18  Make, Buy, or Reprice

Learning Objectives

After completing this chapter, you will be able to:

1. Classify a plant’s conversion costs from the ledger and the production records into costs that vary with output, committed capacity costs, and the cost of capacity left unused, and test each classification against the data.
2. Compute standard, actual absorption, and time-driven costs for product families, and explain why the three disagree and which question each answers.
3. Evaluate a supplier’s quote on relevant costs, separating the costs that stop from those that stay, and value the capacity that buying would free.
4. Analyze a price increase with contribution margins and the volume it can afford to lose, and judge the evidence on how customers respond to price.
5. Propose standard costs on a stated level of capacity, measure their effect on inventory and on statements already issued, and recommend how to report it.
6. Choose SQL, Excel, or Power BI for each step of an integrated analysis, and write a recommendation, family by family, that two decision makers who disagree can act on.

Chapter slides View slides Download PowerPoint

Opening Scenario

It is August 2027. Reviewing the fiscal 2026 results, the CFO found one comparison that would not go away. Once the manufacturing variance is charged, the furniture Charles River makes earns about ten points less than its standard margin, while the furniture it buys earns about what its standards say. The CFO’s reading is blunt. The plant applies overhead at little more than a third of what it costs, and neither list prices nor standard costs have changed in three years, so the standards understate what every manufactured product costs. Is Charles River selling below cost, and should it be making these products at all?

The production manager disagrees. The plant has room to spare, and idle capacity, in the production manager’s words, is not the products’ fault. To test the CFO’s question, the purchasing manager asked a contract manufacturer to quote six of the families the plant makes, and the quote has arrived. It expires on September 15, because the supplier needs the autumn to tool up for January deliveries, and the 2028 price list must go to customers on October 1. The CFO and the production manager meet on August 31 to decide.

The controller asks you, the staff accountant, for the analysis and a decision memo. This chapter is a case, and it has no tutorials. Each requirement states what the decision needs and names the chapters it draws on, and you decide how to produce it. Where a tool is the clear choice, the requirement says why; elsewhere, choose and explain your choice in your documentation.

18.1 The Situation

The CFO asks three questions:

• what each family costs to make, and which of those costs would stop if Charles River stopped making it;
• where the contract manufacturer is cheaper, whether Charles River should buy;
• where Charles River keeps making, what prices the 2028 list needs.

The production manager adds two:

• what happens to the plant’s hours, its crew, and the costs that stay;
• whether the standards should change, and to what.

The controller sets five conditions. First, everyone works from the same assumptions, which she lists in Table 18.2. Second, every figure reconciles to the ledger: the manufacturing variance in account 5080 and the costs that flow into account 1090 Manufacturing Cost Clearing, which are the payroll, the Factory Overhead entries, and the depreciation charged to it, not the debits that favorable closes post back to it. Third, fiscal 2026 is the base year, because the records end there, even though the decisions take effect in 2028 and 2029. Fourth, the decision is made family by family; the products Charles River buys in the same families are different products, not substitutes for the ones it makes. Fifth, decisions about positions belong to the production manager, so the memo states what a change in the crew would save and what it would cost, and leaves the decision there.

The quote is in Table 18.1. Its prices are averages per unit at the 2026 mix of items in each family. They are the case’s assumption, set to resemble what Charles River pays for the products it already buys in those families, and they are not part of the dataset.

Table 18.1: The contract manufacturer’s quote (a hypothetical exhibit)

Family	Quoted annual volume (units)	Average price per unit	One-time tooling and qualification	Lead time
FUR-BNH Benches	1,450	$325	$18,000	8 weeks
FUR-NGT Nightstands	3,200	$270	$22,000	8 weeks
FUR-SDB Sideboards	3,800	$325	$25,000	8 weeks
FUR-TBL Dining tables	5,000	$315	$30,000	8 weeks
LGT-SCN Wall sconces	4,600	$180	$15,000	6 weeks
TXT-PIL Pillow covers	700	$220	$8,000	6 weeks

The terms come with the prices. Prices are fixed for 2028 and 2029, and Charles River commits to buy at least 80% of the quoted volume of each family it chooses each year. The goods are sold at the supplier’s plant, so Charles River pays inbound freight, which the purchasing manager estimates at 3% of price. The supplier builds to Charles River’s designs and bills of material and credits defects above 1.5% of units, Charles River’s quality assurance inspects samples on arrival, and payment is due in 45 days.

