MANAGEMENT DYNAMICS Merging Constraints Accounting to Drive Improvement phần 10 pdf

Asset Key Liability Equity Revenue Expense Suspense (Throughput) XXX 490 Adjustment to Restate Sales at Cash 120 Accounts Receivable 410 Sales 390 Earnings Summary 590 Variable Cost Sales 137 Materials in Finished Goods 136 Variable Cost in Process 131 Materials 910 Payroll Suspense 320 Retained Earnings 310 Common Stock 220 Liability for POOGI Bonus 161 Sources of Future Improvement 160 Investment for Improvement 250 Long-term Debt 210 Vouchers Payable 110 Cash in Bank 139 Allowance to Restate Inventory at Absorption Cost (Various Sources) (Performance Profit) 650 Operational Expense (OE) 790 POOGI Bonus Expense 395 GAAP Reconciliation (GAAP Earnings) 910 Other Revenue and Expense 290 Exhibit A.4 Cost Accounting Flows in Constraints Accounting System 5070_Pages 7/14/04 1:56 PM Page 290 395 GAAP Reconciliation 490 Adjustment to Restate Sales at Cash 590 Variable Cost of Sales 650 Operational Expense 790 POOGI Bonus Expense 910 Other Revenue and Expense These accounts are shown in Exhibit A.4 and are discussed in the follow- ing paragraphs. Resource Acquisition The positive control of expenditures provided by the voucher system re- mains in the constraints accounting system. Expenditures are still vouched and traced to their point of incurrence responsibility. Even though there is greater flexibility and room for managerial judgment within the limits of the existing budget authorizations, managers must be prudent in their expenditures. The Vouchers Payable account operates in exactly the same manner that it does in the GAAP-based system, controlling all cash dis- bursements. Although the acquisition of materials, personnel, and other contrac- tual services are accounted for in a manner similar to the GAAP system, the Cost of Sales line contains only the variable costs of production. The Payroll Suspense account is still used but with a single destination (Opera- tional Expense). Note the first three closing entries (dotted lines) in the earnings summary, the credit from Sales and the debit from Variable Cost of Sales, when adjusted to Restate Sales at a Cash amount, provide a trans- parent throughput amount. The treatment of long-term assets is different if either the direct write-off method or the payback allocation method is used. If the direct write-off method were used, then the acquisition of long-term assets would follow a path similar to other contractual services. Exhibit A.4 assumes that the payback allocation method is used. Expenditures representing specifically approved investments for improvement are vouched in the conventional manner and charged to the Investment for Improvement ac- count. Of course, it is still necessary to maintain a record of, and account- ability for, plant and equipment owned by the organization. Constraints Accounting Cost Distributions Materials used, whether drawn from the Raw Materials Inventory or acquired specifically for a particular job, result in the expenditure of funds that are variable with the production level. These are assigned to the individual job or Constraints Accounting Similarities and Departures 291 5070_Pages 7/14/04 1:56 PM Page 291 product and are part of the throughput calculation when the goods are sold. There is an Allowance to Restate the Product Inventory at Absorption Cost. In keeping with the philosophy of constraint management, conver- sion costs (direct labor and overhead) are not associated with specific or- ders or units of product produced. Instead, all personnel services and other contractual charges are assigned directly to Operational Expense. Even though there is only one destination for the personnel costs, the Pay- roll Suspense account is still used to ensure that the dictates of a sub- sidiary cost assignment system do not interfere with the important task of paying employees promptly. Reconciling Items A reconciling adjustment between the Constraints Accounting Perfor- mance Profit and the GAAP earnings transfer to Retained Earnings will be needed whenever the constraints accounting treatment of a revenue or cost item is different from the GAAP treatment. The closing entry transferring the balance of the Operational Ex- pense account to the Earnings Summary is shown as a dotted line because it is the larger of the actual or budgeted OE for the purpose of calculating the Performance Profit. If the budgeted OE is greater than the actual OE, then the difference is a GAAP Reconciliation item. It will be necessary to associate some conversion cost to the product inventories to comply with GAAP for external reporting. If the organiza- tion has discontinued collecting conversion costs at the product level and has resisted the temptation to collect data regarding processing times, then it will need to establish new allocation bases to effect the association. Work-in-process may be valued using one-quarter of the production rope length. 