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James Brimson in his book "The Handbook of
Process-based Accounting, Leveraging Processes to Predict Results
published by American Institute of Certified Public Accountants,
process based accounting
- "The concepts that form the foundation
of ....are very simple....
- measures value created by the process...
- projects upcoming activities...
- projects cost using a process resource consumption rate
- constantly reduce process variation
- adjust costs of performance of projections based on compatibility of
work to an organization's existing processes
- measures process performance
- update process (activity) standard with each significant process
improvement...
- uses control charts to measure whether a process in in control."
Most of accounting is focused on what happened last month, lat quarter,
or last year. Auditors help ensure that organizations have followed
generally accepted accounting procedures (GAAP). As a management tool,
this historical information is perceived as useful because of the theory
that history repeats itself. However, this may be true in some businesses,
but not in many.
If you are selling stable products like milk and bread, most households
don't substantially change their buying and eating habits for these stable
products. However, most products and services are not that
stable. Even perceived stable products like dental visits, oil changes on
your car, purchases of pharmaceutical drugs, etc. can be very unstable.
The environment can change dramatically making historical information
irrelevant.
- extreme weather
- major competitor goes out of business or obtains new financing
- clothing fads come and go
- technology changes and improvements (e.g. electric cars)
- government regulations
- changes in pricing by competitors
- complementary goods reduce your product sales (e.g. bottled water,
energy drinks, juices versus soda)
- interest rates and availability of credit
- government tax incentives come and go
- styles change
- consumer priorities change
Also your industry changes on how it performs its processes
- call centers: have you tried talking with a person at a call center
without several computer menus?
- self-plane reservations and check-in
- self-checking out at stores
- new manufacturing equipment and processes
- measures value created by the process...
Executives need to
understand how much value is created by each of their processes and whether
or not they should continue to perform that process internally or externally
or stop performing that process. Value can measured by the net cash flow
generated from a process or by benchmarking that process
projects upcoming activities...what
activities will be performed as a result of this activity. If errors are
created or poor quality is shipped what future activities will need to be
performed.
projects cost using a process
resource consumption rate. every process needs certain
resources in order to produce output. Resources consumed include wages,
computer, technology, materials, etc. Based on the number of units of
output, I can begin to determine the resources that will be consumed
including both fixed and variable expenses.
constantly reduce process variation...some
variation is normal, but if a process is not in control (process output
not within a target range, then process costs will in most cases
increase. If an organization completes financial statements in 6 days
instead of 4 days, then extra resources are used. If they complete the
monthly financial statements in 3 days instead of 4 days, that extra day
is not always effectively used for other value creating processes.
adjust costs of performance of projections
based on compatibility of work to an organization's existing processes
An organization must understand the capability of its
processes. If their equipment can not hold tolerances to hundredths of
an inch, then they may be better off buying new equipment, negotiating
different tolerances with their customers, or stop selling that product
which requires such tight tolerances.
- Understand your customer requirements.
- Review your process capabilities
- Redesign your processes to
meet customer requirements
- Negotiate new customer requirements
measures process performance:
performance is measured at the cross functional process level rather
than at the department level. This approach helps to ensure that process
optimization is achieved rather than just department or cost center
optimization.
update process (activity) standard with
each significant process improvement...As improvements are
made to cross functional processes the process performance target is
updated with a corresponding change in resources
- uses control charts to measure whether a
process in in control. a process that is not in control is
more difficult to forecast and more expensive to perform because of
constant tweaking to make the out of control process stay on target. .
Therefore, organizations need to use either mathematical control charts
using statistical process control or simple control charts (e.g. prepare
monthly financial statement in 4 days with a range of 3 to 5 days)
Call John Antos, Jim Brimson or Pat Dowdle at
972-980-7407 to find out more about Process Management.
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