Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
ABC
Main Page | JIT
Main Page | TOC Main Page
| Traditional Costing, ABC, JIT, and TOC Concepts | ||||
| Concept | Traditional Costing | ABC | JIT or Lean Enterprise | TOC |
| Original purpose | Inventory valuation, matching and overall profit | More accurate product costs for management decisions | Reduce waste and increase efficiency | Improve scheduling in a job shop |
| Expanded purpose | Management control - variance analysis | Leads to activity based management | System philosophy of Continuous improvement | System philosophy of Continuous improvement |
| When developed | 1900 -1950 | 1910 and Rediscovered 1980s | Deming + Toyota 1950-1960 | 1980s |
| Concept of optimization | Promotes sub-system optimization | Not addressed by ABC | Promotes system optimization | Promotes system optimization |
| Emphasis on improvement | Assumes a static set of constraints to optimize within, not improvement | Not addressed by ABC, but extends to activity analysis | Kaizen to reach perfection using the Plan Do Check Action technique | 5 step method based on identifying constraints |
| Short or long run orientation | Short run emphasis with long run implications | Long run variable costs | Long run improvement | Short run emphasis with long run implications |
| Main focus or concept | Production and value added by production departments | Cost tracing to provide accurate costs and profits by cost object, e.g., products etc | The whole system: interdependence, cooperation and synergy | Making money by increasing throughput, decreasing assets and operating expenses |
| Production control or emphasis | Push system with emphasis on labor efficiency and production volume | Not addressed | Pull system using kanban authorizations to produce | Demand pull using the drum-buffer-rope concept |
| Overhead cost allocation emphasis and drivers | Allocate using production volume based drivers | Trace to activities, then to products using various drivers | Assign costs based on cycle time in the cells | No cost allocations |
| Product costs accuracy | Not accurate - distorted | Fairly accurate | Fairly accurate | Product costs do not exist |
| Inventory levels | High | Not addressed | Minimum to zero | Buffers in front of constraints |
| Waste | Price and quantity variances | Not addressed, extends to ABM | Emphasis on eliminating | Reduce to reveal constraints |
| Capacity focus | Labor and machine utilization, production volume variances | Measure unused capacity costs to manage capacity | Measured by cycle time. Emphasis on balancing capacity and the flow of work | Balance the flow of work but do not try to balance plant capacity |
| Quality of conformance | Inspect to find spoilage | Not addressed | Quality at the source, Jidoka | Emphasis at bottlenecks |
| Effect producing excess inventory has on profit | Increases profit | Increases profit | Using throughput costing it decreases profit | Using throughput costing it decreases profit |
| Relation to framework | Consistent with the individualistic concepts | Not addressed. Potentially okay with either concept | Consistent with team or communitarian concepts | Many similarities to the communitarian concepts, but TOC is not as broad |
| Signals towards increasing product diversity | Tends to promote it by showing that more diversity creates higher production volume and lower unit cost | Discourages it by showing the additional costs created by product diversity, i.e., overhead creeps up | Discourages it through the concepts of focused factories and dedicated cells | Promotes it by showing that more diversity produces more throughput |
| Recognition of the concept of variability | No explicit recognition of common cause variation | Not addressed specifically from the SPC perspective, but it recognizes that diversity creates variation in costs | Recognized and applied at the operator level with statistical process control (SPC) techniques | Recognizes variability referred to as statistical fluctuations and dependent events in TOC |
| Performance Measurements | Mainly financial measurements, i.e., variances, Net income and return on investment | Product costs, service activity costs and customer costs all related to profitability | Non-financial measurements such as cycle time, on time delivery, quality (% defects) inventory turns as well as unit costs | Maximize throughput, while minimizing inventory (i.e., assets) and operation expense |
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Related summaries:
Baxendale, S. J. and P. S. Raju. 2004. Using ABC to enhance throughput accounting: A strategic perspective. Cost Management (January/February): 31-38. (Summary).
Campbell, R. J. 1995. Steeling time with ABC or TOC. Management Accounting (January): 31-36. (Summary).
Campbell, R., P. Brewer and T. Mills. 1997. Designing an information system using activity-based costing and the theory of constraints. Journal of Cost Management (January/February): 16-25. (Summary).
Clinton, B. D. and S. C. Del Vecchio. 2002. Cosourcing in manufacturing. Journal of Cost Management (September/October): 5-12. (Summary).
Clinton, B. D. and S. C. Del Vecchio. 2002. Cosourcing in manufacturing - Just in time. Journal of Cost Management (November/December): 30-37. (Summary).
