Solution manual cost accounting 8th by kinney chapter 19

Terminology Business process reengineering BPR: a method of examining processes to identify and then eliminate, reduce, or replace functions and processes that add little customer value

Learning Objectives

After reading and studying Chapter 19, you should be able to answer the following questions:

1 How do business process reengineering initiatives cause radical changes in the way firms

execute processes?

2 How are competitive forces driving decisions to downsize and restructure operations?

3 In what ways, and why, are operations of many firms becoming more diverse? How does the

increasing diversity affect the roles of the firms’ accounting systems?

4 Why are firms adopting enterprise resource planning systems, and how are such systems used?

5 What are strategic alliances, what forms do they take, and why do firms participate in them?

6 What are the characteristics of open-book management, and why does its adoption require

changes in accounting methods and practices?

7 What are the three generic approaches that firms can take in controlling environmental costs?

EMERGING MANAGEMENT PRACTICES CHAPTER

19

Terminology Business process reengineering (BPR): a method of examining processes to identify and then

eliminate, reduce, or replace functions and processes that add little customer value to products or

services

Data mining: a form of analysis in which statistical techniques are used to uncover answers to important

questions about business operations

Downsizing: any management action that reduces employment upon restructuring operations in

response to competitive pressures

Enterprise resource planning (ERP) system: a packaged software program that allows companies to

(1) have a single, comprehensive, enterprise-wide database; (2) make quicker decisions based on real-time information and facts; (3) improve decision making quality; (4) reconcile and optimize conflicting organizational goals; (5) standardize business processes; (6) improve procedures that protect assets and prevent falsification of accounting records; and (7) enhance the audit planning and execution process

Open-book management: a philosophy about increasing a firm’s performance by involving all workers

and by ensuring that they have access to the operational and financial information necessary to achieve performance improvements

Organizational memory: the aggregation of data, facts, experiences, and lessons learned that is

important to an organization’s existence

Reality mining: the collection and analysis of technology-based data as it relates to social behavior Strategic alliance: an agreement between two or more firms with complementary core competencies to

contribute jointly to the supply chain

Lecture Outline

LO.1: How do business process reengineering initiatives cause radical changes in the way firms execute processes?

A Introduction

1 Firms are presently decentralizing information, authority, and responsibility to make decisions

2 Unfortunately, not all employees are adequately trained to understand financial information so innovative approaches to developing information skills are needed

3 This chapter discusses innovation in management practices and the impact of innovation on accounting

a The “age of change” is an apt description for the current environment

b Although, some changes have been driven by the fast pace of evolution in management practices and techniques, many changes have been driven by the even faster evolution of technology

c These evolving management methods unite around a theme of focusing organizational resources on customers and maximizing the value the firm delivers to its customers

B The Changing Workplace

1 The forces of global competition and technological advancements have caused profound

changes in business organizations

2 To survive, managers must develop ways to achieve the competitive changes needed in their organizations Change can be achieved immediately or gradually

3 Some overriding principles that managers should follow when implementing changes are

presented in text Exhibit 19–1

4 Business process reengineering is one tool with which to achieve large, quick gains in

effectiveness or efficiency through redesigning the execution of specific business functions

C Business Process Reengineering

1 Business process reengineering (BPR) is a method of examining processes to identify, and

then eliminate, reduce, or replace functions and processes that add little customer value to products or services

a The focus of BPR is on discrete initiatives to improve specific processes

i Examples of processes include handling or storing purchased materials and components, issuing checks to pay labor and other production expenses, wrapping finished products for shipment to customers, recording journal entries, and developing an organizational strategic plan

b BPR is designed to bring radical changes to an organization’s operations and is often

associated with employee layoffs, outsourcing initiatives, and technology acquisition

2 Three major business trends are promoting the increased use of BPR in the 21st century:

a the advancement of technology;

b the pursuit of increased quality; and

c the increase in price competition caused by globalization

3 To successfully compete on the basis of price, firms must identify ways to become more efficient and reduce costs

4 Because BPR is a methodical way to revolutionize business practices, formal steps can be defined; however, creativity is an important element of the methodology

