CHAPTER 27 (FIN MAN); CHAPTER 12 (MAN)
COST MANAGEMENT FOR
JUST-IN-TIME ENVIRONMENTS
QUESTION INFORMATION
Number
EO27(12)-1
Objective
27-1
EO27(12)-2
Description
Difficulty
Easy
Time
5 min
AACSB
Analytic
27-1
Easy
5 min
Analytic
EO27(12)-3
27-1
Easy
5 min
Analytic
EO27(12)-4
27-1
Easy
5 min
Analytic
EO27(12)-5
27-1
Easy
5 min
Analytic
EO27(12)-6
27-2
Easy
5 min
Analytic
EO27(12)-7
27-2
Easy
5 min
Analytic
EO27(12)-8
27-3
Easy
5 min
Analytic
EO27(12)-9
27-3
Easy
5 min
Analytic
EO27(12)-10
27-3
Easy
5 min
Analytic
EO27(12)-11
27-3
Easy
5 min
Analytic
EO27(12)-12
27-3
Easy
5 min
Analytic
EO27(12)-13
27-4
Easy
5 min
Analytic
EO27(12)-14
27-5
Easy
5 min
Analytic
EO27(12)-15
27-5
Easy
5 min
Analytic
EO27(12)-16
27-5
Easy
5 min
Analytic
EO27(12)-17
27-5
Easy
5 min
Analytic
PE27(12)-1A
27-1
Easy
5 min
Analytic
PE27(12)-1B
27-1
Easy
5 min
Analytic
PE27(12)-2A
27-2
Easy
5 min
Analytic
PE27(12)-2B
27-2
Easy
5 min
Analytic
PE27(12)-3A
27-3
Easy
5 min
Analytic
PE27(12)-3B
27-3
Easy
5 min
Analytic
PE27(12)-4A
27-5
Lead time computation and analysis
Lead time computation and analysis
Identity just-in-time
benefits
Identity just-in-time
benefits
Just-in-time journal
entries
Just-in-time journal
entries
Cost of quality report
Easy
5 min
Analytic
PE27(12)-4B
27-5
Cost of quality report
Easy
5 min
Analytic
597
IMA
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
SS
GL
Number
PE27(12)-5A
Objective
27-5
Description
Process activity analysis
Process activity analysis
Just-in-time principles
Difficulty
Easy
Time
5 min
AACSB
Analytic
PE27(12)-5B
27-5
Easy
5 min
Analytic
Ex27(12)-1
27-1
Easy
10 min
Analytic
Ex27(12)-2
27-1
Easy
10 min
Analytic
Easy
10 min
Analytic
27-1
Just-in-time as a
strategy
Lead time reductionservice company
Just-in-time principles
Ex27(12)-3
27-1, 27-4
Ex27(12)-4
Easy
10 min
Analytic
Ex27(12)-5
27-1
Lead time analysis
Easy
10 min
Analytic
Ex27(12)-6
27-1
Reduce setup time
Easy
15 min
Analytic
Ex27(12)-7
27-1
Calculate lead time
Easy
15 min
Analytic
Ex27(12)-8
27-1
Calculate lead time
Easy
15 min
Analytic
Ex27(12)-9
27-1, 27-4
Easy
15 min
Analytic
Ex27(12)-10
27-1
Easy
20 min
Analytic
Ex27(12)-11
27-1
Easy
15 min
Analytic
Ex27(12)-12
27-3
Easy
15 min
Analytic
Ex27(12)-13
27-3
Easy
20 min
Analytic
Ex27(12)-14
27-3
Easy
20 min
Analytic
Ex27(12)-15
27-3
Easy
20 min
Analytic
Ex27(12)-16
27-4
Easy
15 min
Analytic
Ex27(12)-17
27-5
Lead time calculation—doctor's office
Supply chain management
Employee involvement
Accounting issues in
a just-in-time environment
Just-in-time journal
entries
Just-in-time journal
entries
Just-in-time journal
entries
Just-in-time fast-food
restaurant
Pareto chart
Moderate
20 min
Analytic
Ex27(12)-18
27-5
Cost of quality report
Moderate
20 min
Analytic
Ex27(12)-19
27-5
Moderate
27-5
Moderate
30
min
30 min
Analytic
Ex27(12)-20
Ex27(12)-21
27-4, 27-5
Moderate
30 min
Analytic
Ex27(12)-22
27-5
Moderate
30 min
Analytic
Pr27(12)-1A
27-1
Pareto chart for a
service company
Cost of quality and
value-added/nonvalue-added reports
Process activity analysis
Process activity analysis
Just-in-time principles
Moderate
45 min
Analytic
Pr27(12)-2A
27-1
Lead time
Moderate
45 min
Analytic
Pr27(12)-3A
27-3
Difficult
27-4, 27-5
1 1/2
hr
1 1/2
hr
Analytic
Pr27(12)-4A
Pr27(12)-1B
27-1
Just-in-time accounting
