PowerPoint Chapter 13

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  • Consistent with our story line approach, we have found juxtaposition to be an effective approach to teaching JIT. At this point, students should be familiar with the concepts and ideas behind the scientific approach to management. By understanding the transition from traditional to JIT management, students understand the need for different accounting measures. Most companies are neither in one extreme or the other. Thus, procedures applied in practice will need to support both change to new costing methodologies as well as traditional costing methodologies. By introducing the topic as a transition, we are identifying the logic behind the change and the motivation for the change.
  • Toyota did not understand the U.S. market adnd mistakes would be way too costly. Customer focus was essential. Toyota’s low volume production was only part of the problem.
  • To illustrate these concepts, we draw circles and put move — wait — setup — run — quality instpection inside each circle. Later we will take each circle and make them into narrow rectangles to represent reduction in the resources or time consumed by each activity. We will compare this drawing to the high volume transfer line drawing. As we introduce the innovation or redesign, the circles will be narrowed down to rectangular oblongs. e.g. Drilling department — specialized in drilling — setup differently to drill hole for each type of product.
  • This is a key contrast drawing to illustrate the concepts. We show the same move-wait-setup-run-quality control activities as part of an assembly line. The run circles will be the same but the move-wait-setup-run are narrow rectangles with quality control at the end of the process. The objective of JIT is to produce products with the same cost configuration as high-volume transfer production lines. Most companies never reach this point but can approach it. Managers need information to track their success at approaching this state as well as the typical costing information.
  • We draw the large circle the same size as the move circle earlier. Then we point an arrow to an oblong rectangle to demonstrate squeezing out the extra resources or time. Pair/Share: Does decreasing time in the cell meet the criteriaa for a good performance measure? Does the measure you choose correlate well with company value? Does this measure direct workers to actions that will increase company value?
  • Again we draw the wait circle and draw an arrow to the narrow oblong. Pair/Share: Do decreasing time in the cell and decreasing WIP inventories meet the criteria for good performance measures? Do these measures correlate will with company value? Do these measures direct workers to actions that will increase company value?
  • Again we draw the wait circle and draw an arrow to the narrow oblong. Pair/Share: Do these measures meet the criteria for good performance measures? Do these measures correlate well with company value? Do these measures direct workers to actions that will increase company value?
  • Again we draw the wait circle and draw an arrow to the narrow oblong. Pair/Share: Do decreasing time in the cell and decreasing WIP inventories meet the criteria for good performance measures? Do these measures correlate well with company value? Do these measures direct workers to actions that will increase company value?
  • The first portion of Exhibit 13-17
  • Exhibit 13-8, p. 481.
  • This is Exhibit 13-5, p. 476, restructured to fit the slide. The first part of each item is the goal, the second part of each item is the objectives.
  • Exhibit 13-6, p. 478, started.
  • Exhibit 13-6, p. 478, completed.
  • The next portion of Exhibit 13-17
  • The remainder of Exhibit 13-17
  • Pair/Share: Do you see any similarities between TOC and JIT systems?
  • Exhibit 13-15, p. 491. Some of the intermediate scales have been omitted to make the information more visible.
  • Exhibit 13-16, p. 492.
  • Pair/Share: What are some conditions where you would treat direct labor as a variable cost? Pair/Share: What are some conditions where you would treat direct labor as a fixed cost?
  • Exhibit 13-10, p. 485. Pair/Share: Explain the calculation of the cost per unit using backflush costing to your study partner.
  • Pair/Share: Explain the calculation of the cost per unit using time in the cell costing to your study partner.
  • The best alternative is the contribution margin from our most profitable product line if it fully utilizes the available capacity. Thus the failure to exploit the continuous improvement gains is given a financial cost that is communicated throughout the company. Pair/Share: Do decreasing time in the cell and decreasing WIP inventories meet the criteria for good performance measures? Do these measures correlate well with company value? Do these measures direct workers to actions that will increase company value?
