Approximately Right, Not Precisely Wrong:

Cost Accounting, Pricing and Decision Making

Abbreviated Table of Contents Preface

Part 1: The Challenge Chapter 1: The Changes in the Competitive Business Environment

Chapter 2: The Loss of Relevance of Traditional Cost Accounting

Part 2: New Management Approaches, Costing and Decision Making Chapter 3: Just In Time (JIT)

Chapter 4: Management by Constraints: The Theory of Constraints (TOC)

Chapter 5: Quality Management and Process Control

Chapter 6: The Complete Kit Concept

Chapter 7: Back to the Basics – The Pareto Rule

Part 3: Proposed Solutions Chapter 8: Target Costing

Chapter 9: Activity Based Costing (ABC) and Activity Based Management (ABM)

Chapter 10: The “Hourly Rate” Measure:– Simple but Misleading

Part 4: The Global Decision Making (GDM) Methodology Chapter 11: Decision Making in a Resource-Constrained Environment

Chapter 12: Decision Making in an Excess-Capacity Environment

Chapter 13: Profit Centers and Transfer Prices

Part 5: A Summarizing Case Study Chapter 14: The Lily-Rose Case Study

Index

Table of Contents Preface About the Authors

Part 1: The Challenge Chapter 1: The Changes in the Competitive Business Environment 1.1 Introduction

1.2 New Management Approaches

1.3 Issues in Costing and the Decision Making Process

1.4 Summary

1.5 References

Chapter 2: The Loss of Relevance of Traditional Cost Accounting 2.1 Costing and Its Objectives

2.2 The Reasons for Loss of Relevance of Traditional Cost Accounting

2.3 Contribution Costing versus Absorption Costing

2.4 Managerial Costing

2.5 The Lost of Relevance of Traditional Cost Accounting – Real-Life Cases

2.5.1 “It Costs Me More”

2.5.2 “The Large Lots”

2.5.3 “Production Efficiency”

2.5.4 “The Resistance to Reducing Inventory”

2.5.5 “The Cost of the Purchasing Order”

2.6 The Alternative Approaches to Traditional Accounting

2.6.1 Goldratt’s Improvement of Contribution Costing – The Theory of Constraints Approach

2.6.2 From Absorption Costing to Activity Based Costing (ABC)

2.7 Summary

2.8 References

Part 2: New Management Approaches, Costing and Decision Making Chapter 3: Just In Time (JIT)

3.1 Introduction

3.2 Principles of the JIT Approach

3.2.1 Small JIT and Big JIT

3.2.2 JIT Operations Management

3.2.3 JIT Purchasing

3.2.4 From Small JIT to Big JIT

3.2.5 JIT Implementations in Service Organizations and Nonprofit Organizations

3.3 Backflush Costing

3.4 The Economic Benefit of JIT Implementation

3.4.1 General

3.4.2 The Research of Balakrishnan, Linsmeier and Venkatachalam (1996)

3.4.3 The Research of Callen, Fader and Krinsky (1997)

3.4.4 A Critical Evaluation of the Research

3.5 Summary

3.6 References

Chapter 4: Management by Constraints: The Theory of Constraints (TOC) 4.1 Introduction

