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How the nanotechnology revolution will affect cost management

Article  in  Journal of Corporate Accounting & Finance · March 2006

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 The Coming Nanotech Revolution – Accounting Challenges

Saurav Dutta
Associate Professor
University at Albany, SUNY

and

Raef Lawson
Director of Research
Institute of Management Accountants

December 27, 2005

Revised version of the paper was published in the Journal of Cost Management.
Please cite as: Dutta, S. and R. Lawson. 2006. The coming nanotech revolution - Accounting
challenges. Cost Management (May/June): 39-48.

The authors would like to thank Bin Srinidhi for comments on an earlier version of this paper.

1
 The Coming Nanotech Revolution – Accounting Challenges

Executive Summary

Nanotechnology deals with research involving objects that are incredibly small.

Research in this field is rapidly advancing and will soon enable the manufacture of items from

the atom level up which possess superior physical properties. The introduction of

nanotechnology will revolutionize not only the products produced by manufacturing processes,

but also the manufacturing processes themselves.

The coming change in production technology has numerous accounting implications.

The advent of nanoscale production will significantly alter the cost of product development and

production, with an increasing proportion of costs being incurred as overhead and being incurred

very early in a product’s life cycle. These changes will necessitate changes in organizations’

cost management systems and the tool and methodologies they employ. For a strategy

perspective, nanotechnological developments will necessitate organizations’ rethinking their

business strategie and their place in their industries’ extended value chains.

2
 The Coming Nanotech Revolution – Accounting Challenges

There is a revolution coming. It will have a broad impact on society as it exists today,

vastly affecting areas as diverse as how goods are produced, the cleanup of environmental waste,

and the diagnosis of disease and the delivery of medical care. The revolution is called

nanotechnology. While this emerging field has received considerable notice in the technological

and popular press, this has not been the case in accounting.

In this paper, we begin to identify the challenges that the emergence of this technology

will have on the practice of accounting. These include changes to organizations’ cost

management systems to accommodate the dramatic shift in cost patterns that this technology will

bring and rethinking by organizations of their business strategies and their place in their

industries’ extended value chains.

What is Nanotechnology?

Nanotechnology is an encompassing term that covers many areas of research dealing

with objects that are measured in units called nanometers. A nanometer is one-billionth of a

meter in length, or about the size of ten atoms placed side by side. Research in nanotechnology

focuses on methods of manufacturing items with incredible precision. The goal of

nanotechnology is to pick and place millions of individual atoms in a given pattern to produce a

desired structure or product.

The idea behind nanotechnology is not new. In 1959 noble laureate physicist Richard

Feynman espoused the idea of building things by individually arranging atoms: “… it is

something, in principle, that can be done; but in practice, it has not been done because we are too

big.”1 With recent technological advances, the physical hurdles of re-arranging atoms are being

overcome.

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 The scope of nanotechnology is vast. It will have significant impact on almost all

industries and all areas of society, including fields as diverse as medicine, construction,

computers, and the automotive industry. Categories of potential application include:

 Nanosystems. These are small systems that can be viewed as an extension of

biotechnology, and include such things as motors the size of a virus.

 Nanomaterials. Working at the nano-level will enable the creation of new kinds of

materials. Already developed are carbon nanotubes which are stronger and lighter

than steel but conduct electricity better than copper. Other possible new materials

include those that have the ability to react to changing conditions.

 Nano-electronics. Incredible reduction in the size of electronic components,

especially computer chips, will be possible with the introduction of

nanotechnology.2

One of the most anticipated uses of nanotechnology is the creation of medical nano-

robots, made up of just a few molecules and controlled by ultrasound or computer. These nano-

robots will be used to manipulate other molecules, destroying cholesterol molecules in arteries,

targeting precisely and destroying only the cancer cells (while leaving the healthy one

unaffected), or constructing nerve tissues atom by atom in order to cure paralysis.

Stages in the Development of Nanoengineering

There will be three stages in the development of nanotechnology. The first is the ability

to pick up an individual atom or molecule and place it in a desired position. This allows the

manufacture of items with no scrap and with almost perfect efficiency and accuracy. The

manipulation of individual atoms has been possible since the 1990s. As the technology

4
progresses, millions of atoms will be individually placed to precisely construct objects of

virtually any size, shape and material.

