Management Accounting and the Modern Business Environment - Essay Example

Running Head: Accounting Management Accounting of Introduction The technological advancements of thelate twentieth century and the exponential growth of high-tech machinery have turned the world into a global village. This consequently, has revolutionized the modern day business and has added new dimensions to the concept of management accounting. "Management accounting as defined by the National Association of Accountants (NAA) is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information, which is used by management to plan, evaluate, and control within an organization. It ensures the appropriate use of and accountability for an organization's resources. Management accounting also comprises the responsibility for the preparation of financial reports for the non-management groups such as regulatory agencies and tax authorities. Simply stated, management accounting is the accounting for the planning, control, and decision-making activities of an organization." (Shim & Siegel, pg 1, 1998) Management accounting presents the executive professionals with the foundation in making educated business decisions that would allow them to be superiorly equipped in their management and be in command of functions. In contrast to financial accountancy information (which, for public companies, is public information), management accounting information is used within an organization (typically for decision-making) and it is generally classified and accessible by a select few. Its foremost focus is on the formulation of strategies, planning and assembly of business activities and the optimal exploitation of resources. The aspects of decision making, protection of assets and the assistance in making of financial reports are also amongst the fundamental principles working behind the concept of management accounting. The accounting practitioners and mentors of the late 1980s became conscious of the drastic transformation of the fundamentals of global business environment. This led them to diligently work in the development of novel skills and techniques that could cater the needs of the rapidly varying business environment. This transformation of business methodologies is known as the transition from the 'traditional' to the highly developed and sophisticated business technologies. "The business environment in recent years has been characterized by increasing competition and a relentless drive for continuous improvement. Several approaches have been developed to assist organizations in meeting these challenges, including just-in-time (JIT), total quality management (TQM), process reengineering, and the theory of constraints (TOC)." (Garrison and Noreen, 1999) TQM engross focusing on the client, and it utilizes methodical problem solving using teams made up of front-line personnel. Benchmarking and the plan-do-check-act (PDCA) cycle constitute the particular TQM tools. Any internal strife in the organization is shunned due to the emphasis on teamwork, a focus on the client, and facts. On the other hand, Process Reengineering revolves around the entire restructuring of a business procedure so that non-value-added activities are eradicated and prospects for blunders are truncated to a minimum. It relies more on outside experts than TQM and is thus more prone to be promulgated by top management. Where as, the theory of constraints, highlights the significance of administering the organization's limitations. (Garrison and Noreen, 1999) Just-In-Time (JIT) Manufacturing Just-In-time manufacturing or JIT originated in Japan and has been in practice in the country since the early 1970's. It was developed and improved by Taiichi Ohno of Toyota, who is now acclaimed to be the pioneer of the concept of JIT. "The idea was developed by Taiichi Ohno as a procedure to meet client demands with the least possible delays. JIT was therefore, initially, principally used to manufacture goods so that client orders are met with perfect timings rather than to trim down manufacturing wastage". (Silicon, n.d.) "JIT is a management philosophy that targets the eradication of manufacturing wastes by generating only the right quantity and blend of parts at the right place at the right time". (Silicon Fareast) It is founded on the fact that wastes are a product of any procedure that appends cost with no increment in the value of the merchandise. For instance, such a procedure can be the relocation of inventories or even the simple function of stocking them. "Thus the basic objective of JIT is to cut short the existence of non-value-adding functions and non-moving inventories in the production line". (Silicon Fareast) This abridges the throughput times, increases the probability of on-time delivery, enhances the utilization of the equipment, reduces space requirement, reduces dpm's, diminishes costs, and escalates profits. Since the successful execution of JIT implies that the inventory intensities at various stations of the production line have been made infinitesimally low, it is also known as lean production or stockless production. This requires an