4.2 The Focusing Steps

4.2.1 Determine the Goal

4.2.2 Define the Performance Measures

4.2.3 Identify the System Constraints

4.2.4 Decide How to Exploit the Constraint

4.2.5 Subordinate the System to the Above Decision (to the Constraint)

4.2.6 Elevate the Constraint

4.2.7 If the Constraint Was Broken – Go Back to Step 3 (“Identify”); Do Not Let Inertia become the System Constraint

4.3 The Cost Utilization (CUT) Diagram

4.4 Peak Management

4.5 Strategic Aspects of Management by Constraints

4.6 Additional Tools of TOC

4.7 The Economic Benefit of Implementing TOC

4.7.1 Documented Results

4.7.2 A Critical Evaluation

4.8 Summary

4.9 References

Chapter 5: Quality Management and Process Control

5.1 Introduction

5.2 What is Quality?

5.3 Quality Management and Process Control Stages

5.4 Implementing Quality Improvement

5.5 The “Throughput World” and the “Cost World”

5.6 ISO 9000 Standards

5.7 Quality Costs

5.8 Summary

5.9 References

Chapter 6: The Complete Kit Concept 6.1 Introduction

6.2 The “Complete Kit” Concept

6.3 The Evils of the “Incomplete Kit”

6.4 Why Do People Tend to Work with an “Incomplete Kit”?

6.5 Realizing the “Complete Kit” Concept in the Organization

6.5.1 The “Complete Kit” Concept in Manufacturing

6.5.1 The “Complete Kit” Concept in Development Processes

6.5.1 The “Complete Kit” Concept in Knowledge and Logistics Operations

6.5.1 The “Complete Kit” Concept in Sales and Marketing

6.5.1 The “Complete Kit” Concept in Medicine

6.6 Repercussions of the “Complete Kit” Concept on the Various Functions in the Organization

6.7 Implementing the “Complete Kit” Concept in the Organization

6.8 Summary

6.9 References

Chapter 7: Back to the Basics – The Pareto Rule 7.1 The Pareto Rule

7.2 The Focusing Methodology of the Pareto Rule

7.3 Summary of the Research Literature

7.4 Assumptions and Failures in Implementing the Pareto Rule

7.5 The Focusing Matrix

7.6 Summary

7.7 References

Part 3: Proposed Solutions Chapter 8: Target Costing 8.1 Introduction

8.2 Illustrating the Implementation of Target Costing

8.3 Target Costing in Hi-Tech Industries and Winning Tenders

8.4 Target Throughput

8.5 Target Costing and Quality Management

8.6 Summary

8.7 References

Chapter 9: Activity Based Costing (ABC) and Activity Based Management (ABM)

9.1 Introduction

9.2 Principles of the ABC/M Method

9.2.1 Stages of the Implementation

9.2.2 The Hierarchical Structure of Expenses

9.2.3 From ABC Costing to Activity Based Management (ABM)

9.3 Critical Evaluation

9.3.1 The Same Old Thing Dressed Up Differently?

9.3.2 “Strategic” Costing and Not a Decision Making Aid

9.3.3 The Main Lessons Have Been Learned

9.4 Summary

9.5 References

Chapter 10: The “Hourly Rate” Measure: Simple but Misleading 10.1 Introduction

10.2 The Use, Misuse and Abuse of the “Hourly Rate” Measure

10.3 Integrating the “Hourly Rate” Measure into the Theory of Constraints

10.4 Criticism of Allocating Overhead Costs to the Bottleneck

10.5 Summary

10.6 Appendix: Implementation of the GDM Methodology to “Hourly Rate” Issues

10.7 References

Part 4: The Global Decision Making (GDM) Methodology Chapter 11: Decision Making in a Resource-Constrained Environment

11.1 Introduction

11.2 Characteristics of the Resource-Constrained Environment

11.3 Decisions Problems in the Resource-Constrained Environment

11.4 The Tools

11.4.1 The Global Decision Making (GDM)

11.4.2 Global Performance Measures

11.4.3 The “Performance Measures Profile”

11.4.4 The Cost Utilization (CUT) Diagram

11.4.5 Specific Throughput

11.4.6 Subcontractor Throughput

11.5 Summary

11.6 Appendix: Examples of Decision Making in a Resource-Constrained Environment

11.6.1 Example 1: Use of the Specific Throughput Measure

11.6.2 Example 2: Prioritizing Jobs in a Technological Unit

11.6.3 Example 3: Allocating Scarce Components

11.7 References

Chapter 12: Decision Making in an Excess-Capacity Environment 12.1 Excess Capacity in the System

12.2 The “Make or Buy” Decision

12.3 The Decision on Whether to Discontinue Manufacturing a Product

12.4 The Investment Decision

12.5 The Cost of Excess Capacity

12.6 Pricing in an Excess-Capacity Environment (a Market Constraint)

12.7 Summary

12.8 Appendix: Case Analysis – Neutron Ltd

12.8.1 General

12.8.2 Background

12.8.3 Summary

12.9 References

Chapter 13: Profit Centers and Transfer Prices 13.1 Introduction

13.2 The Objectives of Creating Profit Centers

13.3 The “Joint Revenue” Problem

13.4 The “Transfer Prices” Problem

13.4.1 The Combined Products Factory

13.4.2 Problems of Transfer Prices in an Imperfect Market for Intermediate Products

13.5 Application of the GDM Methodology to the Transfer Price Problem

13.5.1 Assumptions of the Proposed Model

13.5.2 The Use of the GDM Methodology

13.6 Summary

13.7 References

Part 5: A Summarizing Case Study

Chapter 14: The “Lily-Rose” Case Study 14.1 Production, Operations, and Marketing Data

14.2 The Traditional Cost Accounting Solution

14.3 The Global Decision Making Solution

14.4 Solution Under Profit Centers and Transfer Prices

14.5 Data, Measuring and the “Carpenters’ Costing” Practice

14.6 The Subcontractor Problem – Buy or Make

14.6.1 Purchasing the End Product from the Subcontractor

14.7 Summary

14.8 References

Index