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...nstraints compared to traditional management accounting approaches to resource utilisation in aiding decisionmaking. It also considers the propagation and evolution of the Theory of Constraints and critically examines the response it has generated in the accounting and management literature. The continuing survival of cost accounting in the face of frequent assaults similar to Goldratt’s may in part be due to the ability of the discipline to adapt its practices to integrate the mandated improvements into practice and educational curricula. One example is the Theory of Constraints itself (e.g. Horngren et al (1999) and Morse & Zimmerman (1997)). The paper reflects on the process by which new ideas are assimilated into the conventional management wisdom based on this example. KEYWORDS Capacity Management,Capacity Plasticity, Constraints, Management Accounting,Financial Brake _________________________________________________________________________________________ 1 Assistant Professor of Islamic Azad University, Rasht 2-6 Master Students of Business Management. Islamic Azad University , Rasht , Branch, Iran . Arabian Journal of Business and Management Review (Nigerian Chapter) Vol. 1, No. 5, 2013 11 INTR...

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...luded in operating costs. In fact as they point out the error even extends to the Noreen et al (1995) independent report on TOC and its implications for management accounting (sponsored by The Institute of Management Accountants -USA), containing a foreword by Eli Goldratt and published by his publisher. It is important to note that the mistaken belief that TOC provides a superior production planning tool to the marginal contribution rule in profit terms is not confined to the Atwater & Gagne paper. It appears repeatedly in other papers, particularly in the field of production management e.g. Blackstone (2001), Umble & Umble (1998). Furthermore where the issue has been discussed in the accounting literature the discussion has tended to centre on pointing out the lack of novelty in the TOC approach, and that fact that it is a mere variation on the marginal contribution based accounting approach,( e.g. Dugdale & Jones (1998, p210) ) rather than pointing out that it is actually inferior and potentially misleading. THE ROLE OF OPTIMISATION Some reviews of TOC assert that it provides additional insights beyond those available from linear programming (LP) e.g. "However, the level of analysis provided by ...

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...ck of novelty in the TOC approach, and that fact that it is a mere variation on the marginal contribution based accounting approach,( e.g. Dugdale & Jones (1998, p210) ) rather than pointing out that it is actually inferior and potentially misleading. THE ROLE OF OPTIMISATION Some reviews of TOC assert that it provides additional insights beyond those available from linear programming (LP) e.g. "However, the level of analysis provided by LP via the shadow prices is not as detailed and does not provide the same level of analysis as provided by TOC through the $ return/constraint unit analysis" Luebbe & Finch (1992, p1477). This statement is misleading at best since in fact linear programming is based on the same principle of maximising contribution per unit of the limited resource. Each "pivoting" iteratio n of the simplex method which linear programming uses to solve optimisation problems is built on this principle. Unlike the TOC rule however linear programming runs through several iterations because it recognises the existence of several candidates for the role of binding constraint. TOC assumes that the choice of binding constraint will be intuitively obvious though build-up of work in progress inv...

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...itional management accounting approaches to resource utilisation in aiding decisionmaking. It also considers the propagation and evolution of the Theory of Constraints and critically examines the response it has generated in the accounting and management literature. The continuing survival of cost accounting in the face of frequent assaults similar to Goldratt’s may in part be due to the ability of the discipline to adapt its practices to integrate the mandated improvements into practice and educational curricula. One example is the Theory of Constraints itself (e.g. Horngren et al (1999) and Morse & Zimmerman (1997)). The paper reflects on the process by which new ideas are assimilated into the conventional management wisdom based on this example. KEYWORDS Capacity Management,Capacity Plasticity, Constraints, Management Accounting,Financial Brake _________________________________________________________________________________________ 1 Assistant Professor of Islamic Azad University, Rasht 2-6 Master Students of Business Management. Islamic Azad University , Rasht , Branch, Iran . Arabian Journal of Business and Management Review (Nigerian Chapter) Vol. 1, No. 5, 2013 11 INTRODUCTION The worldwide econom...

