natalia anisimova_12 tocpa conference_eng_april 2014_russia

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12th International Conference of the TOC Practitioners Alliance - TOCPA

Practical aspects of managerial

accounting

in a company implementing TOC

Natalya AnisimovaNovosibirsk State Technical University (NSTU) Novosibirsk, Russia26.04.2014

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12th International Conference of the

TOC Practitioners Alliance TOCPA

April 26-27, 2014 Moscow, Russia

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Natalya Anisimova

Associate professor of economic informatics

department of Novosibirsk State Technical University

NSTU Ph.D. in Economics, consultant

Ms. Anisimova starting from 2011 teaches TOC as a

part of economic disciplines for students and

undergraduates of NSTU. Natalya was the head of the

presidential program on training engineers in "Modern

approaches to manufacturing processes in 2013,

including the financial TOC indicators, TOC Logistical

Solutions for production and project management, and

thinking processes.

[email protected]

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Managerial accounting is a system that provides

needed decision-making information to managers

in linkage to the goal of the company as a whole

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A TEST TASK: WHY TRADITIONAL APPROACH

DOES NOT WORK?

Simple Case Study:

The company has one division that produces three types of

products.

Review its operation and draw a conclusion, whether it is worth

to discontinue a product based on the following data (traditional

managerial accounting and standard costing):

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A TEST TASK: WHY TRADITIONAL APPROACH

DOES NOT WORK?

Indicators Model A Model D

Volume of sales, units 1000 1200 900 1000

Price in RUB /unit 200 190 220 250

Variable Cost

RUB/unit190 50 120 15

Fixed costs, ths. RUB 60 000 102 000 90 000 105 000

Profit per unit., in RUB -50 55 0 -5

Profit, in RUB -50 000 66 000 0 -5 000

11 000What will be the profit, if they decide to reduce the product range?

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Traditional approach approach

Variable Cost

Variable Cost (VC) are the costs that

change in proportion to the volume of

production

Fixed costs (FC) are the costs that

remain unchanged irrespective of the

volume of production (or are almost

unchanged)

In case of mixed cost, mathematical

methods shall be used to allocate

mixed costs into product cost

Total Variable Cost (VC) are the costs that

grow in direct proportion to the sales volume

of each product item

Operating expenses (OE) do not vary in

direct ratio of each sales cost for the certain

period

Mixed and semivariable costs are related to

operating costs. Operating expenses are not

allocated among different types of products

and the full cost is not calculated.

6

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Traditional approach approach

Financial indicators of performance

Net profit (NP) helps to identify how

much money the solution generated

NP = P V CV

Return on Investment (ROI) helps to

compare the required investments with

the profit

ROI = NP / I

Throughput () speed at which the

organization generates the goal units

(by sales)

For commercial organizations:

TV = P V VC V

(income for a period total variable costs related to the sales

that ensured this throughput)

Per product unit:

Tunit = P VCunit

Linkage to traditional indicators :

NP = T OE ROI = ( - OE) / I

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12th International Conference of the TOC Practitioners Alliance - TOCPA8

DRAWBACKS OF THE TRADITIONAL

APPROACH

Distortion of the result as of the reporting period due to mixing of the indicators from different

categories:

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HOW HAS ACTUAL COST CHANGED?

The volume of production

Sales volume

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APPROACH

Distortion of the result as of the reporting period due to mixing of the indicators from different

categories

approach: Accurate result as Throughput

calculation is based on the directly calculated

indicators per every unit of product or every order...

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APPROACH

Traditional accounting additionally stimulates the creation of inventory, as allocation of costs to

products leads the situation, when part of the

companys expenses are "stored" together with the

products and recognition of them in accounting is

delayed.

approach: Reflect the actual situation, because

does not accumulate errors arising from the allocation

of costs and playing" with inventory

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DRAWBACKS OF ACCOUNTING BASED ON

TRADITIONAL APPROACH

PLANT

10 units

Warehouse

5 units

Customers

5 units

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Initial indicator Sum

Cost of products in the

warehouse (5 units)

Cost of shipped

products (5 units)Revenue

Profit

Standard costing

Variable Costs 10 RUB/unit 50 50

Fixed Costs 100 RUB 50 50

Total 100 100

Price 40 RUB/unit 200 100

Direct-costing


Fixed Costs 100 RUB 100

Total 50 150



Fixed Costs 130 RUB 130

Total 35 165


DRAWBACKS OF ACCOUNTING BASED ON

TRADITIONAL APPROACH

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APPROACH

The methodology is difficult for understanding:

- difficulty in identification and differentiation of

variable or fixed costs.

- It is not clear on what basis costs were allocated or

such allocation may seem not fair to any staff

member who does not deal with accounting directly

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METHODS OF COST ALLOCATION IN

TRADITIONAL ACCOUNTING

(not applicable in TOC!!!)

1. Logical methods

2. High-Low method

21

21

VVVCunit

=22 VVCCFC unitV =

3. Based on regression and correlation analysis

=+

=+

.

,

2 VVVCVFCVVCFCn

unitV

unitV

( )

=22 VnV

VnVVCunit

n

VVCCFC unitV

=

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APPROACH

The methodology is difficult for understanding:

approach:

- Ease of perception and logic reports that were

prepared according to TOC are significantly more

understandable to people who are not accountants

- Ease of preparation - focus on fewer facts, there is no

need to allocate costs, recalculate and reallocate them

at the end of the period

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APPROACH

Does not provide information for selection the best product range, valuation of business portfolio as financial result

depends on the of fixed cost allocation base.