Table 18.2: The controller’s planning assumptions

Assumption	Value
Base year	Fiscal 2026
Practical capacity	80% of the available hours in WorkCenterCalendar
Straight-time labor rate and burden	26.62 an hour; burden 14.14% of pay
Hours per standard hour at plan	1.18, of which 0.18 indirect
Plan volume, taken as normal capacity	68,912.79 standard hours a year
Salaried production staff at plan	263,191.24 a year, before burden
Depreciation at plan	293,499.96 a year
Practical hours of one position	80% × 8 hours × the 2026 working days
Severance per position	Eight 40-hour weeks of straight-time pay with burden
Materiality screen for the statements	5% of income before income taxes as recorded
Margin floor for pricing	40% gross margin on time-driven cost, before unused capacity
Demand-growth test (optional)	Volume 40% and 50% above 2026

18.2 The Data You Will Use

Much of what you need you have already built. Chapter10.sql and Chapter11.sql measured the plant’s hours against standard, and the plan figures in Table 18.2 are the plant’s plan for 2027, which the Part III case built if you completed it. Chapter 7 taught regression, Goal Seek, Data Tables, and Solver, and Chapter 15 built a disconnected table that switches a measure, which you will use again. Exercise 8.6 tested the price lists, and Chapter 7 asked whether a promotion raised volume.

The case also draws on tables the chapters used little or not at all. Item carries each product’s standard cost and its parts: labor, variable and fixed overhead, conversion cost, standard labor hours, and whether it is manufactured or purchased (SupplyMode); material is standard cost less conversion cost. Routing and RoutingOperation give each product’s setup hours per work order and run hours per unit at each work center, and WorkCenter and WorkCenterCalendar give the hours each work center had available. ProductionCompletionLine carries the standard cost released by each completion, part by part. PayrollRegisterLine tells regular, overtime, and salary earnings apart, and Employee.PayClass tells hourly from salaried staff. PriceList and PriceListLine hold the price lists, and PurchaseOrderLine what Charles River pays for the products it buys.

You will keep three files, listed in Table 18.3.

Table 18.3: Tools and files

Tool	File	Holds	Hand-off
SQL	MakeBuy.sql, run on CharlesRiver_Capstone.sqlite	Family results, the inputs to 1090, activities, capacity	Copy with Headers or Export to CSV, unrounded
Excel	Make Buy Reprice.xlsx	Assumptions, cost behavior, costs, make or buy, capacity, prices, standards, documentation	A Table of item costs, one row per item
Power BI	Product Costs.pbix	The explorer for the meeting, with a Validation page and a Tests tab	Reads the workbook and CharlesRiver.xlsx

WarningWatch out

Units and populations need care in this case. Group products into families by the first seven characters of the item code: the three-letter product type of Chapter 5 is not enough, because FUR-TBL is a dining table and LGT-TBL is a table lamp. Quantities are fractional, so add them; never count rows as units. The variance closed in 2026 includes work completed in 2025, and some work orders are still open, so state which units you divide by. Design services carry a standard cost of zero, so leave them out. And the finished goods on hand at the opening of the ledger carry no item detail, so stock by item can be rebuilt only from what was made and shipped since then, and only on an assumption about which units were shipped.

WarningWatch out

Some records cannot carry this analysis. Part III found that direct time recorded by work center moved toward packing and quality assurance and was often recorded after the operation had ended, so use the routings’ standard times, not the time recorded, to measure what each family uses. The overhead variance that each work order’s close records moves with that work order’s actual direct labor cost, so a family’s share of it is an allocation, not a measurement of what the family consumed. Payroll posts on its pay dates, so some months carry three payrolls (Chapter 11), and January 2024 was a start-up month that distorts any monthly trend it enters.

