Management Dynamics

Management Dynamics: Merging Constraints Accounting to Drive Improvement - John A. Caspari, Pamela Caspari ISBN:0471672319

Excerpts (partial)


1 Thinking Bridges


We need reliable and easily applied decision rules to guide our daily actions. A thinking bridge links a rule of thumb with bottom-line profitability through cause-and-effect relationships

Let us examine two such cause-and-effect thinking bridges. The first thinking bridge, least product cost, takes a product-cost accounting ap- proach to evaluation. The second thinking bridge establishes global mea- surements for assessment

Least Product Cost

treating each decoupled area as a separate entity for analytical purposes.1

The equation, restated to distinguish decoupled functional areas, is viewed as: Sales less (Manufacturing and Nonmanufacturing Expenses) equals Net Profit,

Many cost centers are very large organizational units, having hun- dreds of employees. Even so, the responsibility is for costs only

Global Measurements

Viewing the organization analytically as a single comprehensive system, Eliyahu Goldratt and Jeff Cox observed that essentially three things could happen to cash with respect to operations.3 They defined three measure- ments—throughput (T), inventory/investment (I),4 and operational ex- pense (OE), to reflect these events


Some related cash expenditures—the truly variable expenses or throughput expense— are associated with the sale. The difference between the sales and throughput expenses

Throughput corresponds to what management accountants know as contribution margin.


Inventory/investment includes the capabilities of the system as well as raw materials and purchased parts, but it does not include direct la- bor or manufacturing overhead

Operational Expense

These expenses relate to the time period, rather than to specific sales, and accountants call them period costs

T, I, and OE Taken Together

now, rather than breaking the expenses down into functional categories of manufacturing and nonmanufacturing expense, the ex- penses are classified as being either truly variable with sales or as belong- ing to the time period

Sales less Variable Expense less Period Expenses equals Net Profit


A simple example will demonstrate the extent of the difference between the two thinking bridges for decision making

First, we will present some initial data. Then, we will offer four independent, but similar, proposed changes to the operation as four scenarios. Each scenario will first be ana- lyzed using the least product cost thinking bridge, and then the same sce- nario will be analyzed using the global measurements thinking bridge

OE com- prises those costs that are not deducted from revenues in the calculation of T (e.g., materials, royalties, and, perhaps, sales commissions) or catego- rized as a part of I.

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