The next step will be the development of machines called assemblers that can be

programmed to manipulate atoms and molecules. An assembler is a device with a

submicroscopic robotic arm under computer control. These machines will perform assembly at

the nano-level by arranging atoms into their proper place.3

The final step will be to create enough assemblers to build consumer goods. This will be

achieved through replicators. These are assemblers that are programmed to build more

assemblers. The ability to make nano-robots self replicate is a critical key to making this new

technology a reality. This idea is similar to that of the biological cells which self-replicate in all

living organisms. It is the discovery of how to create this process, as well as the means to

control it, that is currently a constraint which has to be overcome.

Impact of Nanotechnology on Production

The theories for using mechanical chemistry to directly manufacture nanoscale structures

are well-developed and progress is being made in the enabling technologies. It is estimated that

at the current rate of development, exponential general-purpose molecular manufacturing might

be become a reality by 2010, is likely by 2015, and almost certainly will be present by 2020. 4

The introduction of nanotechnology will revolutionize not only the products produced by

a manufacturing process, but also the manufacturing processes themselves. There will be no

waste or pollution in the production of goods, and they will be precise to within the size of a

molecule. Objects created using molecular nanotechnology will have perfectly smooth surfaces.

Parts of machinery that come in contact with each other will fit perfectly together, reducing wear

and tear due to abrasion as well as the need with for costly lubrication and cooling systems.

5
Furthermore, having perfectly fitting parts with smooth surfaces reduces friction thereby

diminishing energy needs.

The power of nanotechnology can potentially be contained in simple devices -

nanofactories - that can sit on a desktop. Packed with miniature chemical processors, computing,

and robotics, they will produce a wide-range of items quickly, cleanly, and inexpensively,

building products directly from blueprints. These will use a very simple and limited method of

building products. Functionality will be contained within small blocks, which are then fastened

together by the trillions to make a product.

Manufacturing and prototyping will be the same process; a successful prototype design

could be rapidly distributed and replicated for wide-spread use. This will reduce transportation

costs as well as time and costs associated with product distribution. A prototype design could be

sent to nano-factories all over the world and local factories could re-configure and produce the

product with ease for immediate local distribution. A designer working with a few basic blocks

could design, build and test a simple product in less than a day. The production and distribution

time for a product will also shrink dramatically.

Nanotechnology will not only enable production of a large number of high-quality

products at very low cost, but also allow the production of new nanofactories at the same low

cost and at the same rapid speed. There will be the ability for factories to build other factories -

rapidly, cheaply, and cleanly. The means of production could be able to reproduce exponentially.

In just a few weeks a few nanofactories conceivably could become billions. Nanotechnology is a

revolutionary, powerful technology.5

Industry Implications

6
 The ramifications of nanotechnology in existing industries are immense. For starters, one

may be able to inexpensively manufacture very strong and very light material, such as

shatterproof diamonds which would be about 50 times lighter than, but as strong as, steel. Such

materials would revolutionize the construction industry and the manufacturing of heavy

machinery. With these materials it would be possible to manufacture a luxury-size automobile

that weighed about 100 pounds or a full sized sofa that could be picked up in one hand.

Television screens could be a few atoms thick and be painted on a wall or other surface. With

this technology, almost any manufactured product could be improved, often by orders of

magnitude.

The computer industry will be revolutionized as computer hardware is brought down to

the size of molecular gates and wires. With nanotechnology, each logic element could be made

from just a few atoms, decreasing the size of memory chips. A box no larger than a sugar cube

could contain the entire contents of the Library of Congress. Similarly, massively parallel

computers of similar size could deliver billions of instructions per second. Nanotechnology will

make using computers both cheaper and more efficient.

Many other industries will face similar radical changes. Some of the possibilities in the

healthcare area were previously noted - destroying cholesterol molecules in arteries, destroying

cancer cells, or constructing nerve tissues in order to end paralysis. Surgical equipment could be

made with such precision that it could operate at the cellular level. Since the tools of medicine

will become cheaper and more effective, research and diagnosis will become far more efficient,

allowing rapid response to outbreaks of new diseases. Numerous small, cheap, sensors could be

implanted in a body for continuous health monitoring and semi-automated treatment.

7
 Nanotechnology has the potential to significantly reduce energy costs. For example, it

will cut the cost of both solar cells and the equipment needed to deploy them, making solar

power economical. Once solar cells can be made smaller and more efficient, solar power could

be harnessed more effectively.

