variable costing for management · pdf fileprepared by: c. douglas cloud professor emeritus of...

Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting

Pepperdine University

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as

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1

Chapter 27

Cost Management for Just-in-Time

Environments



Learning Objectives

1. Describe just-in-time manufacturing

practices.

2. Apply just-in-time practices to a

nonmanufacturing setting.

3. Describe the implications of just-in-time

manufacturing on cost accounting and

performance measurement.

4. Describe and illustrate activity analysis for

improving operations.



Learning Objective 1

Describe just-in-

time manufacturing

practices.



Just-in-time processing (JIT), sometimes

called lean manufacturing, is a philosophy

that focuses on reducing time and cost and

eliminating poor quality.

Just-in-Time Practices

LO 1

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Just-in-Time Practices

LO 1




Just-in-time (JIT) manufacturing views

inventory as wasteful and unnecessary. As

a result, JIT emphasizes reducing or

eliminating inventory.

Under traditional manufacturing, inventory

often hides underlying production

problems.

JIT manufacturing attempts to solve and

remove production problems.

LO 1

Reducing Inventory




LO 1

Reducing Inventory



Reducing Lead Time

Lead time, sometimes called throughput

time, 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 to enter,

or being moved to, the next production process

LO 1




Reducing Lead Time

LO 1




LO 1

Reducing Lead Time

The value-added ratio is computed as

follows:

Value-Added Ratio = Value-Added Lead Time

Total Lead Time




LO 1

Reducing Lead Time

5

min.

35

min.

10

min.

55

min.

10

min.

5

min.

120 minutes click only

once




LO 1

Reducing Lead Time

The material in Exhibit 2 (previous slide) 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:


Total Lead Time

Value-Added Ratio = 45 minutes

120 minutes = 37.5%



Reducing Setup Time

LO 1

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 (next slide) shows the relationship between setup times and lead time.




Reducing Setup Time

LO 1




Reducing Setup Time

LO 1

A product can be manufactured in Process X or

Process Y as follows:



Reducing Setup Time

LO 1

(continued)




Reducing Setup Time

LO 1



Reducing Setup Time

LO 1

The lead time for Process Y is longer because

each unit has to wait its ―turn‖ while other units

in the batch are processed. It takes a unit five

minutes for each operation—four minutes

waiting and one minute in production.

The wait time is called within-batch wait time.

The total within-batch wait time is calculated as

follows:

Total Within-Batch Wait Time = (Total Time to Perform

Operations) x (Batch Size – 1)

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Reducing Setup Time

LO 1

The total within-batch wait time for Process Y is

12 minutes, as computed below.

Total Within-Batch Wait Time = (Total Time to Perform

Operations) x (Batch Size – 1)

Total Within-Batch Wait Time = (1 +1 + 1) minutes x (5 – 1)

Total Within-Batch Wait Time = 12 minutes



Reducing Setup Time

LO 1

The value-added ratio for Process Y is 20%, as

computed below.


Total Lead Time

Value-Added Ratio = 3 minutes

15 minutes = 20%



Reducing Setup Time

LO 1

Automotive Components Inc. manufactures

engine starters as follows:

(continued)



Reducing Setup Time

LO 1

The total within-batch wait time is 936 minutes,

as computed below:

The total lead time is 985 minutes, as computed

below:



Reducing Setup Time

LO 1

Based on the data in the preceding slides, the

value-added ratio is approximately 2.4%, as

computed below:


Total Lead Time

Value-Added Ratio = (7 + 9 + 8) minutes

985 minutes

= 2.4% (rounded) Value-Added Ratio



Reducing Setup Time

LO 1

Automotive Components can increase its value-

added ratio by:

reducing setups so that the batch size is one

unit (termed one-piece flow), and

moving the Machining, Assembly, and Testing

operations closer to each other so that the

move time can be reduced.



EE 27-1

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Emphasizing Product-Oriented Layout

If the manufacturing process is organized

around a product, it is called a product-

oriented layout (or product cells).

If the manufacturing process is organized

around a process, it is called a process-

oriented layout.

LO 1




1. Moving materials and products

between processes

Just-in-time normally organizes

manufacturing around products rather

than processes. Organizing work around

products reduces:

2. Work in process inventory

3. Lead time

4. Production costs

Emphasizing Product-Oriented Layout

LO 1



1. Organizing employees into product cells.

2. Cross-training employees to perform

any operation within the product cell.

Emphasizing Employee Involvement

Employee involvement is a management

approach that grants employees the

responsibility and authority to make

decisions about operations by:

LO 1



LO 1

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.




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).

LO 1




1. Scrap

2. Rework required to fix the product

3. Disruption in the production process

4. Dissatisfied customers

5. Warranty costs and expenses

Emphasizing Zero Defects

Just-in-time manufacturing attempts to

eliminate poor quality. Poor quality creates:

LO 1




Emphasizing Zero Defects

LO 1

Six Sigma was developed by Motorola

Corporation and consists of five steps:

Define

Measure

Analyze

Improve

Control

These five steps form the acronym DMAIC.




