain: research and development, design, production, marketing, distribution and service ( S h a n k , G o v i n d a r a j a n , 1992).
The starting point to achieve the goal of SPSI is the use of Activity Based Costing (ABC). The use o f ABC is m ost desirable for companies th at have a variety of products and incur a large am ount o f indirect or overhead cost ( C o o p e r 1989). The greatest im pact o f ABC is on the allocation of such costs. In recent times there has been a phenomenal growth in overheads as a percentage of total costs. In m ost companies, the am ount o f overheads is several times the direct labour cost, so m uch so that some companies treat direct labour as a com ponent o f overheads rather than as a separate category of costs ( B o e r 1994).
In order to m ake a m ore accurate allocation, ABC divides activities into several levels, such as unit level, batch level, product level and facility level ( C o o p e r 1990). One or m ore drivers are used to allocate costs of these activities to various cost objects in an appropriate m anner based upon
a causal relationship. This prevents cross-subsidisation of product costs. Such cross-subsidisation is quite comm on under the traditional cost system using a single driver (e.g. direct labour or another volume-based m easure) to allocate all indirect costs, which leads to m any undesirable consequences.
Allocation o f costs based on activities helps to determ ine the profitability o f various cost objects m ore accurately. F or example, a com pany m ay more accurately com pute not only the profitability o f various products it makes, but also the profitability of groups o f custom ers or channels o f distribution.
The m ain disadvantage o f ABC is the difficulty in obtaining accurate inform ation which would enable the proper allocations ( H u n d a l 1997), that is, it is difficult to obtain the cost per unit o f the activity’s output (unit price o f a cost driver). It has also been argued that ABC requires detailed activity analysis, which implies significant changes in existing cost accounting systems ( S h e l d o n et al. 1991).
Activity Based M anagement (ABM) uses the information developed under ABC. It focuses on the management of activities as the route to improving the value received by the customer and the profit achieved by providing this value. It includes cost driver analysis, activity analysis and performance measurement. R e e v e s (1996) indicates that the ABM system would help fulfil the m an a gers’ need for dynamic inform ation for at least three purposes:
• m anaging and m otivating cost improvement; • improving organisational learning; and • supporting cost-based operational decisions.
Just-in-Time as a m anagem ent philosophy has engendered great interest internationally since the early 1980s. JIT was first implemented by T oyota M otor Com pany in the early 1970s and has since spread to other Japanese companies and globally. It is recognised as one factor contributing to Ja p an ’ reputation for superior quality and growth in productivity ( K e l l e r , K a z a z i 1993).
Johnson and K aplan (1987) have argued that m anagem ent accountants must develop accounting systems which support the changing m anufacturing environm ent. T he accounting literatu re em phasises the im p o rtan ce of performance m easurem ent systems and how they can either inhibit or enhance the im plem entation of the JIT philosophy ( D e L u z i o 1993; S w e n s o n , C a s s i d y 1993; Y o u n g , S e l t o 1991).
Just-in-Time System aims at synchronising the operations of the company through the entire value chain - from the suppliers to custom ers ( H r o n e c 1990). There is no significant inventory at any stage - raw m aterial, goods in process or finished goods. Introduction o f JIT requires analysis o f value added and non-value added activities and their costs, which is provided by ABC ( B a i l e s , K l e i n s o r g e 1992).
Under JIT it is essential that suppliers deliver the m aterial o f right quality in right quantities at the right time. This would require long-term
contracts with reliable suppliers and use o f such techniques as electronic da ta interchange. JIT m ay also require a redesign o f m anufacturing facilities so as to eliminate waiting time, moving and storage.
It may not always be possible to synchronise all the functions of a company. C onstrains m ay arise anywhere in the value chain, such as in the m anufacturing process. U nder such circum stances, the Theory o f C onstrains (TOC) can be used to improve operations ( F o x 1986). T O C prescribes five steps to help improve performance:
• identify various constraints and determine which of these are binding; • exploit the binding constraints;
• subordinate everything else to the exploitation of the binding constraints; • elevate the binding constraints;
• repeat the process after a binding constraint has been elevated. ABC analysis will help identify the constraints, and the acquisition decisions referred too earlier will help elevate the constraints. F o r example: if com pany cannot accurately identify where investment is required and improve its value-adding capability quickly, before order input is affected, the com pany’s future will be in jeopardy. This leads to an acceptance that poor cost-accounting m ethods - over-reliance on m arket m argin to m easure factory performance - and poor investment direction and appraisal, are firmly interwoven (see Fig. 3).
Poor measurement o f factory costs and fuzzy recording o f how costs are built up, without due attention to waste drivers
An over-reliance on existing market margins and profits
Ъ>- w ithout a measure o f adding value capability in factory Poor investment decisions in restructuring actions )>- that do little to reduce
overall product or factory costs
in addition ^ leads to ~ ^
Fig. 3. Poor cost m easurement leads to poor investments decisions ( B a r k e r 1995)
Total Quality M anagem ent (TQM ) requires identification and reduction of quality related costs. Such costs often constitute a significant percentage o f the total costs o f a com pany ( C a r r , T y s o n 1992). T otal elim ination of all quality-related costs is neither possible nor even desirable, as reduction in some costs may require increase in others.