Jeopardizes the marketing campaign of the company thus deteriorating the companys offer

approach:

Allows to identify SKUs that contribute to the growth of profit

There is no dependence on subjective decisions (e.g. on selection of fixed costs allocation base)

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APPROACH

Misleads production divisions, takes away from the companys common goal achievement

- based on the premise that all resources are equally important

- Motivates overloading of equipment/workers, increases batches to

minimize cost per unit

approach:

Plays a motivating role as a positive contribution to the achievement of companys goal is visible.

Allows to decentralize decision-making process, while keeping orientation to the global result

Focuses on exploiting the constraint

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APPROACH

Has a negative impact on assessment of performance of the divisions or entities that are part of the Holding and

participate in on value chain based on the evaluation of their

equivalent measurement as profit centers.

approach: In corporate reporting focuses on movement of money

between the system and the rest of the world instead of

internal movement of money within the system

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CHALLENGES OF TOC ACCOUNTING

IMPLEMENTATION

1. Need to change the mindset:

jumping from using the full cost concept to full

uncontrollable costs

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PRIORITIES

Traditional management

Traditional management

II

TT

Japanese management JIT

Japanese management JIT

II

TT

TT

II

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IMPLEMENTATION

does not call for ignoring costs!

- -based accounting also captures all costs on a daily basis

- For each decision ROI of the decision is identified:

i.e. all core indicators that change upon the decision making are

checked carefully: TVC, OE, T, I

- By knowing and controlling the constraint we avoid cost escalation.

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POINT OF THROUGHPUT

GENERATION

2. Identification of point of throughput generation

receipt of order,

invoicing,

production of order (shipment preparation),

delivery,

receiving payment from the customer

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POINT OF THROUGHPUT

GENERATION

Throughput is generated when the product is shipped

and money are transferred to the seller (two

conditions should be met simultaneously)

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IMPLEMENTATION

It could be:

Payment date = Shipment date

Payment date is earlier than the shipment date

Shipment date is earlier than the payment date

One date of payment and partial shipment (as soon as they are available,

as needed ...)

Several payment dates (prepayment or payment by installments) and one

shipment date

Several payment dates, several shipment dates, clients obliviousness on

payment for a part of the order, rejection of a part of the order with a refund,

re-sorting of the order, replacement or the client said ok, return of

defective product, barter transactions

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IMPLEMENTATION

It could be :

Price of the SKU is the same for all clients (shopping in supermarket), Tu is same

There can be a discount system, considering:

- Lead-times or shipment of stock available in the warehouse

- Dates of shipment

- Prepayment

- Volume

- Seasonal /unseasonal

- Long-term relationships with the client...

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IMPLEMENTATION

It could be:

- environment

- environment

- Mixed environment

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IMPLEMENTATION

Need of throughput identifying for:

- individual SKUs

- orders (deals)

- individual divisions

- company

- group of companies (holding)

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HOW TO TAKE INTO ACCOUNT

EVERYTHING?

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POINT OF THROUGHPUT

GENERATION

Invoice/Date

Amount

of cash

proceeds

Amount of

shipment

Accumulativ

e amount of

cash

proceeds

Accumulativ

e amount of

shipment

Amount of

proceeds for

throughput

estimation

upon

request

Amount of

proceeds for

daily

throughput

estimation

1

01.02.2014 10 0 10 0 0 0

02.02.2014 10 15 20 15 15 15

03.02.2014 20 15 40 30 30 15

04.02.2014 20 25 60 55 55 25

05.02.2014 30 55 90 110 90 35

Total: 90 110 90

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Performance evaluation of holdings entities

and the whole holding

Holdings entities: Holding company :

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THROUGHPUT ACCOUTING USAGE IN THE

PERSONNEL MOTIVATION SYSTEM (E.G.

COMMERCIAL DEPARTMENT )

Bonus fund calculation base for personnel of commercial department -

excess of the actual throughput over statutory minimum

The actual throughput is fixed upon receipt of payment for shipped

products

Minimum statutory throughput minimum throughput value, calculated

on a monthly basis according to the approved budget that allows to

cover annual operating expenses

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Comparison of throughput and operating expenses

( ) ( )

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Level of achievement of target throughput

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Bonus award criteria:

The bonus is not charged if minimum throughput is not

exceeded

The actual bonus fund calculation scale is applied for

the T above the minimum throughput

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Proposed balance of fixed and variable parts of Payroll

PositionFixed salary Bonus

% %

Head of Department 50,00% 50,00%

Senior manager 30,00% 70,00%

Department manager 30,00% 70,00%

Records manager 30,00% 70,00%

Head of Procurement 50,00% 50,00%

Dispatcher 60,00% 40,00%

Head of tender department 50,00% 50,00%

Specialist of tender department 50,00% 50,00%

Head of marketing department 70,00% 30,00%

Marketing-analyst 80,00% 20,00%

Advertising specialist 80,00% 20,00%Marketing manager 80,00% 20,00%

Head of retail department 50,00% 50,00%

Managers of retail department 60,00% 40,00%

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Basic bonus indicator:

!"#$"%'()'$*+(%)$+ ,%'(#+-$+()+)

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We do not propose giving up traditional accounting methods of

accounting, as it is necessary to prepare external statements for

investors and tax authorities, but we claim that, in general,

management based on traditional cost accounting leads to

suboptimal results for the system (company) and does not allow

to make quick management decisions

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Thank you for your attention!

natalia anisimova_12 tocpa conference_eng_april 2014_russia

Documents

toc logisticalsolutions

financial toc indicators

mixed costs

operating costs

semivariable costs

sales cost

case of mixed cost

sales volume