Pareto chart and cost
of quality report—
municipality
Just-in-time principles
45 min
Analytic
Difficult
Moderate
598
Analytic
Analytic
IMA
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
Cost Management
SS
Exl
Exl
Exl
Exl
Exl
Exl
Exl
Exl
GL
Number
Pr27(12)-2B
Objective
27-1
Description
Lead time
Difficulty
Moderate
Time
45 min
AACSB
Analytic
Pr27(12)-3B
27-3
Pr27(12)-4B
27-4, 27-5
Difficult
1 1/2
hr
1 1/2
hr
Analytic
Moderate
30 min
Ethics
Ethical Considerations
27-2
Just-in-time accounting
Pareto chart and cost
of quality report—
municipality
Ethics and professional conduct in
business
Just-in-time principles
SA27(12)-1
27-2
SA27(12)-2
Moderate
30 min
Analytic
SA27(12)-3
27-3
Just-in-time principles
Moderate
30 min
Analytic
SA27(12)-4
27-5
Moderate
45 min
Analytic
SA27(12)-5
27-1
Value-added and
non-value-added
activity costs
Lead time
Cost Management
Cost Management
Cost Management
Difficult
1 hr
Analytic
Difficult
599
Analytic
IMA
Cost Management
Cost Management
Cost Management
Cost Management
SS
Exl
Exl
GL
EYE OPENERS
1. Just-in-time processing is a philosophy that
focuses on reducing time, cost, and poor
quality within manufacturing processes. The
result of these efforts is a reduction in inventory levels.
2. Move time and wait time in inventory.
3. A product-oriented layout can be designed to
minimize materials movements and reduce
(or eliminate) setup time. As a result, a
product-oriented layout should have a shorter lead time than a process-oriented layout.
4. Long setup times lead to large production
runs (batch sizes) in order to amortize the
cost of the setup. Large batch sizes result in
larger inventories, which in turn lead to long
wait times. Thus, long setup times can lead
directly to long lead times.
5. Pull or "make to order" manufacturing requires the manufacturer to build product only
as it is needed for actual customer orders.
As a result, finished goods, work in process,
and materials inventories are minimized.
Make to order manufacturing requires a high
degree of flexibility and insignificant setup
costs.
6. Product defects can cause additional costs
and unpredictability in the process in the
form of scrap, rework, record keeping, and
inspection. In addition, product defects can
cause a process to shut down, because
there is very little work in process inventory
to keep the next (downstream) operations
running. Thus, a just-in-time manufacturer
would wish to eliminate the negative consequences of product defects.
7. With supply chain management, long-term
relationships are established with suppliers
and customers to improve quality, cost, and
delivery. Traditional relationships are usually
focused on reducing price through supplier
or customer competitive bidding. Thus, the
traditional supplier and customer relationship
can be very short-term oriented (until a better "deal" comes along).
8. A just-in-time environment will result in fewer
(or no) work in process control points. As a
result, there are no in-process transactions
into and out of work in process inventory locations throughout the process. The just-intime cost accounting system, termed backflush accounting, “pulls” cost from completed
production, rather than “pushed” through the
plant, using materials requisitions or production orders.
