The developments will be Activity Based Costing (BBC), Throughput accounting (TA) and Just in Time TIT). Activity Based Costing BBC is a developed costing system which focuses on the activities within the business and assigns cost objects to each activity. An activity is any form of work or task which can be related to the product. In costing, direct costs are already attributable to a Job linked to the product I. E. Materials and labor, what BBC does is appropriate Indirect costs to events or tasks as an effort to lower the risks of conventional overhead covers systems.
By doing this It allows managers to estimate the cost of Individual products and services, which lets them remove unprofitable products and reduce the costs of overpriced ones. The concepts of BBC emerged in the manufacturing sector of the US during the ass’s and ass’s after coming from Japan where it was widely used in manufacturing, from then it was formalized and became a popular decision making tool for managers of that time as absorbing costs via labor was leading to poor decision making at the time.
BBC was first coined by Kaplan and Brunt (1987) ho focused on its application in the manufacturing sector (where it had been used to best effect), noting that the increase in technology that decade, had to lead to a massive hike In productivity and in turn, reducing direct labor and material costs and increasing Indirect costs, bringing BBC to fruition. Once the offs came around, BBC started to fade away due to alternative techniques and methods, also developed by Kaplan, such as the balanced scorecard tool and economic value added.
However, today BBC Is soul widely used In many sectors I. E. The service and banking sector but any theorists debate its efficacy. The reasons behind Abs’s large success after its initiation is due largely to it’s accurate cost measurement, as solely recovering direct costs when in reality, the indirect costs play a greater part in the production process means that tasks and jobs were priced much more accordingly.
This meant that individual activities could be focused on specifically by managers and cost’s could be reduced where possible, the same point also meant that cost bases where much more flexible; as business activities change, so do the costs, this allowed managers to identify how these changes affected individual activities. The ability to lower costs effectively was an Invaluable tool, as the ass’s was a huge economic boom and competition was fierce, what BBC also did was directly relate the product cost to the activity (or activities) needed to produce It.
The reason BBC started to fade away slightly after the sass’s was simply due to its expense. BBC is very costly to apply, it data into it as well as operate the system to get any practical function from it. That only applies to one or a small group of activities, many businesses have many activities to monitor, and suddenly BBC needs an entire team Just to get results.
The following are the steps taken to assign indirect costs to activities: Firstly the businesses activities need to be identified, as they will be your cost base, depending on the sector and the business, these will vary in scope. After that, costs can begin to be grouped together as cost pools, this stage can differ, depending on staff understanding and competency, cost drivers will vary, it’s a judgment call from many managers, which can result in differentiation from business to business.
Throughput (or throughput contribution) is the rate which the organization produces money, it can be expressed as Sales Revenue less ‘Materials cost of goods sold’, similarly to contribution in marginal costing which is Sales Revenue less Variable Costs’. Throughput is one of three performance figures which angers refer to when considering the effects of their decisions, the other two being Inventories, which refers to all the money invested in purchases and Operations expenses, which is the money spent converting ‘Inventory into ‘Throughput’.
Throughput emerged as an alternative to cost accounting, it was an early attempt to apply TCO by Galloway and Waldron (1988); Goldwater claimed that labor isn’t the variable cost that it once was back before laborers could work more than 48 hours a week, yet modern managers still base their decisions on labor efficiency, which can cause more harm than good to the organization.
What Goldwater proposed with Throughput, is that the cost accounting focus on efficiencies (specifically labor) be removed and that the focus shift to constraints and the optimum profitability of the business. Fox (1992) defined a constraint as anything that prevents the system from achieving higher performance versus its goal; Throughput refers to constraints as ‘Bottlenecks’.
Goldwater developed a 5-step process to manage bottlenecks in his TCO: Identify the Constraint (Bottleneck) Decide how to best utilize the process constraints Subordinate all other decisions to Step 2 Reduce (or remove) the constraint limitations Go back to Step 1 and repeat the process However, there are some issues with Gladiator’s Theory, as the final step is a ‘repeating constraints can only be reduced so much and as they keep showing up during the process, it can appear as if there’s a large build up of limitations requiring consideration.
The following efficiencies are formulae related to TA, and can show business performance in a different perspective other than labor, for example: Return per Factory Hour = (Selling Price-Material Cost)/(Time on key resource) Cost per Factory Hour = (Total Factory Cost)/(Total time available on key resource) TA Ratio (Return per Factory Hour)/(Cost per Factory Hour) ROI = (Throughput Contribution- Operational Expenses)/elementary TA Example Shiny Shoes Pl.
E Inventory 40 Operational Expenses 25 Selling price 100 Materials 20 Labor 20 Overheads 30 Production Time 2 hours Total Time available 10 hours Return per Factory Hour 40 Cost per Factory Hour 6. 5 TA Ratio 6. 15 ROI 137. 50% These ratios produce significant information for managers; Throughput provides a great ‘snapshot’ of the businesses current performance at any given time and allows insight into other areas such as marketing and distribution.
TA proved highly applicable to businesses with a variety of constraints, whether than be internal or external, for example, a business lacking customer sales can refer to and delegate appropriately to the correct department(s), in this example, marketing. Just in Time SIT is a manufacturing philosophy dedicated to the elimination of waste. Waste in this scenario is inventory, as holding inventory does not add any value to the product or service, SIT proposed that if an activity does not add value it should not be undertaken.
The following are the five steps of the production process: Process Time – Time spent making the product Inspection Time – Time taken to inspect the product Move Time – Time spent moving WIPE around the factory Queue Time – Time while the product is idle, not being attended to Storage Time – Time spent stored up (both raw materials, WIPE and finished other four steps are adding no value and are therefore wasteful, SIT aims to reducing or eliminate these steps.
Kit’s philosophy started off in Japan with the Toyota Motor Company, SIT was applied to the production process at Toyota, and this was the president’s post-WWW strategy to close the 3 year technologically advance gap that he US had gained. At the time the US were applying Economic Order Quantities (EGO) in the automobile industry, which was great for mass product on specific models of car.
However Toyota knew this methodology would not work for Japan as their economy was still recovering from the war, demand was low and the car market wanted varieties of model rather than mass production of one. Toyota needed to sell these cars much cheaper as well, which was achieved by eliminating waste during the production process and not having stock, therefore cutting costs and being able to afford the price drop on their vehicles. Soon after during the ass’s, SIT was being employed by nearly all of the western production industries.
The goals of SIT are simple, but difficult to achieve: To eliminate any activities which add no value to the product To retain zero inventory To have no defects (reducing costs of scrap and rework) To produce ‘Batch sizes’ of one To have zero breakdowns To have a 100% on-time delivery service (to both customers and with suppliers) However, SIT is not an easy overnight decision for a business to make, it involves a complete overhaul and change in dynamic of the way things are managed, and it ugly affects all aspects of the business such as stock levels; stock is a valuable asset and while using SIT over and under stocking is avoided, the aim of SIT is to hold the right amount of stock to be used. Purchasing practices are altered as they are naturally linked to stock levels, therefore inventory needs to be ordered at the right time Oust in time) and at the right quantity.