18.3 Getting Started

Set up your files before you begin. Make a working copy of the downloaded CharlesRiver.sqlite named CharlesRiver_Capstone.sqlite, and open the copy in DB Browser for SQLite, so that the download is never changed and the CharlesRiver_Work.sqlite of Part III keeps its views. Start MakeBuy.sql with a header comment that states its purpose, the database file, the preparer and the date, and the checks it performs, and write two comment lines above every query: what it tests, and its population and expected result. Create Make Buy Reprice.xlsx with an Assumptions sheet that holds Table 18.1 and Table 18.2 and a Documentation sheet that states the purpose, the sources, and the date through which the data run, and create Product Costs.pbix. You need DB Browser for SQLite, Excel for Microsoft 365 with the Solver add-in if you take the optional part of Requirement 7, and Power BI Desktop, which runs only on Windows; if you work on a Mac, plan to use a Windows computer for Requirement 5.

Work in four milestones, one for each phase of the requirements. Your instructor may ask you to hand in each milestone and may then release checkpoint values, so that an early error does not carry through the rest of the case.

1. What the records show (Requirements 1 to 3): the family results, the inputs to 1090 with their behavior tests, and the capacity table.
2. What a product costs (Requirements 4 and 5): the three costs for each family, the unused capacity reconciled to 1090, and the explorer.
3. Make, buy, or reprice (Requirements 6 to 8): the decision for each quoted family, the value of freed capacity, and the price increases.
4. Standards and the memo (Requirements 9 and 10): the revised standard, its effect on the statements, and the memo.

18.4 Requirements

The requirements fall into four phases: what the records show, what a product costs, whether to make, buy, or reprice, and how the standards should change. Each phase uses what the one before it found.

18.4.1 Phase 1: What the Records Show

Requirement 1: Test the CFO’s numbers and the premises behind them (Chapters 9 to 11).

The CFO’s comparison joins invoice lines, items, work orders, their closes, and completions, and every one of those joins can fan out. It is a query, written once and reconciled to the ledger before anyone reads a margin from it.

• In MakeBuy.sql, for each manufactured family in fiscal 2026, return the units sold, revenue, list value, and standard cost; the variance of the year’s closes, by material, labor, and overhead, and as a share of the standard cost completed; and the variance per unit completed.
• Compute three margins for each family: at standard, after the variance per unit completed, and with the year’s whole variance charged, as the ledger charges it. Set the purchased products of the same family beside them.
• Test the CFO’s second premise: whether the records show any change in list prices or standard costs in the three years, and what evidence would show that nothing changed.
• Reconcile the families’ variances to account 5080.

Requirement 2: Take the overhead apart (Chapters 7, 10, and 11).

“Overhead at a third of its cost” compares totals and leaves cost behavior open, and cost behavior is tested, not assumed. SQL extracts what flowed into account 1090 and what the standards released from it; the regressions belong in the workbook, as in Chapter 7.

• Split the 2026 inputs to 1090 into direct and indirect labor, regular and overtime, salaries, employer taxes and benefits, the Factory Overhead entries, and depreciation, and set them against the standard cost that completions released, by labor and overhead. Express both per standard hour.
• Extract each input by month, January 2024 to December 2026, with the standard hours completed each month, and test which inputs move with output from February 2024 on. Explain what including January 2024, and the months with three pay dates, would do to the test.
• Write a sentence for each input that classifies it as a cost that varies with output, a committed capacity cost, or neither, with the evidence.

Requirement 3: Measure the activities and the capacity (Chapters 10 and 11).

What each family uses of the plant comes from the routings, multiplied by what was made; what the plant had comes from its calendar. Both are joins and sums over the year’s work orders, which SQL handles directly.

• For each family’s 2026 completions, return the work orders, units, average batch size, run hours and setup hours by work center, and material issue lines, and express setup hours and issue lines per thousand units.
• For each work center, return the hours available in 2026, the practical capacity under Table 18.2, the routing time used, and its share of each.
• Explain in a sentence why routing time is the right measure of use here, and what it leaves out.