Nanotechnology will revolutionize the travel industry. Currently, planes are made from

aluminum rather than diamond because of cost, malleability and ductility. With nanotechnology

inexpensive shatterproof diamond could be made in any shape and have 50 times more strength

to weight ratio than aluminum. Thus, planes could be manufactured with similar structural

strength but be 50 times lighter. This will drastically reduce the energy costs associated with

travel. Similarly, space travel would become more viable as the performance and economy of

spaceships is improved with nano-engineered materials.

Value Chain Analysis

All products flow through a value chain, which typically begins with research and

development, continues through product design and engineering, production, marketing, and

distribution, and ends with the final customer. (See Figure 1.) Depending on the product, this

chain may include post-sale service and the cost of disposal of a product by the final customer.

*** Insert Figure 1 about here***

The advent of nanotechnology is likely to affect the value chain in every major industry.

For some organizations, nanotechnology will have a direct effect on their internal value chain;

for others it will have an indirect effect through the external value chain of which they are a part.

For example, for products where components are manufactured using nanotechnology, there is

less likelihood of product failure, resulting in lower costs associated with warranty expense

8
(external failure costs) and lower repair costs. Thus a supplier’s adoption of nano-manufacturing

can diminish the down stream costs of warranty and repairs.

For products manufactured using nanotechnology, the initial developmental costs of the

product maybe quite high, but the cost of production will be relatively low, as it will be

undertaken by self-replicating nanobots. Additionally, distribution costs will be reduced as the

prototype can be sent electronically to any nano-factory, anywhere in the world which will be

able to replicate a given product. The manufacturing of nano-products will be localized to the

areas where there is demand for the product, doing away with the need to distribute and ship

inventory of the products, reducing shipping, storage, and related costs. Work in process

inventories throughout the value chain will also be reduced, as the need for inventory is related

to variability in a production and distribution system. The use of nanotechnology eliminates or

reduces much of this variability.

Nanotechnology will even have a significant impact on industries not directly involved in

manufacturing products using nano-technology. For example, the medical profession will use

nanobots that focus only on malignant cells to treat disease. Additionally, some surgery will be

performed by nano-bots inside the body, greatly diminishing recuperating time and costs.

Hence, even though nano-technology is not being developed in the medical domain, it is likely to

have a significant impact on the cost and delivery of healthcare services.

Cost Measurement

The advent of nano-scale production will significantly alter both the cost of production

and how the costs of production are accounted for and managed. This will be partly due to a

significant reduction in material costs. Rather than start with, say, a piece of raw material and

forming a component by removing excess material through a manufacturing process,

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components will be produced one atom at a time with readily available components such as

carbon, oxygen, nitrogen and silicon building blocks.

Additional material savings will arise from the development of new materials possessing

properties only available though nanoscience. Costs in manufacturing industries such as

construction and heavy machinery, for example, will be significantly reduced with the utilization

of carbon nano-tubes, mentioned earlier. While the cost of manufacturing these tubes is

currently too high to make their use commercially viable, it is rapidly declining.

The coming change in production technology has numerous accounting implications.

First, the elimination of scrap in the production process will eliminate the need to deal with the

associated costs. Additionally, the atom-by-atom assembly of products will virtually eliminate

the production of defective units, eliminating the need for accounting for less than 100% yield in

a production process.

Production and assembly using nanotechnology will be accomplished by self-replicating

nanobots. The direct labor costs for each product line will be incurred only in the developmental

phase of the product, for the design and testing of the prototype. Direct labor costs in the

production and assembly process will become negligible. The virtual elimination of direct labor

in the production process will necessitate rethinking the selection of an appropriate basis for the

allocation of overhead costs and the rethinking of what the appropriate drivers of an

organization’s cost are in this new environment.

Environmental Costs

From a molecular perspective, many of today’s manufacturing processes create a great

deal of waste. Current manufacturing processes start with a greater mass of materials and end

with a finished product that weighs much less than the initial raw materials used in

10
manufacturing it. The difference in the mass of raw materials and the end product is scrap and

spoilage which at best can be used as a by-product and at worst is a source of pollution.

