While keeping up with customer value migration is important, it is perhaps only one of the multiple steps that an organization must take in order to achieve sustained superior performance.

Companies traditionally approach value creation through one of two ways--increasing revenues or decreasing costs. Organizations are primarily focused on one of these levers in order to create value at any given point in time. Creating a cost culture through the cost management maturity model provides a way to overcome this value creation paradox. Accelerating revenue growth while maintaining low costs is a matter of organizational and cost management maturity. Successful organizations have been able to create a pervasive culture in which cost management is perceived as a continuous process.

ABC/M Software with basic activity-based functions is commonly used to obtain, process, and generate predifined reports, but system designers often fail to consider how the software will work with the system databases.

This paper examines the relationship between the level of short interest and stock returns in the Nasdaq market from June 1988 through December 1994. The paper finds that heavily shorted firms experience significant negative abnormal returns ranging from -0.76 to -1.13 percent per month after controlling for the market, size, book-to-market, and momentum factors. These negative returns increase with the level of short interest indicating that a higher level of short interest is a stronger bearish signal. The paper finds that heavily shorted firms are more likely to be delisted compared to their size, book-to-market, and momentum matched control firms.

Borrowing from the Theory of Constraints model, velocity costing identifies manufacturing units, recharacterizes employee roles and responsibilities, and drives employee behavior with cost-centered performance measurements in four key areas. The authors detail a seven-step implementation process focused on the shop floor employees of a manufacturing environment. Velocity costing integrates cost and time management so that the cost system becomes adaptive to organizational change.

How a consulting organization identified an Activity-Based Management system for a service company is described. An Activity-Based Information System needs to be put in place to serve as data-driven decision support for planning, pricing, budgeting, and cost management. Activities and activity centers need to be identified with their associated cost drivers as the components of an Activity-Based Information System. Quality, risk management and customer retention issues should be addressed by building specific cost and revenue drivers that develop into strategic choices. The Activity-Based Costing system for project control enabled the firm to focus on activities where costs were incurred. The same approach of measuring, monitoring, and managing the projects could form the basis for helping the management process at all levels.

The corporate history is abound with cases to show how companies embark on rapid sales growth, report happy bottom line and earning per share, and then experience perils of growth. History also suggests that not all growth companies with long-term payoffs are rewarded in the stock market. Over the last one decade or so, academicians and professionals have therefore put more emphasis on value creation for shareholders in crafting the business strategies. No matter what growth strategies are pursued by the companies, they must pass through the benchmark of shareholder value creation. What does constitute shareholder value? How does often growth lead to destruction of shareholder value? What are the key value drivers to be analysed in evaluating alternative growth strategies? This paper presents a comprehensive value creation model to address these questions. Besides, a set of propositions are being derived from this model and their practical implications to strategy formulation discussed.

Despite the need for a good cost accounting system, ABC and ABM systems suffer from too many cost drivers Volume Adjusted Costing is easy to understand, and based on a very believable premise that annual volume is the most valuable cost driver. The purpose of variable adjusted costing is to provide direction for decision marking. "Buy in" among users of cost data is one of the biggest benefits derived by variable adjusting costing.

Activity-based costing and management (ABC/M) paradigms have caught on throughout the United States and in other parts of the world. However, the decision to initiate ABC/M is often made on the spur of the moment or as the result of success stories heard at conferences or seminars. In this paper nine common ABC/M implementation pitfalls that result in partial or unsatisfactory results are described and explored.

We explore how the ability to augment capacity on an as-needed

A firm typically assigns multiple tasks it must perform to either internal employees or out-side vendors. This paper demonstrates the need to integrate a task assignment decision with the design of a managerial control system as each affects the other. An internal employee is distinguished from an outside supplier on four different informational dimensions: (i) at the time of contracting, the outside supplier has less information about the task environment more often than the internal employee; (ii) the principal observes the employee's information set more frequently than that of the supplier; (iii) the principal can exercise a greater control over information flow to the internal employee than to the outside supplier; and (iv) the principal may share the details of the outside supplier's contract with the internal employee but not vice versa. Under each of these four distinguishing dimensions, the principal is shown to outsource the upstream task and assign the downstream task to the internal employee more often than vice versa. Further, under the last two dimensions of the firm's boundary, the principal can eliminate inefficiencies arising from the agents' contracting with incomplete information by assigning the downstream task to the employee and not providing predecision information to him while assigning the upstream task to the supplier.