18.4.2 Phase 2: What a Product Costs

Three costing views answer different questions, as Figure 18.1 shows. Standard costing charges each product a rate per standard hour and sends everything else to the variance account. Actual absorption spreads the year’s whole cost over the units made, so a product’s cost rises whenever the plant runs below capacity. This case can only approximate that view, as Requirement 4 explains, so its absorption figures are a proxy rather than the year’s whole cost spread over every unit. Time-driven costing charges each product for the capacity it uses at the cost of practical capacity, and reports the capacity left unused as a cost of the plant. If supplying an hour of practical capacity costs 40 and a product’s routing takes 1.5 hours a unit, setup included, the product carries 60 of conversion cost, however much of its capacity the plant uses that year. All three are views for managers; what inventory may carry is a separate question, which Requirement 9 takes up.

Figure 18.1: Three ways to cost the plant’s time.

TipIn Practice

Time-driven activity-based costing asks two questions: what each unit of capacity costs, and how much capacity each product or customer uses. Kaplan and Anderson (2004) suggest, as a rule of thumb, that practical capacity is 80% to 85% of theoretical capacity. Cooper and Kaplan (1992) had argued that activity-based systems measure the cost of the resources used, so that the difference between the resources a company supplies and those it uses appears as the cost of unused capacity. Measuring cost on practical capacity, rather than on the volume actually produced, keeps that cost out of the products and makes it visible to the managers who can act on it.

Requirement 4: Compute three costs for each family (Chapter 7).

Each cost is a formula over a handful of inputs that the decision makers will want to change, which makes this workbook work: one Assumptions sheet, every cost a formula, and every assumption a cell.

• Compute each manufactured item’s cost under the three views. Standard is the item’s standard cost. Actual absorption, as this case approximates it, adds its family’s variance per unit completed: the variance of the year’s closes over the units the year completed. Time-driven costs material, with the 2026 material variance as a rate; the Factory Overhead entries per standard hour; and the committed costs of the crew (every hourly manufacturing employee), supervision, and equipment per hour of practical capacity, times the item’s routing time per unit, with setup spread over the family’s average batch.
• Show the unused capacity as its own line, and reconcile the conversion in the item costs, applied to the year’s completions, plus the unused capacity to the inputs to 1090. Setup spread over the family’s average batch is not quite the setup the work orders ran, so show that difference as a line of its own.
• Summarize by family at the 2026 mix of items sold, with the margin under each view, and find the share of margin that the top fifth of the finished goods sold earns under each, with the purchased products at their standard cost in every view.
• Add a Data Table of practical capacity from 75% to 90% of available hours, and explain how the choice divides the same committed cost between the products and the unused capacity. Excel takes a data table’s input cell only from the table’s own worksheet, so keep the practical share that the cost formulas use in a cell on that sheet.
• Keep the item costs as an Excel Table, so that Power BI can load them.

Requirement 5: Build the explorer for the meeting (Chapters 13 to 15).

The CFO and the production manager will want to move between families and items, and between the three views, while they talk. That is a report, not a workbook, and Power BI already has the patterns you need.

• Create Product Costs.pbix. Load the item cost Table from the workbook and the invoice lines and invoices from CharlesRiver.xlsx, add a year column, and relate the lines to the item costs. Design services have no row in the cost table, so decide how the report treats that blank, as Chapter 13 taught. Turn off Auto date/time and Autodetect new relationships after data is loaded under Current File, as Tutorial 13.1 did, so that Power BI does not add hidden date tables or relationships you did not choose.
• Enter a Costing View table with Enter data, and write a Product Cost measure that switches on the view selected, as the Steps table of Tutorial 15.1 switched its measure, with Margin and Margin % beside it.
• Build a Families page with a matrix of families by view, a chart of items ranked by margin under the view a slicer selects, and a Capacity page from the workbook’s capacity table.
• Add an About page, a Validation page that reproduces control totals from earlier chapters, and a Tests tab that checks the totals of each view against the workbook.

18.4.3 Phase 3: Make, Buy, or Reprice

The test for one family is in Figure 18.2. What matters is which costs stop if Charles River stops making the family. Materials and the overhead that varies with output stop at once. The crew’s time stops costing money only if the crew is reduced; otherwise buying adds the supplier’s price to costs the company keeps paying, unless the hours freed have another use, as growth would give them in Requirement 7. The test assumes that the hours freed have no other quantified use, so a supported alternative use is weighed separately, with the supplier’s terms and the cost of the transition. Whichever test a family passes, buying it pays only if the saving over the two years the prices are fixed covers the one-time costs.