Coate, C. J. and K. J. Frey. 1999. Integrating ABC, TOC, and financial reporting. Journal of Cost Management (July/August): 22-27. (Summary).
Cokins, G. 2002. Integrating target costing and ABC. Journal of Cost Management (July/August): 13-22. (Summary).
Cooper, R. 1996. Activity-based management and the lean enterprise. Journal of Cost Management (Winter): 6-14. (Summary).
Cooper, R. and C. A. Raiborn. 1995. Finding the missing pieces in Japanese cost management systems. Advances in Management Accounting (4): 87-102. (Summary).
Corbett, T. 2000. Throughput accounting and activity-based costing: The driving factors behind each methodology. Journal of Cost Management (January/February): 37-45. (Summary). (According to Corbett, the underlying assumptions of ABC and TOC are the exact opposites and accountants cannot agree with both).
Demmy, S. and J. Talbott. 1998. Improve internal reporting with ABC and TOC. Management Accounting (November): 18-20, 22 and 24. (Summary).
Fullerton, R. R. 2003. Performance measurement and reward systems in JIT and non-JIT firms. Cost Management (November/December): 40-47. (Summary).
Fullerton, R. R. and C. S. McWatters. 2002. The role of performance measures and incentive systems in relation to the degree of JIT implementation. Accounting, Organizations and Society 27(8): 711-735. (Summary).
Goldratt, E. M. 1990. The Haystack Syndrome: Sifting Information Out of the Data Ocean. New York: North River Press. (Summary). (In Chapter 7 Goldratt tells us that the business world today has changed and cost accounting has been slow to react. They have not reexamined the fundamentals, the financial statement logic, to create new solutions. Instead, they have formulated ineffective answers like “cost drivers” and “activity-based costing.” We can no longer allocate based on direct labor. So allocating expenses at the unit level, batch level, group level, and company level is meaningless. These cannot be aggregated at their respective levels nor at the top. So why do it?).
Goldratt, E. M. 1990. What is this thing called Theory of Constraints. New York: North River Press. (Summary).
Goldratt, E. M. 1992. From Cost world to throughput world. Advances In Management Accounting (1): 35-53. (Summary).
Goldratt, E. M. and J. Cox. 1986. The Goal: A Process of Ongoing Improvement. New York: North River Press. (Summary).
Goldratt, E. M., E. Schragenheim and C. A. Ptak. 2000. Necessary But Not Sufficient. New York: North River Press. (Summary).
Goodson, R. E. 2002. Read a plant - fast. Harvard Business Review (May): 105-113. (How the rapid plant assessment (RPA) process can tell you if a factory is truly lean in as little as 30 minutes. The process includes two tools: The RPA rating sheet includes 11 categories for assessing leanness, and the RPA questionnaire includes 20 yes or no questions). (Summary).
Holmen, J. S. 1995. ABC vs. TOC: Its a matter of time. Management Accounting (January): 37-40. (Summary).
Huang, L. 1999. The integration of activity-based costing and the theory of constraints. Journal of Cost Management (November/December): 21-27. (Summary).
Huff, P. 2001. Using drum-buffer-rope scheduling rather than just-in-time production. Management Accounting Quarterly (Winter): 36-40. (Summary).
Lee, J. Y., R. Jacob and M. Ulinski. 1994. Activity-based costing and Japanese cost management techniques: A comparison. Advances In Management Accounting (3): 179-196. (Summary).
MacArthur, J. B. 1993. Theory of constraints and activity-based costing: Friends or foes? Journal of Cost Management (Summer): 50-56. (Summary).
MacArthur, J. B. 1996. From activity-based costing to throughput accounting. Management Accounting (April): 30, 34, 36-38. (Summary).
Martin, J. R. Not dated. Comparing Dupont's ROI with Goldratt's ROI. Management And Accounting Web. ComparingDupontGoldrattROI.htm
Martin, J. R. Not dated. Drum-Buffer-Rope System. Management And Accounting Web. DrumBufferRope.htm
Martin, J. R. Not dated. Global measurements of the theory of constraints. Management And Accounting Web. TOCMeasurements.htm
Martin, J. R. Not dated. Goldratt's dice game or match bowl experiment. Management And Accounting Web. MatchBowlExperiment.htm
Martin, J. R. Not dated. TOC problems and introduction to linear programming. Management And Accounting Web. TOCProblemsIntroToLP.htm