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Nowadays, business leaders and managers face a similar quandary. According to intense competition in a rapidly changing world, they have been forced to seek ways to become more competitive. Implementation of new development approaches could change the needs of the organization. Hence become more customer-driven and make customer satisfaction an overriding priority. Companies improve their cost system in order to achieve, cost efficiency, quality, time and innovation are all as the key success factors. Deal with rapidly changing technologies, business around the world tend to adopting new development such as Total Quality management (TQM), Activity Based Costing (ABC) and Just In Time (JIT) they are some of the management accounting solutions.
Into the twenty-first century, business technology should be used to improve the activities of product, service, system and process. Through repair, refine, renovate and reinvent to create such enterprises to improve business performance. No matter the internal or external customer needs to be reached, it is important to get every staffs attention involved making the production process and product quality assurance within the organization also to do a systematic response to customer feedback, lead products to achieve the perfect position. Quality improvement increases profitability. The pursuit of quality excellence does not come at the expense of financial excellence. Rather, financial results are measuring the effectiveness of the system. The difference is the goal of the new model is not profits; it is customer satisfaction of quality improves. These methods applied in Japanese manufacturing that have produced significant cost and quality improvements through the use of quality teams and statistical quality control.
In 1985, U.S. Department of Defense Naval Air System Command first presented the term of " Total quality management (TQM)", and in 1992 defines: "TQM is a customer oriented management approach that emphasizes the efficient use of human resources and quantitative methods, in the continuous improvement process, to provide the best quality products and services. "International Standards Organization (ISO) also states: "TQM is a quality-centered management approach to long-term success is based on full participation, as customer satisfaction, making the total of their organization and society benefit." TQM originated in the 1950s and has progressively become more popular since the 1980s. Deming and Juran were also proposed 14 points and quality of trilogy, making the concept and practice of TQM more clear, wide for enterprises and be acceptable. Garvin (1988) has classified evolution of TQM as the outcome of four major areas of development describing it to be (I) strategic in nature (II) with continuous improvement as the driving force and achieved through (III) quality planning and (IV) employee involvement. TQM as a strategic component affects the levels of profitability by reducing the costs and increasing the market share. It is a philosophy of management that based on participation of all employees and aimed at long term success through customer satisfaction, zero defects and getting things right first time for 100% customer satisfaction benefits to everyone of the organization and to society, consequently reducing losses by wasteful practices. This method is an application of statistical methods and human resources to promote the present and future improvements, provide the organization's materials and services therefore all the processes within the organization could meet customer needs.
For example, a farmer of gourmet potatoes estimates that 20% of the 50000kg of potatoes picked that do not meet customer's satisfaction. After being picked the potatoes are placed on a conveyer belt for inspection and packaging. The inspection team identifies and removes 75% of the defective potatoes. To calculate how many defective potatoes reach the customer?
25% of the defective potatoes are not defected
20% potatoes meet customer's satisfaction
Therefore, (0.25 x 0.2) =5% reach the customer
So that (0.05 x 50000kg) = 2500kg reach the customer
According to this example indicates that first of all needs to be considering is the prevention costs, to eliminate defective units before they are produced. Secondly, appraisal costs, to eliminate defective units before they are shipped. Thirdly, external failure costs, when a customer receives a defective product. Finally, internal failure costs, when a defect is discovered before being sent to the customer. Carry out zero defects strategies. It is the key business improvement strategy and the key management issue of the future because it is essential for efficiency and competitiveness.
