Issues in Management Accounting - Assignment Example

Answer Major Triggers For Change The major triggers for change as discussed in the case are The change in core competencies of Volvo was a major source to push change. Volvo moved from being merely a conglomerate to being in the transportation industry. The major focus was brought to the core business of Volvo Car Corporation which employed 28,000 employees. New Volvo strategy was formulated which was more customer-centered. Every activity was to be aimed at adding value to customer and at the same time being cost efficient. Becoming cost effective required them to be profitable in every activity and therefore cost-cutting and minimizing expenses was their ultimate goal. Product development consumed around 80 percent of the expenses of the product even before the start of production. To broaden their product range and offering, they were planning to introduce a new model every year. This required an effective and cost efficient product development methodology. All these factors contributed to the decision of going through the change and to improve on their costs and its estimates. Barriers To Change The management made several attempts to enforce the cost control systems in the organization, but failed due to resistance from within the company. As a result, the entrepreneurial spirit gradually faded away. Major barriers to change discussed are as follows Engineering was a dominant function in production and was more focused on quality and safety. There was enormous resistance to change and tighten the cost control from the engineering side in all meetings as they feared that the cost control was merely to strengthen the accounting regime in the company. Organizational design was not designed for cross-functional working whereas the system was made to work in a cross-functional environment. The management and the company were not mature enough to implement such an intensive change management program. Change management was not well-handled and planned. This resulted in lower commitment to change activity from the competent employees who were in engineering and other departments. Volvo started off its change initiative when it wasn’t very mature. This created uncertain situation leading to high resistance to change. These barriers led to the failure of the change to cut costs in Volvo. Answer #2 1980 And 1988 Situation Comparison In Relation To Arguments In 1980, Volvo representatives visited Renault plant to see their practices as their practices were taken as industry’s benchmarks. Volvo was facing very high costs in the initial stages of product development. Renault had competence in cost control and thus was taken as benchmark for the cost control drive by Volvo. There was a rapid change in the business environment that required Volvo’s management to implement cost management and control system. The business environment forced Volvo to be pro-active in their costing and to make their systems online to as to increase their efficiency in the intra-departmental and cross-functional accounting and costing. For cost effectiveness in the future, Volvo realized that they needed their cost control activities to be redirected to product development rather than manufacturing and production. This would reduce their costs in the initial stages of product development. The company used to be cost and budget driven whereas the need of the hour was to be customer oriented and delivering value to customers at minimum cost. Modular design and common parts were few major changes that Volvo introduced in their products. The management accounting and costing practices had changed over time. This required changes in their costing system and activities to be in competition with their competitors. Process orientation was another major change that was being implemented in the industry. Instead of being function-oriented, organizations were moving towards process orientation. Redundant activities needed to be identified so that the processes could be streamlined and made more effective and cost efficient. In the past, Volvo worked without any customer oriented goal of manufacturing. But later, the methodology changed. The orientation was customer-centered with everything done to add customer value. Cost targets had become more critical and important. Timely formulation of realistic cost targets saved them huge investments which were not feasible and/or not affordable for their business. Calculations needed to be done in the early stages of product development so that cost-ineffective projects could be dropped early on. Benchmarking at various levels and for various areas was done for better control and monitoring. Given the above differences and similarities, change program is more appropriate today as the trend in the industry today requires more prompt response to the changing business requirements. To meet the current business requirements, Volvo must have a continuous improvement culture which ensures they are changing according to the changing needs. Today in process based organizations like Volvo, the processes must be cost-efficient. They must not have redundant activities because such activities only consume resources without adding much value to the final output. Answer #3 PKS Vs Current System In VCC The Project Control System or PKS was the cost control system that Volvo implemented after analyzing the best practices of Renault (the best practice firm in the industry). The PKS was partly an adoption