Figure 18.2: The make-or-buy test for one family.

Requirement 6: Decide make or buy, family by family (Chapter 7).

The comparison is a few lines per family, with two assumptions that the decision turns on: the quote and what happens to the crew. A workbook lets the decision makers change both and watch the answer move.

• For each quoted family, compute the relevant cost per unit with the crew kept, which is materials and the overhead that varies, and with the crew reduced in step with the hours freed, which adds the crew’s cost of the routing time. Compare each with the delivered quote, and compute the annual effect at the 2026 volume sold.
• Add the one-time costs for the families you would buy: tooling, and severance for the positions no longer needed under Table 18.2. Show the effect over the two years the prices are fixed, before taxes and without discounting.
• Use Goal Seek for the quote at which each family breaks even under each crew case, and build a two-way Data Table of the quote, 10% either side, against the share of the freed crew time actually removed, for the families you would buy taken together.
• Set the CFO’s absorption view beside your answer, and explain in two sentences why the two disagree.
• List the terms that the numbers leave out.

WarningWatch out

Actual absorption cost is not a relevant cost. It includes supervision, depreciation, and the crew’s idle hours, which do not stop when one family is bought. If a family goes and those costs stay, they fall on the families that remain, which then look more expensive and invite the next decision to buy: the spiral that cost systems built on actual volume can set off. Compare the quote with the costs that would stop, and state what has to happen for each of them to stop.

Requirement 7: Value the capacity that buying would free (Chapter 7).

• Measure the hours that buying the families of Requirement 6 would free at each work center, on the 2026 completions that Requirement 3 measured, and the plant’s use of its practical capacity afterwards.
• Compare them with the capacity the plant already leaves unused, in hours and in positions on the same base, and explain what that comparison means for the decision. Hours spare over a year may not be spare in every week, work center, or skill, so say what a plan to change the crew would also have to check.
• Show what happens to the cost of the remaining families if the crew is kept.
• Optional: with Solver, find which families to buy if volume grew by 40% and by 50%, minimizing the added cost with the crew kept and practical capacity at each work center as the limit, and report which work center binds and its shadow price. This model leaves out the quote’s minimum volume and tooling, and it plans a year, not a production schedule, so treat its answer as a benchmark: check each family it buys against the minimum, and say what a plan the supplier would accept costs over the two years.

Requirement 8: Reprice the families below the floor (Chapter 7).

• Use Goal Seek for the price at which each family reaches the margin floor of Table 18.2 on its time-driven cost, and compute the increase and the share of volume the increase could lose before the family earns less contribution than it does now, measuring contribution over the relevant cost with the crew kept.
• Set those figures against what the records show about how Charles River’s customers respond to price: test whether order volume, measured as a list-price-weighted order-value proxy for volume, rose in the months of past promotions, a screen that can reveal a large response but cannot measure how customers would answer an increase, and check the dates and use of the price lists, as Exercise 8.6 did. Recommend increases, and how the lists should be rebuilt.
• Show how the answer changes for any family you would buy in Requirement 6.

TipIn Practice

Price is the most powerful lever on profit, and often the least managed. On the average economics of more than two thousand companies, a 1% improvement in price, with no loss of volume, would raise operating profit by 11.1%, three to four times the effect of a 1% gain in volume (Marn & Rosiello, 1992). The authors traced how the price a customer finally pays falls from the list price through discounts to the invoice price, and then through cash discounts, allowances, rebates, and freight to what they called the pocket price. Chapter 15’s gross-to-net waterfall traced the first part of that path for Charles River, from list value to recorded net revenue. A complete pocket-price analysis may also need off-invoice concessions and transaction costs.

18.4.4 Phase 4: Standards and the Memo

Requirement 9: Revise the standards, and measure what they mean for the statements (Chapter 9).

Standards serve inventory as well as decisions. The inventory standard of U.S. generally accepted accounting principles (Financial Accounting Standards Board Accounting Standards Codification Topic 330) allocates fixed production overhead on the normal capacity of the facilities and charges abnormal costs, such as idle facility expense, to the period. The workbook can rebuild a standard from the plan in Table 18.2 and revalue the stock it applies to.

