Management Accounting Assesssment - Coursework Example

?Management Accounting Assessment Table of Contents Table of Contents 2 Introduction 3 About Corus 4 Benefit of continuous improvement in Corus 5 What is Continuous Improvement- 5 Parties involved in CI- 5 Ways to bring about an improvement- 5 Benefits of CI- 8 Traditional Costing System (TCS) v/s Activity Based Costing System (ABC) 9 Conclusion 12 Reference 13 Bibliography 14 Introduction With time, the corporate world has undergone major transformations and thus to retain the competitiveness in the industry, companies are introducing many changes. These changes are in the form of corporate strategy, business strategy and even in day to day operations. Before introducing the change, companies conduct in-depth analysis of its strengths as well as weaknesses. They also evaluate the external environment (political, economic, social, technical, legal and environmental) to identify external threats as well as opportunities. On the basis of such information, management formulates the future strategy to be followed to retain its competitiveness in the industry. In the contemporary environment, organisations are paying special attention to two main factors. The first one is associated with incorporation of continuous improvement in the operations of the organisation and the second one is monitoring the cost with help of an advanced and flexible accounting system. In this given project, both these factors will be discussed, drawing examples from Corus. At the beginning, a brief introduction about Corus will be given and later on issues associated with continues improvement and flexible costing system will be discussed. Finally, a conclusion will be drawn to summarise the information gathered in the project. About Corus Corus is the second largest steel producer in Europe with its main operations in UK and Netherlands. It is a subsidiary of Tata Steel, one among the world’s top ten steel manufacturers. In 2007, Tata Steel took over Corus as a part of its diversification strategy. The combined production of crude steel by Tata Steel and Corus is almost 28 million tonnes and they employ more than 80,000 employees across four continents. Corus supplies steel and related services to automobile, engineering, construction, packaging and other industries located at different parts of the world (Corus-a, 2010). The company pays special attention towards the changing needs of its international customer base. Tata is an Indian conglomerate that operates in chemical, telecommunication, consumers goods, automotive and leisure industry. The Corus exclusively consumes 6.5 million tonnes of iron ore and 2 million tonnes of coal each year to produce 4.3 million tonnes of steels. Its principle production site is at Scunthorpe that alone employees 5,500 people who work in 2,000 acres of area. The steel produced by Corus is used for production of rail, steel products, steel rods and steel plates. The production units of Corus are highly conscious about sustainable development; hence the company is making investments to minimise emission of carbon and other greenhouse gases. With time, demand for steel in developing nations like China and India will grow further. On the other hand, international organisations are constantly increasing pressure on the steel producers to minimise the negative impact on the environment. Therefore, while formulating the future strategy for the Corus, its management is likely to pay special attention to these vital issues. Benefit of continuous improvement in Corus What is Continuous Improvement- The term ‘continuous improvement’ is derived from the Japanese word “Kaizen” which means making changes that bring about betterment in the overall processes in an organisation. This comprises of IT, engineering, financial, commercial, customer services and manufacturing related processes. It essentially involves making small changes in the process instead of making big changes intermittently. This calls for a close supervision of the overall business processes and exercising a tight control. Parties involved in CI- The management is entrusted with the task of continuous improvement. Under the management, the process of improvement runs through the entire organisation. In short, all the employees are responsible and play an important role in bringing about the necessary improvements. A unified effort on the part of all the employees is required to chalk out the steps required for improving the working practices. Ways to bring about an improvement- By conducting team meetings, the organisation can focus on meeting the needs of the customers. The wall charts and flow charts help in assessing the requisite resources and in determining the accountability of each process. Even though this activity may not create any additional value, it creates an opportunity for minimising wastage of scarce resources. The key areas of the business where it can be exercised include- Inventory- The storage of excess amount of inventory is an area that requires management attention. Motion- Excessive travelling or movement of the people. Waiting Times- The products being tied up in the processes for too long, resulting in prolonged waiting periods. Defects- Any defective production requires rework or it has to be scrapped leading to monetary losses. The production processes that help in minimising any form of wastage of precious resources is termed as ‘lean production’. The main aim of this process is to make an optimal utilisation of the available resources such as materials, space or time resulting in various forms of business efficiencies. Corus Construction & Industrial (CCI) is continuously devising ways to bring about waste reduction in the “plate manufacturing process”. The various stages of the production process in the company are planned very carefully. This means that a proper plan is in place for the activities ranging from the supply of raw material to finished steel plate. The various elements in the production chain are properly scheduled so as to avoid bottlenecks. This helps in taking care of the customer demand. Moreover, a careful planning of the various elements ensures that issues relating to ‘waiting times’ do not occur. By this way, the entire chain of production can be carried out smoothly. For each of the processes, a specified amount of time is designed referred to as “takt time” to control the product level at every stage. This helps in avoiding any delay or overload while keeping the quality and output within the desirable limit. The success of the improvement process is based on team effort. In Scunthorpe, the manager in charge of the CI process helps in co-ordinating the process at all the levels. Besides this, the company arranges for training for its selected workforce referred as ‘CI Coaches’ involved in CI. A “vision improvement plan” spanning 5 years has been framed by the Scunthorpe plate mill that will facilitate the developing of a CI culture. All the employees in the organisation are expected to support and understand the plan. The company has also conducted workshops to highlight the importance of the changes in ensuring competitiveness. The CI coaches have helped the employees in drawing maps for the various processes. This helps in establishing the links between various manufacturing processes and it also guides the flow of information. These maps provide information related to tonnage details, products, inspection points, rework cycles, delays, stocks and costs. Various rules linked to stock