37 For example, if the rope (production cycle time allowed) at the end of the period were 10 working days and there are 200 working days in the year, the rope would represent 5% (10/200 = 0.05) of the manufactur- ing time available. One-quarter of (0.05/4 = 0.0125) of the manufacturing portion of OE would be assigned to the Allowance to Restate Inventory at Absorption Cost for work-in-process. The remaining balance of OE is associated with finished goods and the cost of sales. The ratio of the Materials in Finished Goods to the re- maining OE balance may be used to allocate the finished goods portion of OE to the Allowance to Restate Inventory at Absorption Cost. The balance of the allowance account is added to the materials cost in inventory to ar- rive at an overall GAAP inventory valuation. If inventories increase, the ef- fect will be to increase GAAP earnings by the amount of OE added to the allowance account. An organization will likely want to accrue its receivables in the same manner that it does in a GAAP system in order to maintain positive con- 292 Accounting System Structure 5070_Pages 7/14/04 1:56 PM Page 292 trol of amounts owed to it. The accrued amount may be converted to cash received from sales by adding (or deducting) the decrease (or increase) in Accounts Receivable from Sales during the period. The account, Adjust- ment to Restate Sales at Cash, serves this purpose. The receivables adjust- ment is closed to the GAAP Reconciliation. Constraints Accounting Departures Constraints accounting departs from conventional GAAP reporting in the same manner as direct costing does. Therefore, the conventional direct costing GAAP inventory adjustments would apply equally. POOGI Bonus The POOGI Bonus Pool is a liability to be paid in accordance with the provisions of the POOGI Bonus plan. Since the exact amount of the pay- ment in a given month is not known until the current month’s addition (or reduction) to the pool is known, the payment cannot be vouched until it is ready to be paid. Therefore, a current liability account will be estab- lished to hold the liability. This account, which we will call Liability for POOGI Bonus, could be either a general ledger account or a subsidiary ledger account under Wages and Salaries Payable. The POOGI Bonus Expense is an Other (extraordinary) Variation and is reported as shown in Chapter 4 of this text. It is not included as part of operational expense (OE), and it is not deducted in the computa- tion of Performance Profit. 38 Assume the results for a POOGI Bonus plan that started in October 20X1 were as shown in Exhibit A.5. This exhibit shows that, in the first month of the plan (October 20X1), the wage and salary base is $300,000. Performance Profit increased by $60,000 over October 20X0 (the compar- ison month from a year earlier). Since the POOGI Bonus proportion is 50%, a POOGI Bonus amount of $30,000 ( = 50% of $60,000 increase in Performance Profit) is shown in Exhibit A.3 as an addition to the bonus pool at the end of October. At the end of 12 months, the total of the dif- ferences for each month will equal the total difference in the 12-month amounts. In the second month, November 20X1, there was actually deteriora- tion in performance relative to the year earlier month. Performance Profit is $20,000 less than it was for November 20X0, which is reflected in the addition to the bonus pool of a negative $10,000. This type of situa- tion is common when organizations implement TOC applications such as drum-buffer-rope. Production lead time is reduced, and some of the back- log of order is shipped, pulling orders forward. To the extent that the in- crease in orders shipped came from the backlog rather than an increase Constraints Accounting Similarities and Departures 293 5070_Pages 7/14/04 1:56 PM Page 293 294 Accounting System Structure in the rate of sales, the improved performance reported in October 20X1 was a timing difference, and is compensated for in a following period. Recording the gross amount of the POOGI Bonus is part of the month-end adjusting procedures. When the plan is first established, the balance of the Liability for POOGI Bonus account is zero. The additions to the POOGI Bonus pool are credited to Liability for POOGI Bonus. The corresponding debit to POOGI Bonus Expense is an expense for the month of October 20X1, resulting in the entry (a) shown