Book Report of the Goal

...

4. We could make a better manufacturing decision by identifying following four pitfalls:

Firstly, if we reduce batch size by half on non-bottleneck, we will double the number of setups, which means the direct labor cost on statement will goes up. However, the reality is inverse. Because all we are doing is cutting into time the machine would spend being idle, we do not have to hire more people. Actually, the cost of parts should go down because we making and selling more products and spread the same cost over more products.

Secondly, we should change the base to determine the cost of parts. Instead of using the cost factor of the past twelve months, we can use the past two months because our throughput had a big increase in past two months. It will be more accurate.

Thirdly, there is an accounting distortion which is tied to the way that we evaluate inventory. We've saved a lot by not purchasing new materials to replace this excess inventory, and the cash figures show it clearly. But in the period when we were reducing inventory, a net loss showed on book. The reason why we get inverse result is that we report inventory as asset on the balance sheet.

Finally, we cannot accurately evaluate profit by using cost accounting data. As referred in The Goal, we accept orders for ten percent below cost and gain almost 50% of profit rate. If we measure profit by using cost accounting data, we will not accept this order which means we will lose profit.

...