ACCA - P5 Study text - Emile Woolf INT

Подождите немного. Документ загружается.

Chapter 17: Alternative views of performance measurement

- expanding the business too quickly without the cash resources/capital to

finance the expansion: this is ‘overtrading’ (15 marks)

- excessive borrowing from banks and high gearing (15 marks)

- ‘the big project’: undertaking a large and risky project, which subsequently

fails (15 marks)

Argenti suggested that a satisfactory score for mistakes made is 15.

 Symptoms of failure. Symptoms are evidence of a position that is getting worse,

but they are not the actual cause of the company’s problems. Symptoms include:

- financial ratios getting worse, normally in the two years leading up to failure

(4 marks)

- creative accounting: the use of ‘window dressing’ in the financial statements,

to make the financial position appear better than it really is (4 marks)

- non-financial signs, such as frozen salaries for management, postponements of

necessary capital expenditure, falling market share, increasing rate of staff

turnover (3 marks)

- ‘terminal signs’ just before failure occurs: these are both financial and non-

financial indicators showing even a casual observer that the company will

soon fail (1 mark).

The overall ‘pass mark’ is an A score of 15 or less. Companies with a higher score

should be concerned for their future and should consider measures that may be

necessary to prevent failure in the future.

Other symptoms of failure

There is a wide range of non-financial as well as financial factors that could be an

indicator of risk of financial failure. These may be grouped into:

 Company-specific factors, such as poor management, reliance on a single

customer or a small number of customers or customers concentrated in a specific

industry or region, reliance on a single supplier, the level of diversification of the

business, or a qualified audit report

 General characteristics, such as the nature of the industry in which the company

operates

 Environmental factors, such as the condition of the economy and the business

cycle, and the availability of credit.

It has also been suggested that the fundamental reasons for failure may be

explained as:

 Poor business planning. ‘If you fail to plan, you plan to fail.’ Many businesses

fail because they do not have a clear and well-developed business plan, so that

they know what they are ding and trying to achieve.

 Poor financial planning. The main problems are poor cash flow planning and,

in the case of new and small companies, starting out with insufficient capital.

 Poor marketing. Companies that fail are often guilty of failing to promote

themselves and their products, and ignoring the competition. In a competitive

market, only those that compete successfully will survive.

Paper P5: Advanced performance management

406 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

 Poor management. The owners of small businesses in particular often fail to

recognise their own weaknesses and do not look for help Management may also

lack the experience and skills to make their company a success.

4.6 Using failure prediction models to prevent corporate failure

Corporate failure prediction models might be used ‘after the event’ to explain why

companies failed. However, there is no practical value in analysing the problem

after it is too late and corporate failure has already happened.

The value of corporate failure prediction models, if there is any at all, must lie in

using a model to identify whether a particular company is at risk of failure, and if

so:

 how serious the risk is: the size of the risk can be judged according to the value

of the Z score

 what are the main causes of the problem.

Z score models can be criticised because they identify symptoms of the problem, but

not the causes. ‘A score’ models can be criticised because they rely on subjective

judgements of qualitative factors.

A company might also be unaware that it is at risk of failure, and so might not

consider hiring a firm of specialist consultants to analyse their position using a failure

prediction model.

4.7 Other indicators of failure

It does not require the use of a corporate failure prediction model to identify

businesses at risk of failure. In the P5 examination, you may be required to discuss

the risk of failure for a company whose performance you are analysing. There will

often be more than one indicator of potential failure.

The following measures of performance, taken together, may indicate that a

business is at risk of failure.

 Declining sales and loss of market share. A company may be in a market or

industry that is in decline, so that total sales in the market are failing. In

addition, a company may be losing market share to its competitors. A falling

market share in a declining market could be a strong sign of imminent failure.

 Profitability. Low and declining profits – or losses – may indicate that a

business has a limited future, unless it can turn the position around and restore

profitability to an acceptable level.

 Cash flow. A company can often remain in business when it is unprofitable, as

long as it has sufficient liquidity (cash flow or access to cash). Evidence of

financial collapse may be provided by a worsening cash position, with a bank

overdraft near the limit agreed with the bank, or small amounts of cash and

significant loans due for repayment in the near future

 Lack of innovation. In competitive markets it is often essential for companies to

continue to innovate and develop new products. Many products have a limited

Chapter 17: Alternative views of performance measurement

‘life cycle’ and need to be replaced or refreshed regularly. A lack of innovation –

i.e. a product range that has not changed for many years – could be an indicator

of eventual collapse of the business as customer demand declines over time.

 Age of non-current assets. Viable businesses usually have a policy of regular

replacement and updating of non-current assets, particularly plant, machinery

and equipment. If a company has ‘old’ assets that it does not replace consistently

and regularly, this could be an indication that it does not have the resources to

reinvest in the business. Without reinvestment, a business will eventually

decline.

