Each of these areas involves decision-making practices that have a profound impact on the organization. Cost cutting is often an area of decision-making that can start a cycle of decay if the correct decisions are not made. Cost cuts that erode the competitive posture of the company are the cause. This can result when decisions are made using traditional financial accounting data rather than control-oriented data.

Activity-Based Costing (ABC) arose in the 1980s from the increasing lack of relevance of traditional cost accounting methods. The traditional cost accounting methods were designed around 1870 - 1920 and in those days industry was labor intensive, there was no automation, the product variety was small and the overhead costs in companies were generally very low compared to today. Compari

2. Traditional cost accounting mostly utilizes volume related allocation bases while ABC uses drivers at various levels.

JJMI recognized significant savings over a three-year period and was awarded the Johnson & Johnson Quality Award, an internal award given for TQM efforts. JJMI credits its implementation of ABC and ABM as a vital measure of TQM.

ABC acknowledges that you cannot manage costs, you can only manage what is being done and then costs will change as a consequence. In traditional cost accounting, however, the underlying assumption is that costs can be managed, but as most managers have found out the hard way - managing costs is almost impossible.

2. Empowerment of the workforce to make necessary improvements that produced dramatic effects on the company's bottom line.

ABC is not a panacea for all the ills of an operation. If the data used in constructing the system is flawed, past errors will simply be repeated. It is also not the tool for all decisions. It is, however, a useful tool for many of the management decisions facing companies today. It can bring a picture of the operation to light that may not be obvious through other analysis tools. Specifically, ABC is useful in analyzing specific segments of an organization. This might include a market line, a group of products (even a single product), a customer, or an employee.

Structure-orientation versus process-orientation

Johnson & Johnson Medical Inc. (JJMI) is one example of the successful integration of several managing methods. The company traditionally maintained costs through continuous improvement programs in its plants. However, JJMI realized that it must go beyond its traditional cost maintenance programs to reduce costs and overhead expenses to remain competitive in the face of the threat of declining market share and eroding margins.

JIT production uses a demand-pull system, which is effective at reducing the amount of finished goods inventory. In this system, production and demand are synchronized because production does not start until an order is received.

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