5 Text Exhibit 19-2 provides the steps for implementing BPR

6 Accountants are important participants in the BPR process because they can provide baseline performance measurements, help determine BPR objectives, and measure the achieved

performance of the redesigned process

7 The following keys to a successful BPR implementation highlight the importance of involving customers, suppliers, and top-level managers in the process:

a Set “stretch” goals for the reengineered process, expressing them in the most appropriate performance measure, such as financial, time, or defective production;

b Make certain that the reengineering efforts have a “champion” and are supported by top management;

c To the extent possible, involve in the reengineering project all constituents of the value chain, especially customers and suppliers;

d Assign both the authority and responsibility for the project to a single person; and

e Use a pilot project to identify problems that might arise during full implementation

8 Involvement of customers ensures that their perspective drives the process redesign and the involvement of top management signals the project’s importance to organizational success

9 The focus of BPR is on improvement of organizational operations and so whether the issue is quality, cost, or customer value, BPR can help effect organizational improvements and change

10 BPR’s radical change is often implemented via downsizing and restructuring, which can have a profound impact on employees

LO.2: How are competitive forces driving decisions to downsize and restructure operations?

D Downsizing, Layoffs, and Restructuring

1 Global competition and survival requires firms to improve product quality continually while

maintaining competitive prices

2 Many methods discussed in the chapter, including the use of automated technology to replace manual labor or equipment run by humans, have proven useful in improving process efficiency and effectiveness as well as product quality

3 One impact of such improvements is the creation of excess personnel as fewer and fewer

workers are required to achieve a given level of output

4 Downsizing is any management action that reduces employment upon restructuring operations

in response to competitive pressures

5 Firms can find that layoffs have depleted their in-house talent pool

a The collective workforce knowledge or organizational memory may have been reduced to the point that the ability to solve problems creatively and generate innovative ideas for growth has been greatly diminished

i Organizational memory refers to the aggregation of data, facts, experiences, and

lessons learned that are important to an organization’s existence

b After downsizing, many firms have found positions that once served as feeder pools for future top management talent have been eliminated

6 Successive rounds of layoffs diminish worker morale, cause worker trust in managers to wane, and lead to decreases in communication between workers and managers

a Workers often fear that sharing information could provide insights to management about how

to further increase productivity which in turn would result in the elimination of even more of the workforce

7 Downsizing can destroy a corporate culture that embraced lifetime employment as a key factor in attracting new employees or that was perceived as nurturing by employees

8 Downsizing is an accounting issue because of its implications for financial reporting and its role in cost management The financial consequences of downsizing can be significant

a When restructuring and downsizing occur in the same year, the firm often reports, in that year, large one-time losses caused by sales of unprofitable assets and severance costs connected with employee layoffs

9 Before recommending downsizing to improve organizational efficiency, accountants should examine the likely impacts on customer service, employee morale and loyalty, and future growth opportunities

10 Text Exhibit 19-3 demonstrates that strategic decisions affect the manner in which inputs, such

as labor, technology, purchased material, and services are converted into outputs for customers

11 Financial analysis of the downsizing decision is complex as it relies on comparing cost savings from reduced labor costs realized in the future to the current outlay for restructuring and acquiring additional technology

LO.3: In what ways, and why, are operations of many firms becoming more diverse? How does the increasing diversity affect the roles of the firms’ accounting systems?

E Workforce Diversity

1 With globalization of manufacturing and other operations, companies find that their employees have very divergent religions, races, values, work habits, cultures, political ideologies, and

education levels

2 Corporate policies and information systems must adapt to the changing workforce and greater diversity of operations, which often results in the accounting function having a larger role in managing operations

3 Accounting concepts, tools, and measurements can be the medium through which people of diverse languages and cultures communicate

a Accounting provides an ideal international technical language because it is a basic

application of another universal language—mathematics

4 Within the United States, there is a trend toward increasing workplace diversity driven partly by legal requirements and business initiatives to increase opportunities for minorities

5 Text Exhibit 19-4 presents the results of a survey seeking to identify why self-interested firms

seek a diverse group of employees

LO.4: Why are firms adopting enterprise resource planning systems, and how are such systems used?

