Chapter 26
Cost Management for
Just-in-Time Environments
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Objectives
1. Compare and contrast just-in-time (JIT)
Afterpractices
studying this
manufacturing
with traditional
chapter,
you should
manufacturing
practices.
be able
to:
2. Apply just-in-time
manufacturing
practices to a traditional manufacturing
illustration.
3. Describe the implications of a just-intime manufacturing philosophy on cost
accounting and performance
measurement systems.
Objectives
4. Apply just-in-time practices to a
nonmanufacturing setting.
5. Describe and illustrate activity analysis
for improving operations.
What is Just-in-Time?
JIT is a business philosophy that
focuses on reducing time and cost
and eliminating poor quality within
manufacturing and nonmanufacturing processes.
Sometimes called short-cycle or
lean manufacturing.
Just-in-Time Principles
Just-in-Time Manufacturing
Reduces inventory.
Reduces lead time.
Reduces setup time.
Emphasizes productoriented layout
Emphasizes team-oriented
employee involvement.
Traditional Manufacturing
Increases inventory to protect
against process problems.
Increases lead time as a buffer
against uncertainty.
Disregards setup time as an
improvement priority.
Emphasizes process-oriented
layout.
Emphasizes work of
individuals following manager
instructions.
Continued
Just-in-Time Principles
Just-in-Time Manufacturing
Traditional Manufacturing
Emphasizes pull
manufacturing.
Emphasizes zero defects.
Emphasizes push
manufacturing.
Tolerates defects.
Emphasizes supplier
partners.
Treats suppliers as “arm’slength,” independent entities.
8
Reducing Inventory
Assume the
river is
inventory.
As long as the river (the inventory)
covers the rocks, the (production)
problems are hidden.
9
Reducing Inventory
If the river (inventory) is reduced,
the problems are exposed.
Poor
quality
Machine
breakdowns
Unreliable
suppliers
Untrained
employees
Reducing Lead Time
Lead time, sometimes called
throughput time, is a measure of the
time that elapses between starting a
unit of product…
Reducing Lead Time
…into the beginning of a
process and completing
the unit of product.
Reducing Lead Time
Value-added lead time is
the time required to
actually manufacture a
unit of a product.
Reducing Lead Time
Nonvalue-added lead time is the
time that a unit of product sits in
inventories or moves
unnecessarily.
Components of
Lead Time
Start of production
for a single item
Conversion Time
Value-added
Wait Time
End of production
for a single item
Move Time
Down Time
Nonvalue-added
Total Lead Time
Reducing Setup Time
A setup is the effort
required to prepare
an operation for a
new production run.
Relationship Between Setup
Times and Lead Times
Long
Setup
Times
Large
Batch
Sizes
Longer Lead Times
Large
Inventor
y
Automotive Components Inc.
manufactures a batch of 40 engine
starters through three processing.
Each unit in the batch requires the
following processing time:
Machining
Assembly
Testing
Total
6 minutes
10
8
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 nonvalueadded waiting and moving.
How can we
improve our lead
time performance?
Solutions
1. Reduce setups so that the batch size
could be reduced to one piece (onepiece flow).
2. Move the processes closer to each
other so that the move time is
eliminated.
Emphasizing ProductOriented Layout
Organizing work around the
products is called a
product-oriented layout (or
product cells), while
organizing around
processes is called processoriented layout.
Emphasizing Employee
Involvement
Employee involvement uses
teams organized in product
cells, rather than just
Suchefforts
employee teams
of isolated individuals.
can be cross-trained to
perform any operation
within the product cell.
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”).
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!
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 Operations—Anderson Metal Fabricators
Administrative Offices:
Accounting
Sales
Customer Service
Receiving and
Raw Materials
Inventory
Shipping
Department
Technical Offices:
Design
Scheduling
Manufacturing
Maintenance
and Tooling
Stamping
WIP
Finished
Goods
Inventory
Work in Process Areas
Forming
WIP
Punching
WIP
Just-in-Time Operations—AMF
Administrative Offices:
Accounting
Sales
Customer Service
Technical Offices:
Design
Scheduling
Manufacturing
Stamping
Small covers
Maintenance and Tooling
Medium covers
Maintenance and Tooling
Stamping
Large covers
= Work in Process Areas
Maintenance and Tooling
= Pull Kanban Signal
Shipping
Receiving
Stamping
Just-in-Time Operations—AMF
Technical Offices:
Design
Scheduling
Manufacturing
Administrative Offices:
Accounting
Sales
Customer Service
Stamping
Punching
Maintenance and Tooling
Small covers
Punching
Maintenance and Tooling
Medium covers
Stamping
Forming
Punching
Large covers
= Work in Process Areas
Forming
Maintenance and Tooling
= Pull Kanban Signal
Shipping
Receiving
Stamping
Forming
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.
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.
Budgeted cell
conversion =
cost rate
$2,400,000
1,920
= $1,250 per hour
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
8,000 medium covers. The purchase
cost was $120,000, or $15 per unit.
Raw and In Process Inventory
Accounts Payable
A separate
materials account
is not used.
120,000
120,000
Conversion costs are applied to 8,000
medium covers at a rate of $25 per cover.
Raw and In Process Inventory
Conversion Costs
The Raw and In Process
Inventory account is used
to accumulate the applied
conversion costs.
200,000
200,000
All 8,000 medium covers were completed
in the cell. The cost is $40 per unit
(materials, $15; conversion costs, $25).
Finished Goods Inventory
Raw and In Process Inventory
This is a backflush
transaction.