In nanofactories, by contrast, there are no atoms or molecules wasted; hence there is no

waste in terms of scrap. Moreover, there are no by-products created when the manufacturing

and processing is at the molecular level. A nano-manufacturing process will not pollute, hence

the environmental costs associated with production and assembly will be negligible.

An additional benefit of nanotechnology from an environmental perspective is possible.

Besides being a “clean” technology, nanotechnology has the potential of remedying problems

caused by today’s polluting processes. Nanotechnology could be employed in environmental

clean-up. Since the technology deals with molecules and atoms, pollution causing molecules

could be individually picked and removed from the air, soil, or water. This would make clean-up

operations highly efficient and cheap. Oil spills and other environmental disasters could be

cleaned up more quickly, significantly reducing the environmental costs. The clean-up of super-

funds sites may become more economically feasible with the advent of nanotechnology.

A concern exists regarding the proper disposal of the nano-bots used in production. If

untreated, spent nano-bots could cause pollution or have other adverse environmental effects.

However, few scientists in this field worry about this becoming a serious problem. Nanobots

could be programmed to self-destruct after production is complete, or other “recycling” nano-

bots could be developed. This would require an additional step in a manufacturing process not

currently present.

Cost Management Systems

The change in production technology and the associated change in the consumption of

resources will affect the relevance and application of many of today’s cost management

11
techniques. As mentioned previously, the value chain of key business processes in the

production of manufactured products can include the acquisition of raw materials, product design

and engineering, manufacturing, transportation of goods to and from the manufacturing facility,

storage and marketing. When desk-top size nano-factories can produce a wide variety of

products when and where they are wanted by customers, many of these processes will diminish

in importance. Organizations will need to reexamine their position in the extended value chain

and rethink their core processes in order to survive and prosper.

Another consequence of the flexibility of nano-manufacturing and the accompanying

radical improvement in product quality will be a reevaluation of many of today’s popular cost

management techniques as organizations face new challenges and old ones disappear.

Strategic Cost Management

The drivers that determine an organization’s cost structure can be divided into two

groups: structural and executional.6 The former relate to a company’s choice regarding its

underlying economic structure; they include drivers related to choices regarding the scale, scope,

experience, technology and complexity of an organization’s operations. Choices related to these

drivers determine an organization’s cost structure and its product costs. The latter type of drivers

include drivers related to an organization’s ability to successfully execute its strategy; they

include drivers related to the workforce involvement, quality, capacity utilization, plant layout

efficiency, product configuration and linkages with suppliers and customers.

For organizations adopting nano-technology, the importance of the various structural and

executional cost drivers will change. Since nano-factories are easily adaptable to produce

different products, the diversity and complexity of the product line in those organizations will

cease being a significant cost driver. This is in contrast to the current manufacturing

12
environment in which these factors drive many costs. Furthermore, since nano-factories are

relatively smaller and can be replicated with ease, organizations are not tied to their initial

decisions of scope and scale. As some cost drivers of the current manufacturing environment are

de-emphasized, other cost drivers will become more prominent. For example, workforce

involvement and experience, supplier and customer linkages, technological adaptability will

become more important, as new innovations get implemented with increased speed and alacrity.

Activity-based Costing/Management (ABC/M)

Application of ABC/M will need to shift in the new nano environment. The traditional

use of ABC in the manufacturing environment, with its emphasis on the selection of appropriate

drivers for the application of overhead costs to products will have limited use.

However, ABC/M is more flexible than traditional costing methodologies, and should be

adaptable to the introduction of this new technology. Greater emphasis will need to be placed on

the cost of activities involved in the processes of designing and developing prototypes as

opposed to those associated with production-related activities. Possible candidates for cost

drivers in this new environment include the number of new components to be developed,

development time, and the number of patents or copyrights applied for (or obtained). Since

initial development costs are likely to dominate all other costs, the more components that have to

be designed and the greater their complexity, the greater will be indirect costs. Additionally,

payments for obtaining patents and copyright of nano-components are likely to be another

significant source of costs. The application of ABC will resemble models employed in R&D

organizations and the software industry. Once nanotechnology is implemented in manufacturing

organizations, a detailed study of the cost system of nano-manufacturers will be required to

validate the cost drivers identified in the new production environment.

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 A new issue that may be addressed using ABC/M is the choice of technology to be used

in the manufacture of a product. Given the higher percentage of up-front costs – and thus risk -

of nano-manufacturing, traditional manufacturing methods may be used unless a significantly

higher return can be achieved using the new technology. Another concern is the cost of redesign.

