Management Accounting:

A Road of Discovery

Management Accounting:

A Road of Discovery

James T. Mackey

Michael F. Thomas

Presentations by:

Roderick S. BarclayTexas A&M University - Commerce

James T. MackeyCalifornia State University - Sacramento

© 2000 South-Western College Publishing

Chapter 13

Can’t we improve them all?

Business process reengineering, just-in-

time, and the journey to automation

Key Learning Objectives

4. Calculate the cost of a product made in a JIT cell.

2. Explain business process reengineering, just-in-time, and why organizations are changing to JIT.

5. Prepare a machine uptime report and a continuous improvement productivity ratio.

3. Describe the role for management accounting information in JIT purchasing.

1. Measure the opportunity costs of unused capacity.

6. Discuss how JIT can improve on-time delivery and complete order filling.

Part I

The Journey to JIT:

The Toyota System

The Problem

At the end of WWII, Toyota had few assets but wanted to make cars and trucks.

Toyota needed to sell in the large U.S. market to raise capital.

Toyota’s low volumes couldn’t compete with the costs of high-volume automobile companies.

Domestic largeDomestic small, foreign large

Market size

Well understood, domestic

Poorly understood, foreignMarkets

Skilled and unionizedSkilled, motivated and cheap

Labor

InexpensiveExpensiveMaterial

PlentifulVery littleCapital (Money)

United StatesJapanFor example:

Part II

Low Volume Production

Low Volume Production

Using specialized functional department to lower costs through low cost labor and skills.

Review and analyze Exhibit 13-2, p. 471 for an illustration of the different workflows between a traditional system of functional silos and a system comprised of cells.

Note:

Move – wait – setup – run – quality inspections – move – wait

NVA – NVA – NVA – VA – NVA – NVA – NVA

Part III

High Volume Transfer Lines — Setups Only Once

Illustration

Drilling only one set of holes — Ford’s River Rouge complex making Model T Fords — you can get any color you want as long as it is black.

Problems

A production volume of 200,000 to 300,000 units allow specialized equipment to make a narrow product line.

Toyota’s problem was to make low-volume production, say 10,000 units, as efficient as the high-volume production of U.S. domestic automobile companies.

Part IV

Continuous Improvement Management Using Just-In-Time

Production

and the Journey to Automation

JIT Continuous Improvement

The objective of JIT continuous improvement is keep flexible production operating with the efficiency of high-volume production.

The role of accounting is to provide performance measures and cost information for this environment.

Workers are trained and empowered for continuous improvement strategies to eliminate NVA activities.

Move

Move activities are reduced by Business Process Reengineering (BPR) from functional units into product-line, or component-based cells.

Cells bring machines closely together to minimize move time.

Workers are cross trained to accomplish many tasks.

Review Exhibit 13-3, p. 472, to view an illustration of JIT cells using Kanban Containers.

Wait

Wait activities are reduced by moving from a ‘push’ to a ‘pull’ manufacturing strategy. Traditional manufacturing ‘pushes’ orders

into the factory according to the production schedule. WIP piles up in front of constraints increasing wait time. The more time in the production cycle, the greater the costs.

‘Pull’ manufacturing only releases orders when the customer demands the product. WIP does not pile up. Wait time is reduced.

Performance measures: Decreasing time in the cell, decreasing WIP inventories.

Setup

Setup activities are reduced by improving the setup efficiency and decreasing the number of setups needed by reducing product variety.

Reengineer JIT cells to make a limited range of components or products.

Performance measures: decreasing setups, decreasing setup time, decreasing product variety.

Quality Control

Quality control activities can be eliminated through Total Quality Management (TQM).

When using traditional scientific management, extra inventories are needed to insure the correct quantities are produced despite quality failures.

The costs of eliminating all defects are not assumed to be justified by the benefits.

Quality inspections are necessary to detect these defects.

This increases manufacturing time and quality conformance costs.

TQM reduces the need for inventories and quality inspections.

Performance measures: decreasing quality inspections, defects, nonconformance costs, manufacturing time in the cell. And WIP inventories.

Extend

Extend the JIT cells throughout the production system and into suppliers with JIT purchasing.

Make customers and vendors strategic partners.

Due to long-term contracts, vendor efficiencies become our efficiencies.

JIT, Management Accounting, and Continuous Improvement - Purchasing

1. Strategic measures during early JIT life cycle development (on time deliver, complete order filling, vendor performance index)

2. Problem costing with 2nd generation ABC cost variances

1. Certified vendors2. Guaranteed

material quality3. Guaranteed

material prices4. Kanban container-

sized JIT deliveries to minimize inventories

5. EDI ordering, shipping, and payment

Purchasing

How management accounting helps

How JIT can helpValue chain process

Computer-Integrate Manufacturing (CIM) Cells

Review and understand Exhibit 13-7, p. 480. The exhibit illustrates the makeup of a CIM cell and the components of those cells.

Value Chain Process Activities for JIT Purchasing

Use only a few certified suppliers. Orders, deliveries, and payments are

mde under long-term contracts. Materials arrive JIT and are delivered

directly to manufacturing cells. Supplier are paid periodically and

automatically.

