ABSTRACT
In Chapter 9, we showed you how to calculate the average value stream cost and how to make management decisions using that cost. This approach looks at the impact of management choices related to order pricing, make/buy, and other product profitability decisions. These are based on the impact these choices would have on the value stream cash flow profit before and after the action contemplated by the decision. This decision method, based on overall value stream profit impact, departs from traditional methods based on individual product profitability, as it takes into consideration the impact of real value stream costs on the profitability of any business choice. Traditional methods focus on product based on the assumptions of standard costing. These assumptions, particularly the methods of allocating overheads, provide misleading and inaccurate costs, leading to bad business decisions. For most business decisions, focusing on the cost of an individual manufactured product is misleading and unhelpful. These decisions are best made by taking account of the profitability of the value stream as a whole, not the individual order or transaction.
