On Target | JAMAR | Volume

In this Aug 2006 issue of On Target:

 

Merger Wars!

Key Issues in Strategic Cost Management

What's On

MERGER WARS! THE EMPIRE STRIKES BACK!

This is to inform ICMA Members that the merger negotiations between IMA and ICMA have now officially been terminated by both parties by mutual agreement.

It has been a long and interesting journey (to a far off Galaxy…) for the ICMA Executive. The merger talks initially commenced as an unofficial private discussion between the ICMA President Leon Duval and IMA President and CEO Paul Sharman in late 2004, when the two shared their vision of a unified profession with global standards. This was followed by a more official discussion in July 2005 bwteen the two Presidents.

Following this 2005 discussion a resolution was put to the ICMA AGM in September 2005 to endorse a proposed merger of ICMA Australia with IMA (USA) on the proviso that existing membership statuses are appropriately preserved on transfer of membership to the merged entity. This resolution was passed with a large (but not unanimous) majority.

Discussions were then held in New Jersey between the representatives of the two bodies on Jan 30, 31 and Feb 1, 2006 and many issues were discussed. As there were more stakeholders present at this meeting compared to the first merger meeting, some changes were made by IMA that were contrary to the expectations of resolution put to the ICMA membership at its 2005 AGM.

However, as these changes were largely within the parameters of the authority given by the ICMA membership at the 2005 AGM; the ICMA President Leon Duval and IMA President and CEO Paul Sharman signed a draft MOU in February 2006 that each body agreed to take to their respective Executive Boards (at IMA this is called the Board of Regents) for ratification. In this MOU there were two issues that were potential ‘deal-breakers’:

1.      That the IMA Board of Regents must agree to recognise all ICMA members with a CMA certification as being full-CMA members of IMA.

2.      That the ICMA’s two module CMA program is continued as a separate pipeline for qualified accountants.

The second ‘deal-breaker’ arose after the ICMA studied closely the syllabus and structure of IMA’s CMA program and found that it does not differentiate between accounting graduates and non-accounting graduates (unlike the ICMA’s GMA ‘Conversion Program’), and thus requires all potential CMAs to study undergraduate-level course content. ICMA Australia felt this was needless duplication for accounting graduates and members of other recognised professional accounting bodies (such as. CPA, CA & CIMA). In contrast, ICMA Australia has positioned itself as a post-graduate professional accounting qualification in which its CMA program builds on knowledge and experience already obtained. Also the IMA’s CMAs are required to have only 2-years experience as against the 5-years required by the ICMA Australia. As such, ICMA Australia believed that if its existing two part post-graduate CMA program is abandoned and prospective CMAs are required to take IMA’s four undergraduate level courses as the education prerequisite for membership, the membership pipeline from the other accounting bodies (e.g. CPA, CA & CIMA) will disappear. The ICMA believed that this will give rise to serious questions on the membership growth potential of IMA in overseas market, especially in Australasia; and therefore the long term viability of the IMA Regional Council after the merger. Except for the Middle-East and the Netherlands (and of course the USA), ICMA Australia has more CMAs than IMA in every other country indicating its market acceptance vis-à-vis the IMA’s CMA certification route.

In June 2006, the IMA’s Board of Regents representative responded and it appeared that two issues of contention essentially remained, i.e. the recognition of all membership categories of ICMA, and the recognition of each body’s education programs for CMA certification. The IMA response was discussed by your Executive in July 2006, and the IMA’s changes to the February 2006 Draft MOU were rejected by ICMA Australia, and a counter proposal was made.

Subsequently, some discussions on the ICMA’s counter proposal took place at a meeting between Professor Janek Ratnatunga and an IMA Board of Regents representative in North America, and it was agreed that the two Institutes terminate the merger talks and instead work closely to advance the profession of management accounting as independent bodies.

RCA is thus an approach that allows the integration of cost management methods that have often been applied in isolation. RCA uses a comprehensive approach to management accounting information systems. RCA is typically applied as part of an enterprise resource planning (ERP) system effort to achieve the best combination of cost management principles implemented in an integrated fashion.

Throughput Accounting (Theory of Constraints) 

Throughput Accounting is a management accounting system based on the Theory of Constraints (TOC). TOC views any company as a system. One of the most fundamental concepts is the recognition of the important role that the system's constraint has, and because of this concept Throughput Accounting does not allocate costs to products. As a matter of fact, one of the basic ideas of Throughput Accounting is that if we want to make good decisions we should not calculate the cost of products.

TOC uses the chain analogy to exemplify some of its principles. If we pull a chain, where will it break? On its weakest link (i.e. only one link will break). If we want to increase the chain's strength, what should we do? We should strengthen its weakest link, this system's constraint. Strengthening any other link before strengthening the weakest link would be a waste of time and resources, because it is the weakest link that is determining the maximum performance of all the chain. The system's constraint dictates its performance therefore, if we want to increase the system's performance we have to identify and explore the system's constraint.

Life Cycle Costing

In the past, comparisons of asset alternatives, whether at the concept or detailed design level, have been based mainly on initial capital costs. However, there has been growing pressure to achieve better outcomes from assets, ongoing operating and maintenance costs must be considered as they consume most resources over the asset’s service life. Life Cycle Costing is a process to determine the sum of all the costs associated with an asset or part thereof, including acquisition, installation, operation, maintenance, refurbishment and disposal costs. It is therefore pivotal to the asset management process.

Life Cycle Costing incorporates both Life Cost Planning which occurs during development or manufacture and implementation of that plan by Life Cost Analysis as the asset is used or occupied. Doing a life-cycle cost analysis (LCC) therefore gives the total cost of your asset- including all expenses incurred over the life of the asset.

The term "Life-Cycle Costing" is quite broad and encompasses all those techniques that take into account both initial costs and future costs and benefits (savings) of an investment over some period of time. They differ, however, in their applications which depend on various purposes of investment projects.

Lean Accounting

Lean Accounting is the information system required for Lean Manufacturing, which helps companies identify and reduce waste, giving them extra capacity and freeing up cash, which is so vital to a small manufacturer. Until they utilize that extra capacity, machines spend some time idle. Organisations are not losing money, having made the right part(s) faster. They are actually saving money by not making the wrong products. But from a traditional accounting standpoint this is “dead time,” and on paper it can appear that a company is losing money.

Traditional accounting is a marker of financial performance. However, companies also use it to measure overall performance, not what it was designed to do – especially in today’s market. According to lean experts, traditional methods of accounting and measurement can become a hindrance to any manufacturing business today, and can be particularly damaging to a company trying to implement a Lean Program.

Lean accounting measures focus the company’s efforts on increasing throughput, decreasing inventories and decreasing operating costs. A crucial step is selecting measures that are focused on physical attributes, such as output and cycle time, as opposed to traditional financial measures.

It is important to constantly identify waste, make everybody accountable for cost reduction at their own level and links all reporting to improvement cycles. Accounting control and measurement systems must themselves be Lean.