• Propose a standard conversion rate per standard hour on normal capacity, the plan volume of Table 18.2 at its hours per standard hour: the labor rate with burden for the direct and the normal indirect hours, the overhead that varies, and the plan’s supervision and depreciation spread over the plan volume. Compare it with the current rate, the time-driven rate, and 2026’s actual cost, and explain why a standard built on 2026’s actual cost would carry idle capacity into inventory.
• Revalue the manufactured finished goods made since the ledger opened and still on hand at the end of fiscal 2024, 2025, and 2026, as far as the movements can rebuild them, and measure the effect on retained earnings at the start of fiscal 2025, on 2025 and 2026 income, and on each balance sheet, against the materiality screen of Table 18.2, saying what else bears on whether the effect is material. Show how the answer depends on the volume you treat as normal capacity and, separately, on the indirect hours the rate allows.
• The company issued its fiscal 2025 and 2026 statements to its shareholders. A plan for 2027 does not by itself show that those statements were wrong, so say what evidence would show whether the old standards misstated them or the new one is a change for the years ahead. Then recommend whether any correction belongs in the next statements or calls for revised ones, and what the CFO should tell the shareholders.

Requirement 10: Write the decision memo. Write a memorandum of no more than two pages to the CFO and the production manager, with an appendix of exhibits of no more than three pages and a decision table that gives, for each quoted family and each family below the floor, what to do, the annual effect, the one-time cost, and what the decision depends on. Close with the standards you propose, what the fiscal 2026 statements need, and the one decision that only the production manager can make.

18.5 Deliverables and Checklist

Before you submit, check that you have each of these:

1. MakeBuy.sql, with its header complete and two comment lines above every query.
2. Make Buy Reprice.xlsx, with the Assumptions sheet holding the quote and every assumption in Table 18.2; sheets for cost behavior, costs, make or buy, capacity, prices, and standards; and the Documentation sheet with the date through which the data run.
3. Product Costs.pbix, with its About and Validation pages and its Tests tab.
4. The memorandum, of no more than two pages, with its decision table and an appendix of exhibits of no more than three pages.

18.6 What a Strong Submission Includes

• Every figure reconciled to account 5080 and to the inputs to 1090, with the populations and units stated.
• Cost behavior tested before any cost is called variable or committed, with the records that cannot carry the test named.
• A different cost for each question: the absorption proxy for neither decision of this case, relevant costs for make or buy, time-driven costs for the pricing floor and the capacity question, and standards on normal capacity for inventory (Noreen, 1991; Balakrishnan et al., 2012a).
• The crew assumption made explicit, with the break-even quotes and the one-time costs.
• Price increases set beside the volume they can afford to lose and the evidence on how customers respond.
• Standards proposed on a stated capacity, with their effect on the fiscal 2026 statements measured, the evidence that would show whether those statements need correcting named, and both reported to the CFO.
• Files that someone else could rerun, and a memo that two people who disagree can act on.

NoteConnecting the Dots

This case brought back earlier answers. Chapters 10 to 12 found more hours paid and recorded than the plant’s output needed at standard. Here the routings estimated the capacity left unused, which no product should carry, and that estimate is not a finding that anyone did no work or that every hour could be removed. Chapter 7 found that a promotion needed more lift than the orders showed, which is part of the evidence the price increases rest on. And the fiscal 2026 statements come back too, because a cost study can raise the question of what the statements should have said.

18.7 Looking Ahead

This case asked what the plant’s products cost, and found that the answer depends on the question. Requirements 1 and 3 were descriptive analytics, in the terms of Table 1.1: what the families earned and what they used of the plant. Requirements 2 and 4 were diagnostic: why the variance grew and where the cost really sits. Requirements 7 and 8 were predictive, estimating what freed capacity, growth, and higher prices would do under stated assumptions: forward-looking scenario and optimization work, not validated forecasts of demand. And the recommendations on making, buying, repricing, and the standards were prescriptive, as decisions usually are.