excellent coordination system connecting the stations so that each station generates only the precise quantity required by next station. Alternatively, a station takes out only the precise quantity that it requires from the preceding station. (Silicon,n.d.) The JIT system also characterizes the production flow and establishing the production floor so that the supplies smoothly and unrestrictedly move through the line, and thus material waiting time is condensed. This necessitates a chain of stations with needs that are evenly matched and balanced so that the materials in the production line do not cause bottle necks. Thus the materials go through manufacturing without piling up or getting queued at any part of the production line. "The 'pull' system is also one of the major characteristics of JIT, for the movement of inventories through the production line". (Silicon , n.d.) The modulation factor for the production at a specific station is driven by the requisite of the subsequent station. As a result, great emphasis is laid on the significance of vividly identifying the procedure to be followed for the pulling of lots from one station to another. The application of JIT, is thus, mainly pertinent to processes or manufacturing streams that are constant and do not vary over a considerable time period. A paradigm in this regard would be an automobile assembly line, wherein the cars go through an identical production process. Similarly, it has also been effectively implemented by many semiconductor companies, though, there are some that have a highly intricate manufacturing procedure that is not fit for the application of JIT. (Silicon, n.d.) JIT Hong Kong Experience "Outboard Marine Asia Limited (OMC-Asia) is a wholly owned subsidiary of Outboard Marine Corporation (OMC) in the U.S.A. OMC is a leading international manufacturer and marketer of marine products and services. OMC is tile world's largest manufacturer of outboard motors and the second largest, publicly held, recreational boat manufacturer in the U.S.A. OMC-Asia, based in Hong Kong is the regional marketing and manufacturing headquarters for the Asia-Pacific region .The principal products marketed are outboard motors, speed boats, yachts, instruments as well as boating accessories OMC-Asia's manufacturing activities are mainly engaged in assembly tasks. Whenever possible, all the primary processing is to be done by outside vendors. Its annual purchase value on direct materials is approximately US dollar 28 millions. The total number of active components is around 1,500 items. The majority of those components are being purchased locally in Asia which includes Hong Kong, Taiwan, Japan and China." (Yick, 1991-92). OMC's attempts towards the incorporation of the JIT model into its manufacturing policies materialized when in the early 1984, it launched a Company-wide program to enhance its competitive edge in the market. OMC-Asia formulated a JIT team, to outline the procedure for the implementation of the system in the company, and the team included members from finance, marketing, administration, manufacturing departments along with the President of the company. This management team assembled on monthly basis to discuss the progress of the JIT incorporation plan. By mid1989, OMC-Asia had already launched its second phase of the JIT program so that the concept could be strengthened and the programs that had been implemented could be perfected. Six teams were shaped to handle six different areas and special emphasis was laid on both the materials' management and production side. Materials' management included the maximization of local purchase content, shortening of supply lead time, increment in delivery frequency, check on delivery size, monitoring of shipping ahead, situations, dual sourcing to secure supply for critical components and more importantly, extend quality concept to major vendors. On the other hand, the production side comprised of shortening of tool set-up time, using low-cost dedicated machines whenever possible, reducing production batch sizes, integrating sub-assemblies into main assembly lines, shortening of material waiting time between departments, reducing shop floor work-in-process, simplifying shipping procedures, sharpening shop floor quality control, sharpening problem reaction process, sharpening preventive maintenance and promoting group effort in line balancing. Several supporting programs were also started that included the Local/Dual Sourcing Program, the Vendor Quality Rating System, the Pull Vs Push Material Control System, the Reduction in Manufacturing Through-Put Time, the Preventive Maintenance and the Imaginary Dock System IDS Till the year 1984, the bulk of the parts were provided by the OMC facilities through out the world. The Local/Dual Sourcing Program, however, was aimed at the reduction of the purchase lead time and to enhance command over the suppliers along with a reduction in the costs. As a result of the program the local purchasing increased from 25% to 95%. The company costs dropped significantly as the purchased lead time was reduced due to purchasing from the Asian countries