Activity Based Costing: The Key to World Class Performance - Softcover

Grieco, Peter L.; Pilachowski, Mel

Softcover

ISBN 10: 0945456158 ISBN 13: 9780945456155

Publisher: P T Pubns, 1994

Synopsis

Accounting results have little to do with the activities that take place on the factory floor, in administrative offices or out in the sales field. The traditional practice of accounting leads to a number of faults which end up weakening American businesses. Two of the most prominent problems are:

The emphasis on financial measurements diverts us from improvement.
Traditional cost systems hinder excellence by hiding the elements of cost.

Activity Based Costing (ABC) helps your organization search out cost drivers and assign them directly to products and services, so that you know exactly how much each costs. All too often, our businesses are putting time and effort into projects which are losing money because overhead is under-applied.

Activity Based Costing shows you how to monitor and control activities in order to bring true costs into the open. This attention to the production line will inevitably result in savings to your bottom line. Each chapter focuses on an important facet of this new costing paradigm. You will find out how to:

Recognize the changes required to make your organization less wasteful and more competitive.
Identify the components of Total Cost and cost activities, the foundation of achieving World Class status.
Develop the product/service cost equation.
Streamline your organization into a World Class agile manufacturing environment.
Prepare cost accounting for technology changes.
Perform life cycle costing - from development to market satisfaction.
Guarantee continuous improvement.
Implement Activity Based Costing.

Companies around the world are discovering that Activity Based Costing is the engine that will drive all future improvement efforts. Read this book to see how they are putting their ideas into action.

About this title

About the Author

Peter L. Grieco, Jr., is a Partner with Deloitte & Touche Consulting Group, an international consulting and education firm specializing in the areas of Just-In-Time, Total Quality Control, Automation and Systems Implementation. He was active in the development of Apple Computer's Macintosh Automated Focus Factory in Fremont, California. His industry experience encompasses both repetitive and discrete manufacturing processes. He has more than twenty-five years of experience as a practitioner and educator in the manufacturing environment. He has held numerous operation and financial positions, as well as having responsibility for numerous sales management and marketing departments.

Mr. Grieco presently serves on the Stanford Research Institute Advisory Board (SRI) and is a member of the American Society for Quality Control (ASQC), the National Association of Purchasing Management, and the American Production and Inventory Control Society (APICS) where he has held positions as: Education and Research Foundation Director, National Secretary/Treasurer, Vice President of Region I (New England), and Past President of the Hartford chapter.

Mr. Grieco is the author of several Purchasing and JIT/TQC textbooks: Purchasing Ethics, MRO Purchasing, Supply Management Toolbox, Supplier Certification II: A Handbook for Achieving Excellence Through Continuous Improvement, and World Class: Measuring Its Achievements. He has also coauthored of these latest JIT/TQC textbooks: Made In America - The Total Business Concept, Just-In-Time Purchasing: In Pursuit of Excellence, Behind Bars: Bar Coding Principles and Applications, and The World of Negotiations: Never Being A Loser. He attended Central Connecticut State University and Wharton School of Finance (Moody's School of Commerce). He is a frequent lecturer for numerous professional societies, seminars, conferences, and numerous university programs on Operations Management and Just-In-Time/Total Quality Control related topics. He is also recognized in Inventory Management for his contribution to education and training.

From the Back Cover

Why do you need to know anything about Activity Based Costing? Consider these provocative statements madeby authors Peter L. Grieco, Jr. and Mel Pilachowski :

Traditional accounting practices are weakening American business.
The emphasis on financial measurements diverts us from improvement.
Traditional cost systems hinder excellence by hiding the elements of cost.
What you don't know can hurt you!
It's like weeds in a lawn. You can keep mowing them down.
Or, you can pull them out by their roots.

Activity Based Costing shows you how. Each chapter of this highly practical book focuses on an important facet of the new costing paradigm. Going beyond theory, our book gives you step-by-step examples of how to find the true Total Cost of producing a part or providing a service. Our book explores all areas, departments and functions of your company as well.

We think it is the book that you need to get beyond the reading and thinking stage. This is an action book!

Excerpt. © Reprinted by permission. All rights reserved.

