Bottleneck Accounting

Bottleneck Accounting


Bottlenecks

A company usually has several activities involved in the production and selling of a product or service. For example:



In practice, bottlenecks will usually arise to constrain the amount of products the firm can deliver (Kaplan and Atkinson, pp. 62). A bottleneck is an activity that has a low production and limits total sales. If a firm wants to increase sales, it has to solve it's bottlenecks.

Traditional Variance Analysis

In a traditional variance analysis, managerial accountants analyse the differences between the sales target and actual sales. Typicaly differences between targeted sales and actual sales are analysed as below (see also Horngren and Foster, pp. 138-271).


This report indicates that the actual number of products (volume) sold was lower than the target number of products (negative volume variance) and the average sales price of products was lower than the target sales price (negative price variance). The negative volume variance and the negative price variance explain the difference between the sales target and actual sales.

This traditional variance analysis however does not point out which of the business activities were bottlenecks, which caused the negative volume variance. That is why a traditional variance analysis can't be used to solve bottlenecks in an organization.

Reporting Bottlenecks with Bottleneck Accounting


Thus, with traditional accounting techniques you just report that the actual number of products (volume) sold was lower than the target number of products (negative volume variance). With bottleneck accounting however you specify this negative volume variance by showing the bottleneck activities which caused this negative volume variance (Veltman, 2011).

An example of a bottleneck accounting report is shown below


This report indicates which activities are bottlenecks which caused a lower actual sales number: the casting activity and a decline in market demand. With bottleneck accounting you thus report bottlenecks inside the company (the casting activity) and bottlenecks outside the company (market demand).

This report also shows the magnitude of each bottleneck. The magnitude of the bottleneck is the part of targeted sales which is missed as a result of the existence of the bottleneck. In this case $ 1.114.000 was missed because of the casting bottleneck, $ 500.000 was missed because of the market demand bottleneck and another $ 180.000 was missed because of other bottlenecks.

The magnitude of the bottleneck indicates how urgent the bottleneck is. This case indicates that management should focus on the casting activity first (for instance by increasing the capacity of the casting activity). Secondly, management should focus on the market demand (improve the marketing for instance).

Thus, with bottleneck accounting you not only report which are the bottlenecks to solve, you also point out which bottlenecks are to be handled first. In that way bottleneck accounting will make your management more aware of the necessity to solve bottlenecks and of the correct order in which to eliminate them (Veltman, 2011).

Project Management Life Cycle

The Project Life Cycle refers to a logical sequence of activities to accomplish the project’s goals or objectives. Regardless of scope or complexity, any project goes through a series of stages during its life. There is first an Initiation or Birth phase, in which the outputs and critical success factors are defined, followed by a Planning phase, characterized by breaking down the project into smaller parts/tasks, an Execution phase, in which the project plan is executed, and lastly a Closure or Exit phase, that marks the completion of the project.

Project activities must be grouped into phases because by doing so, the project manager and the core team can efficiently plan and organize resources for each activity, and also objectively measure achievement of goals and justify their decisions to move ahead, correct, or terminate. It is of great importance to organize project phases into industry-specific project cycles. Why? Not only because each industry sector involves specific requirements, tasks, and procedures when it comes to projects, but also because different industry sectors have different needs for life cycle management methodology. And paying close attention to such details is the difference between doing things well and excelling as project managers.

Diverse project management tools and methodologies prevail in the different project cycle phases. Let’s take a closer look at what’s important in each one of these stages:


1) Initiation

In this first stage, the scope of the project is defined along with the approach to be taken to deliver the desired outputs. The project manager is appointed and in turn, he selects the team members based on their skills and experience. The most common tools or methodologies used in the initiation stage are Project Charter, Business Plan, Project Framework (or Overview), Business Case Justification, and Milestones Reviews.


2) Planning

The second phase should include a detailed identification and assignment of each task until the end of the project. It should also include a risk analysis and a definition of a criteria for the successful completion of each deliverable. The governance process is defined, stake holders identified and reporting frequency and channels agreed. The most common tools or methodologies used in the planning stage are Business Plan and Milestones Reviews.


3) Execution and controlling

The most important issue in this phase is to ensure project activities are properly executed and controlled. During the execution phase, the planned solution is implemented to solve the problem specified in the project's requirements. In product and system development, a design resulting in a specific set of product requirements is created. This convergence is measured by prototypes, testing, and reviews. As the execution phase progresses, groups across the organization become more deeply involved in planning for the final testing, production, and support. The most common tools or methodologies used in the execution phase are an update of Risk Analysis and Score Cards, in addition to Business Plan and Milestones Reviews.


4) Closure

In this last stage, the project manager must ensure that the project is brought to its proper completion. The closure phase is characterized by a written formal project review report containing the following components: a formal acceptance of the final product by the client, Weighted Critical Measurements (matching the initial requirements specified by the client with the final delivered product), rewarding the team, a list of lessons learned, releasing project resources, and a formal project closure notification to higher management. No special tool or methodology is needed during the closure phase.

IAS 36

IAS 36