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...mmon problem context of the Relevant or Marginal Pricing of a scarce order in accounting texts. An addition however is that the texts do not generally advocate that firms seek out such opportunities. Costing Unused Capacity Equally a balanced production process may have significant unused capacity. Brausch & Taylor's study found that in general firms do not capture the cost of unused or excess capacity. They recommend that firms explicitly quantify the lost contribution margin from unused capacity as a form of "waste" variance. An example of such a report at income statement level is given by Cooper & Kaplan (1992) as follows. INCOME STATEMENT WITH UNUSED CAPACITY DISCLOSURE Sales $100,000 Less variable costs 70,000 Contribution margin $ 30,000 Less Fixed costs Used Unused Arabian Journal of Business and Management Review (Nigerian Chapter) Vol. 1, No. 5, 2013 19 Process A $ 6,000 $2,000 Process B $10,000 $4,000 $16,000 $6,000 $ 22,000 Operating Income $ 8,000 ====== Income Maximisation from Marginal Pricing The insight provided by linear programming of the marginal contribution to be gained from scarce resources has been operationalised in the airline industry in sophisticated yield management sys tems...

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...d only 3 of their 51 survey companies were determining available capacity, degree of usage and non-usage, or the cost of unused capacity in support areas and non-factory activities. This paper can only begin to question the reasons for this shift from LP to TOC. It does seem to be part of a search for greater relevance and for academic text authors to follow those ideas attracting most attention in the popular business media and consulting markets, combined perhaps with students difficulty with more quantitative material. The origins of LP outside of industry in the military operations field (Pickering 1995) did not place it in the language or customs of business and as Pickering details there is a dialectic of resistance and accommodation between the purely technical and material and the human and social. It cannot be assumed that technical superiority assures automatic adoption. TOC fits into a framework of crisis in accounting. Increasing competitive pressures in business arising from globalisation, deregulation and accelerating technological shifts are mirrored by anxieties in the literature over the future of management accounting. There is a marked search for new meanings, techniques and me...

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...cy, and because of imbalances between the supply and demand of many input resources. The problem of capacity management arises both in a macroeconomic and local, or firm level context. A question arises as to contribution of management accounting in managing such problems. Although issues related to capacity have long been considered in accounting there is a relative lack of advanced quantitative techniques in daily use as recommended in the literature. THE THEORY OF CONSTRAINTS In "The Goal" Eli Goldratt reinvigorated traditional optimisation insights by presenting them in a repackaged form (Goldratt and Cox (1993)). This management best seller took the form of a thriller following the struggle of plant manager with 90 days to save his loss making operation from shutdown. In it Goldratt and Cox attack cost accounting as the "enemy number one of productivity" and instead called for a holistic process of ongoing improvement integrating techniques such as MRP, Just in Time and Statistical Process Control. The continuing survival of cost accounting in the face of frequent assaults of this type may in part be due to the ability of the discipline to adapt its practices to integrate the mandated improvements i...

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...r is not merely that the TOC's criticism of accounting metrics are flawed, or that its own metrics are merely simplified (and inferior) versions of other measures or methods in accounting and management science, and whose restrictive assumptions apply in fewer cases than the models it draws on. Rather it is why the accounting literature has in many cases embraced what is effectively a regressive (or dumbed down) theory. This is interesting since narrative stands as a substitute for empirical evidence in most of Goldratt's work and he ignores academic debates on accounting theory and practice (Jones and Dugdale 1998). They point out that Goldratt almost never cites any other writer, although in presentations he frequently appeals to Plato and Isaac Newton. Despite this Jones and Dugdale accept the TOC as having considerable potential as a theory of transformation. They claim it has "a methodology capable of directing change in specific ways, and it anticipates objections and hindrances so that they may be countered". This last point is at best arguable since it anticipates only selective objections and simply assumes away others e.g. in assuming that there is normally only one binding constraint which is ...

