MANAGEMENT DYNAMICS Merging Constraints Accounting to Drive Improvement phần 3.pdf (kỹ thuật PR)

Cost Control in a Throughput World 45 matter, especially accountants, is able to avoid addressing the accounting measurement issues by assuming that they all have been resolved in the direct costing literature. Second, it allows all of the previously existing direct costing literature to be applied. Although this literature is not necessarily erroneous, we should recognize that direct costing, as well as throughput accounting, did develop in the cost world paradigm. The existing paradigm of throughput accounting as direct costing is therefore a legacy system that is ﬁrmly lodged in the cost world.8 It would seem reasonable that a more appropriate paradigm of accounting would be more useful in the throughput world. Such an accounting paradigm would include both the speciﬁc recognition of the role of Archimedean constraints and the throughput effects associated with every decision. COST CONTROL IN A THROUGHPUT WORLD Link between Cost and Revenue As seen in Chapter 1 (in the section on identifying ongoing improvement), it is necessary to break the proportional long-run linkage between throughput and operational expense. Long-run operational expenses tend to be tied closely to throughput for numerous reasons. Many of these reasons are tied to the product-cost concept. We have already seen that the least product cost thinking bridge is a widely accepted paradigm. Another example would be using the cost of a product (as calculated by a traditional absorption-costing system) to establish the asking, or target, price for a product. Product costs form the focal point of most cost accounting systems. In turn, when used for pricing, the cost accounting system ties the future revenue stream directly to the product-cost calculation. The operating budget, or annual proﬁt plan, is also a means of linking revenues closely to costs. In most organizations, the basic means of controlling operational expense (OE) is the budgetary process.9 Costs are in control if they are less than revenues by a comfortable amount. Budgeted costs will be considered to be in control if they are less than budgeted revenues by an appropriate amount. Actual costs will be in control if they do not exceed budget limitations. The budgetary process typically starts with an estimate of sales revenue, calculated by product or product line. It then uses the estimated revenues to “drive” the budgeted costs. An appropriate balance is achieved by putting pressure on operations to bring costs in line with the sales forecast. An appropriate balance is generally deﬁned as a targeted return on investment. An alternative approach to establishing the budget is to estimate the total expenses and apply pressure to sales and marketing to come up with the necessary sales estimate to achieve the targeted return on investment. In either case, the result is the same—products are 46 Internal Financial Reporting the focal point, and the result of the paradigm is that revenues are closely linked with product costs. Cost Control versus Cost Reduction Our paradigms are powerful contributors to the inertia of our thinking. If we want to shift from the cost world paradigm to the throughput world paradigm, then a deliberate and tenacious grip on the throughput world will be needed. Distinguishing between cost reduction and cost control recognizes that constraint management leads from the cost world paradigm of cost reduction and cost recovery into the growth strategy of the throughput world. Decision Criteria Originally (and now mainstream thought) the constraint management thinking bridge between local decision making and bottom-line proﬁtability results, was thought to satisfactorily measure the relationship among the expected changes in the three basic measurements of T, I, and OE. Since the goal of a publicly held proﬁt-oriented business is to make money, many believe that the desired relationship is to increase T while at the same time reducing I and OE. Many still view this desired relationship as axiomatic. For example, William Dettmer states, “Obviously, increase Throughput, while decreasing Inventory and Operating Expense.”10 In similar fashion, Mokshagundam Srikanth and Scott Robertson state: “the objective of making money translates to increasing throughput, reducing inventory, and reducing operating expense, all at the same time.”11 Even Thomas Corbett suggests that “the ideal is a decision that increases T and decreases I and OE”12 [emphasis added in each case]. Clearly, the basic T, I, and OE measurements of the TOC have encouraged cost reduction actions. But recall the previous discussion of the paradigm shift from the cost world to the throughput world (Chapter 2). If we are serious about this paradigm shift, then we must abandon our reliance on cost reductions to achieve bottom-line improvement. Rather than strive for cost reductions, we might seek cost control of future