Furthermore, Crosby (1986) expressed "an organization's success or lack of it is directly due to the effectiveness of the leader. The initiation of change requires a positive leadership attitude as demonstrated by leader's vision, commitment, and attitude." Crosby and Deming both stated "regardless of what concepts are put in place or what systems are established, the attitude of citizens and employees toward quality is the clear result of what they see in the attitude of their leaders and executive management." In today's business environment is against static historical standards are no longer appropriate, the traditional system only focus on product orientation but not customer oriented. It emphasizes capacity and forgets the quality. Employees compete for promotions, however staffs working in groups and cooperation in the new system, such that managers must plan strategically to maintain a hold on market share, let alone increase it. Consumers place a higher value on quality than on loyalty to home-based producers, and price is no longer the major determining factor in consumer choice. Price has been replaced by quality, and this is true in industrial, service and many other markets. In fact, any organsiation want to be success, is dependent on how accurately defined the needs and expectations of customers. More, successful organisations attempted to improve product quality solely by inspection at the end of a process, and by utilizing and independent team to perform it. By allocate responsibility for improvement both vertically, within an organizational structure, and horizontally, in the processes that flat across organizational boundaries. And then create an environment that empowers and challenges its staff to change and improve their performance continually. It is necessary to achieve a positive operating culture and accepted by all other members of the management team.
Another development to be looked at is Just in Time (JIT), a programmed directed towards ensuing that the right quantities are purchased or produced at the right time. Aims to reduce the cost and seeks to minimize the throughput time by carefully coordinating the receipt of raw materials and the delivery of product with the manufacturing processes. The goal is reduce the waste of maintaining large levels of raw materials, work-in-process or unfinished product. It emphasizes providing products on demand. Drive raw materials to finished products with lead times to processing times to zero because these are non-value-added activities. This management concept was originated in the late 1950s and well developed in many Japanese manufacturing organizations in 1970s; Taiichi Ohno of Toyota was first used the technique to eliminate risk to his business production. The greater motivation of Japanese workers and processes were arranged for maximum output and work efficiency made JIT a success and strengthens the business's competitiveness. It has been widely used for car manufacturing, market demand for the automotive has become a new phase of diversification, the quality requirements are increasing, along with the manufacturing sector for the new issue is how to effectively organise the many varieties of small batch production, otherwise, overproduction is caused by equipment, personnel, inventory costs and a series of waste, thus affecting the competitiveness of enterprises that survive.
To be considered the traditional system, the core of continuous production, only issue orders and expediting or using economic order quantities (EOQ) method determined by the best batch each time. Economic batch method is to use a formula to calculate the constant usage and average stock levels to the sum of the minimum order quantity. However, the practice is not same as the case. These methods are based on assumptions. Assumes the demand for a variety of materials is independent of each other. Respectively, in the actual production, the amount of materials required for the rational allocation, in order to create the assembly into products. In modern manufacturing, the demand for the material is uneven, unstable, intermittent demand for inventory occurred. The traditional system is often assigned the time of earlier orders, resulting in the backlog of materials caused the increase in inventory costs. Under the conditions of intermittent demand, will inevitably lead to overstock, cash flow cycle prolong.
In addition, adopting JIT, purchasing techniques is also an important feature, it is the development of long-term relationship with a few suppliers rather than short term ones with many consequently co-producers in networks of trust providing dependable quality and delivery of goods and services. Hence, there must be recognition of the need to develop closer relationships sharing information and problems that leads to the product or service for the right quality, being delivered in the right quantity, at the right time. JIT production is to maximize profits as the ultimate goal of business. Reduce production cost mainly depends on the size of a single species to achieve. However, small volume production in a multi-species case, this method does not seem to work. So that, JIT production seeks total elimination of waste through to achieve this goal. The so-called waste, JIT production methods at the origin of Toyota Motor Corporation, is defined as "only increases the cost of production factors", in other words it will not bring any added value factors. Any activity not directly benefit the output will be considered waste. The most important is the waste caused by overproduction. Deal with JIT production, waste generation is usually considered to be caused by the bad management. For example, the existence of a large number of raw materials, the suppliers may be result of poor management. Therefore, in order to eliminate such waste, and accordingly produced the following three objectives: amount of production, the number of flexible configuration and quality assurance
For example, ZZ CARS is adopting a JIT system. The current throughput time is 15 days. With a JIT system the throughput time should fall to 9days. Therefore this will reduce it cost of holding work-in-process inventory. The average value of work-in-process inventory is 800,000 and the capital cost of holding inventory is 10% per year. To calculate what is the impact on holding costs if the JIT throughput time is anticipated:
Annual cost of holding inventory 800,000 x 0.1=80000
Holding cost under JIT 800000 x 0.1 x 0.6=48000
The annual cost decreases by 80000-48000=32000
From the example above, it indicates that to reduce throughput time, changes must be made in several areas such as reduce setup times, balance flow rates, plant layout, increase quality and change performance measurement and reward systems. In contrast, it gives benefits of faster response to customers and reduced delivery times, reduced overhead costs for material movers and expediters, lower capital of holding inventory and reduced risk of obsolescence.
