Supply chain management: monitoring strategic partnering contracts with activity-based measures: second-generation ABC systems may be the wave of the future, not just for TQM but now also in supply chain management. In a creative tale of a fictitious small-town business, the authors illustrate why

Management Accounting Quarterly, Fall, 2006 by Michael F. Thomas, James Mackey

"Let me explain my complaint about how we use cost variances," Tommy continued. "The Framing Department gets its cost variance report, which is used to evaluate and reward those people. They don't get rewarded because of the unfavorable cost variances caused by bad lumber. They have no control over the lumber quality, but they're held responsible for the unfavorable cost variances occurring in their department. I don't understand why management believes that a variance in a particular department is necessarily caused by the people in that department.

"Now the Framing Department manager can 'appeal' an unfavorable variance and claim it's not his/her responsibility and shouldn't be used in a performance evaluation. But, it's virtually impossible to unravel an unfavorable direct materials usage variance to determine how much of it is really the responsibility of another department's activities."

SUPPORTING NEW STRATEGY

"It seems our cost variance reporting system is the real cause of the problem!" Julie concluded. "When we evaluate performance, we rely too much on these so-called 'hard numbers.' As the boss used to say, 'You can't argue with the numbers!' He failed to realize that hard numbers aren't always the relevant information we need to make a management decision.

"This is why I try to stress relevance over hardness when measuring and rewarding performance," she added. "Just because a cost variance occurs in one department, this doesn't necessarily mean it's caused in that department. If an Assembly Department variance is caused by activities in a previous department, should the Assembly people be held responsible for it when their performance is being evaluated and rewarded?"

"I agree!" Jackie chimed in. "This is why accountants are often called the 'cops on the block' and are seen only as 'bean counters.' Workers have this negative image of me because when they see me, it's usually about their unfavorable variances. They feel that the beans we count aren't relevant or accurate measures of their performance. Too often I've heard them say that traditional cost variance reporting systems are the 'bane of productivity' because of all this after-the-fact investigation and arguing over who's responsible for the variances. They blame the accountants."

"Well, I'm not sure I'm ready to agree with that!" Jean said. "My job is to buy materials at the lowest price. My ability to create favorable purchase price variances is the relevant measure of my performance."

REWARDING PEOPLE

"Not if it causes all these problems down the line as we're seeing with the lumber," Bob argued. "I've never liked management's reliance on accounting variances for rewarding people. As an industrial engineer, I'm well aware of the origin of this practice from Scientific Management theory. Scientific Management organizes homogeneous activities into separate departments (e.g., sawing, framing, painting, and plumbing). These separate departments (functional silos) operate independently from each other, or so the theory goes. Thus, each department should be responsible for its own cost variances.