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This Certification Exam Review Workshop is to help applicants be aware of the content of the Certification Exam. It is not a training course, nor a sample exam.
The examples and discussion used in this workshop are to guide and assist your understanding of the general nature, scope, and level of detail of the Certification Exam. An exact answer to any/all questions should not be expected.
a. You cannot “fight” or “ignore” accountants not fully trained in TOC
b. You need the accountants on board (you own accounting is insufficient)
c. Traditional internal accounting (unit costs, efficiencies, performance to budget) can sink a TOC implementation even after it has been established and showing good results
I. Finance and Accounting Fundamentals (2 hours*)Objective:
Demonstrate a practical knowledge of the fundamentals of both managerial and financial accounting and their underlying economic principles. Demonstrate the ability to compare and contrast the differences between The Theory
compare and contrast the differences between The Theory of Constraints Throughput Accounting and the above.
A. Understanding “rules” and terms of GAAP financial statements B. Understanding “Contribution or Direct Costing financial statementsi. Create financial statements from a common set of data elements under the rules for standard costing/gross margin vs. direct costing/contribution margin a. Proper placement of standard variances.
ii. Timing differences on balance sheet recognition and statement of cash flows recognition. continued
Finance and Accounting FundamentalsFinance and Accounting Fundamentals (continued)(continued)
C. Understand and contrast full absorption accountingi. Traditional and Activity Based Costing
ii. Direct (or variable) costing vs. throughput accounting iii. Product profitability analysis as well as financial statement reportinga. Problem set deriving product profitability from common data set using: 1. Full absorption costing with various drivers
II. TOC Thinking Process-Finance & Measures (2 hours*)
Objective: Demonstrate the ability to analyze any environment’s finance, measures and decision making system using the four fundamental question of the thinking process.
A. Why change? i. Understand and explain the UDE linkages to the core problem associated with external accounting requirements that overlap the internal decision making system and measures.
ii. Understand interdependencies of fundamental building blocks of return on Investment and the possible dysfunctions when they are used as KPI (key performance indicators)
TOC Thinking Process TOC Thinking Process –– F & MF & M
B. What to change?i. Understand and explain the core conflicts in finance and measures in any type of organizational system through the cloud format: ii. Demonstrate the ability to surface the erroneous assumptions that underlie the core conflicts in finance and measures in any type of organizational system. C. What to change to?
C. What to change to?i. Know how to link the ROI key components system subcomponents to a decision making system synchronized with a constraint focus. ii. Be able to create the necessary injections:
§ That overcome the erroneous assumptions that underlie the core conflicts in finance and measures in any type of organizational system
§ Build the logical connections from the proposed injections to their predicted effects
§ Add the additional injections necessary to round out solution to mitigate the risk and create the necessary buy-in.
− Transition trees to ensure a realistic, time sequenced implementation plan to implement your solution sets.
ii. Understand and communicate the obstacles and intermediate objectives that predictably arise across the organization/supply chain from changes in finance and measures to any level in the organization.
III. Finance and logistical solutionsIII. Finance and logistical solutions (2 hours*)(2 hours*)
Objective:
Demonstrate the ability to understand and design the new measures and decision making system to successfully support a Process of On Going Improvement using the logistical solutions of the Theory of Constraints.
Finance and Logistical SolutionsFinance and Logistical Solutions (continued)(continued)
A. Finance and Metric Requirements to support the decision making system for Supply Chain Logistics (Drum Buffer Rope and Replenishment Inventory Management). Requirements include being able to:
− Demonstrate the TOC methodology to design the buffer management reporting information system. (All types of buffers (stock, time and capacity): size, expedite, relevant data feedback loop, improvement)
Finance and Logistical SolutionsFinance and Logistical Solutions (continued)(continued)
C. The integration of all enterprise logistical systems (DBR, S-DBR, Replenishment, CCPM) and the appropriate reporting and measures to create a portfolio management decision making model to tie their tactics and investments to the organization’s short run and long run strategy. Demonstrate the TOC methodology to design the buffer management
That is, each examination may not include all the material contained in the Exam Content Specification and may not have material compartmentalized (in 2-hour blocks) as illustrated on the previous slides.
2. Correctness of response – is the answer within the range of acceptable responses?
3. Demonstrated knowledge, thought and reasoning ability of candidate – did the candidate address the question using knowledge of accounting, finance and metrics, along with Theory of Constraints understanding and did they demonstrate the logic behind their answer(s).
