RELEVANCE LOST - A CRITICAL DISCUSSION OF DIFFERENT COST ACCOUNTING PRINCIPLES IN CONNECTION WITH DECISION-MAKING FOR BOTH SHORT AND LONG-TERM PRODUCTION SCHEDULING

Based on principles developed early in this century traditional cost accounting systems still constitute an unchallenged context for both short term and long term product-mix decisions in most manufacturing companies. This is valid in spite of fundamental changes in the structure of manufacturing companies rendering the models increasingly irrelevant. This paper analyses the potential gains of the OPT- and ABC-models as far as they have both claimed to alleviate the short-comings of traditional approaches to product-mix decisions. These analyses lead to the following main conclusions: (1) neither OPT nor ABC have a relevance to all product-mix decisions. Their relevance is highly dependent on the time horizon and the manufacturing environment; (2) OPT represents a major improvement in short term product-mix decisions while taking capacity constraints in bottleneck ressources into consideration. On the other hand using OPT-principles for long-term descisions are potentially dangerous as the total factory costs are distributed undifferentiated to the products according to their consumption of bottleneck time. This may lead to discarding of the products with the best long term profitability; (3) the ABC-philosophy constitutes a necessary basis for long term descisions about product-mix as the complete cost-structures are revealed. However the information derived from ABC-analyses unfortunately is not satisfactory for making short term decisions in general; (4) for short term decisions under capacity restrictions the OPT-principles should be practiced; (5) for short term decisions in the absence of capacity constraints traditional variable costing principles should be used, as ABC considers costs as variables that in the short term are definately fixed; (6) because most product-mix decisions have both short and long term consequences and difficulties of classifying all costs as either fixed or variable in the decisions context, combinations of different models will produce a better basis for informed descisions; and (7) both the ABC- and OPT-philosophies need to be further elaborated. Some suggestions for further elaborations are developed in the paper.