F Enterprise Resource Planning Systems (ERP)

1 Firms commonly use networked personal computers and minicomputers to handle the information management requirements of specific business functions such as finance, marketing, and

manufacturing

a The increased use of personal computers and local-area networks has resulted in the

decentralization of information

b As data management and storage have become more decentralized, firms have often lost the ability to integrate information across functions and to access quickly information that spans multiple functions

c Text Exhibit 19-5 shows how internal processes and functions are distributed across the

supply chain and the types of information that may reside in isolated databases

2 Enterprise resource planning (ERP) systems are packaged software programs that allow

companies to (1) have a single, comprehensive, enterprise-wide database; (2) make quicker decisions based on real-time information and facts; (3) improve decision making quality; (4)

reconcile and optimize conflicting organizational goals; (5) standardize business processes; (6) improve procedures that protect assets and prevent falsification of accounting records; and (7) enhance the audit planning and execution process

3 Implementing an ERP system should help a company provide its customers the highest-quality products and best possible service

4 Text Exhibit 19-6 illustrates an integrated centralized information system In theory, the ERP

system should link the customer end of the supply chain with all functional areas responsible for the production and delivery of a product or service

5 The benefits of an ERP package to a business are in reduced overheads, improved customer service and better quality, and more timely management information Reduced overheads should

be achieved through the elimination of duplication of effort in duplicate keying and reconciliation

of independent systems

6 ERP’s key concept is a central repository for all organizational data so that they are accessible in real time by and in an appropriate format for a decision maker

a Text Exhibit 19-7 provides a list of typical modules included in an ERP system

b Text Exhibit 19-8 presents a survey of reasons for adopting ERP and perceived benefits

from adoption

7 Installation of an ERP system impacts the finance function in three significant ways:

a First, financial and system specialists become responsible for selecting and installing the software;

b Second, financial specialists will be responsible for analyzing the data repository to support management decisions;

i Data analysis often involves “drilling down” from aggregate data (such as total sales) to detailed data (such as sales by store) to identify market opportunities and to better manage costs;

ii Analysis may also involve data mining, which uses statistical techniques to uncover

answers to important questions about business operations

 Data mining can uncover quality problems, study customer retention, determine which promotions generate the greatest sales impact, and identify cost drivers

 The modern evolution of data mining is reality mining Reality mining is the

collection and analysis of technology-based data as it relates to social behavior (e.g., tracking a user’s internet browsing activities)

c Third, ERP installation places a burden on financial specialists to maintain the integrity of the data depository

i Fulfilling this obligation requires accountants to monitor the ERP modules and to be confident that the system successfully converts raw data into the standardized format required for the main depository

ii Financial specialists are also accountable for integrating externally purchased data (such

as industry sales data) with internally generated data

d As ERP systems become increasingly integrated into Internet-based technology, customers will have ease of access to a worldwide marketplace

8 In turn, customer-driven competition will cause firms to seek continually innovative ways to attract potential customers, such as through strategic efforts that combine the talents and capabilities of two or more firms

LO.5: What are strategic alliances, what forms do they take, and why do firms participate in them?

