Certified Management Accountant

(CMA)

Part 1
Financial Planning, Performance and Analytics
CMA Part 1

Financial Planning,
Performance and
Analytics

Operational Efficiency
Operational Efficiency

• Operational efficiency is the capability of an enterprise to

deliver products or services to its customers in the most
cost-effective manner possible while still ensuring the high
quality of its products, service and support.
Production Activities-Costs

Activities

Value Non Value

Added Added
Value Added Activities

• Value added is the enhancement a company gives its

product or service before offering the product to
customers.
Non Value Added Activities

• Time and/or money spent on an activity or task that adds

to the total cost, but does not enhance the customer's
judgment of the value of a good or service.
 Elimination of Non Value Added Activities

Activities

Non value-added
activities

Unnecessary Necessary
Reduce or Eliminate Continually Evaluate
and Improve
Just in Time

Pull System
Just in Time
• Just-in-time (JIT) manufacturing is a production model in
which items are created to meet demand, not created in
surplus or in advance of need.

• The purpose of JIT production is to avoid the waste

associated with overproduction, waiting and excess
inventory.

• JIT is system is also known as PULL SYSTEM and Lean

Manufacturing
Just in Time
• Requires more storage space
• Requires tracking and counting
• Increases movement activity
• Hides yield, scrap, and rework problems
• Increases risk of loss from theft, damage, obsolescence
Just in Time

• Philosophy of complete elimination of waste

• In a pull system, nothing is produced until it is needed,

either ultimately by the customer or by the next production
process.
Just in Time

• Philosophy of complete elimination of waste

• In a pull system, nothing is produced until it is needed,

either ultimately by the customer or by the next production
process.
Just in Time
• A just-In-Time inventory system is a pull system, where
nothing is produced until it is needed. Raw materials are
purchased only for the immediate need and are not stored.
Rather, they are delivered and go immediately into the
production process.

• The philosophy is to reduce inventory costs by having the

right material at the right place at the right time.

• Just-In-Time inventory control requires flexible factory in

order to avoid backups at work areas and lack of work in
other areas.
Just in Time
• The objective of JIT is to reduce carrying costs by
eliminating inventories and increasing the deliveries made
by suppliers. Ideally, shipments of raw materials are
received just in time to be incorporated into the
manufacturing process.

• The focus of quality control under JIT is the prevention of

quality problems. Quality control is shifted to the supplier.
JIT companies typically do not inspect incoming goods; the
assumption is that receipts are of perfect quality.

• Suppliers are limited to those who guarantee perfect

quality and prompt delivery.
Just in Time
• JIT system, materials go directly into production without
being inspected. The assumption is that the vendor has
already performed all necessary inspections. The
minimization of inventory reduces the number of suppliers,
storage costs, transaction costs, etc.

• Back flush costing eliminates the traditional sequential

tracking of costs. Instead, entries to inventory may be
delayed until as late as the end of the period.

• For example, all product costs ma y be charged initially to

cost of sales, and costs may be flushed back to the
inventory accounts only at the end of the period. Thus, the
detail of cost accounting is decreased
Just in Time
• JIT system, materials go directly into production without
being inspected. The assumption is that the vendor has
already performed all necessary inspections. The
minimization of inventory reduces the number of suppliers,
storage costs, transaction costs, etc.

• Back flush costing eliminates the traditional sequential

tracking of costs. Instead, entries to inventory may be
delayed until as late as the end of the period.

• For example, all product costs ma y be charged initially to cost of

sales, and costs may be flushed back to the inventory accounts only
at the end of the period. Thus, the detail of cost accounting is
decreased
Just in Time: Cell
• Cellular Manufacturing (CM) refers to a manufacturing system
wherein the equipment and workstations are arranged in an
efficient sequence that allows a continuous and smooth
movement of inventories and materials to produce products
from start to finish in a single process flow, while incurring
minimal transport or waiting time, or any delay for that
matter.

• Cells are sets of machines, often group in semicircles, that

produce a given product or product type.

• CM is an important ingredient of lean manufacturing.

Just in Time: Cell
Just in Time: Kanban
• Kanban is a visual system for managing work as it moves
through a process. Kanban visualizes both the process (the
workflow) and the actual work passing through that process.