A company may not want to employ nanotechnology in relatively uncertain situations where

customer requirements are ill-defined or likely to change. ABC/M can be used to help analyze

the choice of appropriate technology.

Cost of Quality

Concepts of quality and associated costs have gained prominence in recent years due to

increased competition, enhanced consumer awareness, and the increasingly rapid dissemination

of information. Quality has become an essential competitive ingredient and almost all

organizations have adopted some form of quality improvement program. This awareness and

focus on quality is likely to gain greater prominence with the advent of nanotechnology. As the

barriers to enter an industry are eased in a nano-manufacturing environment, the consequences of

lapses in quality are bound to be immediate and grave. Organizations will thus need to have an

even greater sensitivity to quality issues. However, there will be a shift in emphasis between the

various quality measures, as some of the current measures of quality will no longer be relevant in

the nano-manufacturing environment.

A widely accepted framework assigns quality costs to four categories, as follows:

 Prevention costs are incurred in setting up processes to prevent errors or flaws

from occurring in products or services.

 Detection costs are incurred in setting up processes to find flaws in product prior

to those being sold.

14
  Internal Failure costs are incurred in repairing, re-working or scrapping an item in

which flaws were detected.

 External Failure costs are incurred when a defective product is sold to a customer.

These include the cost of warranty, repair and - most importantly - lost customer

goodwill.

The adoption of nanotechnology will affect the relative importance of these various

components of quality. In this new environment, production or replication is precise and perfect,

with minimal possibility of errors being introduced in the production phase. The finished

product is identical to the prototype, hence care must be taken to ensure that a prototype has no

flaws. If a flawed prototype is approved for replication and distribution, the consequences in

terms of external failure costs are likely to be immense. Hence, much greater emphasis will be

placed on prevention costs, with organizations engaging in rigorous testing of prototypes in order

to eliminate the possibility of these containing flaws. The other two costs in the cost of quality

framework (detection and internal failure) will be minimal, at least with regard to a company’s

production process, since the molecular engineering process, while replicating the flaws in

prototype, will ensure that no additional flaws are introduced. The need to test finished product

prior to shipment will be obviated.

Based on these changes in the importance of the various costs of poor quality, the

emphasis of quality control programs (such as Six Sigma, TQM, and CQI) employed by

organizations will need to change. Key to an organization’s success will be ensuring the quality

of its prototypes. Continuous improvement efforts will focus on design efforts which have the

goal of making assemblers, replicators, and nanobots quicker, more powerful, or unique in some

15
way. In this sense, these efforts will resemble the quality programs employed by software

development organizations today, and will face many similar challenges, on an even larger scale.

Quality improvement efforts will continue to be of importance for an organization’s

nonmanufacturing processes. It is not sufficient for a company to manufacture high-quality

nano-products; it must be able to consistently deliver the correct products to its customers in a

timely manner.

Life Cycle Costing

Life cycle costing is a costing concept that looks at the total cost of ownership of a

product “from cradle to grave”, that is from the initial conception of the product to its disposition

by the ultimate customer. The emphasis on all costs and especially the cost of research and

development, product design and development, and the cost of disposal distinguish this approach

from the traditional one.

This approach to costing will be especially important for companies that utilize

nanotechnology. Using current technology, typically 80 to 90% of the total costs incurred over a

product’s life cycle are committed prior to production. With nanotechnology, this percentage

will be even higher. Organizations using this means of production will have relatively high costs

associated with the development of prototypes, but very low replication costs (and higher gross

margins). Consideration of the total cost incurred over the life of a product, rather than just the

cost of manufacture, thus becomes much more important.

*** Insert Figure 2 About Here ***

Figure 2 contrasts the costs incurred over the life cycle of a product in the traditional

manufacturing and nano-manufacturing environments. In traditional manufacturing, the incurred

costs are spread over a product’s life-cycle, with significant costs incurred in the production,

16
sales and after-sales phases. With nano-manufacturing, most costs will be incurred upstream in

the development and prototyping phases and less costs in the production, sales and after-sales

phases. The graph depicts higher total costs under traditional manufacturing to signify the

economic feasibility of nano-manufacturing for a given product. If traditional manufacturing

yields lower total cost for a product, as is currently the case, nano-manufacturing techniques will

not be employed for the product.

