ABSTRACT
The tactical perspective is bounded by a six-month to three-year time frame and focuses on loosening the impact of current constraints on the processes that make up the company’s value chain. Normalized costing is a capacity cost measurement model that uses average performance over time, adjusted for abnormal events, in its calculations. A practical capacity baseline is used at Caterpillar in assessing the potential of a specific cell or machine center. Management continues to debate switching to theoretical capacity, but to date the behavioral and interpretative problems inherent in the theoretical approach are felt to outweigh the potential benefits. A relatively new accounting model, activity-based costing, develops economic estimates for other parts of the business, including the “hard” and “soft” activities performed in nonmanufacturing areas of the firm. The cost savings from excess resources was computed by multiplying the excess capacity of each activity by its respective cost driver rate.