• The goal of Kanban is to identify potential bottlenecks in

your process and fix them so work can flow through it cost-
effectively at an optimal speed or throughput.
Just in Time: Cell - Kanban
Just in Time: Human Resources
• Workers are assets
• Cross-trained workers
• Greater responsibility at lower levels
• Leaders as facilitators, not order givers
Just in Time: Advantages

• Advantages of JIT inventory include:

• Working capital. JIT inventory is designed to be exceedingly low, so
the investment in working capital is minimized.
• Obsolete inventory. Since inventory levels are so low, there is little
risk of having much obsolete inventory.
• Defects. With so little inventory on hand, defective inventory items
are more easy to identify and correct, resulting in lower scrap costs.
• Process time. A thoroughly implemented JIT system should shorten
the amount of time required to manufacture products, which may
decrease the quoted lead times given to customers placing orders.
• Engineering change orders. It is much easier to
implement engineering change orders to existing products, because
there are few existing stocks of raw materials to draw down before
you can implement changes to a product.
Just in Time: Disadvantages
• Shortages: Low JIT inventory levels make it more likely that any problem in the
supplier pipeline will lead to a shortage that will stop production. This risk can be
mitigated through the use of expensive overnight delivery services when
shortages occur.

• Quality Issues: As quality of the material supplied is shifted to the suppliers, the
quality issue may damage reputation company’s products
Just in Time: Recap!

• Pull System
• Lean Manufacturing
• Few carefully selected suppliers
• Cells
• Kanban
• Backflush costing
• Elimination of Waste
Material Requirement Planning
Material Requirement Planning (MRP)
• MRP is a push system, that is, the demand for raw
materials is driven by the forecasted demand for the final
product, which can be programmed into the computer.

• This is in contrast with just-in-time manufacturing, which is

a pull system, meaning items are pulled through
production by current demand, not pushed through by
anticipated demand.
Material Requirement Planning (MRP)
MRP: Benefits
• Reduced idle time,
• Lower setup costs,
• Lower inventory carrying costs, and
• Increased flexibility in responding to market changes.

• The three basic goals of MRP are

The Right Part In The Right Quantity At The Right Time.

Bill of Materials
• A bill of materials or product structure (sometimes bill of
material, BOM or associated list) is a list of the raw
materials, sub-assemblies, intermediate assemblies, sub-
components, parts and the quantities of each needed to
manufacture an end product.
Bill of Materials: Example
 Bill of Materials: Example

Independent Demand Table

Demand(Calculated)

Dependent
Demand(Calculated) Hardware
Legs (4) Ends(2) Sides (2) Top (1)
Kit (1)
 Bill of Materials: Example

Independent Demand
Demand(Calculated)

Dependent
Demand(Calculated)
 Bill of Materials: Example
100 – 20 = 80

[80 x 5 ] = 400
400 – 100 =300
A(2) B(5)

[300 x 2 ] = 600
C(1) D(3) E(2) 600 – 50 =550

Starr has just received an order for 100 units of X, the finished
product. The company has 20 units of X, 100 units of B, and 50 units
of E in inventory. How many units of E must Starr purchase in order to
fill the order?
 Manufacturing Resource Planning (MRP II)

• Manufacturing resource planning (MRP II) is defined as a

method for the effective planning of all resources of a
manufacturing company.

• Ideally, it addresses operational planning in units, financial

planning, and has a simulation capability to answer "what-if"
questions and extension of closed-loop MRP.

• MRP is component of MRP II system.

Enterprise Resource Planning (ERP)
Enterprise Resource Planning (ERP):Definition

• ERP is a process of managing all resources and their use in

the entire enterprise in a coordinated manner

• ERP is a set of integrated business applications, or

modules which carry out common business functions such
as general ledger, accounting, or order management
What is Enterprise Resource Planning (ERP)?

• Enterprise Resource Planning

• Support business through optimizing, maintaining, and
tracking business functions
• Broken down into business processes:
• HRM
• Sales& Distribution
• Financials
• Manufacturing
What Makes ERP Different?

• Integrated modules
• Common definitions
• Common database
• Update one module, automatically updates others
• ERP systems reflect a specific way of doing business
• Must look at your value chains, rather than functions
Benefits of ERP

• Common set of data

• Help in integrating applications for decision making and
planning
• Allow departments to talk to each other
• Easy to integrate by using processed built into ERP
software
• A way to force BPR (reengineering)
• Reduced operating cost
• Reduced human errors
ERP Vendors
Throughput costing

• Throughput costing, sometimes called super variable

costing, recognizes only direct materials costs as being
truly variable and thus relevant to the calculation of
throughput margin (throughput contribution).

• All other manufacturing costs are ignored because they

are considered fixed in the short turn.
Throughput costing: Three Basic Measurements

• Throughput contribution (Sales – Direct Materials),

• Investments (raw materials; work-in-process; finished

goods; R&D costs; and property, plant, and equipment),
and

• Operating costs (all costs except direct materials).

Throughput Contribution

• Throughput contribution is the rate at which contribution

dollars are being earned.