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... Although the Pierce and O'Dea study did find that the frequency of usage was low in many cases, the fact of any usage in a firm presupposed a split of costs into fixed and variable components being available. The literature on TOC also goes beyond the accounting criticisms and attempts to demonstrate its superiority to the accounting model of marginal costing. In particular TOC recommends basing product mix decisions at the bottleneck resource on throughput contribution per unit of the limited resource, rather than accounting contribution margin per unit of the limited resource. For instance Atwater & Gagne (1997) purport to show how profit can be increased using the TOC approach by using the data in Appendix A, Exhibit 6. Their analysis appears that scarce machine time on machine 2 (the bottleneck resource) is best utilised when product P is prioritised using the TOC rule (Exhibits 4 and 5). In contrast the accounting rule would prioritise product Q (Exhibits 7 and 8). In Exhibit 9 the weekly profits of each are compared with TOC showing an apparently superior profit of $1,692 against only $1,630 for the product mix suggested by the accounting method. What is key to understanding the difference is the...

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...ts produced 76 50 Total direct labour cost $418 $175 $593 Incremental direct labour cost from TOC production plan $ 83 In the Atwater and Gagne paper (see Appendix A, Exhibit 9) TOC offers an increased weekly profit of $62 ($1,692 - $1,630). This is however based on the assumption that direct labour costs are unaffected by the production plan chosen and the advantage is reversed by the $83 extra in direct labour cost if labour is truly variable. The gap will grow wider if any of the overheads are truly variable and Appendix B shows how the difference in weekly profit could be as high as $120. Balderstone & Keef (1999) suggest that the definition of throughput as sales minus only material costs is a result of a misreading of Goldratt's work, but even if this is so it has become the standard formulation of throughput contribution in both journals and textbooks as Balderstone & Keef themselves detail. In almost all cases direct materials costs are explicitly deducted while direct labour is not, while direct labour is usually explicitly or implicitly included in operating costs. In fact as they point out the error even extends to the Noreen et al (1995) independent report on TOC and its implications for manage...

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...it of the limited resource. Each "pivoting" iteratio n of the simplex method which linear programming uses to solve optimisation problems is built on this principle. Unlike the TOC rule however linear programming runs through several iterations because it recognises the existence of several candidates for the role of binding constraint. TOC assumes that the choice of binding constraint will be intuitively obvious though build-up of work in progress inventory at particular points. This intuitive or visible choice of bottleneck being readily available is not supported by the empirical evidence. Brausch & Taylor (1997) conducted a field study of 12 firms widely spread in Arabian Journal of Business and Management Review (Nigerian Chapter) Vol. 1, No. 5, 2013 16 size and industry sector to examine how firms managed, and accounted for scarce capacity. (The study in fact mentions neither TOC nor linear programming and so could be taken as 'value neutral'). It found that bottlenecks were more of a problem precisely in those nine firms of the twelve which made products with varying features using less continuous processes. While in some cases bottlenecks were entrenched at particular points, in other cases 'they...

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...Galloway over the origin of the term.) Goldratt's advocacy of marginal costing systems reflects the long standing criticism of absorption costing's weaknesses already prevalent in the accounting literature. The criticisms are therefore correct but unoriginal. They also fail adequately to recognise that accounting may use different costs for different purposes. The fact that organisations have complex absorption costing systems for financial reporting and inventory reporting systems does not preclude them from using marginal cost or variable costing information in at least some decisionmaking. Clarke (1992) and Pierce & O'Dea (1998) both found almost identical usage rates for Cost-VolumeProfit (CVP) analysis of 85% or 82%. Although the Pierce and O'Dea study did find that the frequency of usage was low in many cases, the fact of any usage in a firm presupposed a split of costs into fixed and variable components being available. The literature on TOC also goes beyond the accounting criticisms and attempts to demonstrate its superiority to the accounting model of marginal costing. In particular TOC recommends basing product mix decisions at the bottleneck resource on throughput contribution per un...

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...fference in weekly profit could be as high as $120. Balderstone & Keef (1999) suggest that the definition of throughput as sales minus only material costs is a result of a misreading of Goldratt's work, but even if this is so it has become the standard formulation of throughput contribution in both journals and textbooks as Balderstone & Keef themselves detail. In almost all cases direct materials costs are explicitly deducted while direct labour is not, while direct labour is usually explicitly or implicitly included in operating costs. In fact as they point out the error even extends to the Noreen et al (1995) independent report on TOC and its implications for management accounting (sponsored by The Institute of Management Accountants -USA), containing a foreword by Eli Goldratt and published by his publisher. It is important to note that the mistaken belief that TOC provides a superior production planning tool to the marginal contribution rule in profit terms is not confined to the Atwater & Gagne paper. It appears repeatedly in other papers, particularly in the field of production management e.g. Blackstone (2001), Umble & Umble (1998). Furthermore where the issue has been discussed in the accoun...

