M11
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PowerPoint Presentation by
Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2005 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.

Once you have completed this chapter, you should be able to:
Objective 1
Explain the difference between strategic and operational decisions and how accounting information supports these decisions.
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The New Competitive Environment
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The Japanese automobile industry generally is given credit for developing the concept of a lean enterprise.

The New Competitive Environment
Tuff Cut manufactures rotary mowers used for industrial and agricultural purposes. The firm has enjoyed consistent growth and loyal customers for 40 years because of its highquality product.
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The New Competitive Environment
In recent years, some of
Tuff Cut’s market share has been eroded by competing products manufactured in the United States and abroad. Thus, managers at
Tuff Cut are looking for ways to become more competitive in terms of price, quality, and delivery.
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The New Competitive Environment
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Strategic Changes in the Way to
Manage an Organization
 Strategic decisions include decisions about the types of products a company should manufacture and how these products should be distributed.

The New Competitive Environment
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Strategic Changes in the Way to
Manage an Organization
 Operational decisions focus on day-to-day activities of the organization, but are linked directly to strategic objectives.

Exhibit 1 The Manufacturing Process at Tuff Cut
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Once you have completed this chapter, you should be able to:
Objective 2
Explain the philosophy of total quality management (TQM) and how a modern cost management system can be used to support the philosophy.
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Total Quality Management
Total quality management
(TQM) is a management system that seeks continual improvement by asking everyone in an organization to understand, meet, and exceed the needs of customers.
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Exhibit 2
Elements of TQM
Who are the customers?
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Exhibit 2
Elements of TQM
What are the needs of our customers?
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Exhibit 2
Elements of TQM
How can our products/ services satisfy their needs?
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Exhibit 2
Elements of TQM
Which processes are crucial to meeting their needs?
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Exhibit 2
Elements of TQM
How do we ensure that our processes are satisfactory?
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Elements of TQM
--------------------
A
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A
B+
A
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B+
A
A
A
A
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Which performance measures ensure high quality processes?
Exhibit 2
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Once you have completed this chapter, you should be able to:
Objective 3
Describe the just-in-time (JIT) manufacturing philosophy and evaluate its strengths and weaknesses from financial and operating perspectives.
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Principles of Just-in-Time
Manufacturing (JIT)
Just-in-time manufacturing is a production system that pulls products through the manufacturing process on the basis of market demand.
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Principles of Just-in-Time
Manufacturing (JIT)

Inventory is pulled through the system based on market demand.

Small inventories of raw materials and finished goods are maintained.

The use of high-quality raw materials is critical to success.

Setup time of machines is minimized to allow for production in small batches.
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Principles of Just-in-Time
Manufacturing (JIT)
1. Sawing
The Push System–Exhibit 3A
Work in
Process
Inventory
2. Painting
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Goods are pushed through the plant based on forecast of market demand.

Principles of Just-in-Time
Manufacturing (JIT)
The Push System–Exhibit 3A
2. Painting
Work in
Process
Inventory
3. Assembly
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Principles of Just-in-Time
Manufacturing (JIT)
3. Assembly
The Push System–Exhibit 3A
Finished
Goods
Inventory
Sell to
Customer
Customer
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Principles of Just-in-Time
Manufacturing (JIT)
The Pull System–Exhibit 3B
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Principles of Just-in-Time
Manufacturing (JIT)
The Pull System–Exhibit 3B
2. Assembly
Signal:
Assemble product
1. Customer places order
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Principles of Just-in-Time
Manufacturing (JIT)
The Pull System–Exhibit 3B
3. Painting
Signal:
Paint more components
2. Assembly
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Principles of Just-in-Time
Manufacturing (JIT)
The Pull System–Exhibit 3B
4. Sawing
Signal:
Cut more components
3. Painting
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Principles of Just-in-Time
Manufacturing (JIT)
The Pull System–Exhibit 3B
Vendor 4. Sawing
Signal :
Order more materials from vendor
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Principles of Just-in-Time
Manufacturing (JIT)
Vendor
The Pull System–Exhibit 3B
4. Sawing
Work in
Process
Inventory
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Principles of Just-in-Time
Manufacturing (JIT)
Work in
Process
Inventory
The Pull System–Exhibit 3B
3. Painting
Work in
Process
Inventory
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Work in
Process
Inventory
Principles of Just-in-Time
Manufacturing (JIT)
The Pull System–Exhibit 3B
2. Assembly 1. Customer
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Exhibit 4
Workcenter Processing Times with the Tuf Cut Plant
Fabrication:
20 units per hour;
3 minutes per unit
Welding:
10 units per hour;
6 minutes per unit
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Painting:
30 units per hour;
2 minutes per unit
Assembly:
25 units per hour;
2.4 minutes per unit