Throughput Accounting for Finance & MetricsThroughput Accounting for Finance & Metrics
Competency in finance and metrics requires a fairly detailed knowledge of traditional accounting. That is, you must have sufficient knowledge to discuss traditional
• Merely a product-mix method (you will see limited cost accounting textbook treatment with a P-Q example -- materials typically the only variable cost -- or some variation of P-Q, as well as the five steps illustrated)
• A fad of operations that really does not really impact traditional cost accounting
p "Direct costs” (can be variable or fixed) are traced to the responsible segment and common costs (usually headquarters-type costs) are kept in a lump sum and deducted from the organization's total segment margin.
Direct (Variable) Costing ExampleDirect (Variable) Costing Example
Assume a company that has no beginning inventories of work-in-process or finished goods, produces 20,000 units and sells 15,000 units for $20 each. There is no
n Direct or VC reporting, while used by relatively few companies, is one of the basic building blocks of Throughput Accounting. In the VC income statement, expenses include all fixed manufacturing overhead costs as expenses of the current period.
Bridge to Throughput AccountingBridge to Throughput Accounting
include all fixed manufacturing overhead costs as expenses of the current period.
n The traditional (absorption costing) income statement (next slide) shows $97,500 -$82,500 = $15,000 greater income than the variable costing (throughput) statement [because some fixed mfg. OH is assigned to units produced but not sold].
Traditional Traditional (Absorption Costing)(Absorption Costing) Income StatementIncome StatementFor the Period Ending the Last Day of the PeriodFor the Period Ending the Last Day of the Period
Revenues (15,000 units at average price of $20)$300,000Cost of goods soldBeg. Fin. Goods 0Cost of goods manufactured $200,000
Cost of goods manufactured $200,000Less ending Finished Goods 50,000Cost of goods sold ($10 x 15,000 un) 150,000Gross profit (margin) $150,000Selling and admin. expensesVariable $ 22,500Fixed 30,000Total sell. and admin. expense 52,500Net operating income $ 97,500
statement.This is because manufacturing costs of $10 per unit ($4 DM + $1 DL + $2 VOH + $3 FOH) times 5,000 units, or $50,000, were put in ending inventory and thus deferred (not recognized) until some future period (when these units are sold) even though the $15,000 of fixed overhead that is deferred will be incurred again in the next period.
Because the fixed manufacturing overhead cost per unitper unit is a function of productionproduction, a manager can lower the manufacturing cost per unit (and thus the total manufacturing cost being
the total manufacturing cost being expensed on the income statement) by spreading the $60,000 fixed manufacturing overhead over more than 20,000 units (i.e., producing more units).
Moral of FC Allocation Methods?Moral of FC Allocation Methods?
A “fully absorbed” unit cost was developed at a time when its implicit assumptions were true. Now it is useful only for external GAAP reporting and should not be used to make internal decisions.
− It is a function of the driver quantity (usually production related such as DL hours, machine hours, units of production, etc.) based on some concept of capacity.
− Fixed costs are treated in a total unit cost as if they are variable – and they are NOT (at least not in the short run)!
Difference in Traditional and Direct Costing Statements?Difference in Traditional and Direct Costing Statements?
• Inventories increasingincreasing? Traditional income always will be greater than direct or variable costing income. In the example: 5,000 units (increase in inventory.) x $3 fixed manufacturing overhead cost per unit = $15,000 greater than the variable costing statement.
• If inventories decreasedecrease, the opposite effect occurs: variable costing operating income is higher than traditional operating income. (Impact on inventory control programs?)
• Selling and admin. expenses are the same (in total), but in different locations on the two statements.
Adjusting Direct Costing to GAAPAdjusting Direct Costing to GAAP
Because the only numerical difference between a direct costing income statement and a traditional (full costing) income statement is the treatment of fixed costs in inventory, one adjusting entry at the end of a period will transform direct costing data to GAAP data. For our example,
• Supports production's contention that "specialty" items cost more than "standard" items
• Usually no recognition of differential cost behavior (i.e., variable and fixed)
More on the Role of AllocationsMore on the Role of Allocations (continued)(continued)(continued)(continued)(continued)(continued)(continued)(continued)
• Usually no recognition of differential cost behavior (i.e., variable and fixed)
p ABC equates its long-term perspective to the belief that in the long run all costs can be changed and equates this fact with its stance that therefore all costs are “variable.”
with different cash flows, decisions can be made using the time "FlushFlush" occurs for each investment (similar to "payback period" and “NPV”, but includes the period the cash was but includes the period the cash was tied up here and could not be used for tied up here and could not be used for opportunities elsewhereopportunities elsewhere), or the total dollar days for entire period of the investment.