as compared to North America. On the other hand, enhanced control over the suppliers increased the prospects of bargaining. Several manufacturing processes that could not be done locally were redesigned and redefined. This included the Cadmium plating process that was done primarily in North America only. Accordingly, the specifications in the design of the process were altered along with utilization of some different and cheaper material in lieu of Cadmium, with no compromise in the quality. An important aspect of the program was to check upon the quality control, which had to be carefully administered due to the enormous pressures built on the supply chain as a result of the increased delivery frequency. The Vendor Quality Rating System was thus designed to release a monthly report on the performances of different suppliers of the company and served to convey the company's concerns, if any, with regards to the quality of parts being supplied to them by their vendors. Also, an annual function was organized by the company in which the final scores of the performances of the vendors were issued and the best provider of consistent quality products of the year would be awarded a "Certificate of Excellence". This served as not only an acknowledgement for the good quality providers but also as a motivation for others. The Pull Vs Push Material Control System was adopted to shift from the MRP-II system to the Kanban system. (Yick, pg 32, 1991-92) The Kanban system is viewed as communication tool to convey the data to the workers as to how many parts need to be fabricated just in time to result sub-assemblies of the finished products. (Urabe, Kuniyoshi & Child, pg 22, 1998) In this way the material is only pulled in at the time when they are needed instead of being constantly pushed through the production line irrespective of whether the programmed production schedule is being observed or not. Similarly, OMC-Asia established that most of the setup time (approx. 60% of the time) was exhausted in waiting. The implementation of the JIT system, however, required that the customary activity of keeping the sub-assemblies waiting for the final assembly should be done away with and low-cost dedicated machines should be developed and used broadly. This was achieved and consequently the reduction in the setup time enhanced the response capacity of the company for changes. The Preventive Maintenance System was a computerized program with complete information about the specifications of the machinery, the working environment of the machine in the plant as well as the time and date of the latest tuning of the machine. The program would thus evaluate this data and then systematically guide the maintenance team about the periodic maintenance of these machines. The Imaginary Dock System or the IDS, was another major supporting program introduced by OMC Asia. The realization of the fact that the arduous shipping practices led to stockpiling up of finished goods in the warehouse was a misuse of capital. Thus the IDS was developed which was a computer model program which held imaginary containers in the system which could be automatically allocated to clients along with their shipping documents. The computer would systematically allocate the finished merchandise to these containers as soon as they are shifted to the storehouse from the production floor. This meant that by the time the container arrived in Hong Kong-where customary it takes two working days for an ocean container to turn up- the imaginary container will have been already automatically entirely laden and closed and the shipping papers could be simply printed out from the computer. (Yick, 1991-92) The success that the application of the JIT system at OMC-Asia has had has been remarkable and gigantic revenues with momentous profits have been generated. Apart from the numerous ethereal triumphs some of the major triumphs include the reduction of the inventory level by 60%, reduction in the storage space by 60%, a 25% decrease in the headcount in material treatment group and improvement in the inventory turn rate by a staggering 373%. Besides these, the company was also able to reduce the manufacturing cost on some of its products more than the inflation rate, a high accuracy in data integrity and a tremendous reduction in manufacturing through put time and thus enhanced response time for market changes. (Yick, 1991-92) "The keys to success of JIT in the companies studied have been people's pride and purpose. Praise and recognition of the workers' ideas by top management such as the QUEST in National Semiconductors and Quality Work Group in OMASIA have been seen to inculcate pride within the work force Although the companies studied have all achieved favourable improvement by applying JIT concept, it does not mean that they address JIT processes without problems." (Wong, 1989-1990). JIT-being a new concept in Hong Kong-is not completely understood by many companies. Also, most of the manufacturing industries in Hong Kong are undersized and/or medium sized, most of which are feeble in modern management and thus provide opposition to change. These