1. 1-1 12-1 Click to edit Master title style Click to edit Master text styles –Second level Third level –Fourth level »Fifth level 10/19/20151 12 Cost Management for Just-in-Time Environments Student Version

2. 1-2 12-2 1 Describe just-in-time manufacturing practices. 12-2

3. 1-3 12-3  JIT is a business philosophy that focuses on reducing time and cost and eliminating poor quality within manufacturing and nonmanufacturing processes. What is Just-in-Time (JIT)? 1  Sometimes called lean manu- facturing.

4. 1-4 12-4 Reducing Inventory Just-in-time manufacturing views inventory as wasteful and unnecessary. Under traditional manufacturing, inventory hides underlying production problems. 1

5. 1-5 12-5 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. Reducing Lead Time 1

6. 1-6 12-6 Value-added lead time is the time spent in converting raw materials into a finished unit of product. Value-Added Lead Time 1

7. 1-7 12-7 Nonvalue-added lead time is the time spent while the unit of product is waiting to enter the next production process or is moved from one process to another. Nonvalue-Added Lead Time 1

8. 1-8 12-8 Value-Added Ratio 1 Value-Added Lead Time Total Lead Time =

9. 1-9 12-9 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. Reducing Setup Time 1

10. 1-10 12-10 Automotive Components Inc. 1 Automotive Components Inc. manufactures engine starters as follows:

11. 1-11 12-11 1 Value-Added Ratio = Value-Added Lead Time Total Lead Time Value-Added Ratio = (7 + 9 + 8) minutes 985 minutes = 2.4% Automotive Components Inc.

12. 1-12 12-12 If the manufacturing process is organized around a product, it is called a product- oriented layout (or product cell). Layouts If the manufacturing process is organized around a process, it is called a process- oriented layout. 1

13. 1-13 12-13 Employee involvement is a management approach that grants employees the responsibility and authority to make decisions about operations by: Emphasizing Employee Involvement 1 1.Organizing employees into product cells 2.Cross-training employees to perform any operation within the product cell

14. 1-14 12-14 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”). Emphasizing Pull Manufacturing 1

15. 1-15 12-15 Electronic data interchange (EDI) is a method of using computers to electronically communicate orders, relay information, and make or receive payments from one organization to another. 1 Emphasizing Supply Chain Management

16. 1-16 12-16 Radio frequency identification devices (RFID) are electronic tags (chips) placed on or embedded within products that can be read by radio waves that allow instant monitoring of product location. 1 Emphasizing Supply Chain Management

17. 1-17 12-17 Enterprise resource planning (ERP) systems are integrated business and information systems used by companies to plan and control both internal and supply chain operations. 1 Emphasizing Supply Chain Management

18. 1-18 12-18 3 Describe the implications of just-in-time manufacturing on cost accounting and performance measurement. 12-18

19. 1-19 12-19 1.Fewer transactions. There are fewer transactions to record, thus simplifying the accounting system. Characteristics of a Just-in- Time Accounting System (continued) 2.Combined accounts. All in-process work is combined with raw materials to form a new account, Raw and In Process (RIP) Inventory. 3

20. 1-20 12-20 3.Nonfinancial Performance Measures. There is a greater emphasis on nonfinancial performance measures. 4.Direct Tracing of Overhead. Indirect labor is directly assigned to product production cells, thus less factory overhead is allocated to products. 3 Characteristics of a Just-in- Time Accounting System

21. 1-21 12-21 The annual budgeted conversion cost for AMF’s metal-cover product cell is $2,400,000. These costs will support 1,920 planned hours of production. Anderson Metal Fabricators (AMF) Example 3

22. 1-22 12-22 Cell Conversion Cost Rate Budgeted Conversion Cost Planned Hours of Production = $2,400,000 1,920 hours = = $1,250 per hour 3 Anderson Metal Fabricators (AMF) Example

23. 1-23 12-23 Conversion Cost for Cover Manufacturing Time Cell Conversion Cost Rate = × = 0.02 hours × $1,250 = $25 per unit 3 Anderson Metal Fabricators (AMF) Example

24. 1-24 12-24 Steel coil is purchased for producing 8,000 metal covers. The purchase cost was $120,000, or $15 per unit. Raw and In Process Inventory120,000 Accounts Payable120,000 To record materials purchases. A separate materials account is not used. 3

25. 1-25 12-25 Conversion costs are applied to 8,000 medium covers at a rate of $25 per cover. Raw and In Process Inventory200,000 Conversion Costs200,000 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. 3

26. 1-26 12-26 All 8,000 medium covers were completed in the cell. The cost is $40 per unit (materials, $15; conversion costs, $25). Finished Goods Inventory320,000 Raw and In Process Inventory320,000 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. 3

27. 1-27 12-27 Of the 8,000 units completed, 7,800 were sold and shipped to customers at $70 per unit. Accounts Receivable546,000 Sales546,000 To record sales. 7,800 × $70 (continued) 3

28. 1-28 12-28 Cost of Goods Sold312,000 (concluded) Of the 8,000 units completed, 7,800 were sold and shipped to customers at $70 per unit. 3 Finished Goods312,000 To record cost of goods sold. 7,800 × $40

29. 1-29 12-29 4 Describe and illustrate activity analysis for improving operations. 12-29

30. 1-30 12-30 Prevention costs are the costs of activities that prevent defects from occurring during the design and delivery of products or services. Costs of Quality 4

31. 1-31 12-31 Appraisal costs are the costs of activities that detect, measure, evaluate, and inspect products and processes to ensure that they conform to customer requirements and performance standards. 4 Costs of Quality

32. 1-32 12-32 Internal failure costs are the costs associated with defects discovered by a business before the product or service is delivered to the consumer. 4 Costs of Quality

33. 1-33 12-33 External failure costs are the costs incurred after defective units or services have been delivered to consumers. 4 Costs of Quality

34. 1-34 12-34 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. Pareto Chart of Quality Costs 4

35. 1-35 12-35 Cost of Quality Report A cost of quality report normally reports the: 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 4

36. 1-36 12-36 Process Activity Analysis A process is a series of activities that converts an input into an output. Common business processes include: 1.Procurement 2.Product development 3.Manufacturing 4.Distribution 5.Sales order fulfillment 4

37. 1-37 12-37 Masters Company Example Assume the cost of a firm’s four activities are 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). 4

38. 1-38 12-38 The company determines that only new customers need to have a credit check. 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%. 4 Masters Company Example

39. 1-39 12-39 If 10,000 orders will be filled, the cost savings from these two improvements are as follows: 4 Masters Company Example

40. 1-40 12-40