Management Accounting:
A Road of Discovery
Management Accounting:
A Road of Discovery
James T. Mackey
Michael F. Thomas
Presentations by:
Roderick S. Barclay
Texas A&M University - Commerce
James T. Mackey
California State University - Sacramento
© 2000 South-Western College Publishing
Chapter 13
Can’t we improve them all?
Business process
reengineering, just-in-time,
and the journey to
automation
Key Learning Objectives
1.Measure the opportunity costs
of unused capacity.
2.Explain business process
reengineering, just-in-time, and
why organizations are changing
to JIT.
3.Describe the role for
management accounting
information in JIT purchasing.
4.Calculate the cost of a product
made in a JIT cell.
5.Prepare a machine uptime
report and a continuous
improvement productivity ratio.
6.Discuss how JIT can improve
on-time delivery and complete
order filling.
Part I
The Journey to JIT:
The Toyota System
The Problem

At the end of WWII, Toyota had few assets but
wanted to make cars and trucks.
For example:
Japan
United States
Capital (Money)
Very little
Plentiful
Material
Expensive
Inexpensive
Labor
Skilled, motivated and cheap
Skilled and unionized
Markets
Poorly understood, foreign
Well understood,
domestic
Market size
Domestic small, foreign large
Domestic large


Toyota needed to sell in the large U.S. market to
raise capital.
Toyota’s low volumes couldn’t compete with the costs
of high-volume automobile companies.
Part II
Low Volume Production
Low Volume Production


Using specialized functional department to
lower costs through low cost labor and skills.
Review and analyze Exhibit 13-2, p. 471 for
an illustration of the different workflows
between a traditional system of functional
silos and a system comprised of cells.
Note:
Move – wait – setup – run – quality inspections – move – wait
NVA – NVA – NVA – VA –
NVA
– NVA – NVA
Part III
High Volume Transfer Lines —
Setups Only Once
Illustration

Drilling only one set of holes — Ford’s River Rouge
complex making Model T Fords — you can get any
color you want as long as it is black.
Problems


A production volume of 200,000 to 300,000
units allow specialized equipment to make a
narrow product line.
Toyota’s problem was to make low-volume
production, say 10,000 units, as efficient as
the high-volume production of U.S. domestic
automobile companies.
Part IV
Continuous Improvement
Management Using Just-In-Time
Production
and the Journey to Automation
JIT Continuous Improvement



The objective of JIT continuous improvement is keep
flexible production operating with the efficiency of
high-volume production.
The role of accounting is to provide performance
measures and cost information for this environment.
Workers are trained and empowered for continuous
improvement strategies to eliminate NVA activities.
Move




Move activities are reduced by Business Process
Reengineering (BPR) from functional units into
product-line, or component-based cells.
Cells bring machines closely together to minimize
move time.
Workers are cross trained to accomplish many tasks.
Review Exhibit 13-3, p. 472, to view an illustration of
JIT cells using Kanban Containers.
Wait


Wait activities are reduced by moving from a ‘push’
to a ‘pull’ manufacturing strategy.
 Traditional manufacturing ‘pushes’ orders into the
factory according to the production schedule. WIP
piles up in front of constraints increasing wait
time. The more time in the production cycle, the
greater the costs.
 ‘Pull’ manufacturing only releases orders when the
customer demands the product. WIP does not pile
up. Wait time is reduced.
Performance measures: Decreasing time in the cell,
decreasing WIP inventories.
Setup



Setup activities are reduced by improving the setup
efficiency and decreasing the number of setups
needed by reducing product variety.
Reengineer JIT cells to make a limited range of
components or products.
Performance measures: decreasing setups,
decreasing setup time, decreasing product variety.
Quality Control







Quality control activities can be eliminated through
Total Quality Management (TQM).
When using traditional scientific management, extra
inventories are needed to insure the correct quantities
are produced despite quality failures.
The costs of eliminating all defects are not assumed to
be justified by the benefits.
Quality inspections are necessary to detect these
defects.
This increases manufacturing time and quality
conformance costs.
TQM reduces the need for inventories and quality
inspections.
Performance measures: decreasing quality inspections,
defects, nonconformance costs, manufacturing time in
the cell. And WIP inventories.
Extend