The quality of capacity planning significantly affects firm profitability, particularly for firms in service industries. In practice, firms use product cost data to infer the expected cost of under- and over-stocking capacity and to determine installed capacity. Theory shows that this is not optimal practice. In light of the informational and computational complexities associated with the optimal theoretical formulation, the use of product cost may be justified as a heuristic. For a multi-product, multi-resource firm, we use simulations to investigate the efficiency of four cost-based decision rules in determining the expected cost of under- and over-stocking capacity. Results indicate surprisingly high performance levels, relative to a benchmark solution. The performance of the product-based planning rule deteriorates as products increasingly share capacity resources. The opposite is true for resource-focused rules. There appears to be significant value from identifying mechanisms to balance installed capacity across resources.

We consider the joint cost allocation problem that arises when several lots or resources are available to serve different products or divisions. We provide a two-phase model, wherein the first phase the optimal set of lots to be acquired is chosen and given the optimal set, and the products using each acquired lot is also determined. In the second phase, a stable full cost allocation method is developed that will not induce the divisions to form coalitions to reduce the allocated joint costs. Utilizing the optimal dual solution of the lot selection phase, we provide a joint cost allocation mechanism based on the concept of propensity to contribute and show that this allocation is also stable. If in the first phase there is a dual gap, then we show that there is no cost allocation in the core. A numerical illustration is provided.

This brief report explores some considerations for cost management in modern manufacturing. A conceptual framework for cost management is provided. The framework uses proper cost accounting practices suitable for a computer-integrated manufacturing environment and is applicable on either a local or a global basis.

The goal of any cost management system is to provide relevant and timely information to management. This information supports better management of corporate resources in production of products or provision of services, and improves competitiveness in terms of costs, quality, and profitability. In this context, a cost management system can also be viewed as a planning and control management system (Berliner and Brimson 1988). Cooper (1988a, 1988b, 1989a, 1989b) provided a comprehensive discussion of activity-based costing (ABC), following the pioneering work of Kaplan (1983, 1984). Extension of ABC to the service industry was provided by Rotch (1990). ABC has also been extended into activity-based management (ABM) to include other considerations, such as customer profitability, manpower utilization, distribution channels, and other management issues. Thus, ABC is the information system that reveals the cost and profitability structure of products and services in an organization, while ABM describes the actions taken to improve quality and reduce costs and cycle time, once information about activities' costs is known. In this article, ABC is used as a generic concept without any loss of generality. An ABC system achieves improved accuracy in estimation of costs by using multiple cost drivers to trace the cost of activities to the products associated with the resources consumed by those activities. In this respect, a cost driver is an event, associated with an activity, that results in the consumption of firm's resources. Since the number of events performed in a firm is often vast, it may not be cost-effective to use a distinct and different cost driver for each activity. Thus, many activities may be grouped into a single driver to trace the costs of all the grouped activities for a product or service. For Instance, each setup may be associated with a single cost driver that accounts for moving, grouping, sequencing, and segmenting. At the same time, there may be...

This paper examines empirically the unexpected compensation to the top managers of a sample of 45 firms that voluntarily changed to capitalizing interest on long-term construction projects during the time period 1966-1974. The cash compensation to top management increased starting the year of the accounting change compared to that of top management for a firm in the same industry of similar size. Further, a comparison of the capital expenditure per dollar of sales between the sample and a pair-matched set of firms expensing interest in the same industry suggests that the long- term construction project was not taken up by diverting funds from routine capital expenditures. Collectively, the results are consistent with an inference that the managers were rewarded in the short term for a set of actions with expected future benefits in the long term. The accounting change, which may have facilitated the expansion, appears embedded in such a set of actions.

The article presents an exploration into the auditor-client response to report-contingent audit contracts within an audit market model. Factors concerning positive and negative incentives to initiate such contracts are mentioned. The discrepancies inherent within the model between auditor's public issued estimates and personal opinions are analyzed and their impact on market competition for audit services is outlined. An application of Gresham's Law to auditing is presented, wherein poor quality services hinder legitimate services. Conclusions are offered regarding predictions of auditor attitudes towards standards due to revenue-based externalities.

