As you would suspect, successfully directing an organization requires prudent management of production. Because this is a hands-on process, and frequently entails dealing with the tangible portions of the business (inventory, fabrication, assembly, etc.), some managers are especially focused on this area of oversight. Managerial accounting provides numerous tools for managers to use in support of production and production logistics (moving goods through the production cycle to a customer). To generalize, production management is about running a "lean" business model. This means that costs must be minimized and efficiency maximized, while seeking to achieve enhanced output and quality standards. In the past few decades, advances in technology have greatly contributed to the ability to run a lean business. Product fabrication and assembly have been improved through virtually error free robotics. Accountability is handled via comprehensive software that tracks an array of data on a real-time basis. These enterprise resource packages (ERP) are extensive in their power to deliver specific query-based information for even the largest organizations. B2B (business to business) systems enable data interchange with sufficient power to enable one company's information system to automatically initiate a product order on a vendor's information system. Looking ahead, much is being said about the potential of RFID (radio frequency identification). Tiny micro processors are embedded in inventory and emit radio frequency signals that enable a computer to automatically track the quantity and location of inventory. M2M (machine to machine) enables connected devices to communicate necessary information (e.g., electric meters that no longer need to be read for billing, etc.) without requiring human engagement. These developments are exciting, sometimes frightening, but ultimately enhance organizational efficiency and the living standards of customers who benefit from better and cheaper products. But, despite their robust power, they do not replace human decision making. Managers must pay attention to the information being produced, and be ready to adjust business processes to respond. Production is a complex process requiring constant decision making. It is almost impossible to completely categorize and cover all of the decisions that will be required. But, many organizations will share similar production issues relating to inventory management and responsibility assignment tasks.
Inventory - For a manufacturing company, managing inventory is vital. Inventory may consist of raw materials, work in process, and finished goods. The raw materials are the components and parts that are to be processed into a final product. Work in process consists of goods under production. Finished goods are the completed units awaiting sale to customers. Each category will require special consideration and control. Failure to properly manage any category of inventory can be disastrous to a business. Overstocking raw materials or overproduction of finished goods will increase costs and obsolescence. Conversely, out-of-stock situations for raw materials will silence the production line at potentially great cost. Failure to have finished goods on hand might result in lost sales and customers. Throughout subsequent chapters, you will learn about methods and goals for managing inventory. Some of these techniques carry popular acronyms like JIT (just-in-time inventory management) and EOQ (economic order quantity). It is imperative for a good manager to understand the techniques that are available to properly manage inventory.
Responsibility Considerations - Enabling and motivating employees to work at peak performance is an important managerial role. For this to occur, employees must perceive that their productive efficiency and quality of output are fairly measured. A good manager will understand and be able to explain to others how such measures are determined. Your study of managerial accounting will lead you through various related measurement topics. For instance, direct productive processes must be supported by many "service departments" (maintenance, engineering, accounting, cafeterias, etc.). These service departments have nothing to sell to outsiders, but are essential components of operation. The costs of service departments must be recovered for a business to survive. It is easy for a production manager to focus solely on the area under direct control, and ignore the costs of support tasks. Yet, good management decisions require full consideration of the costs of support services. You will learn alternative techniques that managerial accountants use to allocate responsibility for organizational costs. A good manager will understand the need for such allocations, and be able to explain and justify them to employees who may not be fully cognizant of why profitability is more difficult to achieve than it would seem.
In addition, techniques must be utilized to capture the cost of quality - or perhaps better said, the cost of a lack of quality. Finished goods that do not function as promised entail substantial warranty costs, including rework, shipping (back and forth!), and scrap. There is also an extreme long-run cost associated with a lack of customer satisfaction.
Understanding concepts of responsibility accounting will also require you to think about attaching inputs and outcomes to those responsible for their ultimate disposition. In other words, a manager must be held accountable, but to do this requires the ability to monitor costs incurred and deliverables produced by circumscribed areas of accountability (centers of responsibility). This does not happen by accident and requires extensive systems development work, as well as training and explanation, on the part of management accountants.
Certain business decisions have recurrent themes: whether to outsource production and/or support functions, what level of production and pricing to establish, whether to accept special orders with private label branding or special pricing, and so forth.
Managerial accounting provides theoretical models of calculations that are needed to support these types of decisions. Although such models are not perfect in every case, they certainly are effective in stimulating correct thought. The seemingly obvious answer may not always yield the truly correct or best decision. Therefore, subsequent chapters will provide insight into the logic and methods that need to be employed to manage these types of business decisions.