Activity Based Costing (ABC) is also a remarkable development. The method of indirect relevant costs for decision-making techniques, determining accurate costs, a relatively recent innovation in cost accounting and most appropriate where overhead is a relatively important cost element. It is rapidly being adopted by companies across many industries and within government and not-for-profit organization. Since the mid-1980s, there have been signs of the emergence of an alternative approach aimed at overcoming the problems of traditional overhead costing. Robin Cooper and Robert Kaplan proved that to be a popular approach, quickly gathering great interest from practitioners. They also suggest that service companies in ABC, even more than manufacturing companies. Due to service organizations supply most of their resource in advance and fluctuations in the usage of activity resources by individuals. In 1991 Innes and Mitchell found that almost half of the respondents to a UK CIMA member survey worked for organizations which were considering the implementation of ABC. As competition increased, the basis of competition shifted away from the efficient use of direct labour and machines, manager needed more accurate information about the cost of processes, products and customers than the system used for external financial reporting. This method is most appropriate when overhead is a relatively important cost element rather than output volume determined and is a diversity of product lines on offer.
The basic structure of ABC in that it is two-stage allocating process, the first involving the pooling of the overhead and the second involving the use of rates to attach the overhead to production output. In stage 1 the pooling is based on the activities which have consumed resources and given rise to overhead cost rather than on the basis of production departments or centers. In stage 2 the rates for application to products are based on a series of cost drivers which indicate how each product has made demands on the various activities. The underlying philosophy reflected in this process is that activities consume resources and products consume activities. The use of an ABC approach results in product costs which reflect more closely the resource demands and consumption of the products. This is achieved by treating the various elements of overhead separately and taking account of how each is differently related to production. ABC also uses various cost drivers to trace the cost of activities to the cost of the products or services. Cost drivers reflect the demands placed on activities by products, services or other cost targets. Activities are processes or procedures that cause work and thereby consume resources. In fact, ABC systems can more accurately measure the resources consumed by cost objects. Be contrast with the traditional cost systems report less accurate costs because they use cost drivers where this is no cause-and-effect relationships exist to assign support costs to cost objects.
No. of orders
Resource usage weighting
Weighted order volume
Procurement overhead= 10000000
Cost driver rate:
10000000/10850000=0.92per weighted order
Purchase order costs:
In this way, different order costs are distinguished and thus their costs are more accurately associated with product lines.
In conclusion, analyzing three new developments of TQM, JIT and ABC summarize organizations around the world were using the company's management accounting system; however there have been found two defects. First, the standard cost system in support of direct costs and indirect costs to individual products, services and customers is difficult to play a role. Such a mistake would share the profits of individual products and customers when measuring the level of serious bias. Secondly, the traditional system of performance measure only focus on financial aspects and no measure that drive future financial performance of the non-financial indicators. At the time of mid 80s, the business communities are widely used in Japan's new management methods, such as JIT, TQM. The existing financial system after using these methods to improve the ability arising from the measure can not be quantified. Hence, Kaplan found this system has been insufficient use under this condition. Robin Cooper and Kaplan noted above. Professor George Staubus(1971) based on the operating cost in 1988 propose the development of job-based costing ABC method, which greatly solved the earlier description of the first problem, the cost and responsibility center is not calculated by sector, but in accordance with the calculation of specific activities and processes. ABC has since then continued to be widespread concern in business circles. Successfully record the ABC production and provide customers with products and services activities.
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