320,000
320,000
Of the 8,000 units completed, 7,800 were sold
and shipped to customers at $70 per unit.
Accounts Receivable
Sales
546,000
Cost of Goods Sold
Finished Goods
312,000
546,000
312,000
7,800 x $70
7,800 x $40
Nonfinancial Performance
Measurement








Just-in-time principle addressed by
performance measures (% of respondents):
Inventory turnover
On-time delivery rates
Production lead time
Quality yield
Throughput
Time required for setups
Space utilized
Extent of cross-training or new skills obtained
82%
41
35
32
32
26
12
8
Typical Hospital Process Flow
Patient
Admitted
Admitting Clerks
Collect Patient
Information
Typical Hospital Process Flow
Patient transported to Radiology
X ray made
Patient transported back to Nursing Unit
Patient
Admitted
Tests
Conducted
Typical Hospital Process Flow
Specimen transported to Lab
Tests performed
Results reported to Nursing Unit
Patient
Admitted
Tests
Conducted
Typical Hospital Process Flow
Drugs ordered
Order filled
Drugs sent back to Nursing Unit
Patient
Admitted
Tests
Conducted
Procedure
Performed
Typical Hospital Process Flow
Patient
Admitted
Tests
Conducted
Procedure
Performed
Patient
Discharged
Just-in-Time Hospital Unit Layout
Chemistry
Lab
Patient Rooms
Cross-trained Caregivers
Patient Rooms
X ray
Admitting
Office
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.
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.
Quality Control Activity Analysis—Gifford Co.
Quality Control Activities
Design engineering
Disposal of rejected materials
Finished goods inspection
Materials inspection
Preventive maintenance
Processing returned materials
Disposing of scrap
Assessing vendor quality
Rework
Warranty work
Total activity cost
Activity Cost
$ 55,000
160,000
140,000
70,000
80,000
150,000
195,000
45,000
380,000
225,000
$1,500,000
Quality Cost
Classification
Prevention
Internal Failure
Appraisal
Appraisal
Prevention
External Failure
Internal Failure
Prevention
Internal Failure
External Failure
Pareto Chart of Quality Costs
Costs
$400,000
Quality Control Activities
Rework
350,000
Warranty work
300,000
Disposing of scrap
250,000
Disposal of rejected materials
Processing returned materials
200,000
Finished goods inspection
150,000
Preventive maintenance
100,000
Materials inspection
50,000
Design engineering
Assessing vendor quality
0
Activity Categories
Cost of Quality Report
Cost Summary
Quality Cost
Percent of Total Percent of Total
Classification Quality Cost Quality Cost
Sales
Prevention
$ 180,000
Appraisal
210,000
Internal failure
735,000
External failure
375,000
Total
$1,500,000
12.00%
14.00%
49.00%
25.00%
100.00%
3.6%
4.2%
14.7%
7.5%
30.0%
Indicate whether the item is valueadded or nonvalue-added.
Quality Control Activities
Design engineering
Disposal of rejected materials
Finished goods inspection
Materials inspection
Preventive maintenance
Processing returned materials
Disposing of scrap
Assessing vendor quality
Rework
Warranty work
Total activity cost
Activity Cost
$ 55,000
160,000
140,000
70,000
80,000
150,000
195,000
45,000
380,000
225,000
$1,500,000
Classification
Value-added
Nonvalue-added
Value-added
Value-added
Value-added
Nonvalue-added
Nonvalue-added
Value-added
Nonvalue-added
Nonvalue-added
What percentage is value-added and
what percentage is nonvalue-added?
Quality Control Activities
Design engineering
Disposal of rejected materials
Finished goods inspection
Materials inspection
Preventive maintenance
Processing returned materials
Disposing of scrap
Assessing vendor quality
Rework
Warranty work
Total activity cost
Activity Cost
$ 55,000
160,000
140,000
70,000
80,000
150,000
195,000
45,000
380,000
225,000
$1,500,000
Quality Cost
Classification
Value-added
Nonvalue-added
Value-added
Value-added
Value-added
Nonvalue-added
Nonvalue-added
Value-added
Nonvalue-added
Nonvalue-added
$390,000 ÷ $1,500,000 = 26%
What percentage is value-added and
what percentage is nonvalue-added?
Quality Control Activities
Design engineering
Disposal of rejected materials
Finished goods inspection
Materials inspection
Preventive maintenance
Processing returned materials
Disposing of scrap
Assessing vendor quality
Rework
Warranty work
Total activity cost
Activity Cost
$ 55,000
160,000
140,000
70,000
80,000
150,000
195,000
45,000
380,000
225,000
$1,500,000
Quality Cost
Classification
Value-added
Nonvalue-added
Value-added
Value-added
Value-added
Nonvalue-added
Nonvalue-added
Value-added
Nonvalue-added
Nonvalue-added
$1,110,000 ÷ $1,500,000 = 74%
Activity Analysis for Processes
Sales
Order
Submitted
by
Customer
Customer
Credit
Check
Order
Entered
into a
Computer
System
Activity Analysis for Processes
Order
Picked
from
Warehouse
Order
Shipped
Product
Received
by
Customer
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%.
Activity Analysis
for Processes
Activity Cost Activity Cost
Prior to
After
Improvement Improvement
Customer credit check
Order entering
Order picking
Order shipping
$14,400
9,600
36,000
20,000
$ 3,600
9,600
23,400
20,000
Total sales order fulfillment
$80,000
$56,600
$36,000 x
Cost per shipped order
$8.00
Savings = $23,400
65%
$5.66
Chapter 26
The End