The article presents a commentary on an article published earlier in this journal titled "Optimal employment contracts and the returns to monitoring in a principal-agent context," by Stanley Baiman, Jerrold H. May, and Arijit Mukherji (BMM). The author raises concerns about the problem and model formation, focusing on the assumptions that are restrictive and have no economic implications. Additionally, the author suggests concern over the applicability and analysis of three cases in Proposition I and the comparative statics results. The author suggests that further research might expand the BMM study to include a multi or two-period world model to understand additional labor market effects and risk aversion.

This paper provides an algebraic basis of accounting transactions, procedures and bookkeeping activities in a framework that supports various financial and nonfinancial reports and accounting views. The development is based, on a set of accounting matrix operators. This approach, when combined with database technology, provides for a new level of control and security of accounting information, and minimizes the processing required for information distribution on a "need-to-know" basis. The procedural accounting matrix captures the essence of a complete accounting procedure; it is independent of any chart of accounts. Moreover, the order in which matrix operators are combined into the procedural matrix implicitly defines the chart of accounts for the related procedure and the accounts' balances. Consequently, it provides an environment in which alternative charts of accounts, and their financial and accounting implications, can be investigated. This approach, though not yet tested for operational efficiency, thus promotes multiple accounting views, such as GAAP, tax, and managerial accounting, that are all based on the same set of basic accounts, and simplifies their reconciliation.

In this paper we analyze the effect of audit firm size on audit fees. An economic model is developed using an agency framework, taking into consideration the uncertainties involved in the audit process and the auditor's incentives. Optimal fee schedules are derived for a fixed level of audit effort.

In this paper, a service department chooses a fixed/variable cost combination based on the forecasts of two operating departments. The operating departments then make service usage decisions, and the service department provides the level of service demanded. The allocation of fixed and variable service department costs is used to: (1) encourage efficient short term use of the service and (2) encourage accurate forecasting by the operating departments. Three approaches are used to achieve these objectives - incentive compatible allocations, a modified Soviet incentive scheme, and a Groves allocation scheme - and we discuss conditions under which these schemes are successful.

The main objective of Larsson and Chesley's (1986) paper is to provide a framework for an auditor to assign a probability measure associated with uncertainty or ambiguity related to certain types of events arising in an audit environment. For this framework the authors extracted and applied the general methodology developed by Larsson (1976) in his doctoral thesis, which extends a subjective probability measure from a known σ-algebra θ to an unknown and an extended class β, such that an auditor (decision maker), when faced with an extended lottery on events in β, can still come up with the use of utility theory maximization to rank the decisions. The authors make the following claims: (1) their methodology helps the auditor with this new audit tool of probability measure assessment; (2) their measure can capture a number of previously specified approaches by others in this area; and (3) their measure provides some "intuitive conclusions and some well-known mathematical properties."

Airlines, offering tour plans, have to select a few gateways (airports) to which the air tickets for tour plans are issued. A number of alternate gateways are available for different tour plans, and the selection of gateways is influenced by the perceived preferences of tourists for these and competing plans. In this paper, using the ordinal preferences of tourists, we formulate the problem of gateway selection as an integer program. The solution procedure presented for this integer program is computationally attractive as we exploit the special structure of our formulation. The model proposed is general, and can be applied to the simultaneous positioning of several new products or services.

An optimization model for the audit-staff scheduling decisions faced by public accounting firms is developed in this paper. The model is an integer programming model designed to assign audit-staff to audit engagements in the most effective way. It is shown how the model can be incorporated into a decision support system for audit-staff scheduling. Other components of the decision support system include a judgmental scheduling system and a data base containing relevant scheduling information. The interrelationship between these components is described in detail. Finally, the optimization model is compared with other models which have been developed for this decision.

In this article, the authors provide a unified approach to joint cost allocation for situations where allocation is needed. First, with the help of an illustration, the apparent weakness of Moriarity's scheme is discussed. Later, certain desirable properties of Louderback's method are shown. Employing their "propensity to contribute" concept, the authors utilize the desirable aspects of both the Moriarity and the Louderback schemes to come up with a model which is shown to be in the core. With game-theoretic concepts, a "modified Shapley Value" to allocate the joint cost is provided.

The article refers to regulatory agencies' scrutiny of relations between the management and accounting professions and focuses on internal controls and the use of external auditing for incentive compensation schedules. Certified public accountants or independent auditors, who are responsible to shareholders and boards of directors and rely on management controls, are only required by the Foreign Corrupt Practices Act to have reasonable assurance of compliance for their auditing reports. A 3-party, information economics framework is used to analyze management controls and external auditing. Agency theory, compliance testing with costs, moral hazard, and game theory are mentioned, as well as using the report to assess managerial performance.

