208 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISONS

O BJECTI V E 1 2

an d h opin g an order will com e, a JIT system produ ces produ cts directly for received orders. Several factors are cru cial to th e su ccess of JIT system s:

Explain how JIT systems can reduce

1. Focus on quality. JIT companies try to involve all employees in control-

non-value-added

ling quality. While any system can seek quality improvements, JIT sys-

activities.

tems emphasize total quality control (TQC) and continuous improvement in quality . If all employees strive for zero defects, non-value-added activities such as inspection and rework of defective items are minimized.

Production Cycle Time. The

2. Sh ort p ro d u ctio n cycle tim e . Th e tim e from in itiatin g produ ction to

time from initiating pro-

delivery of goods to th e cu stom er. Keepin g produ ction cycle tim es

duction to delivering the

sh ort allows tim ely respon se to cu stom er orders an d redu ces th e level

goods to the customer.

of in ven tories. Man y JIT com pan ies h ave ach ieved rem arkable redu c- tion s in produ ction cycle tim es. For exam ple, applyin g JIT m eth ods in on e IBM division in Brom on t, Qu ebec cu t process lead tim es from 30 to 40 days to seven days on a ceram ic su bstrate produ ct.

3. Smooth flow of production. Fluctuations in production rates inevitably lead to delays in delivery to customers and excess inventories. To achieve smooth production flow, JIT companies simplify the production process to reduce the possibilities of delay, to develop close relationships with sup- pliers to assure timely delivery and high quality of purchased materials, and to perform routine maintenance on equipment to prevent costly breakdowns. For example, Omark, a chain-saw manufacturer in Guelph, Ontario reduced production flow distance from 806 to 53 metres.

4. Flexible production operations. Two dimensions are important: facilities flexibility and employee flexibility. Facilities should be able to produce a variety of components and products to provide extra capacity when a particular product is in high demand and to avoid shutdown when a unique facility breaks down. Facilities should also require short set-up times—the time it takes to switch from producing one product to another. Cross- training employees—training employees to do a variety of jobs—provides further flexibility. Multiskilled workers can fill in when a particular operation is overloaded, and can reduce set-up time. One company reported

a reduction in set-up time from 45 minutes to one minute by training production workers to perform the set-up operations.

Man y com pan ies h elp ach ieve th ese objectives by im provin g th e ph ysical layou t of th eir plan ts. In con ven tion al m an u factu rin g, sim ilar m ach in es (lath es, m oldin g m ach in es, drillin g m ach in es, etc.) are grou ped togeth er. Workers spe- cialize on on ly on e m ach in e operation (operatin g eith er th e m ou ldin g or th e drillin g m ach in e). Th ere are at least two n egative effects of su ch a layou t. First, produ cts m u st be m oved from on e area of th e plan t to an oth er for requ ired pro- cessin g. Th is in creases m aterial h an dlin g costs an d resu lts in work-in -process in ven tories th at can be su bstan tial. Th ese are n on -valu e-added activities an d costs. Secon d, th e specialized labou r resou rce is often idle—waitin g for work-in - process. Th is wasted resou rce—labou r tim e—is also n on -valu e-added.

In a JIT produ ction system , m ach in es are often organ ized in cells accordin g

Cellular M anufacturing. In

to th e specific requ irem en ts of a produ ct fam ily. Th is process is called ce llu lar

a JIT production system,

m an u factu rin g . On ly th e m ach in es th at are n eeded for th e produ ct fam ily are in

the process of organizing

th e cell, an d th ese m ach in es are located as close to each oth er as possible. Workers

machines into cells according to the specific

are train ed to u se all th e cellu lar m ach in es. Each cell (often sh aped in th e form of

requirements of the

a “U”) is a m in i-factory or focu sed factory. Both of th e problem s associated with

product family.

th e con ven tion al produ ction layou t are elim in ated in cellu lar m an u factu rin g.

Chapter 5 Cost Allocation and Activity-Based Costing Systems

Work-in -process in ven tories are redu ced or elim in ated becau se th ere is n o n eed for m ovin g an d storin g in ven tory. Idle tim e is redu ced or elim in ated becau se workers are capable of m ovin g from idle m ach in e activity to n eeded activities. As

a resu lt, cycle tim es are redu ced.

Accou n tin g for a JIT system is often sim pler th an for oth er system s. Most cost accou n tin g system s focu s on determ in in g produ ct costs for in ven tory valu a- tion . Bu t JIT system s h ave m in im al in ven tories, so th ere is less ben efit from an elaborate in ven tory costin g system . In JIT system s, m aterials, labou r, an d over-

h ead costs cou ld poten tially be ch arged directly to cost of goods sold becau se in ven tories are sm all en ou gh to be ign ored. All costs of produ ction are assu m ed to apply to produ cts th at h ave already been sold.

H I GH LI GH TS TO REM EM BER

Costs are allocated for th ree m ajor pu rposes: (1) m otivation , (2) in com e an d asset m easu rem en t, an d (3) cost ju stification or cost-plu s con tracts. Costs to be allocated are traced to cost pools, preferably keepin g variable costs an d fixed costs in separate pools. Fixed costs of service departm en ts sh ou ld

be allocated u sin g predeterm in ed m on th ly lu m p su m s for providin g a basic capacity to serve. Variable costs sh ou ld be assign ed by u sin g a predeterm in ed stan dard u n it rate for th e services actu ally u sed. Often it is best to allocate on ly th ose cen tral costs of an organ ization for wh ich m easu res of u sage by depart- m en ts are available. Service departm en t costs can be allocated u sin g eith er th e direct m eth od or th e step-down m eth od.

Join t costs are often allocated to produ cts for in ven tory valu ation an d in com e determ in ation u sin g th e ph ysical-u n its or relative-sales-valu e m eth od. However, su ch allocation s sh ou ld n ot effect decision s.

Activity-based costin g is growin g in popu larity. It first assign s costs to th e activities of an organ ization . Th en costs are traced to produ cts or services based on cost drivers th at m easu re th e cau ses of th e costs of a particu lar activity.

Design in g an d im plem en tin g an activity-based costin g system in volves fou r steps. First, m an agers determ in e th e cost objectives, key activities, an d resou rces u sed. Cost drivers (ou tpu t m easu res) are also iden tified for each resou rce an d activity. Secon d, a process-based m ap is drawn th at represen ts th e flow of activities an d resou rces th at su pport th e cost objects. Th e th ird is collectin g cost an d operatin g data. Th e last step is to calcu late an d in terpret th e n ew activity-based in form ation . Often , th is last step requ ires th e u se of a com pu ter du e to th e com - plexity of m an y ABC system s. Usin g ABC in form ation to im prove operation s is called activity-based m an agem en t.

Ju st in tim e (JIT) produ ction system s are u sed to im prove profitability of com pan ies by elim in atin g waste an d im provin g qu ality. JIT system s focu s on qu ality, sh ort produ ction cycles, redu cin g in ven tory, an d flexible u se of operatin g assets an d h u m an resou rces. Each of th ese factors is associated with n on valu e-added activities an d th u s im provem en ts resu lt in redu ced operatin g costs an d im proved proftability.

208 PART ONE MANAGEMENT ACCOUNTING, INFORMATION AND DECISONS