in Exhibit A.6. Since one-twelfth of the balance in the POOGI Bonus pool is being disbursed monthly, the entry to record the vouchering of the bonus pay- Exhibit A.5 POOGI Bonus Pool and Base (A) (B) (C) (D) (E) (F) (G) Month C -1 / 12 POOGI Bonus payments vouched During the month End of month Addition to POOGI Bonus Pool D -1 – B + C End of month POOGI Bonus Pool balance Gross Wages and Salaries (excluding POOGI Bonus) (Total Gross Wages and Salaries for last 12 months or since plan inception) POOGI Bonus Wage and Salary Base D / F POOGI % 20X1 ($) ($) ($) ($) ($) Sep 0 0 0 0- 0 0.0 Oct 0 30,000 30,000 300,000 300,000 10.0 Nov 2,500 -10,000 17,500 300,000 600,000 2.9 Dec 1,458 20,000 36,042 300,000 900,000 4.0 20X2 Jan 3,003 72,429 105,467 300,000 1,200,000 8.8 Feb 8,789 94,158 169,107 300,000 1,500,000 11.3 Mar 14,092 122,405 249,172 300,000 1,800,000 13.8 Apr 20,764 159,127 350,813 300,000 2,100,000 16.7 May 29,234 206,865 480,705 330,000 2,430,000 19.8 Jun 40,059 268,925 647,510 380,000 2,810,000 23.0 Jul 53,959 349,603 862,474 380,000 3,190,000 27.0 Aug 71,873 454,484 1,140,202 380,000 3,570,000 31.9 Sep 95,017 590,829 1,499,666 363,334 3,933,334 38.1 Oct 124,972 768,078 1,965,027 333,333 3,966,667 49.6 Nov 163,752 90,725 1,892,000 333,333 4,000,000 47.3 Exhibit A.6 Recording Gross Amount of POOGI Bonus 20X1 (a) Oct 31 POOGI Bonus Expense $30,000 $30,000 Liability for POOGI Bonus To record the liability for gross amount of POOGI Bonus earned in October 2001 5070_Pages 7/14/04 1:56 PM Page 294 Summary 295 ments on November 10, 20X1, is as shown in Exhibit A.7. Individual checks are then distributed to employees on November 15 as with any other pay- roll (including the various deductions). The entry to record the November 20X1 POOGI Bonus reduction is as shown in Exhibit A.8. The POOGI Bonus pool (Liability for POOGI Bonus) now has a bal- ance of only $17,500 ( = $30,000 – $2,500 – $10,000). On December 10, 20X1, the bonus payment to employees is again vouched, and checks are distributed on December 15 in a manner similar to entry (b) in Exhibit A.5. The entry for the December payment is shown in Exhibit A.9. Entries similar to (a) and (b) are then made each month. At the end of October 20X2, the balance of the Liability for POOGI Bonus account is $1,965,027 as shown in the account illustrated in Exhibit A.10. The $1,801,275 balance on November 10, 20X2, the November addi- tion of $90,725, and the November ending balance of $1,892,000 are shown in Chapter 4 in the main text. SUMMARY As we walk back through the passages of time, it becomes apparent that humans have has an innate need to account for their belongings and the belongings of others. Moreover, the need to measure and be measured is Exhibit A.8 Recording Reduction in Liability as Result of Negative Bonus Amount 20X1 (b) Nov 30 Liability for POOGI Bonus $10,000 $10,000 POOGI Bonus Expense To record the reduction in liability for negative amount of POOGI Bonus earned in November 20X1 Exhibit A.7 Vouchering POOGI Bonus 20X1 (b) No Liability for POOGI Bonus $2,500 $2,500 Vouchers Payable (Payroll) To voucher the November POOGI Bonus payments to employees of 1/12 of the pool balance. 5070_Pages 7/14/04 1:56 PM Page 295 296 Accounting System Structure woven into the fabric of their lives in such a manner that it weaves a web within their minds that can prove to be a catalyst of change, for good and for bad. When tracing transactions both yesterday and today, it is apparent that individuals who demonstrate an understanding of numbers are regu- larly considered to be more mentally agile and are frequently looked upon differently from those individuals who exhibit more artistic abilities. This impression, whether true or false, insidiously leads some people in positions of authority to abdicate their responsibility of checking the trail of numbers within an organization. Furthermore, knowing the great power of understanding that numbers can hold all too often leads some individuals to purposeful complexity, manipulations, distortions, and cor- ruption. We must also recognize the ambiguity of some reporting financial systems laws and regulations, that in themselves promote manipulations within an organization. Such manipulative financial reporting systems serve as a catalyst not only in their quest to measure up to outside eco- nomical forces but also to ensure their survival. There is a superior, more humane, and ethical way for an organiza- tion to realize a dynamic, robust process of ongoing improvement. Own- ers of the organization can demand an operating philosophy that un- leashes the power of constraints, promotes and achieves global goal Exhibit A.10 Liability for POOGI Bonus Account Liability for POOGI Bonus 20X2 20X2 Oct 31 Balance 1,965,027 Nov 10 November payment 163,752 Nov 10 Balance 1,801,275 Nov 30 November Addition 90,725 Nov 30 Balance 1,892,000 Exhibit A.9 Vouchering POOGI Bonus 20X1 (d) Dec 10 Liability for POOGI Bonus $1,458 $1,458 Vouchers Payable (Payroll) To voucher the November POOGI Bonus payments to employees of 1/12 of the pool balance. 