Emphasizing Supply Chain Management

LO 1

Supply chain management coordinates

and controls the flow of materials, services,

information, and finances with suppliers,

manufacturers, and customers.





LO 1

To enhance the interchange of information

between suppliers 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 (chips)

placed on or embedded within products

that can be read by radio waves that allow

instant monitoring of product location




LO 1

Enterprise resource planning (ERP) systems,

which are used to plan and control internal and supply chain operations



EE 27-2




Apply just-in-time

practices to a non-

manufacturing

setting.




(continued)

JIT for Nonmanufacturing Processes

LO 2





LO 2




Describe the

implications of just-in-

time manufacturing on

cost accounting and

performance

measurement.




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.

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.

LO 3



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 of

accounting is termed backflush

accounting.

LO 3




Combined Accounts

LO 3

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:

Cell Conversion Cost Rate = Budgeting Conversion Cost

Planned Hours of Production

Cell Conversion Cost Rate = $2,400,000

1,920 hours $1,250 per hr =




Conversion Cost

for Cover

Manufacturing

Time

Cell Conversion

Cost Rate = ×

= 0.02 hours × $1,250

= $25 per unit

Combined Accounts

LO 3

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.




1. Steel coil is purchased for producing 8,000

metal covers. The purchase cost was $120,000,

or $15 per unit.

Combined Accounts

LO 3

(continued)

Raw and In Process Inventory 120,000

Accounts Payable 120,000

To record materials purchases.

A separate

Raw Materials

account is not

used.




Combined Accounts

LO 3

2. Conversion costs are applied to 8,000 covers at

a rate of $25 per cover.


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.

(continued)




Combined Accounts

LO 3

3. All 8,000 covers were completed in the cell.

Finished Goods 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.

(continued)

Materials

($15 x 8,000 units) $120,000

Conversion

($25 x 8,000 units) 200,000

Total $320,000




7,800 × $70

(concluded)

Combined Accounts

LO 3

4. 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.

Cost of Goods Sold 312,000

Finished Goods Inventory 312,000

To record cost of goods sold.

7,800 × $40




EE 27-3




1. Lead time

2. Value-added ratio 3. Setup time

4. Number of production line stops

5. Number of units scrapped

6. Deviations from scheduled production 7. Number of failed inspections

LO 3

Nonfinancial Performance Measures

A nonfinancial measure is operating information that has not been stated in dollar terms. Examples include:





Describe and

illustrate activity

analysis for

improving

operations.




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

LO 4




Costs of Quality

LO 4

Prevention costs are costs of preventing

defects before or during the manufacture of

the product or delivery of services.

Appraisal costs are costs of activities that

detect, measure, evaluate, and inspect

products and processes to ensure that they

meet customer needs.

(continued)




Costs of Quality

LO 4

Internal failure costs are costs associated

with defects discovered before the product

is delivered to the consumer.

External failure costs are costs incurred after

defective products have been delivered to

consumers.



Costs of Quality

LO 4



Costs of Quality

LO 4

Exhibit 7 (next slide) shows the relationship

between the costs of quality. The internal

and external failure costs decline with

increases in the percentage of good units

produced.




Costs of Quality

LO 4




Quality Activity Analysis

LO 4




Pareto Chart of Quality Costs

LO 4

Managers want information displayed so

that important problems or issues can be

identified quickly. One method of reporting

quality cost 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.




Pareto Chart of Quality Costs

LO 4



2. Percent of total quality costs associated

with each classification

1. Total activity cost for each quality cost

classification

3. Percent of each quality cost classification to sales

Cost of Quality Report

LO 4

A cost of quality report normally reports the:




Cost of Quality Report

LO 4




EE 27-4




Value-Added Activity Analysis

LO 4

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.




Value-Added Activity Analysis

LO 4



1. Procurement

2. Product development 3. Manufacturing

4. Distribution

5. Sales order fulfillment

Process Activity Analysis

LO 4

A process is a series of activities that

converts an input into an output. Common

business processes include:




LO 4



Assume that the cost of a firm’s four activities is

as follows:

If 10,000 sales orders are filled during the current

period, the per-unit process cost is $8 per order

($80,000/10,000 orders).

(continued)


LO 4



Masters Company determines that only new

customers need to have a credit check. If this

change is made, it is estimated that only 25% of

sales orders would require credit checks. In

addition, by revising the warehouse product

layout, it is estimated that the cost of picking

orders can be reduced by 35%.


LO 4

(continued)



If 10,000 orders will be filled, the cost savings

from these two improvements are as follows:


LO 4

(concluded)



EE 27-5


Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting

Pepperdine University



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The End

Cost Management for Just-in-Time

Environments

variable costing for management · pdf fileprepared by: c. douglas cloud professor emeritus of...

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