Economic Constraints on Management Accounting - Coursework Example

Economic constraints on management accounting Introduction Eliyahu M. Goldratt developed the theory of constraints (TOC) in the early 1980s, which is considered to be a systems-management philosophy. The basic premise of TOC is that the restrictions on performance for any system are being established by constraints. However, most firms only have a few basic constraints. Experts believe that managers need to focus on efficiently managing the ability and aptitudes of these constraints in order to develop the firm’s performance. TOC has varied applications in different settings within an organisation contrary to it was originally being used as a simple production-scheduling method (Atwater and Chakravorty, 1995). TOC confronts managers with various ideas and issues, which helps them to rethink some of their basic suppositions on how to attain the goals of their firms, on what needs to be considered as productive performance, and how to identify the actual reason of cost management. TOC centres on considering and controlling the constraints that might be coming in the way of organisation and its goals, and therefore emphasises on the need for maximising the throughput and earn more revenues through enhanced sales. As soon as the constraints are being identified, TOC lowers the resources that are non-constraining for the organisation, in order to cater to the core constraints being faced by the firm. This results in optimising the resources of the total system (Dettmer, 1997; Soren, Ahn and Schmitz, 2005). The requirement to augment new models in the information toolkit also enhances with the financial practitioners and firms that support TOC focus on asking questions and learning about various concern areas and garnering information that could address the issues in the best possible manner. TOC has become an important component of the information toolkit, which provides exclusive insights and centres on the various challenges faced to identify the services and products that helps in maximising the profitability of the firm and provide customer value-addition (Jones and Dugdale, 2005). The paper focuses on the various aspects of TOC methods that deal with logistics, scheduling and performance measurement. The paper explores the various aspects of TOC which may help organisations to implement TOC, especially in the field of management accounting. The discussions focus on the core ideas and give operations and finance professionals some rudimentary understanding about TOC and how it could be applied in an organisation by identifying the unique challenges. TOC and management accounting The financial professional plays an important role in the implementation of TOC within an organisation as management accounting centres to analyse, identify and report pivotal opportunities and events that may exist within an organisation. Management accounting therefore helps in serving as the fundamental for incorporating the different data sources that are available with the decision makers. It emphasises on the maintenance and development of important information related to management in a firm (Abdel-Maksoud, Dugdale and Luther, 2005). With regards to TOC, management accounting performs the role of providing economic estimates of inventory, throughput and operational expense; integrating and accumulating data and information from TOC, undertaking total quality management, and other such management models for ensuring uniformity in the reports; verifying the constraint that are being identified; providing estimates for capacity cost and supporting investment analysis with regards to additions to capacity; explaining the different theories that trigger distinction from other tactical or strategic analyses; working with managers in operations for identifying answers to ease constraints and their possible effect on the organisation; developing and sustaining the management system cost that is activity-based for complementing the data being given and needed by TOC; working for creating an inclusive information base for incremental patterns of cost and fundamental structures of cost for ensuring that the decisions related to TOC incorporation should not affect the semivariable and step-fixed costs within the firm; providing data regarding throughput and identifying the important constraint related to the decisions being taken; identifying the straight links that exist between operational and throughput expenses; reporting on the effect of constraints; and ensuring that the function of the finance division itself does not become a constraint (Noreen, Smith and Mackey, 1995; Coughlan and Darlington, 2003; Mehra, Inman and Tuitie, 2005). One of the important roles that in a TOC setting the finance division plays focuses on to develop the considerable information related to the cost structure that is being required for understanding the effect that changes and constraints in operations and step-fixed costs of a firm. With increase in step-fixed and fixed percentage costs within the entire cost structure of the organisation, it becomes imperative for understanding the time frame when the new costs would be incurred (Blackstone, 2001). Further, the resource cost, especially increment needs to be identified, together with understanding the process of designing the systems and processes that would reduce wasted or permanently idle resources. The finance professional therefore becomes the core person who would have the maximum knowledge