Extend the JIT cells throughout the
production system and into suppliers with JIT
purchasing.
Make customers and vendors strategic
partners.
Due to long-term contracts, vendor
efficiencies become our efficiencies.
JIT, Management Accounting, and
Continuous Improvement - Purchasing
Value chain
process
How JIT can help
How management accounting
helps
Purchasing
1. Certified vendors
1. Strategic measures during
early JIT life cycle
2. Guaranteed material
development (on time deliver,
quality
complete order filling, vendor
3. Guaranteed material
performance index)
prices
nd
2.
Problem
costing
with
2
4. Kanban containergeneration ABC cost variances
sized JIT deliveries to
minimize inventories
5. EDI ordering,
shipping, and payment
Computer-Integrate Manufacturing (CIM)
Cells

Review and understand Exhibit 13-7, p. 480.
The exhibit illustrates the makeup of a CIM
cell and the components of those cells.
Value Chain Process Activities for JIT
Purchasing




Use only a few certified suppliers.
Orders, deliveries, and payments are mde
under long-term contracts.
Materials arrive JIT and are delivered
directly to manufacturing cells.
Supplier are paid periodically and
automatically.
Finally

Maximize product value by Quality Function
Deployment strategies, customer focused
management, concurrent design, target
costing, and Kanban management.
JIT’s Strategic Planning Matrix








Vision Statement — Combine the economies of low-variety,
high-volume production with the benefits of diversified product
lines.
Reengineer for high quality — TQM and continuous improvement
Reengineer to eliminate nonvalue-added activities — Short leadtime, Flexibility, Simplicity
Cellular operations — Short lead time, Flexibility, Simplicity
Eliminate inventories (pull manufacturing) — Short lead time,
Flexibility, Simplicity
Minimize setup time — Short lead time, Flexibility, Simplicity
Cross-train workers — Short lead time Flexibility, TQM and
continuous improvement
Certified vendors — Short lead time, Flexibility, Simplicity
Process Characteristics Comparison
Traditional systems
 Functional departments
performing a single activity on
all products using single-skilled
workers.
 Each department works at its
own pace, maximizes output,
and pushes it into WIP, creating
large inventories to buffer
against uncoordinated
production.
 Acceptable levels of scrap,
rework, and rejects (another
reason for large inventories).
JIT systems
 Cells performing multiple
activities on a single product
using multi-skilled cross-trained
workers.
 Production is pulled through the
cells with kanbans to coordinate
cells and minimize WIP.

Commitment to TQM, elimination
of scrap and rework (nonvalueadded activities), and no rejects.
More Process Characteristics Comparison
Traditional systems
 Uncommitted workers, not
involved in continuous
improvement, with formal
worker manager hierarchy.
 Large inventories and
uncoordinated production
results in long lead times (too
much moving, storage, waiting,
and inspection.
 Infrequent purchases in large
lots from many suppliers to
minimize purchase price.
JIT systems
 Empowered employees involved
and rewarded for continuous
improvement and performing
many management activities.
 Cellular manufacturing, short
setup times, and nonvalue-added
activity elimination to minimize
lead time.

Frequent (hourly or daily) JIT
deliveries from a few certified
vendors using long-term
contracts.
JIT, Management Accounting, and
Continuous Improvement - Production
Value chain
process
How JIT can help
How management accounting
helps
Production
1. Reengineer to eliminate
nonvalue-added
activities through
cellular design
2. Reengineer for higher
quality by training cell
workers for quality
control
3. Kanban scheduling to
minimize WIP
4. Minimize setup time
5. Employee
empowerment and
training for multiple
jobs
1. Lead time and LTE ratios
2. TQM information (defect
rates, setup time, quality cost
variances)
3. Kaizen standards for target
costing achievement and
continuous improvement
measurement
4. Machine uptime ratio and CI
productivity ratio
JIT, Management Accounting, and
Continuous Improvement - Delivery
Value chain
process
How JIT can help
How management accounting
helps
Delivery
1. EDI ordering, shipping,
and payment
2. Minimize inventories to
difference between
customer lead time and
our lead time.
1. Customer performance
measures, on-time deliver,
complete order filling
Part V
Use Kanban Management for
Continuous Improvement
Kanban Concepts