This paper investigates the assignment of tasks in a network of functionally similar computers. We formulate the problem by a periodic review model with Boolean variables. A computationally efficient, integer-generalized transportation model is applicable because of the existence of relative efficiencies of computers for jobs. Since a lob is to be processed exclusively by one computer, we show that an optimal solution to this problem is a basic feasible solution to a slightly modified generalized transportation problem. A branch- and-bound solution procedure prevents possible splitting of a job among computers. We provide an algorithm and computational results.

Computer systems play an increasingly important role in modern enterprises. Such systems represent a major investment, and their performance has major effects on profitability, utilization and user satisfaction. Much effort is therefore directed at the efficient management of these systems, and this paper is a step in this direction. Specifically, we consider the optimal allocation of programs and data to various storage devices in order to minimize the expected operational costs, subject to capacity and timing constraints. This problem is one of the many optimization problems that the system management faces, and its solution, though suboptimal for the whole system, might contribute considerably to the overall system's performance and costs. An effective procedure for the optimal (storage) allocation is presented, whose application to an actual large-scale operating system resulted in high (relative) savings. This procedure, with minor modifications, might be applied to many allocation problems which face users and management of computer systems.

This paper investigates the problem of determining the optimal location of plants, and their respective production and distribution levels, in order to meet demand at a finite number of centers. The possible locations of plants are restricted to a finite set of sites, and the demands are allowed to be random. The cost structure of operating a plant is dependent on its location and is assumed to be a piecewise linear function of the production level, though not necessarily concave or convex. The paper is organized in three parts. In the first part, a branch and bound procedure for the general piecewise linear cost problem is presented, assuming that the demand is known. In the second part, a solution procedure is presented for the case when the demand is random, assuming a linear cost of production. Finally, in the third part, a solution procedure is presented for the general problem utilizing the results of the earlier parts. Certain extensions, such as capacity expansion or reduction at existing plants, and geopolitical configuration constraints can be easily incorporated within this framework.

It is known to be real that the per unit transportation cost from a specific supply source to a given demand sink is dependent on the quantity shipped, so that there exist finite intervals for quantities where price breaks are offered to customers. Thus, such a quantity discount results in a nonconvex, piecewise linear functional. In this paper, an algorithm is provided to solve this problem. This algorithm, with minor modifications, is shown to encompass the incremental quantity discount and the fixed charge transportation problems as well. It is based upon a branch-and-bound solution procedure. The branches lead to ordinary transportation problems, the results of which are obtained by utilizing the cost operator for one branch and rim operator for another branch. Suitable illustrations and extensions are also provided.

The author comments on his paper, written with D. H. Gensch and titled "Solving the Marketing Mix Problem Using Geometric Programming," published in the October 1974 issue of "Management Science." The author explains how the marketing mix problem was solved in the original paper. A new method by J. E. Falk, however, suggests a modification to the author's original work. Falk's procedure leads to globally optimal solutions to signomial functionals, rather than only locally optimal solutions. The new method involves a branch and bound procedure.

This paper investigates the effect of the optimal solution of a (capacitated) generalized transportation problem when the data of the problem (the rim conditions - i.e., the available time of machine types and demands of product types, the per unit production costs, the per unit production time and the upper bounds) are continuously varied as a linear function of a single parameter. Operators that effect the transformation of optimal solution associated with such data changes, are shown to be a product of basis preserving operators (described in our earlier papers) that operate on a sequence of adjacent basis structures. Algorithms are furnished for the three types of operators - rim, cost, and weight. The paper concludes with a discussion of the production and managerial interpretations of the operators and a comment on the production paradox.

This paper gives a new organization of the theoretical results of the Generalized Transportation Problem with capacity constraints. A graph-theoretic approach is utilized to define the basis as a one-forest consisting of one-trees (a tree with an extra edge). Algorithmic development of the pivot-step is presented by the representation of a two-tree (a tree with two extra edges). Constructive procedures and proofs leading to an efficient computer code are provided. The basic definition of an operator theory which leads to the discussion of various operators is also given. In later papers we will present additional results on the operator theory for the generalized transportation problem based on the results in the present paper.