expenditures. After all, we would only need current cost reductions if our previous future spending had been out of control. We want to put into place ﬁnancial management policies and procedures that will allow us to pursue a throughput world growth strategy of increasing T while increasing I and OE at a decoupled and signiﬁcantly slower rate, leading to an ongoing expansion in proﬁtability. This restatement of the desired relationship recognizes that a growth strategy will ultimately require resource expansion, but not necessarily in direct propor- Cost Control in a Throughput World 47 tion to the throughput expansion. This is accomplished by increasing expenditures only in response to elevating constraints or satisfying necessary conditions. One of the most difﬁcult constraint management paradigm shifts for accountants and ﬁnancial managers to grasp is that there is no product-cost concept in the measurements reporting for constraint management.13 Observant readers will contend that we have, in fact, previously discussed a constrainttime-based product costing methodology used within the constraint management framework (early throughput accounting at the beginning of this chapter). And they would be correct. But that concept, though part of the early constraint theory paradigm, is outside the current constraint management paradigm, which emphasizes a process of ongoing improvement. Policies and procedures such as those shown in Exhibit 3.3 will allow us to control costs appropriately, while abandoning the product-cost concept and turning our attention to increasing throughput. Exhibit 3.3 Cost Control Policies to Support a Process of Ongoing Improvement Suggested Policy or Procedure Purpose A Costs are controlled within the budgeted amount. The budgetary process is the basis for financial control. B Increases in OE are reviewed as part of the formal budgetary process. There is an agreed upon procedure for increasing the budget when desirable. C Increases in budgeted OE and I are approved based on careful review of anticipated throughput effects and specification of the constraint being elevated. All increases in budgeted OE result either in elevating a constraint (greater profits) or from a need to satisfy a necessary condition (protecting current profits). D The OE budget is revised immediately to reflect approved OE increases. Warning that costs are out of control when actual expenses exceed budgeted expenses. E Cost reductions are neither rewarded nor specifically encouraged. Emphasize that a focus on throughput increases, rather than cost reductions, is desired. F All employees are provided training in the concepts of constraint management. Employees feel they are valued and know how they can make a difference. Employees are not frustrated when not striving for local optima. G It is all right to have budgetary slack. Proposals that can be implemented without increasing costs beyond currently budgeted costs are implemented at the discretion of the responsible person. 48 Internal Financial Reporting CONSTRAINTS ACCOUNTING VERSUS THROUGHPUT ACCOUNTING Most people who are familiar with TOC believe that throughput accounting should be used for internal ﬁnancial reporting in the constraint management environment. They also believe that using the metrics of throughput (T), inventory/investment (I), and operational expense (OE) constitutes doing throughput accounting. As noted earlier, accountants generally perceive throughput accounting as an extreme form of direct costing. As such, throughput accounting can be viewed as a product-costing technique in which only truly variable costs are assigned to product inventories or, perhaps, as a contribution income reporting technique. In the latter case, truly variable expenses are deducted from revenues to calculate throughput (or throughput contribution), which corresponds to the traditional contribution margin, and the operational expenses take the place of ﬁxed expenses. That is, throughput accounting ﬁts nicely into the existing cost world paradigm. Therefore, throughput accounting is probably not the complete answer for accounting measurement within the constraint management throughput world environment. A reporting methodology should reﬂect the performance of an organization relative to the desired constraint management operating philosophy of the organization. Constraints Accounting Deﬁned It is evident that we are dealing with two different accounting techniques. First, the widely accepted throughput accounting (a form of direct costing) and second, the less well known constraints accounting (CA),14 deﬁned as an accounting reporting technique consistent with a process of ongoing improvement and implementation of the theory of constraints, which includes: 1. Explicit consideration of the role of constraints. 2. Speciﬁcation of throughput contribution effects. 