Kanbans are like soda pop containers that only hold a
specified number of WIP units between each activity.
The number of units are reduced until one machine
activity is idled. This machine becomes the focus for
the next improvement. It is a ‘treasure’. We have
found the constraint to improving the productivity of
the cell.
Units are added back to the Kanban so that
production may continue while the source of the
failure is improved.
As the need for Kanbans decline, the system
approaches automation.
Part VI
Creating Value —
Quality, Delivery and Cost
How to Create Value
Critical Success
/Failure Factors
Quality
Service (Delivery)
Cost
Strategies
Methods
Quality of Design
Customer focus, Snake
charts, Concurrent design
Quality of Conformance
Total Quality Management
Just In Time
Pull manufacturing
Strategic Partnering
Management Accounting
Operational Control
What do we want workers to do?
“What gets measured gets done”
Performance Measures — Quality

Quality Conformance Performance



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Customer complaints
Customer surveys
Warranty claims
Cost of quality reports
Materials Cost/Scrap Control Performance


Scrap rates
Quality rates.
Performance Measures — Service
Service and Delivery Performance


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On-time delivery
setup time
production backlog
lead time
cycle time
waste time
turnover rates by product
cycle count accuracy


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Space reduction
Number of inventoried
items
Inventory turnover rates
Machine availability/
downtime
Machine maintenance
Capacity utilization
Performance Measures — Cost




More accurate costs
Backflush costing
Time-based costing
Unused capacity costs
Machine Uptime Reports
M ach in e u p tim e ratio
100%
50%
0%
M on day
Wedn esday
F rid a y
CI Productivity Ratio for the Truss Cell
rStandard cost allowed from
improvements
Labor cost budgeted for
learning new skills
= r Standard cost x Units produced
= $4 per truss x 50 trusses this month
= $200
= 0.85 hrs/day x $10 /hr x 3 people x 20
days this month
= $510
Continuous improvement = rStandard cost allowed from improvements
productivity ratio
Cost for continuous improvements
= $200
$510
= 39%
Part VII
Management Accounting Issues
Reengineering to JIT Cells

Causes indirect costs to become direct costs.



Previous overhead activities are not done in the
cells, including setups, moves, maintenance and
quality inspections.
Under ABC, we grouped overhead costs into cost
pools with similar activity drivers. When the same
plant is converted into a JIT layout, the number of
cost pools will decline.
As we convert to JIT there are more direct costs.
More direct costs and fewer indirect reduces the
chances of costing errors. Thus costs are
becoming more accurate.
More Causes




Variable cost direct labor now becomes a
fixed cost.
With worker empowerment, continuous
improvement and cross training, the training
costs invested in each worker increase.
Workers no longer do one simple task that
can be learned quickly by anyone ‘off the
street’.
Review Exhibit 13-2, p. 471 for a
comprehensive illustration of these concepts.
Part VIII
Costing Systems for JIT —
Backflush Costing
Backflush Costing

Backflush costing is often used to assign costs in JIT
systems.