G Strategic Alliances

1 While the traditional supply chain structure has no fuzzy boundaries that create an inability to determine where one firm ends its contribution to the supply chain and another begins its

contribution, in some cases companies have incentives to develop interorganizational

agreements that go beyond normal supplier/customer arrangements

2 A strategic alliance is an agreement, involving two or more firms with complementary core

competencies, to contribute jointly to the supply chain

3 Strategic alliances can take many forms including joint ventures, equity investment, licensing, joint R&D arrangements, technology swaps, and exclusive and buyer/seller agreements

a A strategic alliance differs from the usual interactions among independent firms in that there

is a joint output and the rewards of the joint effort are split among the allied firms

b In a typical strategic alliance, a new entity is created

c Beyond simply contributing cash, many new ventures require inputs of human capital,

technology, access to distribution channels, patents, and supply contracts

4 An overriding concern in designing a strategic alliance is aligning the interests of the parent organizations with the new entity

5 Establishing strategic alliances involves a series of complex decisions that are based on inputs from many specialists

6 The process of managing an alliance requires the use of virtually every tool and concept

discussed in the text, including cost management systems, product costing systems, relevant costing, cost allocation, inventory management, decision making, and performance evaluation

LO.6: What are the characteristics of open-book management, and why does its adoption require changes in accounting methods and practices?

H Open-Book Management

1 General

a Open-book management is a philosophy about increasing a firm’s performance by involving

all workers and by ensuring that all workers have access to the operational and financial information necessary to achieve performance improvements

b Firms practicing open-book management typically disclose detailed financial information to all employees, train them to interpret and use the information, empower them to make decisions, and tie a portion of their pay to the company’s bottom line

i See text Exhibit 19-9 for ten common principles of open-book management

ii Application of this philosophy is appropriate in decentralized organizations that have empowered employees to make decisions

c Merely opening the financial records to a firm’s employees will not necessarily solve any problems or improve performance; the key to understanding the records is training

d If financial information is to be the basis of employee decision making, the information must

be structured with the level of sophistication of the decision maker in mind

2 Using Games to Teach Open-Book Management

a Games can be used to teach financially unsophisticated employees how to understand and use accounting and financial information

b Games make learning both fun and competitive and can motivate employees to understand complex financial practices as illustrated by the game described in this section of the text

i Data for the game is provided in text Exhibit 19–10

c To exploit the financial information they are given, workers should be trained in ways to improve profits

i The “game” of trying to increase profits serves as motivation for workers to learn about cost and operational management methods

ii Relating training to the game allows workers to see the relevance of training so that they will seek training to help them understand financial information and to identify approaches that can be used to improve results

3 Motivating Employees

a The obvious way to motivate workers to use the game information to improve profits is to link their compensation to profits

i Open-book management works only if it is accompanied by adequate incentives

b Some companies offer performance-based bonuses to motivate employees, some offer employee stock ownership plans (ESOPs), and some offer both

c Pay and performance links can also be based on non-financial measures such as on-time delivery rates, defect rates, output per labor hour, and other measures to make workers aware of how their inputs and outputs affect other departments and financial outcomes

i All critical dimensions of performance including cost, quality, and investment

management can be captured in performance measurements

d As soon as workers have become accustomed to receiving financial and other information to manage their departments, more elaborate information systems can be developed as the sophistication of the information consumers (workers) evolves

4 Implementation Challenges

a Open-book management can be difficult to implement

i Characteristics of firms that are best suited to a successful implementation include small size, decentralized management, a history of employee empowerment, and the presence

of trust between employees and managers

b One significant obstacle to overcome in most organizations is a history of carefully guarding financial information

i Even in publicly owned organizations that are required to release financial information, top managers have historically limited access of employees to financial data that the top managers regard as sensitive

 Accountants have historically viewed themselves as the custodians of this sensitive information rather than the conveyors

 To successfully implement open-book management, accountants must develop an attitude about information sharing that is as fervent as traditional attitudes of guarding information

c Accountants must develop ways to convey accounting information so that unsophisticated users will understand it Furthermore, by teaching users to have a better understanding of financial data, accountants help facilitate better organizational decision making

d The information system must be designed to be sensitive to the user’s financial

sophistication

e Similarly, performance measures that employees can understand must be devised

i The measures must capture the actual performance relative to the objectives of

organizational segments and the organization as a whole

ii The primary principle of measurement is to measure what is important

f Finally, because principles of open-book management include involving all employees and evaluating and rewarding their performance, measures that can be integrated across

segments and functional areas must be devised