*** Insert Figure 3 About Here ***

Figure 3 extends the above analysis to the profit domain over the life-cycle of a product.

The various life-cycle phases are indicated on the x-axis and the cumulative profit is graphed on

the y-axis. In the initial phases of R&D, prototyping and production, there is no revenue

generated from the product, hence all of the costs incurred result in net loss in the given time

periods. Since the initial development costs are higher in nano-manufacturing, the losses in the

initial period are higher as well. However, once the product is sold and revenue is generated, the

profits in nano-environment are steeper due to very low production costs and other variable

costs. In the traditional manufacturing environment, production costs are significant, hence the

profits accumulate at a slower pace, resulting in a flatter profit curve. The graph depicts higher

profitability in nano-manufacturing again to signify the economic feasibility of the process. The

break-even point is shown to be later with nano-technology. However that may not be true in

general and will depend on the extent of the upstream development and prototyping costs.

Nanotechnology is expected to have an especially large impact on life-cycle costs in the

chemical industry. A large proportion of life cycle costs in chemical products are environmental

costs incurred at the time of disposal of the product. Additionally, since current manufacturing

technology in chemical industry leads to many by-products and effluents released to the

17
environment, significant costs are borne by these industries in trying to limit the pollution of the

environment. With heightened social consciousness and environmental legislation these costs

can be expected to increase for the chemical industry using current manufacturing technology.

However, with molecular manufacturing, where a product is constructed molecule by molecule,

there are no by-products or effluents. Even for traditional chemical technology, nanotechnology

can be employed to remove harmful atoms and molecules from the air and water prior to their

being released in the environment. Nanobots can be programmed to pick up harmful molecules

generated in a chemical process and convert them to neutral molecules prior to effluent being

releasing in the environment. Such technology will greatly lower the environmental costs and

thereby alter the life-cycle costs of affected products. Through similar application of

nanotechnology the disposal costs of chemical products will also be minimized.

Target Costing

Target costing is a price-led, customer-focused, designed-centered system of profit

planning and cost management. It asks what features a product should offer based on customers’

desires and needs, and what customers are willing to pay for the product given those features.

Alternative production techniques and methodologies are examined until the proposed product

can be produced and sold for the desired price while yielding an adequate profit margin.

As with life cycle costing, the coming of nanotechnology will impact the application of

target costing by manufacturing organizations. With more flexible manufacturing techniques, a

wide range of differentiated products can be offered. This flexibility, combined with the lower

costs of production on a nanoscale, will make control of product development costs more critical

in meeting the target cost for a product. Companies will need to ensure that they have design

18
processes in place that can develop products efficiently in order to be able to offer customers

products at competitive prices. Target costing can help ensure that is the case.

Implementation of target costing in this new environment may be more difficult than

when using traditional manufacturing. Given the possible uncertainty surrounding the cost of

development and designing new products, the initial uniqueness of nano-products, and the

relative magnitude of those costs, it many be difficult to set price and cost targets for new

products.

In the target costing process, there will be a shift in importance from production

management to strategic decision-making. Given the relatively high cost of development of a

nano-product and its low cost of production, the key decision point in the development and

production of a product will be whether or not to invest in development. Once a product with

desired characteristics has been developed, most of the costs associated with it have already been

expended, and the actual cost of production and distribution will be relatively nominal.

*** Insert Figures 4A and 4B About Here ***

Figure 4-A graphically illustrates the above concept for traditional manufacturing. Since

significant amount of the total costs are production related (material costs, labor costs, and

manufacturing overhead costs), these costs are incurred once the production process begins. It

continues with sales and distribution costs being incurred as well as the post-sale costs of

warranty and repairs. However, most of the production costs are committed at the time of design

and development; hence the graph depicting committed cost is convex whereas the graph

depicting incurred costs is concave. The graph also illustrates the time-lag between the

commitment of costs and incurrence of those costs in a traditional manufacturing setting. This

time-lag causes management issues and dysfunctional behavior in that the down-stream costs are

19
often ignored or de-emphasized at the developmental phase, at the time when those costs are

being committed. Figure 4-B similarly illustrates the concept of committed and incurred costs

in a nano-environment. In such environment, since most of the costs are incurred in the

development and prototyping phase, the costs are incurred almost simultaneously to when they

get committed. Production costs - material, labor and manufacturing overhead - in this

environment are relatively insignificant. Hence, the incurred costs and committed costs graphs

are similarly shaped and convex. The graph denoting incurred cost is still below that of the

committed costs to portray non-zero production and selling costs, which will continue to be

committed upstream at the development phase. However, since the time lag between committing

costs and incurring costs is diminishing, this obviates the dysfunctional problems and issues

created by the asymmetry in traditional manufacturing.