FlushFlushversus versus Present Present ValueValue
Example: $60,000 investment incurred over 3 weeks; $150,000 cash inflow over 24 weeks
• On Day 2, you have not yet gotten your dollar back. You’ve now lost the opportunity to use that dollar for the second day, in addition to the first day or you now have $1 x 2 Days = 2 Dollar Days
The Role ofThe Role ofPerformance Evaluation MeasuresPerformance Evaluation Measures
"Tell me how you measure me, and I will tell you how I will "Tell me how you measure me, and I will tell you how I will behave."behave."
n Performance to budget usually VERY important in traditional accounting firms
n Focus is usually very short term (one quarter or one
("If you measure me in an irrational way, don't complain about irrational ("If you measure me in an irrational way, don't complain about irrational behavior.")behavior.")
n Focus is usually very short term (one quarter or one year)
n EVA (Economic Value Added) is the latest way to balance long-term and short-term decisions (some percentage of bonus for profitable operations in the current period may be deferred until later periods)
n Contribution to team work usually is not explicitly evaluated and is not explicitly rewarded continued
− Did people do things they were NOT supposed to do?
− If you MUST conduct a formal performance evaluation (most such systems are dysfunctional), think about "netting" dollar day rewards and penalties for performance evaluation purposes.
• What is throughput accounting? All the internal accounting and reporting that supports the TOC management philosophyp Income statements on the direct or variable
p Communication/publication of the actual or assumed internal constraint
p Scheduling for the entire facility (organization) based on the requirements of an internal constraint (which is geared to produce customer orders or, if necessary, produce to a forecast)
p Measurement of the efficiency of non-constraint resources in terms of (1) time required per job (when they have work to do) and (2) adherence to the schedule to support the constraint (nothing early, nothing late --penalties both ways)
p Ratio of buffer size to work still to be completed must be tracked and reported (“dynamic” buffers are required when product mix constantly changes).
p Frequent reporting of "holes" in Regions 1, 2, and 3 of the (1) constraint buffer, (2) assembly buffer (if one exists) and (3) the shipping buffer with the intent of highlighting problem areas where the quality or setup reduction teams can concentrate.
p As "holes" are eliminated, the buffer size can be reduced (Since the manufacturing lead time of the facility is the sum of the buffers, as the buffers are reduced, lead time also is reduced.)
p Investment requests should present the impact on the entire organization, not just the local area.
p Dollar days (computed similar to Flush example, slides 47-50) — can be inventory dollar days (days until inventory needed) or throughput dollar days (days until throughput is earned)..
corrected as soon as possible. If a quality problem is not reported, but discovered at point of assembly or by the customer, the area that should have discovered and fixed the problem can be "charged" for the throughput lost times the number of days until the situation can be corrected.
• Assume you are a manager, with no significant accounting training, employed in an organization that is involved in international operations. Your task is to help the organization achieve its overall objective of earning the highest net income it can both now and in the future.
Futuro International, Inc. Futuro International, Inc. -- Case DetailsCase DetailsTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 Conference
• Your organization has adopted a resource-based * strategic approach. You must develop plans that will enable your company, Futuro International, Inc., to make the best use of its current resource base and, later, make resource acquisition and other decisions.
* See A Resource-Based View of the Firm, B. Wernerfelt, Strategic Management Journal, 5, 1984, pp 171-180, From Critical Resources to Corporate Strategy, B. Wernerfelt, Journal of General Management, 14, 1989, pp 4-12, and The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation, R. M. Grant, California Management Review, Spring, 1991, pp 114-135.
Futuro International, Inc. Futuro International, Inc. -- Case DetailsCase Details
• That is, make your initial decision(s) based on the resources you have available immediately. Longer-term decisions will involve relaxing the static-resource assumption.
• In order to absorb, digest, and come to conclusions in a short period of time, all the details of the company studied in this case have been greatly simplified. You will process this simplified information in a world of certainty in order to remove the many compounding, confusing factors (excuses?) we can point to as reasons why our decisions did not turn out as expected. (If the small numbers bother you, move (If the small numbers bother you, move the decimal points as many places as you wish.)the decimal points as many places as you wish.)
• One of the biggest assumptions is that processing times are known with certainty. If Resource A represents marketing effort, for example, we know exactly how much time is required to obtain an order for each of the products.