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...origin of the term.) Goldratt's advocacy of marginal costing systems reflects the long standing criticism of absorption costing's weaknesses already prevalent in the accounting literature. The criticisms are therefore correct but unoriginal. They also fail adequately to recognise that accounting may use different costs for different purposes. The fact that organisations have complex absorption costing systems for financial reporting and inventory reporting systems does not preclude them from using marginal cost or variable costing information in at least some decisionmaking. Clarke (1992) and Pierce & O'Dea (1998) both found almost identical usage rates for Cost-VolumeProfit (CVP) analysis of 85% or 82%. Although the Pierce and O'Dea study did find that the frequency of usage was low in many cases, the fact of any usage in a firm presupposed a split of costs into fixed and variable components being available. The literature on TOC also goes beyond the accounting criticisms and attempts to demonstrate its superiority to the accounting model of marginal costing. In particular TOC recommends basing product mix decisions at the bottleneck resource on throughput contribution per unit of the limited resource...

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...hose nine firms of the twelve which made products with varying features using less continuous processes. While in some cases bottlenecks were entrenched at particular points, in other cases 'they are in flux due to changes in configuring the processes and in product mix, One obviously frustrated operations manager commented that in his company "bottlenecks are all over the place"'. Tollington (1998) also distinguishes between long term constraints and "wandering bottlenecks" arising from unforeseen events. The proper identification of bottlenecks is likely to be a complex problem in practice. Salafatinos (1995) demonstrates the potential advantages of using techniques such as Activity Mapping and Activity Dependency Grids to identify the true source of bottlenecks since, contrary to much TOC literature, a buildup of WiP in front of one machine may have complex roots elsewhere. He further shows how such mapping may double as support for developing an Activity Based Costing system. In addition the shadow price is in a far more sophisticated measure than the TOC rule since it measures the marginal contribution from a scarce resource whereas the TOC measure only captures the average contribution (assumi...

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...s managed, and accounted for scarce capacity. (The study in fact mentions neither TOC nor linear programming and so could be taken as 'value neutral'). It found that bottlenecks were more of a problem precisely in those nine firms of the twelve which made products with varying features using less continuous processes. While in some cases bottlenecks were entrenched at particular points, in other cases 'they are in flux due to changes in configuring the processes and in product mix, One obviously frustrated operations manager commented that in his company "bottlenecks are all over the place"'. Tollington (1998) also distinguishes between long term constraints and "wandering bottlenecks" arising from unforeseen events. The proper identification of bottlenecks is likely to be a complex problem in practice. Salafatinos (1995) demonstrates the potential advantages of using techniques such as Activity Mapping and Activity Dependency Grids to identify the true source of bottlenecks since, contrary to much TOC literature, a buildup of WiP in front of one machine may have complex roots elsewhere. He further shows how such mapping may double as support for developing an Activity Based Costing system. In addi...

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...costs. In fact as they point out the error even extends to the Noreen et al (1995) independent report on TOC and its implications for management accounting (sponsored by The Institute of Management Accountants -USA), containing a foreword by Eli Goldratt and published by his publisher. It is important to note that the mistaken belief that TOC provides a superior production planning tool to the marginal contribution rule in profit terms is not confined to the Atwater & Gagne paper. It appears repeatedly in other papers, particularly in the field of production management e.g. Blackstone (2001), Umble & Umble (1998). Furthermore where the issue has been discussed in the accounting literature the discussion has tended to centre on pointing out the lack of novelty in the TOC approach, and that fact that it is a mere variation on the marginal contribution based accounting approach,( e.g. Dugdale & Jones (1998, p210) ) rather than pointing out that it is actually inferior and potentially misleading. THE ROLE OF OPTIMISATION Some reviews of TOC assert that it provides additional insights beyond those available from linear programming (LP) e.g. "However, the level of analysis provided by LP via the shadow pric...