Managing Accounting in a

changing environment
Chapter 26 Part 2
Just in Time

 Also called lean production, is a demand-pull manufacturing system because

each component in a production line is produced as soon and only when needed
by the next step in the production line.
 In a JIT production, line manufacturing activity at any particular workstation is
prompted by the need for that workstation's output at the following
workstation.
 The demand-pull feature of JIT production systems achieves close coordination
among workstations. It smoothes the flow of goods, despite low quantities of
inventory.
 Key Features

1. Maintaining a limited number of suppliers. A company must learn to rely on a few ultrareliable
suppliers who are willing to make frequent deliveries in small lots.
2. Improving plant layout. Manufacturing flow lines in the company’s plant must be improved. In a JIT
system, all machines needed to make a particular product are often brought together in one location
(focused factory approach) so that partially completed units are not shifted from place to place all
over the factory to minimize handling and moving.
3. Reducing Setup Time. Setups involve activities such as moving materials, changing machine
settings, setting up of equipment, and running tests that must be performed whenever
production is switched over from making one type of item to another. f unproductive setup time
can be made negligible then the company can respond quickly to the market, reduce cycle times
and make it much easier to spot manufacturing problems.
 Key Features

4. Improving Production Scheduling. JIT businesses schedule production in small batches just in
time to satisfy needs. There should be good coordination of efforts throughout the value
chain.

5. Targeting Zero Defects. Defective units create big problems in a JIT environment because
they could delay the shipment of the order and may generate a ripple effect that delays
other orders. Although it may be next to impossible to obtain a zero-defect goal, companies
have found that they can come very close through "continuous monitoring".

6. Maintaining Flexible Workforce. Companies employing JIT must have workers who are
flexible and multiskilled. Workers assigned to a particular JIT product flow line are often
expected to know how to operate all the equipment on that line.
Financial benefit of JIT

Aside from lower carrying costs of using,

other benefits of lower inventory are:
1) greater transparency of the production
process.
2) heightened emphasis on eliminating the
specific causes of rework, scrap, and
waste, and
3) lower manufacturing lead times.
This Photo by Unknown Author is licensed under CC BY-SA
•
Performance Measures and Control in JIT
Production
Financial performance measures such as inventory turnover ratio
which is expected to increase.

Nonfinancial performance measures of time, inventory and quality,

such as:
• Manufacturing lead time -expected to decrease
• Units produced per hour -expected to increase
• Number of days of inventory on hand -expected to decrease
• Total setup time for machines
• Total manufacturing time - expected to decrease
• Number of unis requiring rework or scrap
• Total number of units started &completed - expected to decrease
JIT Effects on Costing System

JIT systems reduce overhead costs through the reduction of materials

handling, Warehousing and inspection costs.

Also facilitates direct tracing of some costs usually classified as indirect.

Likewise, the use of multi-skilled workers in these cells allows the costs
of set up, maintenance & quality inspection to be traced as direct costs.
Process Re-engineering

It is the fundamental rethinking and redesign of business processes to achieve

improvement in critical measures of performance such as cost, quality, service,
speed and customer satisfaction.

This Photo by Unknown Author is licensed under CC BY-SA-NC

 Re-engineering illustration

 When Timex receives a purchase order from a customer, a copy is sent to manufacturing,
where a production scheduler begins the planning for manufacturing the ordered items.
Frequently, there is a long wait before production is started.
 After manufacturing is complete, the finished products are sent to the Shipping
Department which matches the quantities to be shipped against customer purchase order.
 Often, the finished products are held in inventory until a truck is available for shipment
to the customer. If the quantity shipped does not match the number of chips requested by
the customer, a special shipment is scheduled.
 The shipping documents are sent to the Billing Department for issuing invoices.
 Special staffs in the Accounting Department follow up with customer for payment

This Photo by Unknown Author is licensed under CC BY-SA

Comments on this system

The many transfers of the finished product and/or information about them
across department (sales, manufacturing, shipping, billing and accounting) to
satisfy a customer order have slowed down the process and created delays.
Furthermore, no single individuals has been responsible for fulfilling each
customer order.

This Photo by Unknown Author is licensed under CC BY-NC-ND

will be sent to the customer.
electronically

Re-engineering made

• A customer relationship manager will be responsible for each custom and the customer's
order.
• Timex and its customers will enter in a long-term contract specifying quantities and prices.
• The customer relationship manager will work closely with the customer and with
manufacturing to specify delivery schedules for the product one month in advance.
• The schedule of customer order will be sent electronically to manufacturing.
• Finished products will be shipped directly from the manufacturing plant to customer.
• Each shipment will automatically trigger an invoice that that will be sent electronically to
the customer.
• Customers will transfer funds electronically to Timex' s bank.