industries also lack the realization of the quality notion which is a must in JIT. Hong Kong is also deficient in primary materials such as steel, copper and aluminum which have to be imported and this impedes the local sourcing factor in JIT. "Pioneer companies, like the three companies studied find difficulty in promoting JIT concept to vendors. However, they have overcome the problems by: a) education and training of their vendors on why and how to address JIT and quality, and b) lumping together a wide variety of material requirements to be supplied by a few suppliers so that the company becomes significant and dominating. The suppliers thus become very much like this company's dedicated satellite vendors." (Wong, 1989-1990) Proposals The industries of Hong Kong-which comprise largely of the medium or undersized businesses-should make the factory loadings consistent, linear, and steady.This will eliminate bottlenecks that may arise due to variations in manufacturing loadings. They should condense, if not eradicate, conversion and set-up times as well as reducing the lot sizes. This will result in an even flow of inventories from one station to another, even though this may call for further recurrent deliveries or transfers. The industries should also reduce lead times by moving work stations nearer together and reorganizing the production floor lay-out, using more and more automated procedures, applying cellular manufacturing models and enhancing synchronization. Preventive maintenance should be used to diminish equipment downtimes. Special training programs for the staff should be employed to attain a supple work force. (Silicon Fareast) The transformation of the business environment during the twentieth century has left deep marks on the role of management accounting. The amplified integration of novel concepts in the modern corporate culture and the use of state of the art technology have given rise to a cut throat competition in the international arena. Thus there is a pressing necessity for worldwide modifications in the existing business strategies that could make industrial processes cheaper and more efficient, so that the fruits of the increased profits could be shared by the humanity as a whole. Hong Kong, in this regard, incontrovertibly, has emerged on the globe, not only as a colossal industrial contributor of the Greater China but also of the Asian region. For it to retain its competitive edge in the world market, the industrial sector of the country must swiftly adjust to the changes in the management accounting functions. Smaller industries must focus on obtaining and implementing the innovative business concepts and the incorporation of high-tech manufacturing mechanisms. Bigger corporations, such as the OMC, OMASIA and National Semiconductors, can play I vital role in this regard. Together with the government of Hong Kong these companies can design arrangements for the appropriate education and training for not only their own employees but also the workforce of other potential giants of the industrial sector. A special capital reservoir can also be fashioned to supply financial backing to the companies that are eager to switch their traditional business strategies with the recent ones such as the JIT. References Dear, Anthony; Published in1988; Working Towards Just-in-Time; Springer. ISBN 1850916500; Pages 86-88. Garrison, Ray H. & Noreen, Eric W.; Published in1999; Managerial Accounting; Chapter 1: Managerial Accounting and the Business Environment; McGraw-Hill Professional. ISBN 0071092498. Imai, Masaaki; Published in1997; Gemba Kaizen: A Commonsense, Low-Cost Approach to Management; McGraw-Hill Professional. ISBN 0070314462; pages155-157. Journal of Management Accounting Research Management Accounting Section; http://aaahq.org/MAS/JMAR/JMAR.cfm Accessed, June 18, 2007 Just In Time (Business); Management Accounting; Wikipedia [Online]; http://en.wikipedia.org/wiki/Just_In_Time_%28business%29 Accessed, June 18, 2007 http://en.wikipedia.org/wiki/Management_accounting Accessed, June 18, 2007 Just-In-Time (JIT) Manufacturing http://www.siliconfareast.com/jit2.htm Accessed, June 18, 2007 Just - In - Time Production System; Beval Engineering http://www.bevalengineering.com/Jit.html Accessed, June 18, 2007 Manufacturing innovation; Practical advice for business http://www.businesslink.gov.uk/bdotg/action/detailtype=RESOURCES&itemId=1074405965 Accessed, June 18, 2007 Pick Frankie; Published in1991-92; J.I.T- Hong Kong Experience; Annual Issue of the Institute of Industrial Engineers (HONG KONG) [Online]; Accessed on June 15 2007. Available on: sunzi1.lib.hku.hk/hkjo/view/41/4100162.pdf. Shim, Jae K. & Siegel, Joel G.; Net Library, Inc.; Published in1998; Schaum's Outline of Theory and Problems of Managerial Accounting; McGraw-Hill Professional. ISBN 0070580413 Urabe, Kuniyoshi, John Child; Published in1988; Innovation and Management: International Comparison; Walter de Gruyter. ISBN 3110110075 Wong, Chris, H. C.; Published in1989-90; JIT Manufacturing - The Hong Kong's Experience; Hong Kong journals online [Online]; The University of Hong Kong Libraries; Read More