Management And Accounting Web

Comparing Traditional Costing, ABC, and JIT

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

ABC Main Page | JIT Main Page

Traditional Costing, ABC and JIT Concepts
Concept Traditional Costing ABC JIT and Lean Enterprise
Original purpose Inventory valuation, matching and overall profit More accurate product costs for management decisions Reduce waste and increase efficiency
Expanded purpose Management control - variance analysis Leads to activity based management System philosophy of Continuous improvement
When developed 1900 -1950 1910 and Rediscovered 1980s Deming + Toyota 1950-1960
Concept of optimization Promotes sub-system optimization Not addressed by ABC 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
Short or long run orientation Short run emphasis with long run implications Long run variable costs Long run improvement
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
Production control or emphasis Push system with emphasis on labor efficiency and production volume Not addressed Pull system using kanban authorizations to produce
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
Product costs accuracy Not accurate - distorted Fairly accurate Fairly accurate
Inventory levels High Not addressed Minimum to zero
Waste Price and quantity variances Not addressed, extends to ABM Emphasis on eliminating
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
Quality of conformance Inspect to find spoilage Not addressed Quality at the source, Jidoka
Effect producing excess inventory has on profit Increases profit Increases 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
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
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
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


For a table that includes TOC see Comparing Traditional Costing, ABC, JIT, and TOC

Related summaries:

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).

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).

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).

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).