  • PowerPoint Chapter 13

    1. 1. Management Accounting: A Road of Discovery
    2. 2. Management Accounting : A Road of Discovery James T. Mackey Michael F. Thomas Presentations by: Roderick S. Barclay Texas A&M University - Commerce James T. Mackey California State University - Sacramento © 2000 South-Western College Publishing
    3. 3. Chapter 13 Can’t we improve them all? Business process reengineering, just-in-time, and the journey to automation
    4. 4. 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.
    5. 5. Part I The Journey to JIT: The Toyota System
    6. 6. The Problem <ul><li>At the end of WWII, Toyota had few assets but wanted to make cars and trucks. </li></ul><ul><li>Toyota needed to sell in the large U.S. market to raise capital. </li></ul><ul><li>Toyota’s low volumes couldn’t compete with the costs of high-volume automobile companies. </li></ul>Domestic large Domestic small, foreign large Market size Well understood, domestic Poorly understood, foreign Markets Skilled and unionized Skilled, motivated and cheap Labor Inexpensive Expensive Material Plentiful Very little Capital (Money) United States Japan For example:
    7. 7. Part II Low Volume Production
    8. 8. Low Volume Production <ul><li>Using specialized functional department to lower costs through low cost labor and skills. </li></ul><ul><li>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. </li></ul>Note: Move – wait – setup – run – quality inspections – move – wait NVA – NVA – NVA – VA – NVA – NVA – NVA
    9. 9. Part III High Volume Transfer Lines — Setups Only Once
    10. 10. Illustration <ul><li>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. </li></ul>
    11. 11. Problems <ul><li>A production volume of 200,000 to 300,000 units allow specialized equipment to make a narrow product line. </li></ul><ul><li>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. </li></ul>
    12. 12. Part IV Continuous Improvement Management Using Just-In-Time Production and the Journey to Automation
    13. 13. JIT Continuous Improvement <ul><li>The objective of JIT continuous improvement is keep flexible production operating with the efficiency of high-volume production. </li></ul><ul><li>The role of accounting is to provide performance measures and cost information for this environment. </li></ul><ul><li>Workers are trained and empowered for continuous improvement strategies to eliminate NVA activities. </li></ul>
    14. 14. Move <ul><li>Move activities are reduced by Business Process Reengineering (BPR) from functional units into product-line, or component-based cells. </li></ul><ul><li>Cells bring machines closely together to minimize move time. </li></ul><ul><li>Workers are cross trained to accomplish many tasks. </li></ul><ul><li>Review Exhibit 13-3, p. 472, to view an illustration of JIT cells using Kanban Containers. </li></ul>
    15. 15. Wait <ul><li>Wait activities are reduced by moving from a ‘push’ to a ‘pull’ manufacturing strategy. </li></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>‘Pull’ manufacturing only releases orders when the customer demands the product. WIP does not pile up. Wait time is reduced. </li></ul></ul><ul><li>Performance measures: Decreasing time in the cell, decreasing WIP inventories. </li></ul>
    16. 16. Setup <ul><li>Setup activities are reduced by improving the setup efficiency and decreasing the number of setups needed by reducing product variety. </li></ul><ul><li>Reengineer JIT cells to make a limited range of components or products. </li></ul><ul><li>Performance measures: decreasing setups, decreasing setup time, decreasing product variety. </li></ul>
    17. 17. Quality Control <ul><li>Quality control activities can be eliminated through Total Quality Management (TQM). </li></ul><ul><li>When using traditional scientific management, extra inventories are needed to insure the correct quantities are produced despite quality failures. </li></ul><ul><li>The costs of eliminating all defects are not assumed to be justified by the benefits. </li></ul><ul><li>Quality inspections are necessary to detect these defects. </li></ul><ul><li>This increases manufacturing time and quality conformance costs. </li></ul><ul><li>TQM reduces the need for inventories and quality inspections. </li></ul><ul><li>Performance measures: decreasing quality inspections, defects, nonconformance costs, manufacturing time in the cell. And WIP inventories. </li></ul>
