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Linking manufacturing strategy to product cost: toward time-based accounting: advanced manufacturing strategies are often undermined by legacy control systems of another era. one concept--time-based accounting--can help companies get out of this trap.

Article Excerpt
"The way I sell investment in innovation is as a time reduction, not a cost reduction." (1) This proclamation, made by the general manager of GE Aircraft Engines at the 2005 International Workshop on Accelerated Radical Innovation, underscores both the increasing importance of time and the decreasing relevancy of traditional cost measures. Indeed, many managers competing in time-based industries realize that manufacturing strategy is often undermined by the legacy cost systems of another era.

In response to today's hyper-competitive global business environment, many manufacturing firms have adopted new business strategies such as time-based manufacturing (TBM) in order to maintain their market position over competitors. While some firms credit their success in the marketplace to TBM and other advanced manufacturing strategies, many have realized little or no improvement in performance. Some companies have reported that implementation has had a negative effect on their performance, and in extreme pathological cases some firms have even blamed such strategies for the company's demise. Quite often, the failure is due to the lack of appropriate control mechanisms after implementation, not to flaws in the manufacturing strategy itself. (2)

One crucial control mechanism is the firm's internal management accounting system (MAS), which plays a decisively important role in production decisions, but it seems a great number of academic researchers and practitioners consider the MAS insignificant. Empirical research suggests that MAS design rarely reflects differences in strategy, operating environment, or competitive pressures. (3) Rather than suggest ways to better incorporate strategic measures within the MAS framework, many consultants and researchers have advocated an increased use of nonfinancial, i.e., operational, measures in place of traditional cost measures. (4) The bottom line---pun intended---on the so-called balanced scorecard is that few managers can afford to simply ignore cost. This presents a real conundrum as strategic measures increasingly come into direct conflict with outdated cost measures. What is really needed is not an abandonment of costing but an adaptation that directly links strategic success measures to product cost. After all, a company's ultimate goal is profit, and cost is half of the equation.

[FIGURE 1 OMITTED]

Although not usually high in organizational priorities or in academic research models, a firm's MAS provides the decisive scorecard for managers. Therefore, it is critical that an internal MAS exhibit the following characteristics:

* Provides the information necessary to identify the most profitable products and the pricing and marketing strategies to achieve desired volume levels.

* Provides information to detect production inefficiencies in order to manufacture the proposed products and volumes at minimum cost.

* When combined with the performance evaluation and reward systems, creates incentives for managers to maximize firm value.

* Supports the financial accounting and tax accounting reporting functions.

* Contributes more to firm value than it costs. (5)

Management accounting's objectives are to assist managers and influence their behavior in a way that results in goal-congruent actions. (6) Figure 1 presents a framework for organizational change and management accounting's role in driving the action that leads to firm value. Changes in the business environment should lead to new strategies and, ultimately, to changes in the firm's organizational architecture, including changes in the MAS to better align the interests of employees with the organization's objectives. (7)

The MAS is critical to the following tasks:

* Setting profit goals,

* Establishing departmental targets in the form of budget plans,

* Evaluating the effectiveness of resource usage against those plans,

* Investigating performance of specific manufacturing processes, and

* Taking action on adjustments and improvements necessary to keep the entire manufacturing enterprise moving toward the established strategic objectives.

The fundamental question in today's increasingly time-based competitive environment is: To what extent does the MAS reflect new business strategies?

With the widespread adoption of advanced manufacturing strategies and technologies, many managers have questioned the ability of traditional costing systems (TCS) to achieve their objectives of strategic planning, budgeting and cost control, product pricing, profit determination, and especially employee motivation. In fact, many consider TCS a major obstacle to the success of any advanced manufacturing strategy. Eliyahu M. Goldratt, whose Theory of Constraints (TOC) has developed a worldwide following, labeled TCS "enemy number 1 to operational productivity." (8) TCS have lost their relevance to the dynamic and fast-advancing nature of the modern manufacturing enterprise. (9) Nevertheless, case studies suggest that cost is still the primary--and in the majority of cases, the only--decision criterion in manufacturing. (10) Continued debate on balancing financial (cost) and nonfinancial measures is of dubious practical value. The real challenge for management accountants today is linking manufacturing strategy to product cost.

THE DAWN OF TIME-BASED COMPETITION

Time is fast becoming the next competitive battleground for American industry. (11) Those manufacturing firms that survive face a major shift in paradigm from mass production systems driven solely by cost efficiency to advanced manufacturing systems driven by quick response to customer demands for a much greater variety of high-quality products. A distinctive characteristic of globalized markets has been an increase in customer requirements for ever-faster delivery of...

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