3. Decoupling of throughput (T) from operational expense (OE). The following sections ﬁrst describe an earnings statement format that is typical of the throughput accounting approach. Then an earnings statement is prepared for the same data using a constraints accounting format incorporating the three aspects of constraints accounting enumerated above. Throughput Accounting Earnings Statement The basic format for an earnings statement in the throughput accounting (direct costing) tradition is illustrated in Exhibit 3.4 and is populated with some hypothetical data. Constraints Accounting versus Throughput Accounting Exhibit 3.4 Format 49 Typical Earnings Statement in a Throughput Accounting Throughput Accounting Earnings Statement For Month Ended November 30, 20X2 THROUGHPUT (T): Revenues: Product Atex Product Detron Product Fonic Product Gaton Total Revenues Less: Commissions Net Revenues Materials Expense Throughput (T) OPERATIONAL EXPENSE (OE): Manufacturing Operations Sales and Marketing General and Administrative Total Operational Expense OPERATING PROFIT Variance Favorable / Unfavorable Actual Budget $ 374,400 729,025 374,400 623,119 $2,100,944 105,050 $1,995,894 666,445 $1,329,449 $ 374,400 966,625 0 934,679 $2,275,704 113,785 $2,161,919 729,255 $1,432,664 $ 0 237,600 374,400 311,560 $174,760 8,735 $166,025 62,810 $103,215 U F U U F U F U $195,000 170,000 270,000 $ 635,000 $ 694,449 $ 200,000 180,000 268,000 $ 648,000 $ 784,664 $ F F U F U 5,000 10,000 2,000 $ 13,000 $ 90,215 There are four columns—one for the actual results of operations, one for the originally budgeted amount, another for a variance, and yet another to indicate whether the variance is favorable or unfavorable. The variance is the difference between the originally budgeted amounts and the actual results. Following conventional practice, the variance is favorable if the difference tends to increase reported proﬁtability and unfavorable if it tends to decrease reported proﬁts. That is, it is a good thing for revenues to be more than budgeted and a bad thing for expenses to be more than budgeted. The Throughput Accounting Earnings Statement starts with the revenues, broken down by product. For each product a variance is calculated and marked as either favorable or unfavorable. Because sales of Atex were exactly as budgeted, no variance is reported for this product. Unfavorable variances are reported for the products Detron and Gaton, drawing management’s attention to the problems associated with these products. Fonic, which is apparently a new addition to the product line, has a favorable variance. Overall, revenues were $174,760 less than budgeted. Accountants distinguish two types of budgets: static and ﬂexible. The budget column in Exhibit 3.4 is an example of a static budget in which the results of actual operations are compared to the originally budgeted expectations. Flexible budgets are adjusted for cost control expectations at 50 Internal Financial Reporting the actual activity level. For accounting in the throughput world paradigm, we recommend measuring from initial expectations because changes in throughput, not cost reductions, are the objective. A hierarchy for budgetary control with constraints accounting is discussed further in Chapter 4. Both the sales commissions and materials expense are shown as having favorable variances. This is somewhat misleading since the sales commission is a percentage of sales revenue. The budget column shows the originally budgeted amount of sales commissions based on the originally budgeted sales revenue dollars. Since the total actual sales revenue was less than originally budgeted, the commission expense paid on sales revenues is also less than originally budgeted. Less expense is a good thing, and so the variance is reported as being favorable. In fact, the commission expense is exactly what was expected as a percentage of sales revenue. The favorable variance reported for materials expense is accounted for in similar fashion. The operational expenses appear to be nicely under control, with favorable variances in manufacturing operations as well as in sales and marketing. The overall favorable variance of $13,000 in operational expenses offsets a portion of the unfavorable throughput variance. Thus, the operating proﬁt is $90,215 less than had originally been budgeted. Constrained Operating Environment Even though the traditional Throughput Accounting Earnings Statement of Exhibit 3.4 uses the constraint management terminology of T and OE, it makes no mention of constraints.15 The throughput accounting statement, then, may be prepared without the company even having considered its constraints. However, an understanding of the organization’s constraints will be necessary for the constraints accounting report because the ﬁrst aspect of constraints accounting requires speciﬁc consideration of the role played by the constraints. The example assumes that there are three relatively independent chains within the organization. The constraints of these chains deﬁne the current capabilities, and therefore