This Photo by Unknown Author is licensed under CC BY

Effect of re-engineering

 Benefits from re-engineering are most significant when it cuts across functional lines to focus
on an entire business process.
 Successful re-engineering efforts involves:
 changing roles and responsibilities
 eliminating unnecessary activities and tasks
 using information technology and
 developing employee skills.

This Photo by Unknown Author is licensed under CC BY-SA-NC

Theory of
Constraint

It is a process of identifying
and managing constraint in
the making of products or in
the providing of services. It
also describes methods to
maximize operating income
when faced with some
bottleneck and some non-
bottleneck operations.
 3 Measurements in Theory of Constraints

1. Throughput Contribution:

Revenue

2. Investments: Sum of materials costs in direct materials, work-in-process, and

finished goods inventories; R & D costs; and costs of equipment and buildings.

3. Operating cost .All costs of operations (other than direct materials) incurred to
earn throughput contribution. Operating costs include salaries and wages, rent,
utilities and depreciation.
The basic objective of TOC is to increase throughput contribution while decreasing investment
and operating costs. TOC assumes a short-run time horizon and that operating costs are fixed
costs.

This Photo by Unknown Author is licensed under CC BY-SA

Steps in keeping bottleneck busy
& increase efficiency & capacity

Recognize Find Keep Take

Recognize Find the Keep the Take actions
that the bottleneck- bottleneck to increase
bottleneck operation by operation the
operation identifying busy and efficiency This Photo by Unknown Author is licensed under CC BY-SA

determines operations subordinate and capacity

throughout with large all non- of the
contribution quantities of bottleneck bottleneck
of the entire inventory operations to operation.
system. waiting to be the
worked on. bottleneck
operation.
Management accountant’s role in
Step 4 (Take action….)

Calculating Calculating throughput contribution

Identifying Identifying relevant and irrelevant costs

Doing Doing cost-benefit analysis of alternative actions.

 Eliminate idle time (time when the pressing machine is neither
Eliminate being set up to process products nor actually processing
products) at the bottleneck operation.

Process only those parts or products that increase throughput

Process contribution, not parts or products that will remain in finished

Steps to goods or spare parts inventories.

relieving Shift
Shift products that do not have to be made on the bottleneck
machine to non-bottleneck machines or to outside processing

bottleneck facilities.

constraints Reduce
Reduce setup time and processing time at bottleneck operations
(for example, by simplifying the design or reducing the number
of parts in the product).

Improve Improve the quality of parts or products manufactured at the

bottleneck operation.
Taking home on Theory
of constraints
 It emphasizes the management of
bottleneck operations as the key to
improving the performance of
production operations as a whole.
 Focuses on the short-run maximization
of throughput contribution-revenues
minus direct materials costs.
 However, it is less useful for the long- This Photo by Unknown Author is licensed under CC BY-NC-ND

run management of costs. It is (ABC)

systems that have a long-run perspective
focus.
Conclusion: Why Should the Internal
Accounting System be Changed?

 Internal accounting systems are an integral part of the

organization's architecture.
 When company decentralized decision rights and
empowering employees via TQM or JIT programs,
accounting systems are likewise modified.
 There is no such thing as the ideal management
accounting system. Each organization has different This Photo by Unknown Author is licensed under CC BY-SA-NC

circumstances that lead to different management

accounting decisions.
 Accounting must continually deal with trade-offs among
external users wanting information describing firm
performance and internal users wanting information for
decision making and control.
Conclusion: Why Should the Internal
Accounting System be Changed?
 Surviving organizations must meet the demands of changing
technologies and markets by revising their business strategies
and organizational architectures as organization are in a
constant state of change, accounting system must adapt.
 There are certain signs that indicate that the internal
accounting system is not working well, (i.e. dysfunctional
behavior on the part of managers because of poorly chosen
performance measures, problems with the accounting system is
poor operating decisions. This Photo by Unknown Author is licensed under CC BY-SA-NC

 Managers make decisions that influences performance measure.

If those performance measures are not consistent with the goals
of the organization, management will make decisions that do
not coincide with the organization's goals.
 Often changes in customers' organizational architectures cause
suppliers to change their architecture (and accounting systems).
Conclusion: Why Should the Internal
Accounting System be Changed?
 If your major customers are modifying their organizational
architectures, they are likely responding to technological and
market conditions. These changes are likely affecting your firm's
organizational architecture.
 Each organization must continually evaluate and improve its
management accounting system to meet the challenges of a
changing environment and a changing organization.
 Here we emphasized the dual role of internal accounting systems
for decision making and control. This Photo by Unknown Author is licensed under CC BY-SA-NC

 In its decision-making role, the accounting system is the first

place managers turn to help them estimate opportunity costs.
 Accounting systems record historical costs, which are backward
looking. Therefore, accounting numbers are useful for decision
making only under very strong assumptions, primarily that the
future will look like the past.