9. The raw and in process inventory account
combines the materials and work in process
inventories because the materials are often
introduced directly into the process. Thus,
the materials are not recorded in a separate
materials account before being introduced to
work in process because there is no materials inventory.
10. Direct labor and indirect labor activities become combined in a just-in-time environment. Employees perform both direct and
indirect labor tasks. In addition, direct labor
can be a small part of the cost of producing
product. As such, the direct labor is included
as overall conversion cost (much like in a
process cost system).
11. There is less transaction control under a
just-in-time environment because there are
fewer work in process control points. Thus,
the control intervals are much wider in justin-time manufacturing, and the system is
much simpler. In addition, nonfinancial
measures provide more operational control
information for cell employees than do accounting reports.
12. The actual conversion cost per unit will be
greater than the budgeted conversion cost
per unit due to cell inefficiency, excess
scrap, or lost production time in the cell due
to a drop in demand.
13. Patients with common health problems are
placed together on a floor (product-focused
layout). Centralized services, such as X rays,
are distributed to the floors. Cross-trained
caregivers provide care, rather than many
different specialists.
14. An activity analysis is used for determining
the cost of activities, based on analyses of
employee effort and other records.
15. A Pareto chart shows the totals of a particular attribute for a number of categories. The
categories are ranked and displayed left to
right, so that the largest total is on the left
and the smallest total is on the right. In this
way, management can quickly identify important problems.
16. Non-value-added activities are activities that
are viewed as unnecessary from the customer’s perspective. These activities are
generally considered wasteful and are candidates for elimination through process improvements.
600
17.
The cost of a process can be improved by
improving processing methods or eliminating
unnecessary or wasteful work.
601
PRACTICE EXERCISES
PE 27–1A (FIN MAN); PE 12–1A (MAN)
a.
Value-added lead time:
30 min.
(18 min. + 12 min.)
Non-value-added lead time:
Within-batch wait time 1,020 min.[30 min. × (35 − 1)]
Move time
9
Total lead time
1,059
b.
Value-added ratio:
30 min.
 2.8%
1,059 min.
PE 27–1B (FIN MAN); PE 12–1B (MAN)
a.
Value-added lead time:
23 min.
Non-value-added lead time:
Within-batch wait time 1,357 min.[23 min. × (60 − 1)]
Move time
18
Total lead time
1,398
b.
Value-added ratio:
23 min.
 1.6%
1,398 min.
PE 27–2A (FIN MAN); PE 12–2A (MAN)
b. Smaller batch sizes
c. Employee involvement
602
(8 min. + 15 min.)
PE 27–2B (FIN MAN); PE 12–2B (MAN)
a. Production pace matches demand
c. Less wasted movement of material and people
d. Receive raw materials directly to manufacturing cells
PE 27–3A (FIN MAN); PE 12–3A (MAN)
a. Raw and In Process Inventory .......
Accounts Payable ......................
1,261,500*
1,261,500
*$1,450 per unit × 870 units
b. Raw and In Process Inventory .......
Conversion Costs ......................
159,800*
159,800
*[($1,927,000/2,050 hours) × (12 min./60 min.)] = $188 per unit;
$188 × 850 units = $159,800
c. Finished Goods Inventory ..............
Raw and In Process Inventory..
1,375,920*
1,375,920
*($1,450 + $188) × 840 units
PE 27–3B (FIN MAN); PE 12–3B (MAN)
a. Raw and In Process Inventory .......
Accounts Payable ......................
38,000*
38,000
*$95 per unit × 400 units
b. Raw and In Process Inventory .......
Conversion Costs ......................
22,200*
22,200
*[($270,000/1,800 hours) × (24 min./60 min.)] = $60 per unit;
$60 × 370 units = $22,200
c. Finished Goods Inventory ..............
Raw and In Process Inventory..
54,250*
54,250
*($95 + $60) × 350 units
603
PE 27–4A (FIN MAN); PE 12–4A (MAN)
Cost of Quality Report
Quality Cost Classification
Quality Cost
Prevention .......................................