the tactics, of the company. Exhibit 3.5 shows the association of the four products with the constraints. In following the conventional direct costing paradigm, these data were not used in preparing the Throughput Accounting Earnings Statement. The products Detron and Fonic are associated with the welding constraint because both of them require use of the welder, which is currently fully utilized. Products Atex and Gaton do not require use of the welder. The product Gaton does require a type of labor, Class D, which is in very short supply. Gaton is the only product that requires the Class D labor skills. The production of Atex is not currently restricted by any internal constraint. Constraints Accounting versus Throughput Accounting Exhibit 3.5 Association of Products with Constraints Welder Product 51 Atex Detron Fonic Gaton Relevant Constraint Labor Class “D” Market (Quantity Demanded) X X X X When ﬁrst preparing—or revising—the format of a ﬁnancial report, the accountant must decide what data to include and how to display the data. The challenge is to summarize the data in a meaningful way. For a report to be meaningful it should inform, instruct, and ultimately motivate the recipient to take appropriate action. Of course, the raw data are available in detail, and specialized reports may be prepared. But the routine performance reports, such as the Constraints Accounting Earnings Statement, will provide ongoing direction to recipients of the report. Constraints Accounting Earnings Statement The Constraints Accounting Earnings Statement, shown in Exhibit 3.6, is built on the same ﬁnancial data used to prepare the Throughput Accounting Earnings Statement (Exhibit 3.4). Exhibit 3.6 Earnings Statement in a Constraints Accounting Format Constraints Accounting Earnings Statement For Month ended November 30, 20X2 Actual Throughput Contribution (T) Section: Constraints: Internal: Welder $ 716,380 Labor Class D 373,869 External: Market 239,200 Total Throughput $1,329,449 Contribution Operational Expense (OE) Section: 648,000 Greater of actual or budgeted OE Performance Profit $ 681,449 Budget Variance Favorable / Unfavorable $ 632,700 560,764 $ 83,680 186,895 F Note A U Note B 239,200 0 Note C $1,432,664 $103,215 U Note D 648,000 Note E Note F 52 Internal Financial Reporting Note that the total actual and budgeted throughput ($1,329,449 and $1,432,664, respectively), and hence the total throughput variance ($103,215), are the same for the Constraints Accounting Earnings Statement as for the Throughput Accounting Earnings Statement. Therefore, the underlying data are the same, but the display format has been changed. Explicit Consideration of Constraints Placing the constraint data on the earnings statement brings constraint reporting under the auspices of the ﬁnancial management function and requires its periodic reporting.16 The ﬁrst difference between the Throughput Accounting and Constraints Accounting Earnings Statements is that constraint classiﬁcations replace product classiﬁcations. As Goldratt has observed, “constraints are the essential classiﬁcation, replacing the role that products played.”17 The ﬁrst aspect of constraints accounting, the explicit consideration of the role of constraints, is accommodated by enumerating the various physical constraints of the organization. Throughput Contribution The second aspect of constraints accounting is the speciﬁcation of throughput contribution effects. The constraints accounting report highlights the impact, or lack thereof, of decisions and actions on the throughput contribution relative to the constraints.18 Since all signiﬁcant changes in throughput are the result of “touching” an Archimedean constraint, this presentation invites attention to the appropriate areas—the Archimedean constraints. The top portion of the Constraints Accounting Earnings Statement (Exhibit 3.6) is designated as the throughput contribution section. In order to show the throughput contribution effects, we need to measure from some base point. Therefore, the Constraints Accounting Earning Statement (Exhibit 3.6) includes budget 19 and variance columns, just as does the Throughput Accounting Earnings Statement (Exhibit 3.4). Revenue and variable expense data associated with the relevant constraints are shown in Exhibit 3.7. These data will allow the reader to reconcile the Constraints Accounting Earnings Statement throughput with that of the Throughput Accounting Earnings Statement. Notes to the Earnings Statement The notes to the Constraints Accounting Earnings Statement contain detail appropriate for the managerial level to which the report is directed. The notes might also take the form of “drill down” reports providing additional detail, for example, analyzing the throughput per constraint unit classiﬁed in various ways, for instance, by customer, product line, and so forth. Constraints Accounting versus Throughput Accounting Exhibit 3.7 Throughput Data Associated with Relevant