A stochastic costing model for manufacturing management and control

Abstract

Due to global competition, manufacturing companies need to support decision making on sophisticated, timely and accurate costing systems. Traditional costing methods based on volume measures are not efficient in modern times characterized by product diversity, production complexity and market volatility and uncertainty. Activity-based cost models were introduced in the 1980s and can help to deal with the complexity. In this research project, a cost model has been developed to take into consideration uncertainty and variability in the computation of the product cost. Due to the existence of variability and uncertainty, product costing should be approached stochastically. The stochastic model presented in this paper showcases through its equation the different levels of product costs related to activities' cycle time, production line bottleneck, planned unused capacity (for operational or strategic reasons) and unplanned unused capacity (due to variability in production or market conditions). The model supports and can be extended for cost prediction and cost optimization under conditions of variability in resource costs, process and operations conditions, and demand changes imposed by the market or clients.