Chapter 26 Cost Management for Just-in-Time Environments Financial and Managerial Accounting 8th...

Chapter Chapter 2626Cost Management for Cost Management for

Just-in-Time EnvironmentsJust-in-Time EnvironmentsFinancial and Managerial Accounting

8th Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.

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1. Compare and contrast just-in-time (JIT) manufacturing practices with traditional manufacturing practices.

2. Apply just-in-time manufacturing practices to a traditional manufacturing illustration.

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

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

4. Apply just-in-time practices to a nonmanufacturing setting.

ObjectivesObjectivesObjectivesObjectives

5. Describe and illustrate activity analysis for improving operations.

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

Sometimes called short-cycle or lean manufacturing.

What is Just-in-Time?What is Just-in-Time?What is Just-in-Time?What is Just-in-Time?

Reduces inventory.

Traditional ManufacturingJust-in-Time Manufacturing

Just-in-Time PrinciplesJust-in-Time Principles

Increases inventory to protect against process problems.

Reduces lead time. Increases lead time as a buffer against uncertainty.

Reduces setup time. Disregards setup time as an improvement priority.

Emphasizes product-oriented layout

Emphasizes process-oriented layout.

Emphasizes team-oriented employee involvement.

Emphasizes work of individuals following manager instructions.

ContinuedContinuedContinuedContinued

Emphasizes pull manufacturing.Traditional ManufacturingJust-in-Time Manufacturing

Emphasizes push manufacturing.

Emphasizes zero defects. Tolerates defects.

Emphasizes supplier partners. Treats suppliers as “arm’s-length,” independent entities.

Just-in-Time PrinciplesJust-in-Time Principles

Reducing InventoryReducing InventoryReducing InventoryReducing Inventory

Assume the Assume the river is river is

inventory.inventory.

Assume the Assume the river is river is

inventory.inventory.

88

As long as the river (the inventory) covers the rocks, the (production)

problems are hidden.

As long as the river (the inventory) covers the rocks, the (production)

problems are hidden.

Reducing InventoryReducing InventoryReducing InventoryReducing Inventory

If the river (inventory) is reduced, the problems are exposed.

If the river (inventory) is reduced, the problems are exposed.

99

Poor quality

Unreliable suppliers

Machine breakdowns

Untrained employees

Reducing Lead TimeReducing Lead TimeReducing Lead TimeReducing Lead Time

Lead time, sometimes called throughput time, is a measure of

the time that elapses between starting a unit of product…

Lead time, sometimes called throughput time, is a measure of

the time that elapses between starting a unit of product…


…into the beginning of a process and completing

the unit of product.

…into the beginning of a process and completing

the unit of product.


Value-added lead time is the time required to

actually manufacture a unit of a product.

Value-added lead time is the time required to

actually manufacture a unit of a product.


Nonvalue-added lead time is the time that a unit of product sits in inventories or moves

unnecessarily.

Nonvalue-added lead time is the time that a unit of product sits in inventories or moves

unnecessarily.

Conversion TimeConversion Time

Value-added

Start of productionfor a single item

Components of Components of Lead TimeLead Time

Components of Components of Lead TimeLead Time

Nonvalue-added

Wait TimeWait Time Move TimeMove Time Down TimeDown Time

End of productionfor a single item

Total Lead Time

Reducing Setup TimeReducing Setup TimeReducing Setup TimeReducing Setup Time

A setup is the effort required to prepare an operation for a

new production run.

A setup is the effort required to prepare an operation for a

new production run.

Relationship Between Setup Relationship Between Setup Times and Lead TimesTimes and Lead Times

Relationship Between Setup Relationship Between Setup Times and Lead TimesTimes and Lead Times

Long Long Setup Setup TimesTimes

Large Large Batch Batch SizesSizes

Large Large InventorInventor

yy

Longer Lead Times

Automotive Components Inc. manufactures a batch of 40 engine starters through three processing. Each unit in the batch requires the

following processing time:

Automotive Components Inc. manufactures a batch of 40 engine starters through three processing. Each unit in the batch requires the

following processing time:

Machining 6 minutesAssembly 10Testing 8 Total 24 minutes

After machining, it takes 10 minutes to move the machined batch to

assembly. It then takes 15 minutes to move the assembled batch to testing.