• Throughput contribution is the revenue earned form the

sale of units minus the totally variable costs only (such as
direct material) for those units produced during a given
period of time.
Throughput costing: Three Basic Measurements
Theory of Constraints (TOC)

• Is a means of making decisions at the operational level

that will help a company to speed up its manufacturing
time.
Theory of Constraints (TOC)

• A basic principle of TOC analysis is that short-term profit

maximization requires maximizing the contribution margin
through the constraint, called the throughput margin or
throughput contribution

• Contribution margin through the constraint,

• Throughput margin or throughput contribution

Theory of Constraints (TOC)

Theory of Constraints - Example

Products
A B C
Sales 500 300 200
Deduct:Variable Cost 300 150 100
Contribution 200 150 100
Rank 1 2 3
Theory of Constraints (TOC)
Theory of Constraints - Example
Products
A B C
Sales 500 300 200
Deduct:Variable
Cost 300 150 100
Contribution 200 150 100
Rank 1 2 3
 Theory of Constraints (TOC)
Theory of Constraints - Example
Products
A B C
Sales 500 300 200
Deduct:Variable Cost 300 150 100

Contribution 200 150 100

Rank 1 2 3

Constraint -LH 40Hrs 50Hrs 10Hrs

Contribution =200/40 =150/50 =100/10

based on Const.

Contribution $5 $3 $10
based on Const.
Rank 2 3 1
Theory of Constraints (TOC):Steps

1. Identify the Constraints. There may be more than one,

but there are never many.
2. Determine the most profitable product mix given the
constraint
3. Maximise the flow through the constraint
4. Increase the capacity at the constraint
5. Redesign the manufacturing process for greater flexibility
and speed
 Throughput Time and Rate

• Throughput time, or cycle time, is the time that elapses

between the receipt of a customer order and the shipment of
the order.

• Throughput Rate

• It is the rate at which units can be produced and shipped. For

example, if it takes 2 days to produce and ship 100 units, then
the per day rate is 50 units per day.
Drum, Buffer and Rope System

• Production flow through a constraint is managed using the

drum-buffer-rope (DBR) system.

• The drum (i.e., the beat to which a production process marches) is

the bottleneck operation. The constraint sets the pace for the
entire process.

• The buffer is a minimal amount of work-in-process input to the

drum that is maintained to ensure that it is always in operation.

• The rope is the sequence of activities preceding and including the

bottleneck operation that must be coordinated to avoid inventory
buildup.
Drum, Buffer and Rope System
Kanban
• Kanban is Japanese term for “visual record”. it is a simple
parts movements system or an inventory system in which
“cards” or “tickets” are used to keep track of inventory and
its movement.

• Originally development at Toyota in the 1960s, Kanban is

part of a JIT system and its purpose is to manage the flow
on a manufacturing assembly line. At the core of the
kanban concepts is that the supplier delivers components
to the production line on an “as needed” basis, signaled by
receipt of a card and empty container, eliminating storage
in the production area.
Kanban : Types

1. Withdrawal (Conveyance) Kanban

2. Production Kanban
3. Vendor Kanban
Kanban : Withdrawal
Withdrawal (Conveyance) Kanban
• The main function of a withdrawal Kanban is to pass
the authorization for the movement of parts from
one stage to another.
• A withdrawal Kanban usually carries the following
information:
• part number
• part name
• lotsize etc..,
Kanban : Production
Production Kanban
• The primary function of the production Kanban is to
release an order to the preceding stage to build the
lot size indicated on the card.
• The production Kanban card should have the
following information :
• materials required as inputs at the preceding
stage
• parts required as inputs at the preceding stage
• information stated on withdrawals Kanban
Kanban : Production
Vendor Kanban
• Tells a vendor WHAT,HOW MUCH, WHERE and WHEN
• Select run control options for dispatch vendor
replenishment requests.
• Enter selection criteria for dispatch vendor
replenishment requests.
• Process email dispatches.
• Use the Receive by Kanban ID transaction.
• Use the Receipt by PO End transaction.
• Load receipts.
Capacity Management
Capacity has a cost, whether it is used or not
Capacity
• Capacity is the maximum output or producing ability of a
machine, person, factory, etc.

• Capacity can be measured in physical terms

• Measure of the amount of work done
• Capacity is the measure of the maximum amount of
work that can be done in a given time

• Capacity has a cost

• Cost to acquire or rent the facility, machine, operating
costs, wages, utilities, insurance, etc.