5070_Pages 7/14/04 1:56 PM Page 296 congruence, and incorporates a supporting accounting system that both motivates appropriate behavior and is transparent and fluid in nature. NOTES 1 Roughly from the fourteenth through the sixteenth centuries. 2 Richard Vangermeersch has suggested that the cost allocation concept is a nineteenth-century phenomenon. He points out that in Venice the problem was circumvented by vesting ownership of the ship itself in the city-state. Nevertheless, it is clear that by the seventeenth century ventures were being accounted for in a manner that apportioned, in one way or another, the cost of vessels between sequential undertakings. Thus the conclusion that the concept of cost allocation existed at the time of the Italian Renaissance is mine alone, and I leave it to the reader to draw his or her own conclusion. 3 Perhaps one small and easily portable book was held by the banker or merchant and another, larger, book was the responsibility of an employee at the place of business; or perhaps one book was the banker’s and one the customer’s. 4 As people saw their neighbors hoping to profit from investment in East India companies, they wanted to profit also—and the race was on. 5 iTulip.com. 6 H. Thomas Johnson and Robert Kaplan, Relevance Lost: The Rise and Fall of Management Accounting (Harvard Business School Press, 1987), p. 130. 7 Ibid., p. 131. 8 Ibid., p. 127. 9 Ibid., p. 126. 10 The quote is from Johnson and Kaplan, Relevance Lost, p. 128, but they attribute the idea to Robin Cooper, who is generally acknowledged as the driving force behind the popularity of the activity-based cost and activity-based management fads of the late twentieth century. 11 Ibid. 12 An additional cause reservation is one of about eight categories of legitimate reservation specified as part of the theory of constraints thinking processes. These categories of legitimate reservation provide a civilized way to disagree because they emphasize the logic and the system rather than individual personalities. The additional cause reservation says, “I see your point and I agree that the effect exists. However, I think that there is another cause that is so much more important than what you have cited that it should replace the causal relationship in your thinking.” 13 Johnson and Kaplan, Relevance Lost, p. 132. The internal quote is from Harrington Emerson. 14 C. J. McNair and Richard Vangermeersch, Total Capacity Management: Optimizing at the Operational, Tactical, and Strategic Levels (St. Lucie Press, 1998), p. 136. 15 Johnson and Kaplan, Relevance Lost, p. 135. 16 Ibid., p. 145. 17 McNair and Vangermeersch, Total Capacity Management, pp. 140–141. 18 Ibid., p. 138. 19 Ibid., p. 140. 20 Generally accepted accounting principles (GAAP) is an empty term because there was no list of such principles until about 50 years later. Then, rather than having general acceptance, the GAAP principles were dictated by either the Financial Accounting Standards Board or the Securities and Exchange Commission. At the time of this writing the regulations have become so complex Notes 297 5070_Pages 7/14/04 1:56 PM Page 297 298 Accounting System Structure that relatively few people can comprehend the full body of GAAP or the resulting financial statements. As a result, the public turns to the community of professional financial analysts to interpret the GAAP statements. That even this community of financial analysts routinely ignores the GAAP model in their interpretations is strong evidence that GAAP principles are, in fact, not generally accepted. 21 McNair and Vangermeersch, Total Capacity Management, pp. 174–187. 22 An interesting side issue that is rarely mentioned is the ethical question of whether cost plus pricing is appropriate for use when the objective is more or maximum profits, rather than reasonable profits. 23 In addition to cost-based pricing, some techniques for linking expenses to revenues are (1) budgeting managed costs as a percentage of sales—the notion that all costs are long-run variable, and (2) budgeting all costs as a percentage of sales. 24 Gross margin is the difference between the selling price and the GAAP product cost of a product. 