of the Renault. It was introduced in 1981 and revised in 1984. The PKS was initiated as a move to control product development costs in a better way. This was initiated after the visit to Renault by Volvo’s group. The PKS manual was made to show various costs and their calculations in the PKS system. The manual emphasized on three-step approach. The approach was to define cost targets for benchmarking, commitment to attainment of set targets and finally to follow-up the activities. The product development activities were divided into pre-study and product-project stages. Simulations were used to simulate various situations and scenarios based on price and sales volumes. Cost targets for standard factory costs were calculated by taking inputs from various functions as per the requirement. Backward calculations were done to calculate the breakdown costs. The results from the simulation were taken as inputs for the calculations. Product development costs, investments in stock, warranty costs and sales costs resulted in the target costs. Targets were set for variants. Various calculations were done to derive the best alternative for a given variant or product. Build up calculations were done from adding the costs of individual activities involved in the product development. At the end of pre-study stage, verification of the cost target was done by the build-up calculation. Assumptions made were verified. The current project was then compared with another car as reference. The costs were then compared and the variations were then looked into. After that, the manufacturing costs and factory costs were calculated Build-up costs were then compared with the breakdown costs. The project received acceptance if the build-up costs were less than or equal to the breakdown costs. The current system, as discussed, in Volvo was advancement to the PKS. It was a three-stage product development process. Three stages wee (1) The Concept development; (2)The pre-study and (3)The project stage. The current system used a project gate system. Gates made sure the quality was achieved and standards met at every stage of product development. There were 11 gates, 10 of which were related to project stage. Four statuses (initiated, preliminary, finalized and verified) were used for all requirements. In the initial stages (gates 0-2), the cost engineering function provided cost engineers with cost analyses. They established cost requirements for a limited function or system in the car. At gate 2, cost management function was involved. Cost estimates were verified and cost review meetings were carried out if needed. Business controllers ensured the profitability in the product development stage. Business controllers coordinated with various relevant personnel to ensure that they were going up to the mark. They used sensitivity analyses and various calculations to perform their work. In the concept development stage, various concepts were considered to reach a final concept to work on. The final concept was then used by cost engineers for their costing. The engineers took a reference car (often the model being replaced) as benchmark and monitored their costs with the benchmark. Additional costs for improvements were calculated and distributed among different car properties and systems. After establishment of costs, the cost matrix was made in which the increase in cost was compared with the increased customer value. Cost requirements were set for the standard factory costs and ticket costs. In the pre-study stage revenue estimates were done through simulations. Based on the cost, profit targets calculations were carried out for the attainment of desired profitability level. Later during the first gates in the project stage, finalized costs were estimated by discussing with the project leaders. In the remaining gates, cost requirements were done with the help of task managers. They can be considered as target costing systems as there are targets which are to be achieved and the benchmarks are set beforehand so as to make sure the costs are within the control of management. The PKS, in my opinion may be regarded as a target costing system because of the use of breakdown and buildup cost mechanism. Answer #4 Different Statuses On Cost Requirements Cost requirements were assigned different statuses. The statuses used by Volvo were (i)initiated, (ii)preliminary, (iii)finalized and (iv)verified. The benefits of assigning statuses to the cost requirements were multifold. The first and foremost benefit was that the statuses depicted the current status of the cost requirement at any time. By simply looking at it, the user or the cost engineer could have an idea as to what the status of that particular cost was. If it was only ‘initiated’, they should spend more time on it investigating how it could be reduced or what alternatives they could take to omit it. On the other hand, if it was ‘finalized’ or ‘verified’, there wasn’t much use putting time and effort in it as it had already been worked. So this could have allowed them to allocate time and other resources in an efficient manner. Different cost statuses allowed for a better estimation as the cost engineers were aware of the degree of accuracy and correctness of the estimate. If the status was ‘verified’ or ‘finalized’, this indicated that the cost had been thoroughly worked out and discussed with relevant personnel; and therefore it improved the probability of the estimate being accurate and more likely to be correct. Read More