    18. 18. Extend <ul><li>Extend the JIT cells throughout the production system and into suppliers with JIT purchasing. </li></ul><ul><li>Make customers and vendors strategic partners. </li></ul><ul><li>Due to long-term contracts, vendor efficiencies become our efficiencies. </li></ul>
    19. 19. 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 2 nd generation ABC cost variances 1. Certified vendors 2. Guaranteed material quality 3. Guaranteed material prices 4. Kanban container-sized JIT deliveries to minimize inventories 5. EDI ordering, shipping, and payment Purchasing How management accounting helps How JIT can help Value chain process
    20. 20. Computer-Integrate Manufacturing (CIM) Cells <ul><li>Review and understand Exhibit 13-7, p. 480. The exhibit illustrates the makeup of a CIM cell and the components of those cells. </li></ul>
    21. 21. Value Chain Process Activities for JIT Purchasing <ul><li>Use only a few certified suppliers. </li></ul><ul><li>Orders, deliveries, and payments are mde under long-term contracts. </li></ul><ul><li>Materials arrive JIT and are delivered directly to manufacturing cells. </li></ul><ul><li>Supplier are paid periodically and automatically. </li></ul>
    22. 22. Finally <ul><li>Maximize product value by Quality Function Deployment strategies, customer focused management, concurrent design, target costing, and Kanban management. </li></ul>
    23. 23. JIT’s Strategic Planning Matrix <ul><li>Vision Statement — Combine the economies of low-variety, high-volume production with the benefits of diversified product lines. </li></ul><ul><li>Reengineer for high quality — TQM and continuous improvement </li></ul><ul><li>Reengineer to eliminate nonvalue-added activities — Short lead-time, Flexibility, Simplicity </li></ul><ul><li>Cellular operations — Short lead time, Flexibility, Simplicity </li></ul><ul><li>Eliminate inventories (pull manufacturing) — Short lead time, Flexibility, Simplicity </li></ul><ul><li>Minimize setup time — Short lead time, Flexibility, Simplicity </li></ul><ul><li>Cross-train workers — Short lead time Flexibility, TQM and continuous improvement </li></ul><ul><li>Certified vendors — Short lead time, Flexibility, Simplicity </li></ul>
    24. 24. Process Characteristics Comparison <ul><li>Traditional systems </li></ul><ul><li>Functional departments performing a single activity on all products using single-skilled workers. </li></ul><ul><li>Each department works at its own pace, maximizes output, and pushes it into WIP, creating large inventories to buffer against uncoordinated production. </li></ul><ul><li>Acceptable levels of scrap, rework, and rejects (another reason for large inventories). </li></ul><ul><li>JIT systems </li></ul><ul><li>Cells performing multiple activities on a single product using multi-skilled cross-trained workers. </li></ul><ul><li>Production is pulled through the cells with kanbans to coordinate cells and minimize WIP. </li></ul><ul><li>Commitment to TQM, elimination of scrap and rework (nonvalue-added activities), and no rejects. </li></ul>
    25. 25. More Process Characteristics Comparison <ul><li>Traditional systems </li></ul><ul><li>Uncommitted workers, not involved in continuous improvement, with formal worker manager hierarchy. </li></ul><ul><li>Large inventories and uncoordinated production results in long lead times (too much moving, storage, waiting, and inspection. </li></ul><ul><li>Infrequent purchases in large lots from many suppliers to minimize purchase price. </li></ul><ul><li>JIT systems </li></ul><ul><li>Empowered employees involved and rewarded for continuous improvement and performing many management activities. </li></ul><ul><li>Cellular manufacturing, short setup times, and nonvalue-added activity elimination to minimize lead time. </li></ul><ul><li>Frequent (hourly or daily) JIT deliveries from a few certified vendors using long-term contracts. </li></ul>