Nonfinancial Performance
Measures
Cycle time is the total time required to move a unit from raw materials inventory to finished goods inventory.
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Nonfinancial Performance
Measures
Processing time is the number of minutes in which value is added to raw materials.
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Nonfinancial Performance
Measures
Wait time is the time a unit spends waiting to be processed.
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Nonfinancial Performance
Measures
Wait time makes up the major portion of the cycle time required to move a unit of product through the plant.
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Nonfinancial Performance
Measures
Production rate is the number of units a manufacturing system is capable of producing in a given time period.
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Nonfinancial Performance
Measures
Processes that work at slow production rates and restrict the flow of goods or services are termed bottlenecks.
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Nonfinancial Performance
Measures
Throughput represents the number of units completed by a process.
480
8 hours per shift x 60 minutes per hour = available minutes per shift
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Nonfinancial Performance
Measures
Throughput represents the number of units completed by a process.
Production = One unit every six minutes
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Nonfinancial Performance
Measures
Throughput represents the number of units completed by a process.
Throughput = 480 x 1/6 = 80 units per eight-hour shift
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Once you have completed this chapter, you should be able to:
Objective 4
Explain how a traditional “processoriented” plant layout differs from a
“product-oriented” plant layout, and describe the financial consequences of each layout.
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Exhibit 5
Traditional “Process-Oriented” Plant Layout
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Product-Oriented Plant Layout
Process-oriented plant layouts typically are arranged according to machine function, with machines that perform similar functions placed together.
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Product-Oriented Plant Layout
Process-oriented plant layout is based on manufacturing cells that meet the production requirements of products or product families.
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Exhibit 6
Cellular
“Product-
Oriented” Plant
Layout
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Product-Oriented Plant Layout
A manufacturing cell is a group of related machines, typically arranged in the shape of a U.
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Financial Benefits From JIT
 Reduced inventory levels result in lower carrying costs.
 Fast setup times contribute to short manufacturing cycle times.
 Responsive factories often gain a competitive advantage that translates into increased sales.
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Financial Benefits From JIT
Tuff Cut– Before Changing to JIT
Annual sales
Variable manufacturing expenses (40% of sales) $37,200,000
$93,000,000
Fixed manufacturing costs 28,000,000
Fixed general and administrative costs 11,000,000 76,200,000
Operating Income $16,800,000
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Financial Benefits From JIT
Tuff Cut– Before Changing to JIT
ROA =
Profit Margin Asset Turnover
$16,800,000
$93,000,000 x
$93,000,000
$139,500,000
ROA = 0.18 x 0.67
ROA = 0.12
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Financial Benefits From JIT
Tuff Cut– After Changing to JIT
Annual sales
Variable manufacturing expenses (38.5% of sales) $39,385,500
$102,300,000
Fixed manufacturing costs 27,000,000
Fixed general and administrative costs 10,000,000 76,385,500
Operating Income $25,914,500
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Financial Benefits From JIT
Tuff Cut– After Changing to JIT
ROA =
Profit Margin Asset Turnover
$25,914,500
$102,300,000 x
$102,300,000
$138,105,000
ROA = 0.25 x 0.74
ROA = 0.19
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Drawbacks to the JIT
Manufacturing Philosophy
 Reducing inventory to a JIT level could cause closure in case of a strike by a supplier or a part of the company’s assembly plant.
 The cost savings from reducing inventories might be offset by increased delivery costs.
 JIT typically increases the number of batches and machine setups.
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Once you have completed this chapter, you should be able to:
Objective 5
Identify the primary components of the theory of constraints.
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The Theory of Constraints
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Bottlenecks result from the processing speed of a machine or production area being less than that of other machines or production areas.

The Theory of Constraints
The theory of constraints states that by identifying a constraint, such as a bottleneck, that exists in the processing of a good or service and taking corrective steps, the process will be improved.
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The Theory of Constraints
Recommended steps for process improvement:
Step 1: Attack a bottleneck by identifying the system’s constraints.
Step 2: Decide how to make the best use of the constraint.
Step 3: Subordinate all other decisions to those made in step 2.
Step 4: Improve the performance of the constraint.
Step 5: If a constraint has been broken, but a different bottleneck has been created, go back to step
1 and start over.
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Exhibit 7
Revised Workcenter Processing Times within the Tuff Cut Plant
Fabrication:
20 units per hour;
3 minutes per unit
Welding:
25 units per hour;
2.4 minutes per unit
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Painting:
30 units per hour;
2 minutes per unit
Assembly:
25 units per hour;
2.4 minutes per unit

Bottleneck Identification
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Exhibit 9
Continued

Bottleneck Identification
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Exhibit 9

Just-in-Time and Theory of
Constraint Similarities and
Differences
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The theory of constraints
True… Just-in-time
The theory of constraints emphasizes external practices.
environment workers are never idle.
considerations.
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Once you have completed this chapter, you should be able to:
Objective 6
Explain how new manufacturing environment concepts apply to service organizations.
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Service Organizations in a
Global Business Environment
The manufacturing environment concepts already discussed in this chapter are directly applicable to companies that deliver services.
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Service Organizations in a
Global Business Environment
Understanding administrative processes permits managers in various service industries to deliver value to their customers.
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