 Lack of adequate internal controls. A sound system of internal control is

needed to manage the risk of failures in financial, operational and compliance

systems. Weak controls increase the probability of fraud or error, with resulting

losses. When controls are not working effectively, possibly because they are

ignored, a company is unlikely to have the ability to succeed long-term.

Eventually, something serious could easily ‘go wrong’.

 Loss of key employees. When a company is declining and becoming less

successful, it is often the ‘best’ employees who identify the problems first. There

could be a high rate of loss of experienced and important personnel, leaving to

take a job with a more successful rival.

4.8 Avoiding failure

When a company is seen to be at risk of failure, measures should be taken to reduce

the risk. The measures that are needed may be apparent from the indicators of

failure. A number of writers have put forward suggestions about what should be

done to avoid failure. For example, Ross and Kami (1973), in an article on ‘why the

mighty fall’, recommended Ten Commandments which should not be broken.

Breaking any of the following commandments could result in corporate failure:

1 You must have a strategy.

2 You must have controls.

3 The board of directors must participate.

4 You must avoid a system of ‘one man rule’.

5 There must be management in depth.

6 You must keep yourself informed of change, and react to it.

7 The customer is king.

8 Do not mis-use computers.

9 Do not manipulate your accounts.

10 Organise to meet the needs of your employees.

Paper P5: Advanced performance management

408 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Paper P5

Advanced performance management

CHAPTER

Developments in management

accounting and performance

management

Contents

1 Management accountants as ‘change agents’:

Burns and Scapens

2 Just-in-time (JIT)

3 Quality management and quality costs

4 Target costing and Kaizen costing

5 Environmental management accounting

6 Six Sigma

7 Performance prism

Paper P5: Advanced performance management

410 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Management accountants as ‘change agents’: Burns and Scapens

 Resistance to change in management accounting

 Management accountants as agents of change

1 Management accountants as ‘change agents’: Burns

and Scapens

This chapter describes a variety of developments in management accounting and

performance management that are identified in the Study Guide for the examination

syllabus.

1.1 Resistance to change in management accounting

Burns and Scapens (Conceptualising Management Accounting Change, 2000) have

carried out research into resistance to change within organisations generally, and

more particularly within management accounting practices. In many organisations,

management accountants have been reluctant to adopt new techniques and

methods.

Resistance to change has three separate causes.

 There may be formal and clearly-expressed resistance to change, due to a

competing interest.

 Resistance to change might be caused by an inability to cope with the change.

 Resistance to change might also be caused by a ‘mental allegiance’ to established

ways of thinking, and existing routines and institutions.

The arguments of Burns and Scapens are based on ‘institutional theory’. Institutions

are ways of thinking and acting that make it difficult for individuals to consider

change and the possibility that change might bring improvements. There are both

formal and informal institutions.

 Formal institutions are settled patterns of thought and actions. These are

expressed in established formal rules and procedures.

 Informal institutions are actions that people take because ‘things have always

been done this way.’

Example

The directors of a company wanted to introduce an Enterprise Resource Planning

(ERP) system into the company, and instructed their key managers, including senior

accountants, that the system had to be introduced. The managers resisted the

implementation of the new system, and through their control over resources and

systems were successful in making the project fail. The ERP system was abandoned.

Chapter 18: Developments in management accounting and performance management

Changes in routines and institutions can happen, but there will be much less

resistance to change when the change can be accommodated within existing ways of

thinking.

Burns and Scapens argue that this is the reason why change in management

accounting practices is often very slow. Existing management accounting systems

are both formal and informal institutions that create resistance to change.

1.2 Management accountants as agents of change

Burns and Scapens argue, however, management accountants should be in a

position to encourage change and act as ‘change agents’. This requires a different

outlook and attitude.

 Management accountants should recognise that most companies and other

entities must accept change as inevitable. In order to survive and succeed in a

changing environment, it is necessary to recognise changes when they occur.

 Entities must change internally in order to respond to the changes in the

business environment.

 To help entities to change, management must be provided with relevant

information.

 Management accounting systems must therefore respond to change, and adapt

so that they provide the required (relevant) information.

Paper P5: Advanced performance management

412 Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides © EWP

Just-in-time (JIT)

 JIT production and JIT purchasing

 Practical implications of JIT

 Eliminating waste

 JIT techniques

 JIT in service operations

 Problems with JIT

 Information requirements and JIT

2 Just-in-time (JIT)

JIT originated in Japan in the 1970s. It is based on concepts that have close

similarities to continuous improvement (‘kaizen’), lean manufacturing and total

quality management (TQM).

2.1 JIT production and JIT purchasing

Just-in-time is a concept that can be applied to both manufacturing and service

operations, although it is usually associated with manufacturing.

The principle of JIT is that producing items for inventory is wasteful, because

inventory adds no value, and holding inventory is therefore an expense for which

there is no benefit.

If there is no immediate demand for output from any part of the system, the

production system should not produce output for holding as inventory. There is no

value in achieving higher volumes of output if the extra output goes into inventory

that has no immediate use.