    26. 26. JIT, Management Accounting, and Continuous Improvement - Production 1. Lead time and LTE ratios 2. 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 time 5. Employee empowerment and training for multiple jobs Production How management accounting helps How JIT can help Value chain process
    27. 27. 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 help Value chain process
    28. 28. Part V Use Kanban Management for Continuous Improvement
    29. 29. Kanban Concepts <ul><li>Kanbans are like soda pop containers that only hold a specified number of WIP units between each activity. </li></ul><ul><li>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. </li></ul><ul><li>Units are added back to the Kanban so that production may continue while the source of the failure is improved. </li></ul><ul><li>As the need for Kanbans decline, the system approaches automation. </li></ul>
    30. 30. Part VI Creating Value — Quality, Delivery and Cost
    31. 31. How to Create Value Pull manufacturing Strategic Partnering Just In Time Service (Delivery) Management Accounting Cost Total Quality Management Quality of Conformance Customer focus, Snake charts, Concurrent design Quality of Design Quality Methods Strategies Critical Success /Failure Factors
    32. 32. Operational Control <ul><li>What do we want workers to do? </li></ul><ul><li>“ What gets measured gets done” </li></ul>
    33. 33. Performance Measures — Quality <ul><li>Quality Conformance Performance </li></ul><ul><ul><li>Customer complaints </li></ul></ul><ul><ul><li>Customer surveys </li></ul></ul><ul><ul><li>Warranty claims </li></ul></ul><ul><ul><li>Cost of quality reports </li></ul></ul><ul><li>Materials Cost/Scrap Control Performance </li></ul><ul><ul><li>Scrap rates </li></ul></ul><ul><ul><li>Quality rates . </li></ul></ul>
    34. 34. Performance Measures — Service <ul><li>On-time delivery </li></ul><ul><li>setup time </li></ul><ul><li>production backlog </li></ul><ul><li>lead time </li></ul><ul><li>cycle time </li></ul><ul><li>waste time </li></ul><ul><li>turnover rates by product </li></ul><ul><li>cycle count accuracy </li></ul><ul><li>Space reduction </li></ul><ul><li>Number of inventoried items </li></ul><ul><li>Inventory turnover rates </li></ul><ul><li>Machine availability/ downtime </li></ul><ul><li>Machine maintenance </li></ul><ul><li>Capacity utilization </li></ul>Service and Delivery Performance
    35. 35. Performance Measures — Cost <ul><li>More accurate costs </li></ul><ul><li>Backflush costing </li></ul><ul><li>Time-based costing </li></ul><ul><li>Unused capacity costs </li></ul>
    36. 36. Machine Uptime Reports
    37. 37. CI Productivity Ratio for the Truss Cell Continuous improvement =  Standard cost allowed from improvements productivity ratio Cost for continuous improvements =  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
    38. 38. Part VII Management Accounting Issues
    39. 39. Reengineering to JIT Cells <ul><li>Causes indirect costs to become direct costs. </li></ul><ul><ul><li>Previous overhead activities are not done in the cells, including setups, moves, maintenance and quality inspections. </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>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. </li></ul></ul>
    40. 40. More Causes <ul><li>Variable cost direct labor now becomes a fixed cost. </li></ul><ul><li>With worker empowerment, continuous improvement and cross training, the training costs invested in each worker increase. </li></ul><ul><li>Workers no longer do one simple task that can be learned quickly by anyone ‘off the street’. </li></ul><ul><li>Review Exhibit 13-2, p. 471 for a comprehensive illustration of these concepts. </li></ul>
    41. 41. Part VIII Costing Systems for JIT — Backflush Costing
    42. 42. Backflush Costing <ul><li>Backflush costing is often used to assign costs in JIT systems. </li></ul><ul><ul><li>Only two accounts are necessary — Conversion costs and Transfer-In costs. </li></ul></ul><ul><li>Trigger points, where units are transferred between cost centers, mark boundaries of level JIT production. </li></ul><ul><li>Level inventories within cells means beginning and ending inventories are equal. </li></ul><ul><li>Therefore all current costs may be assigned to current production. </li></ul>
