Activity Based Costing in the Information Age

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I. Traditional costing today Despite the fact that it is over 75 years old, most companies still use standard cost systems both to value inventory for financial statement purposes and for many other management purposes as well. While it has some advantages for financial statement purposes (simplicity, consistency, well understood by auditors), it is, at best, meaningless and, at worst, misleading as a tool to assist in making effective management decisions. Why is this true? It’s because the business case for which it is being used today is not the business case for which it was designed. Standard cost accounting…
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Maintaining and Verifying Database Integrity in a Manufacturing Environment

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Introduction In this age of rapidly changing products and processes it is important that all elements of the manufacturing database are verifiably accurate if an MRP system or any other type manufacturing control system is to be used effectively. The objectives of this paper are 1) to review cycle counting principles as applied to inventory quantities, 2) to establish a problem solving approach that will correct the source of errors, not merely correct the errors and 3) to identify other elements of the manufacturing database that should be audited. Too few companies have an effective inventory cycle counting system in…
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Performance Measurement for a Customer Focus Strategy

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Introduction Many organizations are in a perpetual state of change. Changing markets, changing competition, changing organization structures, total quality initiatives and reengineering are often the rule rather than the exception. Often these initiatives fail to yield the desired results or, in the extreme, fail entirely. The reasons for this failure, of course, can be many and multiple. However, one that often stands out is the lack of change in the performance measurement system as the needs for measurement change. The recommended solution is often to establish new measures appropriate to the new techniques employed and appending them to the existing…
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Performance Measurements – Designing the Guidance System for Your Organization

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Introduction Your business is changing. JIT, TQM, Reengineering, Information Technology, Teams, Time Based Competition, the supply chain and the decline of the Command/Control organization structure are just some of the changes taking place. The critical success factor is knowledge, not physical work. Competitive advantage can no longer be perpetually and automatically maintained. In many industries continuous change and improvement is no longer an option, it is a way of life. But what are we measuring? Often organizations are measuring the same things they were 10, 20 and even 50 years ago. Most organizations are still using a cost accounting structure…
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Seven Ways To Reduce Your Inventory

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The amount of inventory required to run a business effectively is always a concern. If you have too much cash flow problems can result, too little and you run the risk of poor customer service. How can you run your business effectively and still maintain a reasonable amount of inventory? The cost of carrying inventory can run 30% or more of the value of the inventory per year. $10,000,000 of inventory can cost you $3,000,000 per year for the privilege of carrying it. This article does not attempt to tell you in detail how to reduce your inventory. Rather it…
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Balance the Line, Save Some Time and Cut Wip– All Without the Computer

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LEAD TIME is defined as starting when the need for a product, part or service is recognized and ending when that product, part or service is available for use at the point of use. For example, manufacturing lead time would run from the time a shop order is issued until the product is available for shipment. In many manufacturing situations the bulk of this time elapses while the product is sitting around waiting for something to happen. This time is called non value added time, as opposed to value added time when the product is having work performed on it.…
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Activity Based Management– Merging Process and Measurement

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Introduction Increasing competition, both globally and locally, make it clear that businesses know accurately and understand the source of process, product and service costs within their organization. Activity Based Costing (ABC), with its focus on deconstructing overhead pools and assigning costs to products and services in a more meaningful manner, has been a giant leap forward from traditional costing models where a high percentage of cost is arbitrarily allocated to products. However, ABC models often look at cost from a financial point of view, making sure only that all costs are assigned to some product accounting “box” without a thorough…
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