1. Chapter 26 Cost Management for Just-in-Time Environments
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3. After studying this chapter, you should be able to:
Objectives
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.
After studying this chapter, you should be able to:

4. Objectives
4. Apply just-in-time practices to a nonmanufacturing setting.
5. Describe and illustrate activity analysis for improving operations.

5. What is Just-in-Time?
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.

6. Just-in-Time Principles
Just-in-Time Manufacturing
Traditional Manufacturing
Increases inventory to protect against process problems.
Reduces inventory.
Reduces lead time.
Increases lead time as a buffer against uncertainty.
Disregards setup time as an improvement priority.
Reduces setup time.
Emphasizes product-oriented layout
Emphasizes process-oriented layout.
Emphasizes team-oriented employee involvement.
Emphasizes work of individuals following manager instructions.
Continued

7. Just-in-Time Principles
Just-in-Time Manufacturing
Traditional Manufacturing
Emphasizes pull manufacturing.
Emphasizes push manufacturing.
Emphasizes zero defects.
Tolerates defects.
Emphasizes supplier partners.
Treats suppliers as “arm’s-length,” independent entities.

8. Assume the river is inventory.8
Reducing Inventory
Assume the river is inventory.
As long as the river (the inventory) covers the rocks, the (production) problems are hidden.

9. If the river (inventory) is reduced, the problems are exposed.
Reducing Inventory
If the river (inventory) is reduced, the problems are exposed. 9
Machine breakdowns
Poor quality
Untrained employees
Unreliable suppliers

10. Reducing Lead Time
Lead time, sometimes called throughput time, is a measure of the time that elapses between starting a unit of product…

11. …into the beginning of a process and completing the unit of product.
Reducing Lead Time
…into the beginning of a process and completing the unit of product.

12. Reducing Lead Time
Value-added lead time is the time required to actually manufacture a unit of a product.

13. Reducing Lead Time
Nonvalue-added lead time is the time that a unit of product sits in inventories or moves unnecessarily.

14. Components of Lead Time
Start of production
for a single item
End of production
for a single item
Conversion Time
Value-added
Wait Time
Move Time
Down Time
Nonvalue-added
Total Lead Time

15. Reducing Setup Time
A setup is the effort required to prepare an operation for a new production run.

16. Relationship Between Setup Times and Lead Times
Long Setup Times
Large Batch Sizes
Large Inventory
Longer Lead Times

17. Automotive Components Inc
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 minutes
Assembly 10
Testing 8
Total 24 minutes

18. 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.

19. How can we improve our lead time performance?

20. Solutions
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.

21. Emphasizing Product-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.

22. Emphasizing Employee Involvement
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.

23. Emphasizing Pull Manufacturing
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”).

24. Emphasizing 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.
MAKE IT RIGHT THE FIRST TIME!

25. 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.

26. Traditional Operations—Anderson Metal Fabricators
Administrative Offices:
Accounting
Sales
Customer Service
Technical Offices:
Design
Scheduling
Manufacturing
Maintenance and Tooling
Receiving and Raw Materials Inventory
Stamping
WIP
Forming
WIP
Punching
WIP
Finished
Goods
Inventory
Shipping
Department
Work in Process Areas

27. Just-in-Time Operations—AMF Administrative Offices:
Accounting
Sales
Customer Service
Technical Offices:
Design
Scheduling
Manufacturing
Receiving
Maintenance and Tooling
Small covers
Stamping
Shipping
Maintenance and Tooling
Medium covers
Stamping
Maintenance and Tooling
Large covers
Stamping
= Work in Process Areas
= Pull Kanban Signal

28. Just-in-Time Operations—AMF Administrative Offices:
Accounting
Sales
Customer Service
Technical Offices:
Design
Scheduling
Manufacturing
Receiving
Maintenance and Tooling
Small covers
Stamping
Medium covers
Large covers
= Work in Process Areas
= Pull Kanban Signal
Shipping
Punching
Forming

29. Accounting for Just-in-Time Operations
In a just-in-time operating environment, the accounting system will have the following characteristics:
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.

30. The transfer of costs as products move through the production process is termed backflush accounting.

31. Combined Transactions

32. Budgeted cell conversion cost rate
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 =
$2,400,000
1,920
= $1,250 per hour

33. Conversion cost per unit = 0.02 x $1,250
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

34. A separate materials account is not used.
Steel coil is purchased for producing 8,000 medium covers. The purchase cost was $120,000, or $15 per unit.
Raw and In Process Inventory 120,000
Accounts Payable 120,000
A separate materials account is not used.