• The cost is incurred even if capacity is underused

Measuring the Cost of Capacity
• Theoretical
• Level of output that can be completed with ZERO downtime for
setups, maintenance, vacations, etc.
• Practical
• Level of output under current conditions, allowing for normal
downtime for setups, maintenance, vacations, etc.
• Normal
• Average level of output achieved or anticipated over several years
• Budget
• Level of output anticipated for the current year
• Actual
• Level of output actually achieved in the current year
Measuring the Cost of Capacity
• Nonproductive capacity
• Capacity that does not result in usable output
• Downtime for maintenance, setups, lack of
materials, etc.
• Productive time lost due to waste, scrap, rework,
etc.

• Idle capacity
• Capacity that is not available due to policy
decisions or market reasons such as holidays, lack
of orders, etc.
Measuring the Cost of Capacity
• Nonproductive capacity
• Capacity that does not result in usable output
• Downtime for maintenance, setups, lack of
materials, etc.
• Productive time lost due to waste, scrap, rework,
etc.

• Idle capacity
• Capacity that is not available due to policy
decisions or market reasons such as holidays, lack
of orders, etc.
Measuring the Cost of Capacity
Capacity costs may be fixed, but can still be managed
ØReduction of idle capacity
• Increasing sales to use unused capacity
• Renting unused capacity to others
• Reduction in “days off”
ØReduction of nonproductive capacity
• Reduction of setup time, defects, etc.
ØReduction of rated capacity
• Replace the asset with one having less capacity
• Lower capacity asset can be more fully utilized
Value Chain Analysis
• The value chain included all of the activities that go into the
production of the product that add value to the finished
good. By analyzing this, the company can determine what
they can do to add more value to the product, and also
what does not add vale and can be eliminated.

• The steps in the value-chain are:

• Research and development,
• Design of products, services or processes,
• Production,
• Marketing
• Distribution, and
• Customer service
Value Chain Analysis
• The value chain included all of the activities that go into the
production of the product that add value to the finished
good. By analyzing this, the company can determine what
they can do to add more value to the product, and also
what does not add vale and can be eliminated.

• The steps in the value-chain are:

• Research and development,
• Design of products, services or processes,
• Production,
• Marketing
• Distribution, and
• Customer service
Value Chain Analysis

• Identify the main functions and types of firms in the value

chain;
• Analyze structural connections; and
• Analyze dynamics.
Value Chain Analysis
• The value chain included all of the activities that go into the
production of the product that add value to the finished
good. By analyzing this, the company can determine what
they can do to add more value to the product, and also
what does not add vale and can be eliminated.

• The steps in the value-chain are:

• Research and development,
• Design of products, services or processes,
• Production,
• Marketing
• Distribution, and
• Customer service
Value Chain Analysis
Value Chain Analysis

Research and development,

Design of products, services or processes,

Production,

Marketing
Distribution, and
Customer service
Process Analysis

Process analysis is a form of technical writing and expository

writing "designed to convey to the reader how a change takes
place through a series of stages".
Process Value Analysis
• A strategy that businesses use to determine whether all of
their operational expenses are necessary and if they could
be operating more efficiently.

• Process value analysis looks at what the customer wants

and then asks if each aspect of operations is necessary to
achieve that result.

• The goal of process value analysis is to eliminate

unnecessary expenses incurred in the process of creating a
good or service without sacrificing customer satisfaction.
Types of Processes

• Continuous
• Batch
• Hybrid
• Make-to-stock
• Make-to-order
Process Value Analysis
• Activity-based management (ABM) is a method of
identifying and evaluating activities that a business
performs using activity-based costing to carry out a value
chain analysis or a re-engineering initiative to improve
strategic and operational decisions in an organization.
Process Value Analysis-Continuous
Improvement
• Kaizen, also known as continuous improvement, is a long-
term approach to work that systematically seeks to achieve
small, incremental changes in processes in order to improve
efficiency and quality.
Process Value Analysis-Continuous
Improvement
• Kaizen (Continuous Improvement) is a strategy where
employees at all levels of a company work together
proactively to achieve regular, incremental improvements to
the manufacturing process.

• Kaizen combines the collective talents within a company to

create a powerful engine for improvement.
Process Value Analysis-Continuous
Improvement
• The term kaizen is a Japanese word that means
“improvement.” As used in business, it implies “continuous
improvement,” or slow but constant incremental
improvements being made in all areas of business
operations.

• Small-scale improvements are considered to be less risky

than a major overhaul of a system or process.
Balanced Score Card – Disadvantages

• Balanced Scorecard objectives are easy to reach but hard to

quantify.

• When a company is not able to meet its balanced scorecard

objectives, the objective maybe re-interpreted to the current
situation of affairs to achieve success or avoid failure.

• Balanced Scorecard does not incorporate direct financial

analysis of economic value or risk management. Goal selection
under Balanced Scorecard does not automatically include
opportunity cost calculations.
Thank You