Futuro International, Inc. Futuro International, Inc. -- Case DetailsCase DetailsTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 Conference
• Futuro International, Inc. is a company that currently does business in many countries and is open to additional international expansion. It has three major products that are sold to customers. Production of each of these products require different times on company resources, and require different variable costs.
• Resources may be viewed as individual personnel, departments, or divisions. If these resources are in different countries, we will assume away any import/export and taxation problems. Once again, to keep the calculations manageable, we will assume that Futuro has only one resource of each
Futuro International, Inc. Futuro International, Inc. -- Case DetailsCase DetailsTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 Conference
assume that Futuro has only one resource of each type (A, B, C, and D).
• The diagram following these instructions explains the processing (rectangular boxes) that is required to produce one unit, and the variable costs (circles) for each of the products.
• The selling price for Product 1000 is $150 per unit, and the market demands 90 units per week. That is, if Futuro decides to provide 90 units, they will be purchased. If Futuro wants to provide 100 units for Product 1000, 10 will not be sold.
• Product 2000 units have a selling price of $120 per
Futuro International, Inc. Futuro International, Inc. -- Case DetailsCase DetailsTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 Conference
• Operating expenses, excluding the variable costs shown on the diagram, total $12,000 per week.
• Following the flow diagram, we have provided some details of the $12,000 in weekly expenses. If you prefer a simple traditional analysis, you will want to
Futuro International, Inc. Futuro International, Inc. -- Case DetailsCase DetailsTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 Conference
prefer a simple traditional analysis, you will want to use the data provided under “Traditional Assignment of Operating Expenses,” or some variation of this data. If you prefer a more detailed analysis that utilizes the activities performed by the resources, you will want to use the data provided under “Alternative Activity (ABC) Assignment of Operating Expenses.”
• You should use whatever data set (one of the two provided or some other data set) you feel most comfortable using to make the decisions you must make. So that we face a comparable situation, please do not assume any detailed breakdown of costs that departs from the activity
Futuro International, Inc. Futuro International, Inc. -- Case DetailsCase DetailsTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 Conference
breakdown of costs that departs from the activity analysis shown. (That is, assume that the activity pools and drivers shown are the best ones available.)
B Task 2
Selling Price = $120/UnitDemand: 50 Units/Week
C
Selling Price = $150/UnitDemand: 90 Units/Week
D10 min
C CRM #7$5 perUnit
Selling Price = $90/UnitDemand: 80 Units/Week
Futuro International, Inc.Futuro International, Inc.
D5 min
D10 min
Product 1000 Product 3000Product 2000
A Task 15 min
B Task 110 min
B Task 210 min
RM #4$20 perUnit
RM #3$20 perUnit
B Task 310 min
C 5 min
RM #2$20 perUnit
RM #1$20 perUnit
C 5 min
C10 min
B Task 45 min
RM #6$20 perUnit
Unit
RM #5$20 perUnit
A Task 315 min
A, B, C, D: 1 each (no OT, no cross-training) Available time: 2,400 min/wk
Operating Expenses (not including VC) = $12,000/wk
Alternative Activity Assignment of Alternative Activity Assignment of Operating Expense Using ABC Operating Expense Using ABC (next 5 slides)(next 5 slides)
STAGE 1
Futuro International, Inc.Futuro International, Inc.
Processing$45.35 X 45 2,041$45.35 X 35 1,587$45.35 X 40 1,814Total Processing 5,442Support$11.6735 X 140 1,634$11.6735 X 80 934$11.6735 X 120 1,401Total Support 3,969Tot. OE Assigned* $4,538 $3,672 $3,790 $12,000
Calculate the maximum income Futuro can earn in one week. If the system does not have sufficient capacity to produce all units demanded, you must decide which product is most profitable and which is least profitable so that you can select
Futuro International, Inc.Futuro International, Inc.
Total Revenue $ 26,700Material Costs(90 X $60) 5,400(50 X $40) 2,000(80 X $45) 3,600Tot. RM Costs 11,000Throughput $ 8,100 $4,000 $3,600 $ 15,700Operating Exp. 12,000Oper. Inc. before taxes $ 3,700
But wait a moment... This performance is not possible. Project management people tell us we can not deliver all of Product 1000 and Product 2000 units demanded. We do not have enough capacity.
So, we will deliver what we can while we look for a higher gross margin product, consider restructuring one more time, or look for a buyer for this business.
The weakest link (or that which causes the weakest link) is called a CONSTRAINT -- anything that limits the system from achieving higher performance in terms of its goal.
efficiency of the Futuro operation. Work in small groups to analyze these opportunities. Indicate whether or not each of these investments should be approved. If you decide to approve more than one investment, establish a priority ranking for the alternatives.