Approximately 97.5 percent of the lead time is consumed by nonvalue-

added waiting and moving.

After machining, it takes 10 minutes to move the machined batch to

assembly. It then takes 15 minutes to move the assembled batch to testing.

Approximately 97.5 percent of the lead time is consumed by nonvalue-

added waiting and moving.

How can we improve our lead

time performance?

How can we improve our lead

time performance?

1. Reduce setups so that the batch size could be reduced to one piece (one-piece flow).

2. Move the processes closer to each other so that the move time is eliminated.

Solutions

Emphasizing Product-Emphasizing Product-Oriented LayoutOriented Layout

Emphasizing Product-Emphasizing Product-Oriented LayoutOriented Layout

Organizing work around the products is called a

product-oriented layout (or product cells), while

organizing around processes is called process-

oriented layout.

Organizing work around the products is called a

product-oriented layout (or product cells), while

organizing around processes is called process-

oriented layout.

Emphasizing Employee Emphasizing Employee InvolvementInvolvement

Emphasizing Employee Emphasizing Employee InvolvementInvolvement

Employee involvement uses teams organized in product cells, rather than just efforts

of isolated individuals.

Employee involvement uses teams organized in product cells, rather than just efforts

of isolated individuals. Such employee teams

can be cross-trained to perform any operation within the product cell.

Such employee teams can be cross-trained to perform any operation within the product cell.

Emphasizing Pull Emphasizing Pull ManufacturingManufacturing

Emphasizing Pull Emphasizing Pull ManufacturingManufacturing

Producing items only as they are needed by the customer is called pull manufacturing. The system

that accomplishes pull manufacturing is often called

kanban (Japanese for “cards”).

Producing items only as they are needed by the customer is called pull manufacturing. The system

that accomplishes pull manufacturing is often called

kanban (Japanese for “cards”).

Emphasizing Zero DefectsEmphasizing Zero DefectsEmphasizing Zero DefectsEmphasizing Zero Defects

Poor quality results in increased need for inspection, more

production interruptions, an increased need for

rework, a higher cost from scrap, and additional

warranty costs.

Poor quality results in increased need for inspection, more

production interruptions, an increased need for

rework, a higher cost from scrap, and additional

warranty costs.

MAKE IT RIGHT THE FIRST TIME!MAKE IT RIGHT THE FIRST TIME!

Anderson Metal Fabricators (AMF) makes two types of metal

covers, large and small. Metal covers are made by stamping a pattern of the cover from sheet steel. The stamped patterns are

then sent through a hole punching operation, then a

forming operation.

Anderson Metal Fabricators (AMF) makes two types of metal

covers, large and small. Metal covers are made by stamping a pattern of the cover from sheet steel. The stamped patterns are

then sent through a hole punching operation, then a

forming operation.

Traditional OperationsTraditional Operations——Anderson Metal FabricatorsAnderson Metal Fabricators

Administrative Offices:Accounting

SalesCustomer Service

Maintenance and Tooling

Technical Offices:Design

SchedulingManufacturing

Receiving and Raw Materials

Inventory

Work in Process AreasWork in Process Areas

Stamping

WIPWIP

Punching

WIPWIP

Forming

WIPWIP

FinishedGoods

Inventory

ShippingDepartment

Just-in-Time OperationsJust-in-Time Operations——AMFAMF





Receivin

g

Maintenance and ToolingSmall covers

Stamping

Maintenance and ToolingMedium covers

Stamping

Maintenance and ToolingLarge covers

Stamping

= Work in Process Areas = Pull Kanban Signal

Sh

ipp

ing

Just-in-Time OperationsJust-in-Time Operations——AMFAMF





Receivin

g

Maintenance and ToolingSmall covers

Stamping

Maintenance and ToolingMedium covers

Stamping

Maintenance and ToolingLarge covers

Stamping

= Work in Process Areas = Pull Kanban Signal

Sh

ipp

ing

Punching

Punching

Punching

Forming

Forming

Forming

Accounting for Just-in-Time OperationsAccounting for Just-in-Time OperationsAccounting for Just-in-Time OperationsAccounting for Just-in-Time Operations

Fewer transactions. The accounting system is simpler because there are fewer transactions to record.