It follows that in an ideal production system:

 there should be no inventory of finished goods: items should be produced just in

time to meet customer orders, and not before (just in time production)

 there should be no inventories of purchased materials and components:

purchases should be delivered by external suppliers just in time for when they

are needed in production (just in time purchasing).

JIT has also been called ‘stockless production’ and ‘fast throughput manufacturing’.

 ‘Just-in-time production is a production system which is driven by demand for

finished products, whereby each component on a production line is produced

only when needed for the next stage.

 Just-in-time purchasing is a purchasing system in which material purchases are

contracted so that the receipt and usage of the material, to the maximum extent

possible, coincide’ (CIMA Official Terminology, 2005 ed.).

Chapter 18: Developments in management accounting and performance management

2.2 Practical implications of JIT

It is important that items should be available when required. Finished goods must

be available when customers order them, and raw materials and components must

be supplied when they are needed for production.

In practice, this means that:

 Production times must be very fast. If there is no inventory of finished goods,

production has to be fast in order to meet new customer orders quickly.

 Production must be reliable, and there must be no hold-ups, stoppages or

bottlenecks. Poor quality production, leading to rejected items and scrap, is

unacceptable.

 Deliveries from suppliers must be reliable: suppliers must deliver quickly and

purchased materials and components must be of a high quality (so that there

will be no scrapped items or rejected items in production).

JIT therefore depends for its success on highly efficient and high-quality production,

and efficient and reliable supply arrangements with key suppliers. For successful

JIT purchasing, there must be an excellent relationship with key suppliers.

Collaborative long-term relationships should be established with major suppliers,

and purchasing should not be based on selecting the lowest price offered by

competing suppliers.

Flexibility in production. The production system must be flexible, so that it can be

switched immediately to making products that are ordered by customers, as soon as

the order is received. Batch sizes should be small (to avoid inventory), and the ideal

batch size is 1. A flexible production system requires a skilled and flexible work

force.

Lower costs. Another aim of JIT is to reduce costs. Costs can be reduced by:

 eliminating waste in production

 speeding up production times and

 reducing inventory levels to zero.

2.3 Eliminating waste

Waste is any activity that does not add value. In the Toyota car manufacturing

system in Japan, where JIT originated, seven causes of waste were identified.

 Over-production. Producing items is wasteful if the items go into inventory or

are held in production as part-finished work in progress.

 Waiting time. Time spent waiting for work is wasteful, and creates inefficiency

in both labour and machine usage.

 Transport (movement of materials). It costs money and uses up time to move

items from one place to another, but moving items adds no value. The layout of

the factory floor should therefore be designed in a way that minimises

movement of materials from one stage in production to the next.

 Waste in the process. Waste in the process results in lost materials.

Paper P5: Advanced performance management

 Inventory. As explained already, holding inventory is wasteful. It does not add

value but it creates a cost and ties up cash. The aim is to reduce inventory to

zero.

 Motion. When individuals move from one place to another in their work, they

might not be adding value. The aim should be to simplify work procedures by

eliminating unnecessary movements by people.

 Defective goods are ‘quality waste’.

2.4 JIT techniques

Various techniques and methods are associated with JIT:

 Work flow and the layout of the factory floor. The layout of the factory floor

should be designed in a way that minimises waste of transportation and waste

of motion. One way of doing this is to organise the work around ‘dedicated

work cells’. A work cell is a small group of employees with all the equipment

and skills necessary to produce a finished item.

 Reducing setup time. ‘Setup’ activities are the activities that have to be carried

out to get ready for the next job, for example tidying up the work place and

cleaning machinery, and getting the materials for the next job. Setup activities do

not add value. The aim should therefore be to reduce setup times.

 Total productive maintenance. (TPM). The aim of Total Productive

Maintenance is to prevent breakdowns in equipment that cause an unscheduled

hold-up in production, by improving maintenance systems.

 ‘Kanban’ systems and visibility in the work place. To improve production

flow, and avoid production of items that are not yet wanted, there should be

clear signs in the workplace that indicate when more production is required. In a

JIT system, ‘kanban’ cards might be used as a signalling system. These are

signals – similar to flags – that send messages to other parts of the production

system.

For example, a card can be used by one stage in the production process to signal

to the previous stage in production that more output is now required. Details of

the output required can be written on the card. Kanban cards can therefore be

used to authorise a movement of materials within the production system.

Without the authorisation, there should be no movement.

2.5 JIT in service operations

JIT can be applied to service operations. In particular, JIT regards queuing as

wasteful, because it wastes the time of the individuals waiting in the queue.

It might also be expensive to provide a system for holding customers in a queue

(such as a system for making people wait in a telephone answering system).

2.6 Problems with JIT

There might be several problems with using JIT in practice.

 Zero inventories cannot be achieved in some industries, where customer

demand cannot be predicted with certainty and the production cycle is quite

ACCA - P5 Study text - Emile Woolf INT - 2010

Подождите немного. Документ загружается.