Intuitively (after having gone through the initial solutions to the Futuro Industries case), the first response to this proposal is “No, resource A is not our problem.
Futuro International, Inc.Futuro International, Inc.-- Investment AInvestment A
Intuitively (after having gone through the initial solutions to the Futuro Industries case), the first response to this proposal is “Yes,” resource B is our problem. Increasing B’s capacity means that Futuro can produce more output. Let’s look at the
“Cost” per minute x $ 0.50Total amount saved per week $80
Payback period using “traditional” analysis: $6,000/$80 ≈≈≈≈ 75 weeks. Using traditional analysis, we might incorrectly decide that this is a bad investment. This especially is true if the person making the decision does not understand the constraint concept or does not know where the constraint is located.
“Cost” per minute x $ 0.50Total amount saved per week $100.00
Payback period using “traditional” analysis: $7,000/$100 ≈≈≈≈ 70 weeks. Using traditional analysis, we might incorrectly decide that this is a bad investment. This might happen if the person making the decision does not understand the constraint concept or does not know where the constraint is located.
For a $10,000 investment, plus an increase of $800 in wages, resource C would be able to perform all the operations currently performed by resource A. In addition, the processing time required by resource C to
Futuro International, Inc.Futuro International, Inc.-- Investment CInvestment C
processing time required by resource C to do its jobs, including those previously done by resource A, would be cut in half. If Futuro chooses to undertake this investment, resource A can be eliminated. Phasing out resource A would require a $5,000 charge to operations. (Assume that resource A wages are 1/4 of total weekly wages of $4,800.)
B Task 2
Selling Price = $120/UnitDemand: 50 Units/Week
C
Selling Price = $150/UnitDemand: 90 Units/Week
D10 min
C CRM #7$5 perUnit
Selling Price = $90/UnitDemand: 80 Units/Week
Futuro International, Inc.Futuro International, Inc.
D5 min
D10 min
Product 1000 Product 3000Product 2000
2.5 2.5 2.5
Operating Expenses (not including VC) = $12,000/wk 124
A Task 15 min
B Task 110 min
124
B Task 210 min
RM #4$20 perUnit
RM #3$20 perUnit
B Task 310 min
C 5 min
RM #2$20 perUnit
RM #1$20 perUnit
C 5 min
C10 min
B Task 45 min
RM #6$20 perUnit
Unit
RM #5$20 perUnit
A Task 315 min
A, B, C, D: 1 each (no OT, no cross-training) Available time: 2,400 min/wk
replacement will not be hired. Therefore, a true cost savings results: $4,800/4 = $1,200 per week minus the $800 additional salaries for resource C = $400 per week savings. Payback period: $15,000/$400 ≈≈≈≈ 38 weeks. This would be an acceptable investment. However, if Futuro has limited funds, it would not be the first choice.
Your quality supervisor has determined that virtually all errors that occur in the operation are caused by problems at resource D. The scrap rate is 4% of Product 1000, 7% for Product 2000, and 8% for Product 3000. The quality improvement team
Futuro International, Inc.Futuro International, Inc.
for Product 3000. The quality improvement team can only focus their attention on one product at a time.
Which product line should receive top priority? That is, errors in which product causes the greatest loss? (Assume that there is an equal potential for error reduction for each of the three products, and the time and cost involved is the same for each product).
B Task 2
Selling Price = $120/UnitDemand: 50 Units/Week
C
Selling Price = $150/UnitDemand: 90 Units/Week
D10 min
C CRM #7$5 perUnit
Selling Price = $90/UnitDemand: 80 Units/Week
Futuro International, Inc.Futuro International, Inc.
D5 min
D10 min
Product 1000 Product 3000Product 2000
4% 7% 8%
Operating Expenses (not including VC) = $12,000/wk 128
A Task 15 min
B Task 110 min
128
B Task 210 min
RM #4$20 perUnit
RM #3$20 perUnit
B Task 310 min
C 5 min
RM #2$20 perUnit
RM #1$20 perUnit
C 5 min
C10 min
B Task 45 min
RM #6$20 perUnit
Unit
RM #5$20 perUnit
A Task 315 min
A, B, C, D: 1 each (no OT, no cross-training) Available time: 2,400 min/wk
Product 1000 2000 3000RM (per unit) $ 60.00 $ 40.00 $ 45.00Time lost 45 min. 35 min. 40 min.Value of lost time x $0.50 x $0.50 x $0.50
Futuro International, Inc. Futuro International, Inc. ��Traditional Approach to Traditional Approach to the Quality Improvements Dilemmathe Quality Improvements Dilemma
lost time x $0.50 x $0.50 x $0.50Cost-lost time 22.50 17.50 20.00Tot. cost/unit $ 82.50 $ 57.50 $ 65.00No. of units x 3.6 x .7 x 6.4Total cost $297.00 $ 40.25 $416.00
contribution margin per minute that the company would lose on its lowest priority product. (This assumes that the more profitable scrapped units will be replaced.)