to understand the appropriate principles related to incremental costs (Mabin and Davies, 2003). In order for TOC to operate in an effective manner, such cost principles are required to be known and assumed. Therefore, as in case of many organisations, the understanding of these costs comes under the ambit of the finance division for ensuring that the data collected is consistent, objective, as well as in a format that could be used easily with other data sources as well. However, this does not entail that TOC or other such management systems would have to give the traditional standard cost information. In fact, it befalls on the finance professionals to create the cost information in new formats for making it sure that such important data could be maintained and designed keeping in mind the requirements of all the managers in the entire organisation (Brierley, Cowton and Drury, 2001). In case the financial reporting system wants to retain its importance and value, it is required to change the format and nature of the financial reporting that is being done. For the retention of relevance for the environment regarding TOC, it starts by learning about the various methods related to TOC and focusing on the information needs as well (Draman, Lockamy and Cox, 2002). Further, the importance of product costs are not given that much emphasis as the constraints by the TOC, due to the fact that development is indicative due to the materials being used in the productive process other than that of the cost decrease being done through piecemeal efforts in separate systems of the organisation. Constraints can be further divided into various categories such as capacity, market, behavioural, logistical and managerial, with each of the categories creating its own effect on the operational process of the firm (Corbett, 2000). For instance with regards to behavioural constraints, employees often showcase behaviours that may stem from their poor performance within the organisation, while managerial constraints might be those that focus on undertaking policies, strategies or decisions that are erroneous and may impact the overall performance of the firm. Further, logistical constraints are those that focus on restrictions on the control and planning systems. It has been seen that in order to decrease throughput constraints need to interact. For example, the seemingly non-constrained resource of poor scheduling might over a period of time become into a constraint due to the effect of it on the entire system in the firm (Gupta, 2001; Dugdale and Jones, 1996). Further, batching may also create several interactive issues due to the problem of placing huge volumes or artificial buffers in the system which results in either starving or clogging the entire throughput. The important point to consider is to focus on the created and real constraints which take place within the system that in turn helps in identifying how it would impact the entire throughput of the firm (Sheu, Chen and Kovar, 2003). V-A-T Logical Product Structure Analysis Firms have a tendency to look at a business as either being a production centred company or as a product centred one. In case of production centred, the company consists of planners and engineers and in case of product centred, it has sales and marketing. This leads to creating a very traditional method of creating a business. This kind of functional view about a company leads to the creation of production planning systems that are often computer-based. However, such a view might in turn lead to taking up inappropriate decisions by even good managers within an organisation (Cooper and Slagmulder, 1999; Chakrabarty, Majumdar and Sarkar, 2006). The V-A-T analysis therefore helps in breaking down such traditional barriers and looks at the firm as one that interacts with the processes as well as the products. With the organisation being viewed through its systems, three generic categories related to production shapes and structures emerge, wherein each of the structure needs varied approach towards management control and planning (Coate and Frey, 1999). Through V-A-T logical structure analysis and looking at the entire production process being a system, together with controlling and planning the material being used in the system, it could be possible to make considerable changes in the entire production process. Therefore, the management needs to focus on not just one particular process, but should look at the entire system in a holistic manner (Garrison, Noreen and Brewer, 2010). Drum-Buffer-Rope Scheduling Method The manufacturing units have statistical fluctuations and dependent events. The most prominent factor has been to manage the fluctuations and events in such a way that the organization is able to achieve the goal. The importance or the focus in the drum-buffer-rope scheduling or DBR has been to incorporate the inevitable dependent events as well as statistical fluctuations in any system which is in the development of scheduling approach (Luther and O’Donovan, 1998). With regards to the DBR methodology is considered for developing unique obtainable and smooth schedule in case of the plants for managing and maximizing the productivity of manufacturing facility in terms of a global perspective. The system differs from one manufacturing unit to another as it focuses on determining the relationships within the resources for resolving conflicts for creating smooth flow of product. It is also applicable for all types of processes to know if it is repetitive, job