The company’s profits are falling and there is a build-up of inventory within the production process. This report considers three management systems which could rectify the situation. Considering theory of constraints, just in time and programme evaluation and review technique, the report recommends that more information regarding the cause of the problems is undertaken, and a suitable programme of revaluation of the business processes is undertaken.
The role of management accounting in the organisation has become so much more that the reporting of the score to managers (Hansen, Mouritsen 2006). In the wake of the decline of Western Manufacturing and the relevance crisis of management accounting to modern business as outlined by Kaplan and Johnson in ‘Relevance Lost’, the traditional cost accounting approach has been largely replaced by alternative methodologies (Kee, Schmidt 2000). The role of the management accounting in the modern firm is not only to report the score, but to seek to influence the score by using techniques and theoretical approaches to improve the business processes. As such it is important for managers to understand the use and usefulness of a variety of alternatives to traditional accounting approaches, especially traditional cost accounting and look to introduce other techniques which may have practical advantages for the firm (Dugdale, Jones 1998). There is no one size fits all approach which will work in any case and the application of cost accounting can and will always provide key information about how the business is doing in terms of its goals. Indeed many of the newer techniques focus on particular applications within industry and each of them has something to offer the firm in terms of improving the business processes (Plenert 1993). This report considers three approaches in the context of practical application to a range of common problems, problems which may be responsible for the inventory build-up of the firm in question and its declining profits. The approaches are the Theory of Constraints (TOC) and the attendant logic of Throughput Accounting (TA), Just in Tim Inventory Management (JIT) and wider implications to ‘Lean’ manufacturing methodologies and the Program Evaluation and Review Technique framework (PERT). The report outlines the main features of these methodologies and the advantages and limitations of them with specific reference to their usefulness in a variety of practical situations. The report concludes that each of the methodologies has something to offer and that any management decision must be based on the goals and objectives of the company and its strategic direction.
Developed by E.M. Goldratt as a response to the criticisms of traditional cost accounting, the TOC states that the traditional variable costs of Cost Accounting do not apply, or rather, they apply with less rigour in a modern management situation (Bragg 2007). In the past Labour was seen as a totally variable cost, workers would work to the management’s discretion and short time and layoffs were dictated by the level of production need.
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