This quality solution is counter-intuitive. We should improve errors first at the lowest error rate: Product 1000. However, if we fix this problem first, we will save $504 per week versus saving only $416 if we
Futuro International, Inc.Futuro International, Inc.
Futuro has decided to explore marketopportunities in China. Futuro has found apotential customer in China who is willing topurchase up to 20 units per week of each of ourproducts. The only catch is that this customer
products. The only catch is that this customerwill only pay 80% of what the products sell fordomestically.
It is Futuro’s choice to decide if they want to sell anything to this new customer, and if so, how much. What should Futuro do? (For simplicity, assume that all costs, such as transportation, would not change and that collectibility is not an issue).
Futuro International, Inc.Futuro International, Inc.
Even though Futuro is operating at full capacity and still cannot satisfy all domestic demand, every opportunity should be considered carefully before it is dismissed.
With this priority structure, Futuro would produce all of Product 3000 (90 units), all of China 3000 (20 units), all of Product 1000, five units of Product 2000, and no units of China 1000 and China 2000. BUT…
Because the “3000” line consumes so much Resource A time, this new mix should be checked against Resource A availability.
Product Information:
UnitsTime required on each resource
Make Sure the Constraint Status is Unchanged!Make Sure the Constraint Status is Unchanged!TOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 Conference
UnitsTime required on each resourceDemanded for each unit produced (minutes)Resource A B C D TotalProduct 1000 90 10 20 5 10 45Product 2000 5 5 20 5 5 35Product 3000 80 15 5 10 10 40China 3000 20 15 5 10 10 40
Revised Profitability with China 3000 SalesRevised Profitability with China 3000 SalesTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 ConferenceTOCICO 2008 Conference
IF Futuro were in the position of having excess capacity, it should do everything in its power to “sell” that excess capacity. Futuro might attempt to segment its markets in some way.
This means, in the short run, perhaps offering special prices on some variation of one of its current Product Lines. A better solution is to try to find some product line that it can produce with its current resource base that it is not currently producing. This alternative is especially attractive if the “new” product line requires resources C and D rather than B or A.
There are many ways to segment a market: price is one of the worst ways and should be used cautiously. The price approach can be deadly if regular customers hear of it. Japan, however, has segmented its markets by price (and by geography) for a long time, and, as
(and by geography) for a long time, and, as far as we know, has never been convicted of “dumping.”
Pricing, in general, should be based on the capacity of the selling firm and value to the customer. “Cost,” as far as the customer is concerned, is irrelevant in the pricing decision.
Adopted from Spoede Budd, Charlene, Adopted from Spoede Budd, Charlene, Improvement Initiatives and Accounting Function Improvement Initiatives and Accounting Function RestructuringRestructuring, Accounting Policy & Practice Series, BNA, Inc. (forthcoming, 2007), with permission , Accounting Policy & Practice Series, BNA, Inc. (forthcoming, 2007), with permission of Tax Management, Inc., a subsidiary of BNA, Inc.of Tax Management, Inc., a subsidiary of BNA, Inc. All rights reserved.All rights reserved.
Adopted from Spoede Budd, Charlene, Improvement Initiatives and Accounting Function Restructuring, Accounting Policy & Practice Series, BNA, Inc., 2007, with permission of Tax Management, Inc., a subsidiary of BNA, Inc. All rights reserved.
TOTAL OPERATING EXPENSESTotal
Resource Driver CostPurchasing Orders $ 440Inven. Carry. Costs $ of items carried 120Acct.-Purchasing Transactions 60Computer Time & supplies used 80Supervision Time spent 900Training Number of people 120Travel-Sp. Product benefiting 530Travel-General Product sales 600Legal Exp.-Sp. Time billed 180
in accounting and co-authored A Practical Guide to Earned Value Project Management (2005 and 2010) andInternal Reporting and improvement Initiatives (2007) with husband Chuck Budd.
She also has published many articles in accounting and project management journals and several chapters in the TOC Handbook.