1. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 12 Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Student Version These slides should be viewed using the presentation mode (left click your mouse on the icon). Cost Management for Just-in-Time Environments Principles of Managerial Accounting 11e Reeve Warren Duchac

2. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 1 Describe just-in- time manufacturing practices.

3. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Just-in-time processing (JIT), sometimes called lean manufacturing, is a philosophy that focuses on reducing time and cost, and eliminating poor quality.  Under traditional manufacturing, inventory often hides underlying production problems.  JIT manufacturing attempts to solve and remove production problems. LO 1 Reducing Inventory

4. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. The lead time can be classified as one of the following:  Value-added lead time, which is the time spent in converting raw materials into a finished unit of product.  Non-value-added lead time, which is the time spent while the unit of product is waiting or being moved to the next production process. LO 1

5. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 1 Reducing Lead Time  The value-added ratio is computed as follows: Value-Added Ratio = Value-Added Lead Time Total Lead Time

6. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 1 Reducing Lead Time The material in Exhibit 2 (in your textbook) arrived at 2:00 o’clock and was delivered to the customer at 4:00 o’clock, or 120 minutes later. Value was added in only 45 of these minutes. The value-added ratio is calculated as follows: Value-Added Ratio = Value-Added Lead Time Total Lead Time Value-Added Ratio = 45 minutes 120 minutes = 37.5%

7. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Reducing Setup Time LO 1  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.  Large batch sizes allow setup costs to be spread over more units and, thus, reduce the cost per unit.  Exhibit 3 (in your textbook) shows the relationship between setup times and lead time.

8. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Emphasizing Product-Oriented Layout  If the manufacturing process is organized around a product, it is called a product- oriented layout (or product cells ).  If the manufacturing process is organized around a process, it is called a process- oriented layout. LO 1

9. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1.Moving materials and products between processes  Just-in-time normally organizes manufacturing around products rather than processes. Organizing work around products reduces: 2.Work in process inventory 3.Lead time 4.Production costs LO 1 Emphasizing Product-Oriented Layout

10. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1.Organizing employees into product cells. 2.Cross-training employees to perform any operation within the product cell. Emphasizing Employee Involvement  Employee involvement is a management approach that grants employees the responsibility and authority to make decisions about operations by: LO 1

11. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 1 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”). Electronic cards or containers signal production quantities to be filled by the preceding operation.

12. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Emphasizing Pull Manufacturing  In contrast, the traditional approach is to schedule production based on forecasted customer requirements. This principle is called push manufacturing (or make to stock ). LO 1

13. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Emphasizing Supply Chain Management LO 1  Supply chain management coordinates and controls the flow of materials, services, information, and finances with suppliers, manufacturers, and customers.

14. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Emphasizing Supply Chain Management LO 1  To enhance the interchange of information between supplier and customers, supply chain management often uses:  Electronic data interchange (EDI), which uses computers to communicate  Radio frequency identification devices (RFID), which are electronic tags placed on or embedded with products that can be read by radio waves that allow instant monitoring of product location

15. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Emphasizing Supply Chain Management LO 1  Enterprise resource planning (ERP) systems, which are used to plan and control internal and supply chain operations

16. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 2 Apply just-in-time practices to a non- manufacturing setting.

17. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. ( continued) JIT for Nonmanufacturing Processes LO 2

18. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. JIT for Nonmanufacturing Processes LO 2

19. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 3 Describe the implications of just-in- time manufacturing on cost accounting and performance measurement.

20. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting for JIT Manufacturing  In just-in-time manufacturing, the accounting system has the following characteristics:  Fewer transactions. There are fewer transactions to record, thus simplifying the accounting system.  Combined accounts. All in process work is combined with raw materials to form a new account, Raw and In Process (RIP) Inventory. LO 3

21. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting for JIT Manufacturing  Combined accounts. Direct labor is combined with other costs to form a new account titled Conversion Costs.  Nonfinancial performance measures. Nonfinancial performance measures are emphasized.  Direct tracing of overhead. Indirect labor is directly assigned to product cells, thus, less factory overhead is allocated to products. LO 3

22. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fewer Transactions  The accounting system for just-in-time manufacturing is simplified by eliminating the accumulation and transfer of product costs by departments. This type of accounting is termed backflush accounting. LO 3

23. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Combined Accounts LO 3 Anderson Metal Fabricators, a manufacturer of metal covers for electronic test equipment, has an annual budgeted conversion cost of $2,400,000 and 1,920 planned hours of production. The cell conversion cost rate is determined as follows: Cell Conversion Cost Rate = Budgeting Conversion Cost Planned Hours of Production Cell Conversion Cost Rate = $2,400,000 1,920 hours $1,250 per ton =

24. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Conversion Cost for Cover Manufacturing Time Cell Conversion Cost Rate = × = 0.02 hours × $1,250 = $25 per unit Combined Accounts LO 3 Assume that Anderson Metal’s cover product cell is expected to require 0.02 hour of manufacturing time per unit. Thus, the conversion cost for the cover is $25 per unit, as shown below.

25. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1.Steel coil is purchased for producing 8,000 metal covers. The purchase cost was $120,000, or $15 per unit. Combined Accounts LO 3 Raw and In Process Inventory120,000 Accounts Payable120,000 To record material purchases. A separate Raw Materials account is not used.

26. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Combined Accounts LO 3 2.Conversion costs are applied to 8,000 covers at a rate of $25 per cover. Raw and In Process Inventory200,000 Conversion Costs200,000 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.

27. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Combined Accounts LO 3 3.All 8,000 covers were completed in the cell. Finished Goods Inventory320,000 Raw and In Process Inventory320,000 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. Materials ($15 x 8,000 units)$120,000 Conversion ($25 x 8,000 units) 200,000 Total$320,000 Total$320,000Materials ($15 x 8,000 units)$120,000 Conversion ($25 x 8,000 units) 200,000 Total$320,000 Total$320,000

28. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7,800 × $70 Combined Accounts LO 3 4.Of the 8,000 units completed, 7,800 were sold and shipped to customers at $70 per unit. Accounts Receivable546,000 Sales546,000 To record sales. Cost of Goods Sold312,000 Finished Goods Inventory312,000 To record cost of goods sold. 7,800 × $40

29. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 4 Describe and illustrate activity analysis for improving operations.

30. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Activity Analysis  An activity analysis determines the cost of activities based on an analysis of employee effort and other records. An activity analysis can be used to determine the cost of:  Quality  Value-added activities  Processes LO 4

31. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost of Quality LO 4  Prevention costs, which are costs of preventing defects before or during the manufacture of the product or delivery of services.  Appraisal costs, which are costs of activities that detect, measure, evaluate, and inspect products and process to ensure that they meet customer needs. (continued)

32. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost of Quality LO 4  Internal failure costs, which are costs associated with defects discovered before the product is delivered to the consumer.  External failure costs, which are costs incurred after defective products have been delivered to consumers.

33. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost of Quality LO 4  Exhibit 7 (in your textbook) shows the relationship between the costs of quality. The internal and external failure costs decline with increases in the percentage of good units produced.

34. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Pareto Chart of Quality Costs LO 4  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.

35. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 Cost of Quality Report LO 4  A cost of quality report normally reports the:

36. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Value-Added Activity Analysis LO 4  A value-added activity is one that is necessary to meet customer requirements.  A non-value-added activity is not required by the customer, but occurs because of mistakes, errors, omissions, and process failures.

37. © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1.Procurement 2.Product development 3.Manufacturing 4.Distribution 5.Sales order fulfillment Process Activity Analysis LO 4  A process is a series of activities that converts an input into an output. Common business processes include:

38. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The End Cost Management for Just-in-Time Environments