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

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

Direct Tracing of Overhead. Indirect labor is directly assigned to product production cells.

In a just-in-time operating environment, the accounting system will have the following characteristics:

The transfer of costs as products move through the

production process is termed backflush

accounting.

The transfer of costs as products move through the

production process is termed backflush

accounting.

Combined Transactions

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

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

Budgeted cell conversion

cost rate=

$2,400,0001,920

= $1,250 per hour

The medium-cover product cell is expected to require 0.02 hours of

manufacturing time per unit.

The medium-cover product cell is expected to require 0.02 hours of

manufacturing time per unit.

Conversion cost per unit = 0.02 x $1,250

= $25 conversion cost per unit

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

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

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

A separate A separate materials account materials account

is not used.is not used.

A separate A separate materials account materials account

is not used.is not used.

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

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

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

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

conversion costs.conversion costs.

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

conversion costs.conversion costs.

All 8,000 medium covers were completed All 8,000 medium covers were completed in the cell. The cost is $40 per unit in the cell. The cost is $40 per unit

(materials, $15; conversion costs, $25).(materials, $15; conversion costs, $25).

All 8,000 medium covers were completed All 8,000 medium covers were completed in the cell. The cost is $40 per unit in the cell. The cost is $40 per unit

(materials, $15; conversion costs, $25).(materials, $15; conversion costs, $25).

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

This is a backflush This is a backflush transaction.transaction.

This is a backflush This is a backflush transaction.transaction.

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

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

Accounts Receivable 546,000Sales 546,000

Cost of Goods Sold 312,000Finished Goods 312,0007,800 x $707,800 x $707,800 x $707,800 x $70

7,800 x $407,800 x $407,800 x $407,800 x $40

Nonfinancial Performance Nonfinancial Performance MeasurementMeasurement

Nonfinancial Performance Nonfinancial Performance MeasurementMeasurement

Inventory turnover 82% On-time delivery rates 41 Production lead time 35 Quality yield 32 Throughput 32 Time required for setups 26 Space utilized 12 Extent of cross-training or new skills obtained 8

Just-in-time principle addressed by performance measures (% of respondents):

Typical Hospital Process FlowTypical Hospital Process FlowTypical Hospital Process FlowTypical Hospital Process Flow

Patient Patient AdmittedAdmitted

Admitting Clerks Collect Patient

Information



Tests Tests ConductedConducted

Patient transported to RadiologyX ray madePatient transported back to Nursing Unit




Specimen transported to LabTests performedResults reported to Nursing Unit




Drugs orderedOrder filledDrugs sent back to Nursing Unit

Procedure Procedure PerformedPerformed




Procedure Procedure PerformedPerformed

Patient Patient DischargedDischarged

Just-in-Time Hospital Unit LayoutJust-in-Time Hospital Unit LayoutJust-in-Time Hospital Unit LayoutJust-in-Time Hospital Unit Layout

Patient RoomsPatient RoomsChemistry Chemistry

LabLab

Patient RoomsPatient Rooms X ray Admitting Office

Cross-trained Caregivers

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

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

Costs of Quality Using Costs of Quality Using Activity AnalysisActivity Analysis


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



External failure costs are the costs incurred after defective units or services have been delivered to consumers. Although difficult to measure, it may be the largest cost in the quality equation.

Design engineering $ 55,000Disposal of rejected materials 160,000Finished goods inspection 140,000Materials inspection 70,000Preventive maintenance 80,000Processing returned materials 150,000Disposing of scrap 195,000Assessing vendor quality 45,000Rework 380,000Warranty work 225,000

Total activity cost $1,500,000

Quality Control Activity AnalysisQuality Control Activity Analysis—Gifford Co.—Gifford Co.

