Cost Management for Just-in-Time Environments

1. Chapter 12 Cost Management for Just-in-Time Environments These slides should be viewed using the presentation mode (left click your mouse on the icon). Principles of Managerial Accounting 11e Student Version Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University Reeve Warren Duchac

2. Learning Objective 1 Describe just-in-time manufacturing practices.

3. LO 1 0 Reducing Inventory • 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.

4. LO 1 0 Reducing Lead Time • Lead time, sometimes called throughputtime, 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.

5. Value-Added Lead Time Total Lead Time Value-Added Ratio = LO 1 0 Reducing Lead Time • The value-added ratio is computed as follows:

6. Value-Added Lead Time Total Lead Time Value-Added Ratio = 45 minutes 120 minutes Value-Added Ratio = = 37.5% LO 1 Reducing Lead Time The material inExhibit 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:

7. LO 1 0 Reducing Setup Time • 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. LO 1 0 Emphasizing Product-Oriented Layout • If the manufacturing process is organized around a product, it is called aproduct-oriented layout(or product cells). • If the manufacturing process is organized around a process, it is called a process-oriented layout.

9. LO 1 Emphasizing Product-Oriented Layout • Just-in-time normally organizes manufacturing around products rather than processes. Organizing work around products reduces: • Moving materials and products between processes • Work in process inventory • Lead time • Production costs

10. LO 1 Emphasizing Employee Involvement • Employee involvementis a management approach that grants employees the responsibility and authority to make decisions about operations by: • Organizing employees into product cells. 2.Cross-trainingemployees to perform any operation within the product cell.

11. LO 1 0 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. LO 1 0 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).

13. LO 1 0 Emphasizing Supply Chain Management • Supply chain management coordinates and controls the flow of materials, services, information, and finances with suppliers, manufacturers, and customers.

14. LO 1 Emphasizing Supply Chain Management • 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. LO 1 Emphasizing Supply Chain Management • Enterprise resource planning (ERP) systems, which are used to plan and control internal and supply chain operations

16. 0 Learning Objective 2 Apply just-in-time practices to a non-manufacturing setting.

17. LO 2 0 JIT for Nonmanufacturing Processes (continued)

18. LO 2 JIT for Nonmanufacturing Processes

19. 0 Learning Objective 3 Describe the implications of just-in-time manufacturing on cost accounting and performance measurement.

20. LO 3 0 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.

21. LO 3 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.

22. LO 3 0 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 ofaccounting is termedbackflush accounting.

23. Budgeting Conversion Cost Planned Hours of Production Cell Conversion Cost Rate = $2,400,000 1,920 hours Cell Conversion Cost Rate = $1,250 per ton = LO 3 0 Combined Accounts 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:

24. Conversion Cost for Cover Manufacturing Time Cell Conversion Cost Rate = × 0.02 hours × $1,250 $25 per unit = = LO 3 0 Combined Accounts 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. LO 3 0 Combined Accounts • Steel coil is purchased for producing 8,000 metal covers. The purchase cost was $120,000, or $15 per unit. Raw and In Process Inventory 120,000 Accounts Payable 120,000 To record material purchases. A separate Raw Materials account is not used.

26. LO 3 0 Combined Accounts • Conversion costs are applied to 8,000 covers at a rate of $25 per cover. Raw and In Process Inventory 200,000 Conversion Costs 200,000 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. Materials ($15 x 8,000 units) $120,000 Conversion ($25 x 8,000 units) 200,000 Total $320,000 LO 3 0 Combined Accounts • All 8,000 covers were completed in the cell. Finished Goods Inventory 320,000 Raw and In Process Inventory 320,000 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.

28. LO 3 0 Combined Accounts • 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 To record sales. 7,800 × $70 Cost of Goods Sold 312,000 Finished Goods Inventory 312,000 To record cost of goods sold. 7,800 × $40

29. 0 Learning Objective 4 Describe and illustrate activity analysis for improving operations.

30. LO 4 0 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

31. LO 4 0 Cost of Quality • 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. LO 4 Cost of Quality • 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. LO 4 0 Cost of Quality • 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. LO 4 0 Pareto Chart of Quality Costs • 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. LO 4 0 Cost of Quality Report • A cost of quality report normally reports the: • Total activity cost for each quality cost classification • Percent of total quality costs associated with each classification • Percent of each quality cost classification to sales

36. LO 4 0 Value-Added Activity Analysis • 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. LO 4 Process Activity Analysis • A processis a series of activities that converts an input into an output. Common business processes include: • Procurement • Product development • Manufacturing • Distribution • Sales order fulfillment

38. Cost Management for Just-in-Time Environments The End