Today’s intensely competitive and rapidly-changing business environment requires manufacturers and distributors to make quality decisions faster than ever before when entering new markets, designing new products, and engineering improved processes. When making these decisions, management teams and their consultants need critically pertinent and fundamentally reliable cost accounting information; information that clearly identifies which of their products and processes contribute most to the profitability of their companies.
 
The inadequacies of traditional cost accounting

Similar to other facets of manufacturing operations today, the cost accounting models developed by experienced managers and their consultants have changed significantly from 20 years ago. The deficiencies identified in traditional, generally accepted accounting principles (GAAP) cost accounting have led managers, CPAs, and consultants to develop advanced cost and management accounting systems, and other innovative programs, that set standards and measure a company’s performance results. 

Newer approaches to management accounting: Activity-Based Costing (ABC)

Activity-Based Costing (ABC) is a widely used approach developed in recent years. It is based on the theory that it is more practical to assign standard costs to activities than to units of production. Proponents of ABC argue that the cost of an employee on an hourly basis is considerably less important than the labor costs required to perform the multiple activities within the manufacturing process. Using ABC, management is able to identify and segregate value-added activities from non-value-added activities, and manage process flows and resource allocations accordingly.   
 
The Theory of Constraints (TOC)

Another philosophy gaining in acceptance among contemporary management teams is “throughput” accounting, an accounting method developed under the Theory of Constraints (TOC). TOC advocates believe that all accounting systems based on measuring costs are meaningless, and even counterproductive, because they believe there is no relevant way to allocate costs either to units of production or to activities. 

Rather than focusing on reducing costs to measure and improve total company profitability, TOC focuses on increasing “throughput” per unit, which is accomplished by identifying and managing the constraints inherent in every production system. With throughput accounting, most categories of cost including labor are assumed to be fixed. Among the few costs that are accounted for as being variable are raw materials and packaging.
 
Measuring nonfinancial information

Management teams are realizing that in order to lead their companies to optimal results, they need to measure and monitor more than just the financial aspects of their operations. Business decisions will often be based on both financial and nonfinancial performance information. Using the theories developed in the Balanced Scorecard, performance measurement systems are being developed whereby management is able to establish and control metrics for customer service, internal business processes, and innovation, in addition to the more common financial metrics.

Staying competitive in today’s global marketplace

This discussion is vitally important to the ability of American industry to compete in the business world’s global marketplace. In striving to achieve ultimate profitability and other business goals, management and their consultants should strategically evaluate their companies’ manufacturing and distribution processes, and determine based on all information available to them which cost accounting and performance measurement systems best serve their needs.