Applying Matrixed Pareto Analysis with Activity Based Costing for Operations and Cost Management
Berniker, Eli, McNabb, David E., Journal of Business and Management
Management decisions made in operations planning and control determine what goods will be produced, when, and in what quantities; these determinations, in turn, shape other functional areas, including marketing, purchasing, receiving, storing, pricing, record keeping, inventory control, accounting, and other financial activities. Production management systems have long been effective at ensuring optimal efficiency in the flow of raw materials and finished goods through the production cycle. However, the accelerated proliferation of product varieties and product mixes that include both high volume and low volume specialty products has made it difficult for management to establish effective cost management and pricing policies. This paper expands traditional Pareto Analysis, a proven tool used in production and inventory control systems, by incorporating opposed metrics to create an effective low-cost tool to disaggregate product mixes and more accurately identify and control production costs.
Operations planning and control is concerned with the efficient and effective allocation of resources. Total quality management, just-in-time deliver); activity based accounting, optimized production technology, and the theory of constraints are among the many management procedures and concepts developed in managements' efforts to optimize the distribution of scare resources (Berniker, 1997; Ronen & Spector 1992).
Pareto Analysis has been shown to be an effective measurement tool with applications in most of these procedures. Classification systems such as Pareto Analysis (ABC Analysis possibly the best known) have contributed significantly to the development of inventory controls and other production management systems (Bradford & Sugrue, 1997). Chu and Chu (1987) described an easy-to-follow six-step procedure for classifying products into their relevant Pareto categories.
The accelerated proliferation of product varieties and product mixes that include both high volume and low volume specialty products has made it difficult for management to establish effective cost management and pricing policies. Simple Pareto analysis does not provide the necessary information for production, pricing, and inventory decisions. Combining activity based accounting with Pareto analysis overcomes some of the key shortcomings of each process alone. According to Ronen and Spector (1992), in order to plan what will be a "good, reliable, and economic production line," the planner must consider the cost of the resource, its location in the production chain, and its internal (demand) fluctuations.
Since the 1980s, many U.S. manufacturing firms have been forced to consider manufacturing as a way to gain a competitive advantage. In this way, inventory management systems, just-in-time supply (JIT), lean production, continuous product improvement (CPI), and similar programs are typical of efforts manufacturers have had to implement to improve productivity, become more efficient, and cut costs and reduce wastes (Azari-Rad, 2004). In addition to these concerns, designing and supporting an optimal mix of products has become a particularly pressing problem for firms that support a great variety of product offerings; product mix decisions may be most difficult when long product lines also require a wide variety of complex manufacturing processes. While marketing in such firms traditionally supports a wide spectrum of offerings to satisfy all customer demands, production managers often find it difficult to recover the costs associated with small or unique production runs. In many cases, true costs of manufacturing these special goods are difficult, if not impossible, to ascertain. Traditional cost accounting techniques are particularly weak in these instances.
The cost accounting techniques which evolved at the beginning of the last century as part of the scientific management movement work well for firms with few products that are manufactured in relatively simple processes. …