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A privately owned German power tool company was dissatisfied with its existing cost system. The system could not produce timely accurate reports on cost center operations, and newly purchased automated machines were attracting large overhead costs. A new, highly automated system was designed and installed that used 600 cost centers and an appropriate activity base chosen for each center. The case shows the design of a highly accurate cost control system with flexible budgets used in both support and production cost centers.

Managers in companies selling multiple products are making strategic decisions about pricing and product mix with distorted cost information, detecting the problem only after their competitiveness and profitability have deteriorated. An alternative is activity-based costing. Virtually all of a company's activities exist to support the production and delivery of today's goods and services. Companies need not scrap their official cost systems to use activity-based methods. The two can exist simultaneously.

Texas Instruments implements a Cost of Quality (COQ) system as part of a company-wide "Total Quality Thrust." After several years of operation, group management questions whether or not the COQ system should be updated to make it more useful in identifying areas for quality improvement. The case documents the current system and asks students to analyze the role it played in the quality control process and areas in which it could be improved.

No one cost system gives managers all the information they need to promote operational efficiency and produce the highest quality product at the lowest cost. Cost systems must serve three functions--inventory valuation, operational control, and product cost measurement. This system for operations management performs three functions: it reports information according to production cycles, differentiates between fixed and variable costs, and allocates costs only to cost centers directly related to production activities. A more subjective system is advised for measuring product costs, starting with interviews with supervisors and including transaction measures as well as traditional volume-related measures.

Having installed an activity-based system, the division is now exploring the insight provided by that system. In particular, it is studying the economics of lot-size process planning and product mix management.

Spreadsheet Supplement for case 187108.

American Bank is developing a new system to compute product costs. The deregulated, more competitive environment for commercial banks has created both problems and opportunities for banking operations. In order to price existing products and assess the desirability of new product introduction, a system is needed to estimate the demands that each banking product places on the organization's resources.

The division has recognized the inadequacies of its existing, traditional cost system for estimating product costs. Describes the innovative activity-based system that was developed to more accurately trace overhead costs to individual products. Provides students with the opportunity to critique a standard cost system and to assess the characteristics of the proposed system that traces costs to production activities.

Spreadsheet supplement for case number 187107.

The apparent inability of traditional modes of financial analysis like discounted cash flow to justify investments in computer-integrated manufacturing has led many managers to turn to criteria that seem more closely connected with strategy. Actually, there is no conflict between the financial and the strategic justification of CIM. There is no unbreachable gulf between the logic of DCF and the nature of CIM. All that are needed are new ways to apply DCF to CIM investment proposals. DCF usually fails to work right when companies set arbitrarily high hurdle rates for evaluating new investment projects. Despite the costs that introducing CIM entails, for many companies there is no real alternative to investment in CIM.

Outdated cost accounting and management control systems are an obstacle to the lasting success of new manufacturing technologies and procedures. They distort the realities of manufacturing performance and fail to give managers the information they need to optimize the benefits of computer-aided manufacturing processes. Measurement systems for today's manufacturing operations must include such nonfinancial indicators as quality, inventory, productivity, innovation, and the morale and skills of the work force. McKinsey Award Winner.