    43. 43. A Comprehensive Example <ul><li>Consider an example of backflush costing for the assembly of computer terminals. </li></ul><ul><li>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. </li></ul>
    44. 44. Cost Calculation for cell A <ul><li>Conversion costs are the direct labor cost plus all the overhead and cell costs incurred. </li></ul><ul><li>Backflush costing simply divides the units finished into the conversion costs for the cell and adds the cost of materials. </li></ul><ul><li>One hundred units were started and completed. </li></ul><ul><ul><li>Level production exists throughout the measurement period. </li></ul></ul><ul><ul><li>No reductions in inventories were made this period. </li></ul></ul><ul><ul><li>The WIP in cell A at the end of the month equals the beginning inventory. </li></ul></ul>
    45. 45. Current Period Costs for Cell A Cost per unit = $6,000 / 100 units = $60.00 per unit $6,000 Total 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 units Components
    46. 46. Current Period Costs for Cell B <ul><li>Operating under the same conditions, 80 units were started and finished in cell B. </li></ul><ul><li>No additional parts or materials are added. </li></ul><ul><li>The conversion costs for this time period are $4,500. </li></ul><ul><li>What is the cost assigned to each unit finished in cell B? </li></ul>Cost per unit = conversion costs from cell B + costs from cell A = $4,500 / 80 + $60.00 = $116.25
    47. 47. Standard Homes Truss Cell Budget $80.00 per truss Standard 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 0 None Allocated product line $62,400 per year Cell labor Cell level: (No Batch Level Costs) Costs incurred in cell $55.00 per truss Total unit-level costs 2.00 per truss Direct technology $53.00 per truss Direct materials Unit level: Amounts Resources Activities
    48. 48. Part IX Time-Based Costing Systems Combining Control & Cost
    49. 49. Time-Based Performance Measures <ul><li>Notice from Section IV how often time-based performance measures were useful. </li></ul><ul><ul><li>Time-based measures correlate with value creation and provide direction to shop floor management on how to create value </li></ul></ul><ul><ul><li>The most effective measures of value should include quality, delivery, and the cost of each activity. </li></ul></ul><ul><ul><li>Combining time and cost assignment captures many of the value creating characteristics. </li></ul></ul>
    50. 50. Cell Time <ul><li>Time-in-the-cell directly determines capacity. </li></ul><ul><li>The less time per product, the more products. </li></ul><ul><li>Reducing time-in-the-cell creates capacity for increased production. </li></ul><ul><li>Using time to assign cell costs is more accurate when cells produce a variety of products. </li></ul><ul><li>The costs are divided by the uptime to estimate a cost per unit of time. </li></ul><ul><li>This method encourages reduction in cell manufacturing cycle time for continuous improvement. </li></ul>
    51. 51. An Illustration: Time-Based Cell Costs <ul><li>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. </li></ul><ul><li>Last week the cell manufactured 100 small boards in 1,000 minutes and 50 large boards in 750 minutes. </li></ul><ul><li>The cell has an 80% uptime rating and $10,000 in conversion costs. </li></ul><ul><li>For a 40-hour week the time equals (40 hours x 60 minutes x .8 uptime ratio) 1.920 minutes. </li></ul><ul><li>The charge per minute is $10,000 / 1.920 minutes or approximately $5.208 per minute. </li></ul><ul><li>Uncharged and unused capacity is 170 minutes. </li></ul>
    52. 52. Time-Based Cell Costs — Page 2 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. $77.08 $128.12 Cost per unit 25.00 50.00 Materials $52.08 $ 78.12 Conversion costs – 10 min 15 min Small Boards Large Boards Costs The costs assigned to each unit using the time-in-the-cell method are calculated as follows:
    53. 53. Part X The Opportunity Cost of Unused Capacity
    54. 54. Unused Capacity <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>We should only use this measure to encourage the use of the capacity gains from continuous improvement. </li></ul><ul><li>Review Exhibit 13-1, p. 468, for a quantitative illustration of these concepts. </li></ul>

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