Quality Control Activities Activity Cost Classification

PreventionPreventionInternal FailureInternal FailureAppraisalAppraisalAppraisalAppraisalPreventionPreventionExternal FailureExternal FailureInternal FailureInternal FailurePreventionPreventionInternal FailureInternal FailureExternal FailureExternal Failure

Quality Cost

Pareto Chart of Quality CostsPareto Chart of Quality Costs

$400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

Rework

Warranty work

Disposing of scrap

Disposal of rejected materials

Processing returned materials

Finished goods inspection

Preventive maintenance

Materials inspection

Design engineering

Assessing vendor quality

Quality Control Activities

Activity Categories

Costs

Cost of Quality ReportCost of Quality ReportCost of Quality ReportCost of Quality Report

Quality Cost Percent of Total Percent of TotalClassification Quality Cost Quality Cost Sales

Cost Summary

Prevention $ 180,000 12.00% 3.6%

Appraisal 210,000 14.00% 4.2%

Internal failure 735,000 49.00% 14.7%

External failure 375,000 25.00% 7.5%

Total $1,500,000 100.00% 30.0%



Indicate whether the item is value-Indicate whether the item is value-added or nonvalue-added.added or nonvalue-added.

Indicate whether the item is value-Indicate whether the item is value-added or nonvalue-added.added or nonvalue-added.


Value-addedValue-addedNonvalue-addedNonvalue-addedValue-addedValue-addedValue-addedValue-addedValue-addedValue-addedNonvalue-addedNonvalue-addedNonvalue-addedNonvalue-addedValue-addedValue-addedNonvalue-addedNonvalue-addedNonvalue-addedNonvalue-added

What percentage is value-added and What percentage is value-added and what percentage is nonvalue-added?what percentage is nonvalue-added?What percentage is value-added and What percentage is value-added and what percentage is nonvalue-added?what percentage is nonvalue-added?




Value-addedNonvalue-addedValue-addedValue-addedValue-addedNonvalue-addedNonvalue-addedValue-addedNonvalue-addedNonvalue-added

Quality Cost

$390,000 $390,000 ÷ $1,500,000 = 26%÷ $1,500,000 = 26%

What percentage is value-added and What percentage is value-added and what percentage is nonvalue-added?what percentage is nonvalue-added?What percentage is value-added and What percentage is value-added and what percentage is nonvalue-added?what percentage is nonvalue-added?




Value-addedNonvalue-addedValue-addedValue-addedValue-addedNonvalue-addedNonvalue-addedValue-addedNonvalue-addedNonvalue-added

Quality Cost

$1,110,000 $1,110,000 ÷ $1,500,000 = 74%÷ $1,500,000 = 74%

Activity Analysis for ProcessesActivity Analysis for ProcessesActivity Analysis for ProcessesActivity Analysis for Processes

Sales Order

Submitted by

Customer

Customer Credit Check

Order Entered into a

Computer System


Product Received

by Customer

Order Picked from

Warehouse

Order Shipped

Management determines that not all customer orders need to go through credit

check, but only orders from new customers require this effort. If this

change is made, only 2,500 of the 10,000 sales orders will require credit checks.

Management determines that not all customer orders need to go through credit

check, but only orders from new customers require this effort. If this

change is made, only 2,500 of the 10,000 sales orders will require credit checks.

Management introduced a more efficient warehouse product layout. This layout

reduces the cost of picking orders by 35%.

Management introduced a more efficient warehouse product layout. This layout

reduces the cost of picking orders by 35%.


Activity Cost Prior to

Improvement

Activity Cost After

Improvement

Customer credit check $14,400 $ 3,600Order entering 9,600 9,600Order picking 36,000 23,400Order shipping 20,000 20,000

$36,000 x $36,000 x 65% 65%

$36,000 x $36,000 x 65% 65%

Total sales order fulfillment $80,000 $56,600

Cost per shipped order $8.00 $5.66

Savings = $23,400Savings = $23,400Savings = $23,400Savings = $23,400

Activity Analysis Activity Analysis for Processesfor Processes

Activity Analysis Activity Analysis for Processesfor Processes

The EndThe End

Chapter 26Chapter 26

Chapter 26 Cost Management for Just-in-Time Environments Financial and Managerial Accounting 8th...

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