CONNECTING CONCEPTS OF BUSINESS STRATEGY AND COMPETITIVE ADVANTAGE TO ACTIVITY-BASED MACHINE COST ALLOCATIONS

Abstract

As manufacturers continue to increase their level of automation, the issue of how to allocate machinery costs to products becomes increasingly important to product profitability. If machine costs are allocated to products on a basis that is incongruent with the realities of machine use, then income and product profitability will be distorted. Adding complexity to the dilemma of identifying an appropriate method of allocating machine costs to products is the changing nature of machinery itself. Depreciation concepts were formulated in days when a machine typically automated a single operation on a product. Today’s collections of computer numerically controlled machines can perform a wide variety of operations on products. Different products utilize different machine capabilities which, depending on the function used, put greater or less wear and tear on the equipment. This paper presents a mini-case that requires management accountants to consider alternative machine cost allocation methods. The implementation of an activity-based method allows managers to better match machine cost consumption to products. Better matching of machine costs to products enables better strategic decisions about pricing, mix, customer retention, capacity utilization, and equipment acquisition.

Citation

Palmer, R.J. and Davis, H.H. (2004), "CONNECTING CONCEPTS OF BUSINESS STRATEGY AND COMPETITIVE ADVANTAGE TO ACTIVITY-BASED MACHINE COST ALLOCATIONS", Advances in Management Accounting (Advances in Management Accounting, Vol. 12), Emerald Group Publishing Limited, Leeds, pp. 219-236. https://doi.org/10.1016/S1474-7871(04)12010-8