Focused Operations Management

Chapter 16. Marketing, Costing, and Pricing Considerations in Decision‐Making Processes

In recent years, two approaches have been developed to handle the irrelevancy of traditional cost accounting and to aid managers in decision making:

1. Activity‐based costing. This cost accounting method is actually a refinement and improvement of classical cost accounting (absorbing accounting) and was first introduced by Cooper and Kaplan (1988). Activity‐based costing (ABC) analyzes indirect costs and assigns them in sophisticated and precise methods across various services or products.

2. Throughput accounting. This accounting method was introduced in the 1940s and is an improvement on contribution accounting. Throughput accounting was improved as a managerial decision‐making tool by Goldratt (1991). In this chapter, we discuss the basics of throughput accounting and improve on it by adding a structured methodology (global decision making, GDM) and other simple tools that aid managerial decision making.

Activity‐based costing only partially aids decision‐making processes and is, in fact, using cost allocation that is somewhat arbitrary and not relevant (Eden and Ronen, ).

The load of organizational resources is a critical factor in decision‐making processes regarding pricing, investment, or make or buy decisions. Two environments that decision makers may encounter include:

1. Decision making in a resource constrained environment

2. Decision making in an excess capacity environment (market constraint)

Decision ...