Flexible Manufacturing Systems

Nanotechnology will bring forth a revolution in flexible manufacturing systems. Nano-

factories will be capable of switching from manufacturing one product to the next in a matter of

seconds. All that will be involved is changing the way the basic building blocks get arranged:

the building blocks and the robots performing the assembly remain the same. The difference is

in the software commands controlling which atoms are placed at what locations.

This will significantly reduce downtime between production runs. The cost of switching

between producing different products, while often significant currently, will become negligible

in nanotech factories, increasing the flexibility of these production systems. Other production

concerns with current manufacturing systems, such as downtime, throughput, and bottleneck will

also be less of an issue after the nanotech revolution.

Conclusion

20
 The development of nanotechnology will dramatically revolutionize the production of

goods and the delivery of services. Nanotechnological developments will necessitate

organizations’ rethinking their business strategy and where they fit in their industry’s extended

value chain. Vast changes to their cost structures will necessitate changes to their cost

management systems and the tool and methodologies they employ. The nanotech revolution is

coming. Organizations need to begin to address these issues in order to be ready when it arrives.

21
Authors’ Bios

Saurav Dutta, Ph. D., CMA is an Associate Professor in the Department of Accounting

and Law at the University of Albany, State University of New York. He earned his Ph.D. degree

from the University of Kansas. He can be contacted at sdutta@albany.edu .

Raef A. Lawson, Ph.D., CPA, CMA is Director of Research for the Institute of

Management Accounting. He earned M.B.A. and Ph.D. degrees from the Stern School of

Business, New York University. He can be contacted at lawson@albany.edu.

22
Figure 1. Internal Value Chain

Marketing Customer
R &D Design Production Distribution
Service

23
 Figure 2. Costs Incurred Over the Life Cycle of a Product

Total
Costs
ring
actu
o manuf
Nan

r ing
ctu
ufa
an
l M
io na
adit
Tr

R&D Prototype Prod. Sales Post-Sales: Phases of

Warranty Development
Repair
Quality Costs

24
 Figure 3. Profits Over the Life Cycle of a Product

Cumulative
Profits

R&D Prototype Prod. Sales Time

Post-Sales
g
rin Warranty
ctu
ing
nufa tur Repair
a
M
al Quality Costs
fac

it ion
anu

T rad
no m
Na

25
 Figure 4-A. Target Costing in Traditional Manufacturing

Costs

osts
ed C
mitt
Com

sts
d Co
urre
Inc

R&D Prototype Prod. Sales Post-Sales Phases of

Warranty Development
Repair
Quality Costs

26
 Figure 4-B. Target Costing in Nano-Manufacturing

Costs
osts
ed C
mitt
Com

sts
d Co
u rre
Inc

R&D Prototype Prod. Sales Post-Sales Phases of

Warranty Development
Repair
Quality Costs

27
 1
Richard Feynman talk entitled “There is Plenty of Room at the Bottom”, presented December 29, 1959 at the
annual meeting of the American Physical Society at the California Institute of Technology
2
Accenture, “Nanotechnology and Business: The Power of Being Small”, at
http://www.accenture.com/xd/xd.asp?it=enweb&xd=ideas%5Coutlook%5Cpov%5Cpov_nanotechnology.xmlhttp://
www.accenture.com/xd/xd.asp?it=enweb&xd=ideas%5Coutlook%5Cpov%5Cpov_nanotechnology.xml
3
Fanning, Kurt, “Nanotechnology: An Emerging Technology with Implications for Accountants” working paper.
4
Center for Responsible Nanotechnology, at http://www.crnano.org/timeline.htm
5
Center for Responsible Nanotechnology, at http://www.crnano.org/index.html
6
Shank, J. and Govindarajan, V., Strategic Cost Management, New York: The Free Press, 1993, pp. 20-22.

28

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