Hank Barr, CPIM, C.P.M.

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Chapter 2

• Hank Barr, CPIM, C.P.M.
• WWU
• Professional Development Meeting
• April 14, 2004

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Opening

• The goal is to make .
• Net profit and Return On Investment are not good
  measurements for day-to-day decisions.
• We need a guide for actions and decisions that
  lead to company profitability.

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Relevance Lost

• Where an ineffective management accounting
  system prevails, the best outcome occurs when
  managers understand the irrelevance of the system
  and by-pass it by developing personalized
  information systems. Johnson and Kaplan,
  Relevance Lost, the Rise and Fall of Management
  Accounting.

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Chapter 2s Example

• External causes eliminated
• Taxes low
• Competition not fierce
• Constant market
• Employees trained
• Resources new
• Suppliers reliable and stable

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Processes and Products

• Two Machines
• One Cuts
• One Sews
• Mens Womens Shirts

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Data
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Capacity Requirements
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What Should We Do?
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120 Womens 60 Mens
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Least Profitable120 Mens 80 Womens
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Minimizing Time and Costs?

• Reduce cutting time for mens shirts 2 minutes
• Invest 100 to do it.

• Should We?
• What will be the impact on profit?

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Least Profitable120 Mens 80 Womens

• Nothing wrong with your eyes, no change, except
  for the 100 expense.

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Questions To Ask

• Sell more products? No!
• Because the sewing machine is the bottleneck.
• Consequence of decision?
• Depreciable investment (cost) increased!

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Heres An Expensive Idea!

• Reduce sewing time for womens shirts by 1 minute
• Increase its time on cutting machine by 3 minutes
• Invest 1,000 to do it.

• Should We?
• What will be the impact on profit?

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120 Mens 85 Womens
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What Was The Problem?

• Cost accounting is not capable of giving good
  information because it assumes that all the
  companys resources are equally important.

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Heres The Secret

• When a resource is scarce, the thing that counts
  is contribution per unit of scarce resource
• 60/15 4/minute women's
• 50/10 5/minute mens

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Close

• The secret was contribution per unit of the
  scarce resource.
• Pay attention to bottom line, not local
  measurements.
• Dont waste time and resources trying to just
  improve something.

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Part Two ABC vs TOC

• Accounting, Budget Cost system
• VS
• Theory of Constraints

A Practical Approach
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Chapter 5 TOC v. ABC

• Hank Barr, CPIM, C.P.M.
• WWU
• Professional Development Meeting
• April 14, 2004

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Resource requirements if you try to make 130
(current market demand) of each product
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12,000
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Tracing Quality Testing to Products
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Tracing Shipping Costs to Products
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Total costs per unit using ABC
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Maximum profit according to ABC 130 S and 72 R
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Here we are using all our available resources and
selling only the most profitable item per ABC
(171 Ss) and we are losing our shirt!!!!
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TOC only needs to know the Throughput/Time on CCR
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When all you sell is your most profitable product
your profit actually goes up!!!!
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ABC v. TOC

• Traces costs
• Generates many transactions
• Aggregates value to WIP and FG
• Did not properly guide towards profit
• Inconsistent between accountants

• Does not trace costs
• No transactions
• Few calculations
• Guides towards profit
• So simple its hard to be inconsistent

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Questions?