Only two accounts are necessary — Conversion costs
and Transfer-In costs.
Trigger points, where units are transferred between
cost centers, mark boundaries of level JIT
production.
Level inventories within cells means beginning and
ending inventories are equal.
Therefore all current costs may be assigned to
current production.
A Comprehensive Example


Consider an example of backflush costing for the
assembly of computer terminals.
When originally engineered, it was separated into
two sequential cells (A & B). They were separated by
a surge rack to store WIP. This buffer was required
because the two cells were initially unstable.
Cost Calculation for cell A



Conversion costs are the direct labor cost plus all the
overhead and cell costs incurred.
Backflush costing simply divides the units finished
into the conversion costs for the cell and adds the
cost of materials.
One hundred units were started and completed.
 Level production exists throughout the
measurement period.
 No reductions in inventories were made this
period.
 The WIP in cell A at the end of the month equals
the beginning inventory.
Current Period Costs for Cell A
Components
$10 per unit x 100 units
$1,000
Conversion costs:
Cell labor
$10 per hour x 200 hours
2,000
Overhead
$15 per hour x 200 hours
3,000
Total costs
Cost per unit = $6,000 / 100 units = $60.00 per unit
$6,000
Current Period Costs for Cell B




Operating under the same conditions, 80 units were
started and finished in cell B.
No additional parts or materials are added.
The conversion costs for this time period are $4,500.
What is the cost assigned to each unit finished in cell
B?
Cost per unit = conversion costs from cell B + costs from cell A
= $4,500 / 80 + $60.00 = $116.25
Standard Homes Truss Cell Budget
Activities
Resources
Unit level:
Direct materials
Amounts
$53.00 per truss
Direct technology
Total unit-level costs
2.00 per truss
$55.00 per truss
Costs incurred in cell
(No Batch Level Costs)
Cell level:
Cell labor
Allocated product line
None
Allocated facilities
Supervision, administration
$62,400 per year
0
500 per year
Building
1,100 per year
Total cell costs
$64,000 per year
 Production forecast

Standard truss cell cost
$80.00 per truss
Standard absorptive truss cost
800 per year
$135.00 per truss
Part IX
Time-Based Costing Systems
Combining Control & Cost
Time-Based Performance Measures

Notice from Section IV how often time-based
performance measures were useful.



Time-based measures correlate with value
creation and provide direction to shop floor
management on how to create value
The most effective measures of value should
include quality, delivery, and the cost of each
activity.
Combining time and cost assignment captures
many of the value creating characteristics.
Cell Time


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
Time-in-the-cell directly determines capacity.
The less time per product, the more products.
Reducing time-in-the-cell creates capacity for
increased production.
Using time to assign cell costs is more accurate when
cells produce a variety of products.
The costs are divided by the uptime to estimate a
cost per unit of time.
This method encourages reduction in cell
manufacturing cycle time for continuous
improvement.
An Illustration: Time-Based Cell Costs

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Board Maker Laser systems has a general purpose JIT
cell for mounting components on computer
motherboards. Currently the make two types of board —
large and small.
Last week the cell manufactured 100 small boards in
1,000 minutes and 50 large boards in 750 minutes.
The cell has an 80% uptime rating and $10,000 in
conversion costs.
For a 40-hour week the time equals (40 hours x 60
minutes x .8 uptime ratio) 1.920 minutes.
The charge per minute is $10,000 / 1.920 minutes or
approximately $5.208 per minute.
Uncharged and unused capacity is 170 minutes.
Time-Based Cell Costs — Page 2
The costs assigned to each unit using the time-in-the-cell method are
calculated as follows:
Costs
Conversion costs – 10 min
15 min
Materials
Cost per unit
Large Boards
Small Boards
$52.08
$ 78.12
50.00
25.00
$128.12
$77.08
Review, study, and analyze Exhibit 13-19 and Exhibit 13-20,
both on p. 497. These exhibits provide a thorough
computational analysis of the cost structure for cell
manufacturing.
Part X
The Opportunity Cost of Unused
Capacity
Unused Capacity




The problem — as continuous improvement
continues, excess capacity is created. However, this
increased capacity is not always obvious and the
benefits of this new capacity may not be realized.
The solution — is the creation of an unused capacity
measure of the opportunity value of the ‘created’
capacity. We use the value of the best alternative use
of this new capacity.
We should only use this measure to encourage the
use of the capacity gains from continuous
improvement.
Review Exhibit 13-1, p. 468, for a quantitative
illustration of these concepts.