Constraints Constraints Actual Throughput Budgeted Throughput Revenue Variable Expense* Throughput $1,103,425 387,045 $ 716,380 $ 966,625 333,925 $ 632,700 Revenue Variable Expense* Throughput $ 623,119 249,250 $ 373,869 $ 934,679 373,915 $ 560,764 Revenue Variable Expense* Throughput $ 374,400 135,200 $ 239,200 $ 374,400 135,200 $ 239,200 Total Throughput Contribution $1,329,449 * Variable expense includes commissions and raw materials. $1,432,664 Internal: Welder: (Detron & Fonic) Labor Class D: (Gaton) External: Market (Atex) 53 The existence of an internal physical constraint, such as the welder and “Class D” labor in this example, implies that at least some customer orders have been turned away—either intentionally or unintentionally. Consequently, an analysis of the lost or rejected orders would be an appropriate addition to the notes relating to internal constraints. The availability of such evidence lends credence to the fact that the speciﬁed constraint is, in fact, an active constraint. In some cases, the “constraint” speciﬁed may turn out to be a strategically selected leverage point or focal point used for scheduling production or projects, but not a currently active constraint. In that case, the constraint should be presented as being a marketing constraint rather than a production constraint. Note A, for the welding constraint, might look something like this: Note A: During November the sales emphasis for products using the welder was changed from Detron to Fonic. As a result of the higher throughput per constraint (welder) minute of Fonic ($8.21) versus Detron ($5.29), overall throughput increased by $83,680. The remaining unﬁlled market for Detron available is estimated to be 2,000 units or $360,000 of throughput. We see, then, that there is some inherent ambiguity in the Throughput Accounting Earnings Statement (Exhibit 3.4). By treating interrelated activities (products Detron and Fonic) as independent, the Throughput Accounting Earnings Statement shows two variances: an unfavorable vari- 54 Internal Financial Reporting ance of $237,800 for product Detron and a favorable variance of $374,400 for product Fonic. There is nothing to tie the two variances together. This ambiguity is resolved in the Constraints Accounting Earnings Statement (Exhibit 3.6). By focusing on constraints rather than products, the net effect of interactions among parts of the organization is identiﬁed. Whereas the Throughput Accounting Earnings Statement tells the recipient about what happened to the individual parts of the organization in isolation, the Constraints Accounting Earnings Statement exposes how the individual parts of the organization interacted during the period. When people focus on isolated areas, there is a danger that the isolated area will become the whole for the individual. Let us now turn to the second internal constraint, Class D labor. The example assumes that, at the beginning of the month, one of the organization’s three employees with these skills left to accept a similar, but higher paying, position with a competitor. This saved the organization about $5,000 in wages and fringe beneﬁts during the month (which was reﬂected as a favorable variance in manufacturing operations in the traditional format of Exhibit 3.4). Had a similar event occurred in any area of operations other than Class D labor or the welder, it would have been merely a statistical ﬂuctuation in a resource level. However, because Class D labor is a constraint, the loss of this employee (whom we either were unable to, or elected not to, replace) caused us to be unable to deliver a full third of our commitment to the market. The result was a loss of one-third of the throughput of Gaton—as well as considerable customer goodwill. Note B might read as follows: Note B: Reduction of the headcount of Class D labor from three to two during the month resulted in the shipment of only two-thirds of the product which uses this type of labor and a loss of $186,895 of throughput. Sales estimates that about 75% of these customers will be permanently lost, but that at least $150,000 of throughput remains available to us in this market. The marginal throughput associated with an additional Class D employee is about $900 per hour.20 Note C would disclose some information about the market constraint for Atex. Probably the most signiﬁcant thing about this product is that there is no variance—we sold what we expected to sell. The question is, “What are we doing to exploit, subordinate to, or elevate this constraint?” It appears that there were no effective actions in this area during the month; inertia may be playing a role here.21 The Total Throughput Contribution line in the throughput section of the Constraints Accounting Earnings Statement (Exhibit 3.6) is simply a summary of the overall throughput effects. November actions, or lack of actions, resulted in proﬁts being $103,215 less than budgeted.

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