35. 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
The Raw and In Process Inventory account is used to accumulate the applied conversion costs.

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

37. 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
7,800 x $70
Cost of Goods Sold 312,000
Finished Goods 312,000
7,800 x $40

38. Nonfinancial Performance Measurement
Just-in-time principle addressed by performance measures (% of respondents):
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

39. Typical Hospital Process Flow
Patient Admitted
Admitting Clerks Collect Patient Information

40. Typical Hospital Process Flow
Patient transported to Radiology
X ray made
Patient transported back to Nursing Unit
Patient Admitted
Tests Conducted

41. Typical Hospital Process Flow
Specimen transported to Lab
Tests performed
Results reported to Nursing Unit
Patient Admitted
Tests Conducted

42. Typical Hospital Process Flow
Drugs ordered
Order filled
Drugs sent back to Nursing Unit
Patient Admitted
Tests Conducted
Procedure Performed

43. Typical Hospital Process Flow
Patient Admitted
Tests Conducted
Procedure Performed
Patient Discharged

44. Just-in-Time Hospital Unit Layout
Patient Rooms
Chemistry Lab
Cross-trained Caregivers
Patient Rooms
X ray
Admitting Office

45. Costs of Quality Using Activity Analysis
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.

46. Costs of Quality Using Activity 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.

47. Quality Control Activity Analysis—Gifford Co.
Quality Cost
Quality Control Activities Activity Cost Classification
Design engineering $ 55,000
Disposal of rejected materials 160,000
Finished goods inspection 140,000
Materials inspection 70,000
Preventive maintenance 80,000
Processing returned materials 150,000
Disposing of scrap 195,000
Assessing vendor quality 45,000
Rework 380,000
Warranty work ,000
Total activity cost $1,500,000
Prevention
Internal Failure
Appraisal
External Failure

48. Pareto Chart of Quality Costs
$400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
Costs
Quality Control Activities
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
Activity Categories

49. Cost of Quality Report Cost Summary
Quality Cost Percent of Total Percent of Total
Classification Quality Cost Quality Cost Sales
Prevention $ 180, % 3.6%
Appraisal 210, % 4.2%
Internal failure 735, % 14.7%
External failure , % 7.5%
Total $1,500, % 30.0%

50. Indicate whether the item is value-added or nonvalue-added.
Quality Control Activities Activity Cost Classification
Design engineering $ 55,000
Disposal of rejected materials 160,000
Finished goods inspection 140,000
Materials inspection 70,000
Preventive maintenance 80,000
Processing returned materials 150,000
Disposing of scrap 195,000
Assessing vendor quality 45,000
Rework 380,000
Warranty work ,000
Total activity cost $1,500,000
Value-added
Nonvalue-added

51. What percentage is value-added and what percentage is nonvalue-added?
Design engineering $ 55,000
Disposal of rejected materials 160,000
Finished goods inspection 140,000
Materials inspection 70,000
Preventive maintenance 80,000
Processing returned materials 150,000
Disposing of scrap 195,000
Assessing vendor quality 45,000
Rework 380,000
Warranty work ,000
Total activity cost $1,500,000
Quality Control Activities Activity Cost Classification
Value-added
Nonvalue-added
Quality Cost
$390,000 ÷ $1,500,000 = 26%

52. What percentage is value-added and what percentage is nonvalue-added?
Design engineering $ 55,000
Disposal of rejected materials 160,000
Finished goods inspection 140,000
Materials inspection 70,000
Preventive maintenance 80,000
Processing returned materials 150,000
Disposing of scrap 195,000
Assessing vendor quality 45,000
Rework 380,000
Warranty work ,000
Total activity cost $1,500,000
Quality Control Activities Activity Cost Classification
Value-added
Nonvalue-added
Quality Cost
$1,110,000 ÷ $1,500,000 = 74%

53. Activity Analysis for Processes
Order Entered into a Computer System
Sales Order Submitted by Customer
Customer Credit Check

54. Activity Analysis for Processes
Order Picked from Warehouse
Order Shipped
Product Received by Customer

55. Activity Analysis for Processes
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%.

56. Activity Analysis for Processes
Activity Cost Prior to Improvement
Activity Cost After Improvement
Customer credit check $14,400 $ 3,600
Order entering 9,600 9,600
Order picking 36,000 23,400
Order shipping 20,000 20,000
$36,000 x 65%
Total sales order fulfillment $80,000 $56,600
Cost per shipped order $8.00 $5.66
Savings = $23,400

57. Chapter 26
The End