Finally

Maximize product value by Quality Function Deployment strategies, customer focused management, concurrent design, target costing, and Kanban management.

JIT’s Strategic Planning Matrix

Vision Statement — Combine the economies of low-variety, high-volume production with the benefits of diversified product lines.

Reengineer for high quality — TQM and continuous improvement

Reengineer to eliminate nonvalue-added activities — Short lead-time, Flexibility, Simplicity

Cellular operations — Short lead time, Flexibility, Simplicity Eliminate inventories (pull manufacturing) — Short lead

time, Flexibility, Simplicity Minimize setup time — Short lead time, Flexibility, Simplicity Cross-train workers — Short lead time Flexibility, TQM and

continuous improvement Certified vendors — Short lead time, Flexibility, Simplicity

Process Characteristics Comparison

Traditional systems Functional departments

performing a single activity on all products using single-skilled workers.

Each department works at its own pace, maximizes output, and pushes it into WIP, creating large inventories to buffer against uncoordinated production.

Acceptable levels of scrap, rework, and rejects (another reason for large inventories).

JIT systems Cells performing multiple

activities on a single product using multi-skilled cross-trained workers.

Production is pulled through the cells with kanbans to coordinate cells and minimize WIP.

Commitment to TQM, elimination of scrap and rework (nonvalue-added activities), and no rejects.

More Process Characteristics Comparison

Traditional systems Uncommitted workers, not

involved in continuous improvement, with formal worker manager hierarchy.

Large inventories and uncoordinated production results in long lead times (too much moving, storage, waiting, and inspection.

Infrequent purchases in large lots from many suppliers to minimize purchase price.

JIT systems Empowered employees

involved and rewarded for continuous improvement and performing many management activities.

Cellular manufacturing, short setup times, and nonvalue-added activity elimination to minimize lead time.

Frequent (hourly or daily) JIT deliveries from a few certified vendors using long-term contracts.

JIT, Management Accounting, and Continuous Improvement - Production

1. Lead time and LTE ratios2. TQM information (defect

rates, setup time, quality cost variances)

3. Kaizen standards for target costing achievement and continuous improvement measurement

4. Machine uptime ratio and CI productivity ratio

1. Reengineer to eliminate nonvalue-added activities through cellular design

2. Reengineer for higher quality by training cell workers for quality control

3. Kanban scheduling to minimize WIP

4. Minimize setup time5. Employee

empowerment and training for multiple jobs

Production

How management accounting helps

How JIT can helpValue chain process

JIT, Management Accounting, and Continuous Improvement - Delivery

1. Customer performance measures, on-time deliver, complete order filling

1. EDI ordering, shipping, and payment

2. Minimize inventories to difference between customer lead time and our lead time.

Delivery

How management accounting helps

How JIT can helpValue chain process

Part V

Use Kanban Management for Continuous Improvement

Kanban Concepts

Kanbans are like soda pop containers that only hold a specified number of WIP units between each activity.

The number of units are reduced until one machine activity is idled. This machine becomes the focus for the next improvement. It is a ‘treasure’. We have found the constraint to improving the productivity of the cell.

Units are added back to the Kanban so that production may continue while the source of the failure is improved.

As the need for Kanbans decline, the system approaches automation.

Part VI

Creating Value —

Quality, Delivery and Cost

How to Create Value

Pull manufacturingStrategic Partnering

Just In TimeService (Delivery)

Management AccountingCost

Total Quality Management

Quality of Conformance

Customer focus, Snake charts, Concurrent design

Quality of DesignQuality

MethodsStrategiesCritical Success /Failure Factors

Operational Control

What do we want workers to do?

“What gets measured gets done”

Performance Measures — Quality

Quality Conformance Performance Customer complaints Customer surveys Warranty claims Cost of quality reports

Materials Cost/Scrap Control Performance Scrap rates Quality rates.

Performance Measures — Service

On-time delivery setup time production backlog lead time cycle time waste time turnover rates by

product cycle count accuracy

Space reduction Number of inventoried

items Inventory turnover

rates Machine availability/

downtime Machine maintenance Capacity utilization

Service and Delivery Performance

Performance Measures — Cost

More accurate costs Backflush costing Time-based costing Unused capacity costs

0%

50%

100%

Monday Wednesday Friday

Machine uptime ratio

Machine Uptime Reports

CI Productivity Ratio for the Truss Cell

= Standard cost x Units produced

= $4 per truss x 50 trusses this month

= $200= 0.85 hrs/day x $10 /hr x 3 people x

20 days this month= $510

= $200 $510= 39%

Standard cost allowed from improvements

Labor cost budgeted for learning new skills

Continuous improvement = Standard cost allowed from improvements productivity ratio Cost for continuous improvements

Part VII

Management Accounting Issues

Reengineering to JIT Cells

Causes indirect costs to become direct costs. Previous overhead activities are not done in the

cells, including setups, moves, maintenance and quality inspections.

