control of operations, are primarily the province of the engineering departments and operations management. Standards are based on engineering process designs, actual operational data, forecasts of demand and sales of products, existing inventories, capacity constraints, and other such factors. Control of operations is an ongoing function that includes periodic monitoring of production units, yields, and quality of outputs. Both of these components are commonly based on volumes, weights, and other physical measures of productivity. Information is usually gathered in some form at every stage of production (as well as in other activities of the firm, such as sales).

At the end of some regular period of time, the information gathered is aggregated and summarized into a variety of performance evaluation reports. These reports include, but are not limited to, financial reports such as income statements, balance sheets, and cash flow information for internal as well as external dissemination, detailed cost accounting schedules for production and sales during the period, and comparisons of actual production numbers with operating budgets and forecasts. The various performance evaluation reports are then used for feedback and system modification, to control operations, improve profitability, reduce risk, take advantage of business opportunities, and reward managers who are "successful" (as measured by the performance evaluation reports).

Feedback and modification are the ultimate objectives of the management information and control systems. The success of the system depends on (1) the quality of information produced by the system, and (2) the timeliness of the information received by those in a position to modify the system.

Traditional Cost Accounting Systems

A traditional cost accounting system is shown in Figure 2. The system assumes that the firm produces two products, Widget A and Widget B, both of which use direct labor and materials. By direct labor and materials, we mean those factors that not only are associated with the production of the product, but also become a part of the product, such as raw materials, or are required to transform the raw materials, such as direct labor.

All other costs of production, including supervisory salaries, occupancy costs of manufacturing facilities, janitorial services, utilities, property taxes, materials handling costs, and disposal of wastes, including "environmental" wastes, and a host of other costs, are accumulated into "pools" of costs, usually termed "overhead" costs. Such costs are then allocated to individual products based on some systematic and rational cost allocation scheme, for example, budgeted labor hours per unit of product.

It is readily apparent that there are several problems that can have a profound effect on economic decision-making for individual products. First, important information is lost in the process of aggregation. For example, the amount of a certain waste material produced by Widget A will not be specifically captured for

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