Quality-related costs are often well hidden, and ABC provides considerable help in their m easurem ent, m aking the m anagem ent aware o f such costs
( O s t r e n g a 1991). TQM provides significant help in the reduction of non-value added activities and im provem ent o f value added activities.
Process Improvement begins with the identification of various processes carried out by company that involve num erous activities and cut across functional lines. A m apping o f the processes m ay lead to significant reduction in non-value added activities and im provem ent o f value added activities (O s t r e n g a, P r o b s t 1992). ABC analysis provides considerable help in process improvement.
Process improvement is an incremental approach under which existing processes are examined and improved. Examples o f such im provem ent are: elimination o f unnecessary paper work, reduction in the num ber of approvals needed, improvement in com m unication, and change form m anual analysis to electronic analysis of data. In contrast, process innovation or reengineering involves a total change in the way the work is done. Examples o f such innovation would include the first time use o f target costing in the development of new products, flexible m anufacturing systems or cellular m anufacturing. In either case, time is considered to be a crucial element in all phases o f the value chain. Com panies use time as a competitive element ( R o t h , B o r t h i c k 1993).
5. Commitment of top management
SPS1 cannot be established w ithout the active su pp ort o f the top management of the company. Top management’s commitment is a prerequisite to the successful implem entation o f any strategy or innovation ( H u n t , et al. 1985). As shown in Fig. 4, this requires the following:
6. Involvement of workers
Employee involvement m eans using the creative and synergistic effects of all employees to solve problems. In other words, the objective o f an employee involvement program is to tap the resources of employee ideas, creativeness, and energies to solve operating problems and ensure continuous improvement ( H a l l 1987).
F o r a successful implem entation of SPSI, it is necessary to have active involvement o f workers at all levels - from factory floor to m iddle m anagem ent. In addition to being involved with the m anufacturing process, workers m ust also become involved with each oth er’s responsibilities. As shown in Fig. 5, this would require the following:
Fig. 5. W orker Involvement ( A g r a w a l , M e h r a , S i e g e l 1998)
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Česlovas Christauskas, Alfreda Sapkauskiene
SY STEM ZAR ZĄ D ZA N IA K O SZTA M I: PO M IA R DOKONAŃ (Streszczenie)
Obecne standardy działalności produkcyjnej na Zachodzie nie są zbyt wysokie i sporo jest do zrobienia w zakresie popraw y zdolności d o generowania wartości dodanej i wyeliminowania niegospodarności. System zarządzania kosztami wiąże się z koniecznością zaangażow ania kadry kierowniczej najwyższego szczebla i wszystkich innych pracow ników o raz w prow adzenia systemu ciągłego doskonalenia, który pomoże usprawnić działania tw orzące now ą w artość i zredukować działania nie tworzące nowej wartości. M ożna zacząć od stosow ania rachunku kosztów działań (ABC), ale kompleksowy system obejmuje rów nież A BM , kompleksowe zarządzania jakością (TQM ), J(T (Just-in-tim e) oraz doskonalenie procesu. T aki system pom oże firmie sprostać światowej konkurencji obecnie i w przyszłości.
Przedsiębiorstwo przyszłości będzie zmuszone wykorzystywać wszelkie zasoby swej energii twórczej, ale trudno sobie wyobrazić, jak jeden rodzaj m ierników (np. wielkości wyrażone w pieniądzu) może odzwierciedlić te wszystkie aspekty, chociaż z pew nością tradycyjne wskaźniki, takie jak rentowność inwestycji (ROI), będą nadal stosowane.
Česlovas Christauskas, Alfreda Sapkauskienc
k aSt i j VALDYM O SISTEM A: V EIK LO S (VKRTINIM AS (Santrauka)
Kasty valdymas susideda iš dviejy dedam yjy: kašty apskaitos ir valdymo apskaitos. Kašty valdymo sistemos tikslas yra imonés pcly maksimizavimas - d ab ar ir ateityje. Siekiant šio tikslo, imoné turi atpažinti ir iveikti savo konkurentus ne tik šiandien, bet tobuléti ir ateityje. Todél jy sukurta kašty valdymo sistema turi skatinti imonę siekli dviejy pagrindiniy dalyky: globalinés konkurencijos ir nuolatinio tobuléjimo. K ašty valdymo sistema pareikalauja pastangy iš aukščiausio lygio vadovy, itraukia visy lygiy d arb u o to ju s ir n uolat save to b u lin an ti personalą, kas padeda tobulinti veikas pridedančias vertę ir mažina nepridedančias vcrtés veikas. Sią sistemą galétume pradéti veiky kašty apskaita (ABC), tačiau pilna sistem a taip p a t apim a veikomis grist ą valdymą, visuotin? kokybę, Ju st-in -lim e sistemą ir veiky tobulinim ą.
