Management And Accounting Web

Comparing Traditional Costing, ABC, JIT, and TOC

Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

ABC Main Page | JIT Main Page | TOC Main Page


Citation: Martin, J. R. Not dated. Comparing Traditional Costing, ABC, JIT, and TOC.  Management And Accounting Web. http://maaw.info/TradABCJITTOC.htm

Traditional Costing, ABC, JIT, and TOC Concepts

Concept

Traditional Costing

ABC

JIT
(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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