rotation and stock levels have been formulated. By stock rotation, it is ensured that one customer’s plates are not buried by the others and delayed in the process. The requisite quantity of slab steel is suppose to be “in front of the mill” by every Tuesday. By ensuring that the plates are rolled as per the plan, a proper schedule of the downstream processes like cutting, inspection and levelling can be achieved. With the maps, CCI has been able to improve the working environment and the smooth flow of the process. It has also successfully reduced unnecessary motion, processing and transport. With the small strides and the all-around participation of the employees, the on time product delivery of the company has enhanced from 70% to 92%. A new set of KPIs has been laid down by Corus. These focus on meeting the deadlines of the customer’s. This means that there is ‘no’ backlog of customer orders resulting in on-time delivery to the customers. Besides, the workers achieve the targets relating to ‘rolling steel plates’ within the allotted week. The company also monitors the operations with that of its rivals in the industry. This means a continuous review of all the activities with the aim of learning the best practice. Benefits of CI- Although a sufficient amount of resources has to be allocated in framing a CI program, the benefits derived from the same, show that it is worth the efforts. As is evident in the case of Corus, the company is reaping the benefits of its CI practices. Through the lean production process, the company has been able to reduce the wastage. The quality of the output has improved while the rework time has also been reduced considerably. Moreover, the timely delivery of the products also creates a good image in the eyes of the customers. This has helped in retaining the existing customer base and attracting more number of customers. An assessment of the KPIs shows that the company has been successful in achieving the set targets and completing the orders of the customers on a timely basis. The lead time has also been reduced. Traditional Costing System (TCS) v/s Activity Based Costing System (ABC) The history of traditional costing is quite old as it roots can be traced to the early human civilisation. With time, humans learned to trade and thus, it was quite essential to develop a system that can maintain scientific records of all the transition taking place. With time, the tradition accounting system came into existence and organisations started using it, not just to maintain the records but also to analyse the profit or loss incurred throughout the year. In 1900s, almost all the companies were following traditional costing system that uses a single cost pool for all the indirect costs incurred in the company. This system is effective when the company produces a single product but when the company produces large number of products, it becomes quite problematic to get in-depth information about cost incurred by each and every product. Again, the traditional system is not much suitable for the service industry. With growing complexity in the production process, it was necessary to modify this traditional production process (Horngren, 2008, p.150). It was found that to monitor the total optional cost, the management should have in-depth information regarding specific cost associated with each and every activity. As a result, the concept of activity based costing came into existence. This is a two step method where at first the total overhands incurring in the operational activity are accumulated as a single pool. Later on, overheads should be segregated on basis of different cost drives. (Bhattacharyya, 2005, p.353). Figure 1: TCS v/s ABCS (Source: Baker, 1998, p.3) As compared to traditional costing system, activity based costing system provides more flexibility in monitoring the cost. To introduce ABC system in the organisation, management has to follow some predetermined steps. These steps are as follows: 1. Identification of the functional area in the organisation. 2. Identification of the key activities in each of the functional area. 3. Allocation of common indirect cost to all the key functional areas. 4. Identification of the most suitable cost drive for allocation of indirect cost. 5. Finally, preparation of activity wise expenditure statement. (Palanivelu, 2007, p.238). The TCS assumes that the overhead costs increase in proportion to rise in the production volume. But there exist certain costs that cannot be expected to rise in proportion to the volume. This results in cost overruns. In contrast to TCS, Activity Based Costing (ABC) uses the activities for the allocation of costs (Khan & Jain, 2006, p.12.2). The traditional costing uses the concept of ‘unit based costing’ and is more suited in the case of manufacturing environments. The ABC method gives credence to the activities and its concepts can be used even outside the manufacturing environment. Traditional costing is suitable in the case of ‘one product’ whereas the concepts of ABC can be used even in the case of multiple product environments. The former is most suited for external reporting as the external users are more interested in the profitability of the product whereas ABC is used for the purpose of internal management (Quinnipiac University, n.d.). It helps in identification of the true cost of a product. Like allocation of machine overhead is allocated under ABC using the number of machine hours used by the product whereas the total machine overhead is divided on a unit cost basis in TCS. This distorts the true cost of a product. However reporting under the ABC process is suitable for facilitating decisions by the internal management. Under this costing process the costs are allocated on the basis of labour hours or machine hours. Therefore it helps in ascertaining the true cost of a product which often guides the management in making production related decisions. Conclusion A continuous improvement program is essential in order to ensure that all the available resources in an organisation are utilised efficiently. This is mainly aimed at ‘waste reduction’ and making improvisations so as to keep pace with the market innovations in order to meet the needs of the customers. The success of this program is based on team effort and requires the co-ordination of workers at all levels of the organisation. Reference Corus-a. (2010) ‘About Us’ (online) (cited) February 25, 2011). Available from http://www.corusconstruction.com/en/about_us/ Baker, J. J. (1998). Activity-based costing and activity-based management for health care US, Jones & Bartlett Learning. Bhattacharyya, A. K. (2005) Principles And Practice Of Cost Accounting 3Rd Ed. India, PHI Learning Pvt. Ltd. Horngren, C. T. (2008). Introduction to Management Accounting US, Pearson Education. Khan, Y.M. Jain, K.P. (2006). Management Accounting. Tata McGraw-Hill. Palanivelu, V. R. (2007). Accounting for Management US, Firewall Media. Quinnipiac University. (No Date). Traditional Cost vs. Activity Based Costing. The ABC 's of Activity Based Costing. (cited) February 25, 2011. Available from http://faculty.quinnipiac.edu/business/accounting/Quest/ABC/benefits.html Bibliography Baker, J.J. (1998). Activity-based costing and activity-based management for health care. Jones & Bartlett Learning. Forrest, E. (1996). Activity-based management: a comprehensive implementation guide. McGraw-Hill Professional. Scarlett, R. (2008). CIMA Official Learning System Management Accounting - Performance Evaluation. Elsevier. Read More