shop or process (Kershaw, 2000; Boyd and Cox, 2002). The Drum-buffer-rope provides improved method for protecting the impact of the disturbances for minimising the production flow. The DBR methodology has three elements which is a drum, the rope and the buffer (White, 2009). The drum Drum could schedule for constraints in the system and represent portion of exploitation phase for the improvement in the process in five-step. It could maximize available time of constraint as well as creating master production schedule or MPS. It is like the bass drum which is marching band. It could be a drumbeat in the manufacturing facility. In other resources, it could produce a synchronization of the constraint’s schedule (White, 2009). The buffer It is a time mechanism which is used for allowing those things that could go wrong. It also determines lead time for the products for gating operations. This buffer is considered to be equal with regards to the processing time plus that is setup time for an estimate which is an aggregated amount for protecting time which is required for ensuring the product which would get the buffer origin when it is needed (Shim and Sudit, 1995). The rope It is a synchronization mechanism for other resources. It also consists of release schedule for gating operations. In the technical terms, it is equal to the constraint schedule date and deducted with the buffer time. In this release of the material determines the timing for the parts that could be processed with the non-constraint resources. In concise, DBR methodology is considered to be a unique technique for developing obtainable and smooth schedule for plant as well for maximizing and managing productivity for manufacturing facility in terms of global perspective. DBR has been also able to provide improved method for focusing protection in such as way that the impact of disturbances on smooth production flow could be minimised (Taylor III, 1999). Buffer Management Buffer management considered to be an integral part of TOC execution. In case the buffer has been managed in terms of the constraint buffer, assembly buffer, shipping buffer, in this term the approach remains the same. Under the TOC, the buffer management forms the basis for controlling shop floor. In specific terms, non-constrained resources have been scheduled for ensuring that they are able to work on the target job provided. At the times which is right for the sequence, as well as right production batch quantities for meeting the requirement of the constrained resources schedule as well as needs with regards to customer delivery (Goldratt, 1990). Buffer management can also serve as a warning system in the early stages. In placing it in a strategic way, the buffer could be used for identifying the process problems which is prior to emergence, which could be the gap between the drum or gating operations schedule for attaining the constrained resource for becoming evident. In comparing the two schedules, it allows the buffer manager for identifying the upcoming shipments that could miss the prescheduled time of delivery, and thus giving an opportunity for finding ways for adjusting production for avoiding potential problems (Gosselin, 2007). Buffer managers could make adjustments for the schedules in order to ship and with regards to drum work center as the drum schedule could produce by DBR process. It is the timetable which causes the factory for producing possibly make consistent with regards to priorities for shipping schedule. For fine-tuning protective time, work-in-process, capacity, buffers has been called dynamic buffering. For using continuous improvement techniques, some kind of reduction could be made in the buffer sizes till the process appear. The adjustments may not be made in real time; Dependency and Gantt charts could be deployed for analysing systems and identifying limits. MRP or Manufacturing resource planning could be used for conducting sensitivity analysis on buffers (Umble and Umble, 1998). Supply Chain Management TOC can be applied outside the boundaries of organization which could reach backward as well as forward in supply chain for reducing inventories and improving throughput as well as increasing responsiveness for changing the needs of customers. The concept for leveraging the primary constraint which is across supply chain creates the schedules and priorities which could ensure system-wide limiting factors for serving on the basis for developing integrated scheduling as well as execution and logistics planning. The linkages could take the form for protective capacity or the protective time, it could be inventory buffers as well. The goal has to be for maximizing profitability with regards to entire system for ensuring system’s constraint which could be used for pacing entire flow of materials as well as value from beginning of the production cycle. DBR scheduling could be applied across organisation for ensuring constrained resources which could be used effectively (Yahya-Zadeh, 1999; Smith, 2000). Conclusion TOC is able to bring a new dimension for managing philosophy as well as providing interesting challenge in terms of the traditional ways for looking at profitability of an organization. In order to adopt it within the wide variety of organizations as well as settings, it appears that organisations that use TOC have been able to determine that they could help in achieving number of management objectives which includes continuous improvement. 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