Cost Management for Just-in-Time Environments

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Cost Management for Just-in-Time Environments
Student Version
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Describe just-in-time manufacturing practices.
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What is Just-in-Time (JIT)?

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

• 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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Reducing Lead Time
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.
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Value-Added Lead Time
Value-added lead time is the time spent in
converting raw materials into a finished unit of
product.
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Nonvalue-Added Lead Time
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.
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Value-Added Ratio
Value-Added Lead Time Total Lead Time
Value-Added Ratio

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Reducing Setup Time
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.
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Automotive Components Inc.
Automotive Components Inc. manufactures engine
starters as follows
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Automotive Components Inc.
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Layouts
If the manufacturing process is organized around
a product, it is called a product-oriented layout
(or product cell).
If the manufacturing process is organized around
a process, it is called a process-oriented
layout.
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Emphasizing Employee Involvement
Employee involvement is a management approach
that grants employees the responsibility and
authority to make decisions about operations by

1. Organizing employees into product cells

2. Cross-training employees to perform any
operation within the product cell
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Emphasizing Pull Manufacturing
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).
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Emphasizing Supply Chain Management
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
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
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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Describe the implications of just-in-time
manufacturing on cost accounting and performance
measurement.
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Characteristics of a Just-in-Time Accounting
System
1. Fewer transactions. There are fewer
transactions to record, thus simplifying the
accounting system.
2. Combined accounts. All in-process work is
combined with raw materials to form a new
account, Raw and In Process (RIP) Inventory.
(continued)
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Characteristics of a Just-in-Time Accounting
System
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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Anderson Metal Fabricators (AMF) Example
The annual budgeted conversion cost for AMFs
metal-cover product cell is 2,400,000. These
costs will support 1,920 planned hours of
production.
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Anderson Metal Fabricators (AMF) Example
Cell Conversion Cost Rate
Budgeted Conversion Cost Planned Hours of
Production

1,250 per hour
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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 120,000 Accounts
Payable 120,000 To record materials purchases.
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 200,000 Conversion
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.
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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 320,000 Raw and In
Process Inventory 320,000 To transfer the cost
of completed units to finished goods.
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 546,000 Sales 546,000 To
record sales.
7,800 70
(continued)
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Of the 8,000 units completed, 7,800 were sold and
shipped to customers at 70 per unit.
Cost of Goods Sold 312,000
Finished Goods 312,000
7,800 40
To record cost of goods sold.
(concluded)
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Describe and illustrate activity analysis for
improving operations.
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Costs of Quality

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

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Costs of Quality
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

• 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
External failure costs are the costs incurred
after defective units or services have been
delivered to consumers.
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Pareto Chart of Quality Costs
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.
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Cost of Quality Report
A cost of quality report normally reports the

1. Total activity cost for each quality cost
   classification

1. Percent of total quality costs associated with
   each classification

1. 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. Procurement
2. Product development
3. Manufacturing
4. Distribution
5. Sales order fulfillment

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Masters Company Example
Assume the cost of a firms 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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Masters Company Example
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
If 10,000 orders will be filled, the cost savings
from these two improvements are as follows
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