Under ABC, we grouped overhead costs into cost pools with similar activity drivers. When the same plant is converted into a JIT layout, the number of cost pools will decline.

As we convert to JIT there are more direct costs. More direct costs and fewer indirect reduces the chances of costing errors. Thus costs are becoming more accurate.

More Causes

Variable cost direct labor now becomes a fixed cost.

With worker empowerment, continuous improvement and cross training, the training costs invested in each worker increase.

Workers no longer do one simple task that can be learned quickly by anyone ‘off the street’.

Review Exhibit 13-2, p. 471 for a comprehensive illustration of these concepts.

Part VIII

Costing Systems for JIT —

Backflush Costing

Backflush Costing

Backflush costing is often used to assign costs in JIT systems.

Only two accounts are necessary — Conversion costs and Transfer-In costs.

Trigger points, where units are transferred between cost centers, mark boundaries of level JIT production.

Level inventories within cells means beginning and ending inventories are equal.

Therefore all current costs may be assigned to current production.

A Comprehensive Example

Consider an example of backflush costing for the assembly of computer terminals.

When originally engineered, it was separated into two sequential cells (A & B). They were separated by a surge rack to store WIP. This buffer was required because the two cells were initially unstable.

Cost Calculation for cell A

Conversion costs are the direct labor cost plus all the overhead and cell costs incurred.

Backflush costing simply divides the units finished into the conversion costs for the cell and adds the cost of materials.

One hundred units were started and completed. Level production exists throughout the

measurement period. No reductions in inventories were made this

period. The WIP in cell A at the end of the month

equals the beginning inventory.

Current Period Costs for Cell A

Cost per unit = $6,000 / 100 units = $60.00 per unit

$6,000Total costs

3,000$15 per hour x 200 hours Overhead

2,000$10 per hour x 200 hours Cell labor

Conversion costs:

$1,000$10 per unit x 100 unitsComponents

Current Period Costs for Cell B

Operating under the same conditions, 80 units were started and finished in cell B.

No additional parts or materials are added. The conversion costs for this time period are

$4,500. What is the cost assigned to each unit finished in

cell B?

Cost per unit = conversion costs from cell B + costs from cell A

= $4,500 / 80 + $60.00 = $116.25

Standard Homes Truss Cell Budget

$80.00 per trussStandard truss cell cost

800 per year

Production forecast

$135.00 per truss

Standard absorptive truss cost

$64,000 per year

Total cell costs

1,100 per year

Building

500 per year

Supervision, administration

Allocated facilities

0NoneAllocated product line

$62,400 per year

Cell laborCell level:

(No Batch Level Costs)Costs incurred in cell

$55.00 per trussTotal unit-level costs

2.00 per trussDirect technology

$53.00 per trussDirect materialsUnit level:

AmountsResourcesActivities

Part IX

Time-Based Costing Systems Combining Control & Cost

Time-Based Performance Measures

Notice from Section IV how often time-based performance measures were useful. Time-based measures correlate with value

creation and provide direction to shop floor management on how to create value

The most effective measures of value should include quality, delivery, and the cost of each activity.

Combining time and cost assignment captures many of the value creating characteristics.

Cell Time

Time-in-the-cell directly determines capacity. The less time per product, the more products. Reducing time-in-the-cell creates capacity for

increased production. Using time to assign cell costs is more

accurate when cells produce a variety of products.

The costs are divided by the uptime to estimate a cost per unit of time.

This method encourages reduction in cell manufacturing cycle time for continuous improvement.

An Illustration: Time-Based Cell Costs

Board Maker Laser systems has a general purpose JIT cell for mounting components on computer motherboards. Currently the make two types of board — large and small.

Last week the cell manufactured 100 small boards in 1,000 minutes and 50 large boards in 750 minutes.

The cell has an 80% uptime rating and $10,000 in conversion costs.

For a 40-hour week the time equals (40 hours x 60 minutes x .8 uptime ratio) 1.920 minutes.

The charge per minute is $10,000 / 1.920 minutes or approximately $5.208 per minute.

Uncharged and unused capacity is 170 minutes.

Time-Based Cell Costs — Page 2

$77.08$128.12Cost per unit

25.00 50.00Materials

$52.08$ 78.12

Conversion costs – 10 min 15 min

Small BoardsLarge BoardsCosts

The costs assigned to each unit using the time-in-the-cell method are calculated as follows:

Review, study, and analyze Exhibit 13-19 and Exhibit 13-20, both on p. 497. These exhibits provide a thorough computational analysis of the cost structure for cell manufacturing.

Part X

The Opportunity Cost of Unused Capacity

Unused Capacity

The problem — as continuous improvement continues, excess capacity is created. However, this increased capacity is not always obvious and the benefits of this new capacity may not be realized.

The solution — is the creation of an unused capacity measure of the opportunity value of the ‘created’ capacity. We use the value of the best alternative use of this new capacity.

We should only use this measure to encourage the use of the capacity gains from continuous improvement.

Review Exhibit 13-1, p. 468, for a quantitative illustration of these concepts.