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27

Cost Management for Just-in-Time

Environments

Student Version

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Describe just-in-time manufacturing practices.

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JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality within manufacturing and nonmanufacturing processes.

What is Just-in-Time (JIT)?

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Sometimes called lean manu-facturing.

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Reducing Inventory

Just-in-time manufacturing views inventory as wasteful and unnecessary. Under traditional manufacturing, inventory hides underlying production problems.

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Lead time, sometimes called throughput time, is a measure of the time that elapses between starting a unit of product and completing the unit of product.

Reducing Lead Time

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Value-added lead time is the time spent in converting raw materials into a finished unit of product.

Value-Added Lead Time

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Nonvalue-added lead time is the time spent while the unit of product is waiting to enter the next production process or is moved from one process to another.

Nonvalue-Added Lead Time

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Value-Added Ratio

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Value-Added Ratio

Value-Added Lead Time

Total Lead Time

=

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A setup is the effort spent preparing an operation or process for a production run. If setups are long and costly, the batch size (number of units) for the related production run is normally large.

Reducing Setup Time

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Automotive Components Inc.

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Automotive Components Inc. manufactures engine starters as follows:

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Value-Added Ratio =Value-Added Lead Time

Total Lead Time

Value-Added Ratio =(7 + 9 + 8)

minutes

985 minutes

= 2.4%

Automotive Components Inc.

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If the manufacturing process is organized around a product, it is called a product-oriented layout (or product cell).

Layouts

If the manufacturing process is organized around a process, it is called a process-oriented layout.

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Employee involvement is a management approach that grants employees the responsibility and authority to make decisions about operations by:

Emphasizing Employee Involvement

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1. Organizing employees into product cells

2. Cross-training employees to perform any operation within the product cell

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Producing items only as they are needed by the customer is called pull manufacturing (or make to order). A system that accomplishes pull manufacturing is often called kanban (Japanese for “cards”).

Emphasizing Pull Manufacturing

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Electronic data interchange (EDI) is a method of using computers to electronically communicate orders, relay information, and make or receive payments from one organization to another.

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Emphasizing Supply Chain Management

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Radio frequency identification devices (RFID) are electronic tags (chips) placed on or embedded within products that can be read by radio waves that allow instant monitoring of product location.

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Emphasizing Supply Chain Management

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Enterprise resource planning (ERP) systems are integrated business and information systems used by companies to plan and control both internal and supply chain operations.

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Emphasizing Supply Chain Management

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Describe the implications of just-in-time manufacturing on cost accounting and performance measurement.

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1. Fewer transactions. There are fewer transactions to record, thus simplifying the accounting system.

Characteristics of a Just-in-Time Accounting System

(continued)

2. Combined accounts. All in-process work is combined with raw materials to form a new account, Raw and In Process (RIP) Inventory.

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3. Nonfinancial Performance Measures. There is a greater emphasis on nonfinancial performance measures.

4. Direct Tracing of Overhead. Indirect labor is directly assigned to product production cells, thus less factory overhead is allocated to products.

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Characteristics of a Just-in-Time Accounting System

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The annual budgeted conversion cost for AMF’s metal-cover product cell is $2,400,000. These costs will support 1,920 planned hours of production.

Anderson Metal Fabricators (AMF) Example

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Cell Conversion Cost Rate

Budgeted Conversion Cost

Planned Hours of Production=

$2,400,000

1,920 hours=

= $1,250 per hour

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Anderson Metal Fabricators (AMF) Example

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Conversion Cost for Cover

Manufacturing Time

Cell Conversion Cost Rate= ×

= 0.02 hours × $1,250

= $25 per unit

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Anderson Metal Fabricators (AMF) Example

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Steel coil is purchased for producing 8,000 metal covers. The purchase cost was $120,000, or $15 per unit.

Raw and In Process Inventory 120,000Accounts Payable 120,000

To record materials purchases.

A separate materials

account is not used.

A separate materials

account is not used.

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Conversion costs are applied to 8,000 medium covers at a rate of $25 per cover.

Raw and In Process Inventory 200,000Conversion Costs 200,000

To record applied conversion costs of the medium-cover line.

The Raw and In Process Inventory account is used to accumulate the applied

conversion costs.

The Raw and In Process Inventory account is used to accumulate the applied

conversion costs.

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All 8,000 medium covers were completed in the cell. The cost is $40 per unit (materials, $15; conversion costs, $25).

Finished Goods Inventory 320,000Raw and In Process Inventory 320,000

To transfer the cost of completedunits to finished goods.

This is a backflush transaction because the raw and in process

inventory account balance is zero after the transfer.

This is a backflush transaction because the raw and in process

inventory account balance is zero after the transfer.

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Of the 8,000 units completed, 7,800 were sold and shipped to customers at $70 per unit.

Accounts Receivable 546,000Sales 546,000

To record sales.

7,800 × $707,800 × $70

(continued)

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Cost of Goods Sold 312,000

(concluded)

Of the 8,000 units completed, 7,800 were sold and shipped to customers at $70 per unit.

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Finished Goods 312,000To record cost of goods sold.

7,800 × $407,800 × $40

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Describe and illustrate activity analysis for improving operations.

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Prevention costs are the costs of activities that prevent defects from occurring during the design and delivery of products or services.

Costs of Quality

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Appraisal costs are the costs of activities that detect, measure, evaluate, and inspect products and processes to ensure that they conform to customer requirements and performance standards.

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Costs of Quality

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Internal failure costs are the costs associated with defects discovered by a business before the product or service is delivered to the consumer.

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Costs of Quality

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External failure costs are the costs incurred after defective units or services have been delivered to consumers.

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Costs of Quality

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Managers want information displayed so that the important problems or issues can be identified quickly. One method of reporting information is the Pareto chart. A Pareto chart is a bar chart that shows the totals of an attribute for a number of ranked categories.

Pareto Chart of Quality Costs

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Cost of Quality Report

A cost of quality report normally reports the:

2. Percent of total quality costs associated with each classification

1. Total activity cost for each quality cost classification

3. Percent of each quality cost classification to sales

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Process Activity Analysis

A process is a series of activities that converts an input into an output. Common business processes include:1. Procurement2. Product development3. Manufacturing4. Distribution5. Sales order fulfillment

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Masters Company Example

Assume the cost of a firm’s four activities are as follows:

If 10,000 sales orders are filled during the current period, the per unit process cost is $8 per order ($80,000/10,000 orders).

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The company determines that only new customers need to have a credit check. It is estimated that only 25% of sales orders would require credit checks. In addition, by revising the warehouse product layout, it is estimated that the cost of picking orders can be reduced by 35%.

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Masters Company Example

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If 10,000 orders will be filled, the cost savings from these two improvements are as follows:

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Masters Company Example

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