From Chapter One Accounting Is Weakening American Business Imagine a baseball game where the scorekeepers use complicated procedures and formulas involving players' salaries, batting averages, ticket sales, number of hot dogs sold during the third inning and projected draft picks to determine who won. They completely ignore the number of runs produced by each team. Imagine this scenario and you have an idea of what is going on in American businesses as accounting departments try to determine what companies have spent to build products or provide services. As we shall see, accounting results have little to do with the activities that take place on the factory floor, in the administrative offices or out in the sales field. Furthermore, the results we now use may be causing us to sink even deeper into a hole where we are no longer profitable or competitive with other companies in the global marketplace.

The traditional practice of accounting leads to a number of faults which end up weakening American business. Some of the more devastating are listed below.

Traditional accounting practices fail to provide management with a window on performance because they focus on external (financial) results rather than on internal results.

Traditional accounting practices reinforce tendencies by management to become increasingly more concerned with the bottom line instead of She production line.
Traditional accounting practices fail to pinpoint troubles which are eating away at profit margins and providing an opportunity for the competition to capture market share.
Traditional accounting practices fail to identify recovery opportunities in a company. They also overlook the real (root) causes of waste as well as cost reduction through the elimination of non-value-added activities or the improvement of value-added activities.
Traditional accounting practices favor quick fixes to reduce costs either by reducing labor or by forcing suppliers to cut costs. These actions not only avoid internal issues of waste, continuous improvement, and the identification of true cost drivers and misallocated costs, but can create even more intractable problems via the neglect.

Avoidance is a big issue here and it reminds us of weeds in our lawns. Cutting them off at the surface only temporarily hides the problem. To eliminate weeds, you need to get at the roots and pull them out of the ground. Only then can you produce a healthier lawn. The same thing applies to our businesses. We need the tools to get at the roots and we need a cost management system that lets us use these tools to their full advantage.

Just-In-Time, Total Quality Management, Statistical Process Control, Set-Up Reduction, Bar Coding, Team Building and Supplier Certification are a few of these new tools. In our consulting work, we have seen them help put companies back on their feet and on their way to prosperity. But, we have also noticed that the greatest success comes when these tools are used in the context of a total cost system which looks to continuously improve performance by eliminating waste and reducing costs. The principal method whereby this happens is to assign each product its true share of activity costs and not to lump all costs which are not directly traceable into overhead which is then inaccurately allocated to products based on direct labor costs. This is the way we used to do product costing, but it is no longer a viable method. Let's take a look at some manufacturing history to see why.

The History of Costs in Manufacturing: Assigning costs to products has been a way of doing business since time immemorial. The principal cost elements are material, labor and overhead. Labor and material have been allocated directly, that is, the cost of steel or a welder' s hourly wage has been directly assessed against the product which was being built. All other costs, such as electricity, storage, insurance, benefits, rents, scrap and so on are dumped into the "catchall" barrel of overhead. Overhead costs are then allocated to units of production based on a predetermined burden rate which was correlated to labor dollars.

This system worked fine up through the 1970s when it started to become more and more clear that the figures weren't reflecting actual costs. Companies up to this point had been able to hide from these problems because price increases were allowing them to maintain profit margins, as were advances in technology and market share. In short, there was no need for aggressive cost management in prosperous times. But, cost systems were not keeping pace with the increasing complexity of operations, R&D advancements, multiple products, repetitive manufacturing and automation, to name a few areas. In addition, accounting had been increasingly turning toward the reporting of financial or external information in order to satisfy increasing public ownership of their companies and federal laws and regulations. It got to the point where reporting external financials was seen as the principal job of accounting, not reporting on internal costs and seeking ways to reduce them.

Another important shift that has occurred over the decades of this century is that labor costs began to constitute a smaller and smaller percentage of total costs as the chart on the next page shows:

As we have noted, however, overhead and other indirect costs were allocated to products based on labor dollars when labor costs were a much more significant factor. Unfortunately, the old cost system still operates under the assumptions of the late l9th and early 20th century when it made sense to allocate overhead costs based on labor. This way of doing business can no longer continue. Product cost data must be made to reflect the real activities that are performed while making the product. And cost systems need to give managers the information they really need to make intelligent decisions.

Edition details

• Publisher: P T Pubns
• Publication date: 1994
• Language: English
• ISBN 10: 0945456158
• ISBN 13: 9780945456155
• Binding: Paperback