This paper investigates the effect on the optimum solution of a capacitated generalized transportation problem when any coefficient of any row constraint is continuously varied as a linear function of a single parameter. The entire analysis is divided into three parts. Results are derived relative to the cases when the coefficient under consideration is associated, to a cell where the optimal solution in that cell attains its lower bound or its upper bound. The discussion relative to the case when the coefficient under consideration is associated to a cell in the optimal basis is given in two parts. The first part deals with the primal changes of the optimal solution while the second part is concerned with the dual changes. It is shown that the optimal cost varies in a nonlinear fashion when the coefficient changes linearly in certain cases. The discussion in this paper is limited to basis-preserving operators for which the changes in the data are such that the optimum bases are preserved. Relevant algorithms and illustrations are provided throughout the paper.

This paper investigates the effect on the optimum solution of a capacitated generalized transportation problem when certain data of the problem are continuously varied as a linear function of a single parameter. First the rim conditions, then the cost coefficients, and finally the cell upper bounds are varied parametrically and the effect on the optimal solution, the associated change in costs and the dual changes are derived. Finally the effect of simultaneous changes in both cost coefficients and rim conditions are investigated. Bound operators that effect changes in upper bounds are shown to be equivalent to rim operators. The discussion in this paper is limited to basis preserving operators for which the changes in the data are such that the optimum bases are preserved.

This paper investigates a production growth logistics system for the machine loading problem (generalized transportation model), with a linear cost structure and minimum levels on total machine hours (resources) and product types (demands). An algorithm is provided for tracing the production growth path of this system, viz. in determining the optimal machine loading schedule of machines for product types, when the volumes of (i) total machine hours, and (ii) the total amount of product types are increased either individually for each total or simultaneously for both. Extensions of this methodology, when (i) the costs of production are convex and piecewise linear, and (ii) when the costs are nonconvex due to quantity discounts, and (iii) when there are upper bounds for productions are also discussed. Finally, a goal-programming production growth model where the specified demands are treated as just goals and not as absolute quantities to be satisfied is also considered.

This paper investigates the optimal allocation of the marketing budget within the marketing-mix decision variables so that sales (or profit) is maximized in a planning horizon. Since the influence of marketing mix variables upon sales are, in reality, nonlinear and interactive, a geometric programming algorithm is used that solves this problem. A procedure to estimate a functional of sales on the marketing mix and environmental variables utilizing the experienced judgments of the firm's executives and the raw data is provided. The derived functional is later optimized by the Geometric Programming algorithm under a constraint set consisting of budget and strategy restrictions imposed by a firm's marketing environment, and conditions under which the optimal solution is either local or global are identified. An empirical application for a large midwestern brewery is provided which utilizes and illustrates both the estimation an optimization procedures.

Focuses on a problem of companies adapting to a business environment characterized by shortages and inflationary pressure. Decision options facing management during periods of shortages and inflation; Reason for the error in the assumption of businessmen that shortages is a past problem; Major adjustment elements in trying to respond to sudden shortages.

The model presented in this paper can serve as a useful extension to the previously developed WSEIAC methodology. This usefulness stems from the fact the randomness in the availability, dependability, and capability matrices, which form components of system effectiveness, is explicitly addressed in the model.

Special structures are usually noticed when a linear program represents a large scale system of inequalities associated with a management application. Such models are formulated frequently when describing production or capital budgeting problems. These linear programs of specific structures may contain both generalized upper bounding (GUB) and/or variable upper bounding (VUB) constraints. A variant of the revised simplex method is provided in this chapter for these types of linear programs so that the basis size is reduced. Based on some theoretical results derived, a special algorithm using two working bases is provided for pivoting, pricing, and inverting. Its implementation is shown to be computationally efficient.

Business process reengineering (BPR) has dominated the thinking of corporate executives for much of the 1990s. In 1993, Michael Hammer and James Champy published Reengineering the Corporation. According to Hammer and Champy, reengineering was "the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical contemporary measures of performance, such as cost, quality, service, and speed." A 1994 survey by CSC Index (State of Reengineering Report 1994) found that 69 percent of U.S. companies had some reengineering initiative in place. By 1996, a survey conducted by Louis Harris & Associates revealed that 60 percent of the companies surveyed had undertaken a formal reengineering project in the past two years and that cutting costs was the main reason. However, we believe that BPR is unlikely to be remembered in the new millennium as the panacea for corporate ills. When Bain & Company, a consulting group, asked executives at 1,000 companies to rate different management tools in 1996, BPR did not score very high. Even the gurus who formalized the ideas of BPR acknowledged the difficulty of its implementation.