BUDGETARY CONTROL 239
accounting system.Just-in-time (JIT)aims to improve productivity and eliminate
waste by obtaining manufacturing components in the right quality, at the right
time and place to meet the demands of the manufacturing cycle. It requires close
co-operation within the supply chain and is generally associated with continuous
manufacturing processes with low inventory holdings, a result of eliminating
buffer inventories – considered waste – between the different stages of manufac-
ture. Many of these costs are hidden in a traditional cost accounting system.
Variance analysis has less emphasis in a JIT environment because price varia-
tions are only one component of total cost. Variance analysis does not account,
for example, for higher or lower investments in inventory. Purchasing man-
agers should therefore consider thetotal cost of ownershiprather than the initial
purchase price.
In the non-manufacturing sector, overheads form the dominant part of the cost
of producing a service and so price and usage variance analysis has a limited role
to play. However, organizations can use variance analysis in a number of ways to
support their business strategy, most commonly by investigating the reasons for
variations between budget and actual costs, even if those costs are independent
of volume. These variations may identify poor budgeting practice, lack of cost
control or variations in the usage or price of resources that may be outside a
manager’s control.
We have already described approaches to total quality management (TQM)
and continuous improvement in Chapter 9 and the implications of these processes
for cost management. It is important to recognize that reducing variances based
on standard costs can be an overly restrictive approach in a TQM or continu-
ous improvement environment. This is because there will be a tendency to aim
at the more obvious cost reductions (cheaper labour and materials) rather than
issues of quality, reliability, on-time delivery, flexibility etc. in purchased goods
and services. It will also tend to emphasize following standard work instruc-
tions rather than encouraging employees to adopt an innovative approach to
re-engineering processes.
Using a case study of the Portables division of Tektronix, Turney and Anderson
(1989) found that accounting systems were obsolete, reporting information that
was no longer used, but that the role of accounting changed ‘from being a watchdog
to being a change facilitator’ (p. 41). They described how:
the accounting function has failed to adapt to a new competitive environment
that requires continuous improvement in the design, manufacturing, and
marketing of a product. (p. 37)The traditional focus for cost collection was labour, material and overhead for a
work order, but shifted to the output of a production line based on standard costs.
This moved improvement from individual worker performance to overall process
effectiveness. Variance reports were replaced by a system of stopping production
when a defect was found. Overhead was ‘bloated’ due to:
the enormous complexity of the production process...long production runs
tended to produce large inventories of the wrong product...[in which the]