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Keywords
Strategic management, Cost analysis, Accounting policy, Accounting theory, Constraint handling
Abstract
Since the 1980s, firms have searched for better ways to align their cost management systems with the realities of their business environments. The advent of accelerated global competitiveness, reduced product life cycles, rapid technological advancements, and inter-- organizational supply chains have drastically increased the need for more effective approaches to cost management. In recent years, activity-based, constraint-based, and hybrid cost management systems have been adopted by some firms to dampen the effects of their traditional (full-absorption) costing methodologies. However, a holistic approach is needed to facilitate strategic cost management based upon organizational objectives, organizational needs and capabilities, and customer requirements. The Theory of Constraints provides the foundation for developing cost management systems that are global, integrative, and strategic in nature. A framework is presented in this paper for using a constraint-based approach to strategic cost management.
1. Introduction
Management accounting systems evolved during the late nineteenth and early twentieth centuries to support the growing industrial activities in Europe and the USA. Most of the features seen in today's traditional cost and managerial accounting were established by the 1930s. While the business environment has undergone dramatic changes since the 1970s, very little change has occurred in the fundamental principles used in the supporting accounting systems.
Most firms have separate financial and management accounting systems. Financial accounting systems are designed to translate company activities into dollar values that are reported to various external entities. The methods and procedures must conform to Generally Accepted Accounting Principles (GAAP). This system acts on the behalf of shareholders and other concerned parties (i.e., the government and other stakeholders) to reflect the current and future realities of the business in financial terms. Through the analysis of financial reports, stakeholders are provided "information" for making short-- and long-term investment decisions, judgments concerning acquisitions or joint ventures, etc. In theory, cost and managerial accounting systems are designed to furnish "information" for internal decision making. These systems should provide the firm with revenue and cost information that reflects the current and future realities of the business in relation to goals, customers, finances, and resources.
Since the 1980s, there has been a considerable amount of research on the problems associated...