Decisions like these are rarely made once. Quotes expire, crews change, and prices move, so the workbook and the explorer you built are tools for the next round as much as answers to this one. A plant that measures its costs on practical capacity every year sees idle capacity while it is still small, and a company that reviews its standards every year never has to explain three years of stale ones at once.

18.8 Further Reading

Balakrishnan, R., Labro, E., & Sivaramakrishnan, K. (2012a). Product costs as decision aids: An analysis of alternative approaches (Part 1). Accounting Horizons, 26(1), 1–20. https://doi.org/10.2308/acch-50086 The first of two papers that set four ways of computing product costs on one platform: traditional volume-based systems, activity-based costing, time-driven activity-based costing, and resource consumption accounting. A continuing numerical example shows what the systems share and where they differ, much as this case set three costing views side by side.

Balakrishnan, R., Labro, E., & Sivaramakrishnan, K. (2012b). Product costs as decision aids: An analysis of alternative approaches (Part 2). Accounting Horizons, 26(1), 21–41. https://doi.org/10.2308/acch-10197 The second paper compares the four systems on what they cost to build and maintain, on whether they provide data relevant to decisions, and on the incentives they create to manage the demand for resources. No system dominates, and the authors suggest how future systems might combine the best features of each.

Everaert, P., Bruggeman, W., Sarens, G., Anderson, S. R., & Levant, Y. (2008). Cost modeling in logistics using time-driven ABC: Experiences from a wholesaler. International Journal of Physical Distribution & Logistics Management, 38(3), 172–191. https://doi.org/10.1108/09600030810866977 A case study of time-driven activity-based costing at a Belgian wholesaler, where time equations captured operations that a single cost driver could not. At the case company the time-driven model gave more accurate costs than conventional activity-based costing, and its users found it useful for profitability reporting, which makes it a practical companion to Requirement 4.

Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business Review, 82(11), 131–138. https://hbr.org/2004/11/time-driven-activity-based-costing The article that brought time-driven activity-based costing to a wide audience: estimate the cost of supplying each unit of capacity and the time each product, order, or customer uses, and report the capacity left unused. It offers the rule of thumb that practical capacity is 80% to 85% of theoretical capacity, an estimate to check against a plant’s own records.

Marn, M. V., & Rosiello, R. L. (1992). Managing price, gaining profit. Harvard Business Review, 70(5), 84–93. https://hbr.org/1992/09/managing-price-gaining-profit A classic on price management. On the average economics of more than two thousand companies, the authors show that a 1% gain in price, if volume holds, would raise operating profit more than a 1% gain in volume or a 1% cut in cost, and they trace the pocket price waterfall from the list price to the price a company finally keeps. It frames the repricing decision of Requirement 8.

Noreen, E. (1991). Conditions under which activity-based cost systems provide relevant costs. Journal of Management Accounting Research, 3, 159–168. https://doi.org/10.2308/jmar-9701273049 A short analytical paper that sets out when activity-based costs are relevant to a decision: each cost pool must depend on a single activity, its cost must be strictly proportional to that activity, and each activity must be divisible among products so that what each product is charged depends only on that product, which rules out joint processes. Committed capacity costs, such as the crew in this case, fail the second condition, which is why the make-or-buy decision rests on relevant costs rather than on any full product cost.

18.9 References

Balakrishnan, R., Labro, E., & Sivaramakrishnan, K. (2012a). Product costs as decision aids: An analysis of alternative approaches (Part 1). Accounting Horizons, 26(1), 1–20. https://doi.org/10.2308/acch-50086

Cooper, R., & Kaplan, R. S. (1992). Activity-based systems: Measuring the costs of resource usage. Accounting Horizons, 6(3), 1–13. https://doi.org/10.2308/ah-9604083361

Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business Review, 82(11), 131–138. https://hbr.org/2004/11/time-driven-activity-based-costing

Marn, M. V., & Rosiello, R. L. (1992). Managing price, gaining profit. Harvard Business Review, 70(5), 84–93. https://hbr.org/1992/09/managing-price-gaining-profit

Noreen, E. (1991). Conditions under which activity-based cost systems provide relevant costs. Journal of Management Accounting Research, 3, 159–168. https://doi.org/10.2308/jmar-9701273049