Management accounting in ERP integrated MRP and TOC environments
| DOI | https://doi.org/10.1108/02635570710822813 |
| Date | 02 October 2007 |
| Pages | 1188-1211 |
| Published date | 02 October 2007 |
| Author | Bih‐Ru Lea |
| Subject Matter | Economics,Information & knowledge management,Management science & operations |
Management accounting in
ERP integrated MRP and
TOC environments
Bih-Ru Lea
Department of Business Administration, University of Missouri - Rolla,
Rolla, Missouri, USA
Abstract
Purpose – The purpose of this paper is to examine traditional costing, activity-based costing (ABC),
and through-put accounting in an enterprise resource planning (ERP) integrated environment for
decision making.
Design/methodology/approach – Computer simulation is used to model a manufacturing firm
operating under a manufacturing resource planning environment and a theory of constraints
environment.
Findings – Through the inclusion of both manufacturing and non-manufacturing costs and the use
of both volume and non-volume-based cost drivers, ABC captures manufacturing characteristics and
resource usage more accurately than traditional costing and through-put accounting and results in
higher profit, lower inventory, and better customer service for both the short and long term.
Research limitations/implications – This study only simulates industries that have a relatively
high-overhead content and relatively low labor and raw material costs and inventory evaluations
includes only work-in-process inventory. Studies of a different industry, where raw material content is
relatively high and labor and overhead content are relatively insignificant, would also be valuable.
Studies that evaluate raw material or finished goods inventory would be helpful.
Practical implications – In order to realize full benefits of ERP integration, a management
accounting system should be carefully selected to properly depict manufacturing processes.
Management should consider both manufacturing costs and non-manufacturing costs to capture the
characteristics resource usage among products for better decision making.
Originality/value – This study incorporates the ERP system to prevent poor decisions being made
from using obsolete or outdated data because changes are now made instantly. The impact of
management accounting systems was evaluated through a large-scale simulation to ensure
comparability among experimental settings and to provide realistic manufacturing settings.
Keywords Activity based costing,Management accounting, Manufacturing resource planning,
Throughput accounting, Product mix
Paper type Research paper
Introduction
Ideally, to make product mix decisions, managers need cost information from the
accounting information system, production data from the manufacturing information
system, and demand forecast information from the marketing information system.
However, non-optimal decisions are often made from insufficient information or from
using inaccurate or outdated data due to poor communication and integration among
information systems across different functional areas or because of the difficulty of
obtaining cross-functional data (Lea et al., 2005). With a common database and
real-time information sharing, an enterprise resource planning (ERP) system makes it
The current issue and full text archive of this journal is available at
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IMDS
107,8
1188
Industrial Management & Data
Systems
Vol. 107 No. 8, 2007
pp. 1188-1211
qEmerald Group Publishing Limited
0263-5577
DOI 10.1108/02635570710822813
possible to use real-time data from different functional areas in decision making to
prevent inferior decisions being made from obsolete or outdated data (Lea et al., 2005).
However, management accounting systems that provide cost information for
various decisions are seldom a choice when making ERP implementation decision or in
most commercial ERP packages. This is because of the misconception that
management accounting systems are used only to report profitability, and the
lack of understanding on how the management accounting system interacts with
the manufacturing system to influence performance. On the manufacturing side, the
reported benefits from the ERP implementation include quick information response
time, shortened order cycle, improved on-time delivery, lowered inventory, and
reduced operating costs (Mabert et al., 2000; Lea et al., 2005). However, the majority
of ERP literature focus on issues related to ERP implemented and installation.
Few systematic studies that examine how the common database and real-time
information sharing features of an ERP system influence manufacturing performance
exist.
This study is designed to show how management accounting systems affect
management decisions and consequently influence manufacturing performance over
time. By utilizing the real-time information sharing feature of an ERP integrated
environment, this study examines how management accounting systems affect
product mix decisions through product cost calculations, and consequently influence
manufacturing performance over time. To make direct comparison possible, the
computer simulation is used to replicate an ERP integrated factory operated in both
traditional manufacturing resource planning (MRP) and theory of constraints (TOC)
environments. The results of this study will help managers to identify an appropriate
management accounting system to determine optimal product mix in a constrained
environment in order to provide the right goal for production based on the desired
performance measures.
The structure of the paper is as follows: first, a brief literature review is provided.
Next, the research questions and hypotheses are defined, and the research design is
outlined. Then, the results are discussed. Finally, the summary, implications and future
research directions are presented.
Literature review
The objective of this study is to examine the impact of management accounting
systems on manufacturing performance within the context of the planning horizon in a
MRP and a TOC manufacturing firms where an integrated ERP system is
implemented. A brief review on the interrelationships among product mix decision,
management accounting, planning horizon, manufacturing environment, and ERP
implementation will be provided before discussion of detailed research questions and
modeling.
Manufacturing involves the conversion of raw materials into finished products
through the efforts of workers and the use of production equipment. A product mix
problem can be formulated as:
Maximize Z¼X
n
j¼1
ðPj2cjÞxj
Management
accounting
1189
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