Management Control System

Case Study: Boeing Company

By Ridwan Satryo Heryawan (F0316088)

A. Factual Summary
Mike MacFarlane, as a cost analyst from Boeing Company has transferred from
Boeing Company Headquarters (HQ) to Propulsion System Division (PSD). In the Boeing
Company Headquarters, he was not statisfied because most of his work there was far
enough from actual airplane production. With his experience in engineering and
accounting, he thought that PSD would provide career opportunities more than
Headquarters.
Mike MacFarlane then assigned to a project team that examined the potential value
of process and activity analysis follows the objective of the process and activity analysis
project to enhance Boeing Company’s competitive strengths and to achieve continuous
quality improvement in every aspect of the company’s operation. Also, the top
management has stated that that the company’s goal is to reliagn the acounting system so
that the cost information provided aligns with understanding of the flow of resources in the
processes at Boeing.

B. Problem Statement
Problem is a situation where effective action can be planned to improve the
situation of the organization. Consider to their prior management accounting system,
Boeing Company’s management thought it’s not enough to provide a reliable and
comprehensive information about cost to identify improvement opportunities in order to
improve company’s performance. What happen to management accounting system in
Boeing Company and how the effect changing the system using process and activity
analysis then?

C. Analysis of Problem

The top management’s commitment to continuously improvement can be realised

only if the company identifiy specific opportunities for improvement. The cost that
currently present in managerial report may contain some fraudulent activity, because when
 work crossed organizational boundaries, costs created by underlying total production
process remained largely hidden. The cost that still largely hidden, can be caused by the
limitation of implementing existing management accounting system, or there was a
fraudulent activity that performed by workgroup.
The shortcoming of the cost visibility is that it is structured along functional
organization lines. If Boeing Company want to identify opportunities for process
improvement, they need to associate cost with processes and activity, not just functional
organizations. Also, they need to be able to estimate the change in total cost, given a change
to manufacturing process. By viewing the data, they will enhance ability to identify
improvement opportunities. Then, they must be able to compare their relative importance
and to judge what the leverage that influence in making modifications.

D. Solution
Boeing company can choose between activity based costing or process and activity
analysis to provide information about cost. While activity based costing emphasised
accounting, process and activity analysis emphasised company’s intention to apply the
project result to all business operations and not just to improve the cost management
system. Process and activity analysis was like a comprehensive medical check-up, a labour-
intensive diagnostic tool that pointed to the areas where high leverage opportunities
existed. In other hand, process and activity analysis did not provide the re-measurement
capabilities of a costing system, which the term activity based costing implied.

E. Recommended Solution
The solution of Boeing Company’s case is using process and activity analysis,
because it is provide the need and objectives of company. Boeing Company’s objective is
to realign the accounting system so that the cost information provided aligns with
understanding of the flow of resources in the processes at Boeing Company. By using
process and activity analysis, Boeing Company will have ability to identify specific
opportunities for improvement.
By using process and activity analysis project, there are five objectives that must be achieve
by the team:
1) increase cost visibility
2) identify major cost driver
 3) trace overhead cost to processes where possible
4) identify non-value added activity
5) provide a processes flow chart to help guide improvement measures

The Boeing Company hopes by implementing the process and activity analysis make their
ability to identify, predict and eliminate cost that impede efficiency.

F. Implementation
In the first step of process and activity analysis each workgroup developed a list of
activities and tasks. Each task was characterised by its value, end-product, activity type,
task time, flow time, and task dollars. The value was either primary external (PE), primary
internal (PI), support external (SE), or support internal (SI).
For each task, the workgroup estimated the task time, which was the number of
hours spent on each task per product unit. The task time described the actual duration of
the work performed. The hours spent per unit then were multiplied by the number of units
produced to obtain estimated total hours.
The project team collected all directly assignable costs for each workgroup. These
costs included direct labour, indirect labour, overtime, fringe benefits and non-labour costs
such as supplies, training, furniture and fixtures, shipping material, etc. These costs were
extracted from the current cost accounting system by the charge number, which uniquely
identified each workgroup. That is, the only costs assignable to each workgroup were those
that the group’s supervisor could control.
By using the process and activity analysis, company have ability to depict the
interactions between the various process and the cost affected by that process or activity.
But, to implementing process and activity analysis, company may have several problems.
1. Data collection in process and activity analysis was performed mainly by interview.
Company must rely on interviewers that may have limited understanding about certain
company’s business process and activity. If company create training program for
interviewers, company may deal with the cost of that training program itself.
2. Difficult to identify if the workgroup performed a fraudulent activity, because data
collection was performed mainly by interview.
3. The reliability of information given by each workgroup was difficult to determined.
Also, there was difficult to determine who and how much people that must interview.