25 Assets are recorded on the left-hand, or debit, side of an account page; liabilities and equity are recorded on the right-hand, or credit, side. Thus, the rule stands that debits must equal credits. 26 Closing an account involves transferring the entire balance to another account, leaving the closed account with a zero balance. The closed account is then ready to be reopened to collect and summarize data for the next fiscal period. 27 The assets owned include monetary amounts that others owe us, which are shown in the illustration as accounts receivable. 28 When the revenues and expenses are shown on a formal report, the report is an earnings statement. The bottom line of an earnings statement is the net earnings or profit, and that is the source of the general expression, bottom-line results. 29 The key is shown in the lower right-hand corners of Exhibits A.2 and A.4. 30 The Vouchers Payable account is similar to Accounts Payable, but all cash being paid out goes through the Vouchers Payable account and there is an implication that a process is in place to vouch for the appropriateness of the expenditure. A voucher is a place in the system to collect data about the transaction, such as authority for ordering, proof of delivery, agreement on terms, and approvals for account distribution and payment. When a transaction takes place that results in a cash payment, the transaction is vouchered. 31 The Accumulated Depreciation account is a valuation, or contra-asset, account. 32 The Resources in Progress account obviously summarizes a great deal of activity. The single account shown in Exhibits A.1 and A.2 may represent a summary of an entire subsidiary ledger having detailed cost flows through each department of the manufacturing plant. 33 Resources in Progress (RIP) is also known as work-in-process or work in progress (WIP inventory). 34 Sometimes direct labor is called touch labor. 35 The allocation process is discussed in Chapter 5. 36 Also known as Cost of Goods Sold. This is an expense. 37 A rope is used with a constraint management drum-buffer-rope production scheduling system. It is the period of time allowed between when an order is released to production and the scheduled delivery date. The use of one-quarter of the rope length assumes that the work-in-process is 50% complete and that, on the average, orders are completed in one-half of the production rope length. 38 The POOGI Bonus Expense will be included as part of the General Administrative Expenses on the external (GAAP) financial statements. 5070_Pages 7/14/04 1:56 PM Page 298 Glossary Account classification, method of: A technique for classifying expenses into various categories (for routine financial reporting purposes) based on the general characteristics of another classification. For example, costs that are classified as raw materials might also have the derivative classifica- tion of truly variable for constraints accounting purposes. This technique allows routine financial reports of a specialized nature, such as constraints accounting, to be prepared automatically from the existing financial data- base. Accounting identity: Assets = Liabilities + Owners Equity. Activity-based costing (ABC): A system for allocating costs to products or other cost objectives using multiple measures of inputs used. The tech- nique is similar to traditional service department allocations except that the activity base is an input measure, known as a cost driver, rather than an output volume measure. ABC also forms the basis for activity-based management. Annual profit plan: See budget. Archimedean constraint: A constraint that results in a dynamic change in system performance—either good or bad—when touched. Archimedes point: A place to focus attention in order to get powerful re- sults. Archimedes was a Greek mathematician in the third century before the Common Era. He is probably best known for running naked down the street and shouting “Eureka!,” which was the way Greeks said “I found it!” He had discovered how to determine the weight of gold in the king’s crown. As the story goes, he was bathing and noticed that he displaced his volume in water. He was then able to determine the weight of the gold in the king’s irregularly shaped crown by determining how much water it dis- placed relative to an equal weight of gold of known purity. This business about the displacement of water is known as Archimedes’ principle. But Archimedes was a man of many talents and also set about to move the en- tire world. He said that all he would need would be a firm place to stand, a lever of sufficient length, and a fulcrum against which to put the lever. That firm place to stand, which would allow the entire world to be moved, 299 5070_Pages 7/14/04 1:56 PM Page 299 [...]