variable costing for management · pdf fileprepared by: c. douglas cloud professor emeritus of...
TRANSCRIPT
Prepared by: C. Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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1
Chapter 27
Cost Management for Just-in-Time
Environments
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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.
© 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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Learning Objective 1
Describe just-in-
time manufacturing
practices.
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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
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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
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LO 1
Reducing Inventory
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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
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Reducing Lead Time
LO 1
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LO 1
Reducing Lead Time
The value-added ratio is computed as
follows:
Value-Added Ratio = Value-Added Lead Time
Total Lead Time
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LO 1
Reducing Lead Time
5
min.
35
min.
10
min.
55
min.
10
min.
5
min.
120 minutes click only
once
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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:
Value-Added Ratio = Value-Added Lead Time
Total Lead Time
Value-Added Ratio = 45 minutes
120 minutes = 37.5%
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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.
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Reducing Setup Time
LO 1
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Reducing Setup Time
LO 1
A product can be manufactured in Process X or
Process Y as follows:
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Reducing Setup Time
LO 1
(continued)
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Reducing Setup Time
LO 1
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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
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Reducing Setup Time
LO 1
The value-added ratio for Process Y is 20%, as
computed below.
Value-Added Ratio = Value-Added Lead Time
Total Lead Time
Value-Added Ratio = 3 minutes
15 minutes = 20%
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Reducing Setup Time
LO 1
Automotive Components Inc. manufactures
engine starters as follows:
(continued)
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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:
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Reducing Setup Time
LO 1
Based on the data in the preceding slides, the
value-added ratio is approximately 2.4%, as
computed below:
Value-Added Ratio = Value-Added Lead Time
Total Lead Time
Value-Added Ratio = (7 + 9 + 8) minutes
985 minutes
= 2.4% (rounded) Value-Added Ratio
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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.
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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
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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
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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
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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.
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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
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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
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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.
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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.
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Emphasizing Supply Chain Management
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
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Emphasizing Supply Chain Management
LO 1
Enterprise resource planning (ERP) systems,
which are used to plan and control internal and supply chain operations
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Learning Objective 2
Apply just-in-time
practices to a non-
manufacturing
setting.
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(continued)
JIT for Nonmanufacturing Processes
LO 2
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JIT for Nonmanufacturing Processes
LO 2
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JIT for Nonmanufacturing Processes
LO 2
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Learning Objective 3
Describe the
implications of just-in-
time manufacturing on
cost accounting and
performance
measurement.
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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
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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
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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
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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 =
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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.
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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.
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Combined Accounts
LO 3
2. 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.
(continued)
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Combined Accounts
LO 3
3. 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.
(continued)
Materials
($15 x 8,000 units) $120,000
Conversion
($25 x 8,000 units) 200,000
Total $320,000
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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
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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:
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Learning Objective 4
Describe and
illustrate activity
analysis for
improving
operations.
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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
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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)
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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.
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Costs of Quality
LO 4
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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.
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Costs of Quality
LO 4
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Quality Activity Analysis
LO 4
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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.
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Pareto Chart of Quality Costs
LO 4
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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:
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Cost of Quality Report
LO 4
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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.
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Value-Added Activity Analysis
LO 4
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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:
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Process Activity Analysis
LO 4
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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)
Process Activity Analysis
LO 4
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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%.
Process Activity Analysis
LO 4
(continued)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
If 10,000 orders will be filled, the cost savings
from these two improvements are as follows:
Process Activity Analysis
LO 4
(concluded)
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
EE 27-5
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
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
74
The End
Cost Management for Just-in-Time
Environments