... amounts relating to a relatively broad range of activity Strategic constraints: Locations selected by top management as being strategically desirable places to have constraints May or may not be active as constraints Strategic plan: A plan for the direction of an organization established by strategically selecting constraints and allowing the elegant simplicity of constraint management to lead to an unavoidable... 314 target, 219–220 See also Sales funnel Capital expenditure, 6, 33, 81, 96, 100 , 104 –112, 258, 260, 301 internal rate of return, 6, 8, 10, 250, 256, 308, 313 return on investment, 101 , 108 , 247 See also Profit Capital write-off methods: depreciation, 104 direct write-off, 104 105 example, 106 –112 payback allocation method, 105 , 311 Cash flow, operating, 96 Caspari, John A., 129 Choopchick(s), 27 Coffin,... leverage-point management Constraints accounting: An accounting reporting technique, consistent with a process of ongoing improvement and implementation of the theory of constraints and constraint management, 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) Contribution margin: An accounting. .. Raymond, 23, 38 Collins, James C., 91 Constraint(s), 21–38, 24, 25, 302 accounting See Accounting, constraints Archimedean, 26, 31, 52 relationship to POOGI bonus, 68 constraints accounting See Accounting Index management, 302 current status, 264 necessary conditions, 263 subordination, 264–267 successful, 262–269 near, 187, 219, 222, 260, 310 nonconstraint, 28 not used in cost-based pricing, 143 operating... concept refers to distinguishing between a business (or other) organization and its owners (4) An analytical entity is a management accounting entity that may be either broader or narrower than the legal organizational entity Evaporating cloud: (1) A TOC thinking process used to express a conflict; (2) a TOC thinking process used to break out of existing paradigms Exception reporting: A focusing tool; the... I: See inventory/investment Identified potential sales opportunity: Something (product, service, offering) that a salesperson is attempting to sell to a specific customer and that the customer is not currently buying Identify: First step of the TOC focusing process, identification of the constraint Improvement: Always measured in terms of the global goal of the organization in constraint management Income... relative buffer consumption or penetration) Inventory: See inventory/investment Inventory/investment (I): Costs incurred that have not yet been assigned to expense Inventory profits: Apparent profits reported when more units are produced than sold and absorption-costing methods are used Absorption costing assigns some costs that relate to time periods to product inventories If the products are not sold, then... 314 Income statement See Earnings statement Inertia, 31, 33, 34, 35, 46, 54, 62, 68, 73, 102 , 104 , 105 , 114, 259, 266, 271, 308 Information system, 28, 31 legacy, 45 Institute of Management Accountants (IMA), 62 Inventory(ies) competitive position, 23 inventory/investment (I), 2, 3, 98, 308 defined, 100 nature, 101 product, 1 profits, 135, 308 role in profitability, 23 Johnson, H Thomas, 19, 207 Jones,... available when needed Similar to a feeding buffer in critical chain applications Asset: A cost that is capitalized and allocated to expense over a number of fiscal periods Balance sheet: An accounting report, based on the accounting identity, showing the financial position of an organization at a specific point in time Bonus pool: The total dollars to be paid in the form of a bonus Bottom line: The summary position... the subject Pareto analysis: See Pareto principle Pareto principle: J M Juran coined the phrase the vital few and trivial many to apply to the phenomenon that when there is a common effect resulting from a population containing many different sources, relatively few of the sources account for most of the effect He also recognized that the phenomenon was applicable to so many fields as to be a general . Earnings 310 Common Stock 220 Liability for POOGI Bonus 161 Sources of Future Improvement 160 Investment for Improvement 250 Long-term Debt 210 Vouchers Payable 110 Cash in Bank 139 Allowance to Restate. to the re- maining OE balance may be used to allocate the finished goods portion of OE to the Allowance to Restate Inventory at Absorption Cost. The balance of the allowance account is added to. materials cost in inventory to ar- rive at an overall GAAP inventory valuation. If inventories increase, the ef- fect will be to increase GAAP earnings by the amount of OE added to the allowance account. An