Appraisal ..........................................
Internal failure ................................
External failure ................................
Total..................................................
$105,000
30,000
12,000
3,000
$ 150,000
Percent of
Total Quality
Cost
70%
20
8
2
100%
Percent of
Total
Sales
10.5%
3.0
1.2
0.3
15.0%
PE 27–4B (FIN MAN); PE 12–4B (MAN)
Cost of Quality Report
Quality Cost Classification
Quality Cost
Prevention .......................................
Appraisal ..........................................
Internal failure ................................
External failure ................................
Total..................................................
$270,000
90,000
45,000
495,000
$ 900,000
Percent of
Total Quality
Cost
30%
10
5
55
100%
Percent of
Total
Sales
4.50%
1.50
0.75
8.25
15.00%
PE 27–5A (FIN MAN); PE 12–5A (MAN)
Inspection activity before improvement: $360,000/60,000 units = $6.00 per unit
Inspection activity after improvement: ($360,000 × 25%)/60,000 units = $1.50
per unit
PE 27–5B (FIN MAN); PE 12–5B (MAN)
Inspection activity before improvement: $45,000/5,000 units = $9.00 per unit
Inspection activity after improvement: [$45,000 × (500/5,000)]/5,000 units =
$0.90 per unit
604
EXERCISES
Ex. 27–1 (FIN MAN); Ex. 12–1 (MAN)
The CEO must not have been listening very closely at the conference. Just-intime is not primarily an inventory reduction method. Just-in-time is a process
improvement philosophy that focuses on reducing time, cost, poor quality, and
uncertainty from a process. Large inventories are merely a symptom of poorly
designed processes. Thus, the CEO’s statement is naive. The company must first
remove the reasons for inventory. These causes are poor quality, large setup
times, unreliable equipment, poor employee relationships, poor layout design
(process focus), and poor supplier relationships. When these are improved, then
the inventory level can be reduced, lead times can be shortened, and the company can begin pull manufacturing. If the employees follow the CEO’s orders without making the process improvements, the plant will likely suffer reduced
productivity.
In addition, the CEO has not provided the training or action plan for moving to
just-in-time. The CEO has only commanded that it be done. This will create anxiety in the workforce, and it is not consistent with employee involvement.
Ex. 27–2 (FIN MAN); Ex. 12–2 (MAN)
This is an actual situation facing the U.S. apparel industry. Warren Featherbone
and other U.S.-based apparel manufacturers are discovering the strategic power
of just-in-time. Rather than competing with the offshore manufacturers on price,
these companies are providing smaller quantities with much faster delivery. The
retailer is able to order and receive goods in smaller, more frequent batch sizes.
As a result, the retailer is able to move with fashion trends much more quickly. If,
for example, a particular style is proving popular, the domestic manufacturer can
immediately produce and deliver more of this item. The offshore operation manufactures in batch sizes that are too large and too far away to respond quickly. In
addition, the retailer does not have to commit significant inventory to unknown
fashion trends when purchasing from the local company. As a result, the retailer
is able to avoid markdowns on slow-moving goods. Markdowns represent the
second largest cost to retailing operations (next to cost of merchandise sold).
The retailer must make large order commitments to the offshore manufacturer. If
the product eventually proves to be disappointing in the market, the retailer has
no choice but to incur severe markdowns to move the excess inventory. Because
of significant benefits, the retailer will be willing to pay a higher cost for manufactured items from the domestic company. This is how the German and Italian apparel industries are positioning themselves.
605
Ex. 27–3 (FIN MAN); Ex. 12–3 (MAN)
Homeguard Insurance Company should adopt just-in-time principles in its claims
payment operations. Management should first consider changing the layout for
this process. Instead of processing the claims payments through three different
departments that are organized by process, the company could design claims
payment “cells” that are organized around different types of insurance products
or customers. For example, a cell could be created for all marine insurance. The
cell would have data input, claims audit, and claims adjustment personnel all located together (co-located) to process marine insurance claims. This would reduce the move time between the departments considerably. In addition, the
claims batches should be reduced. If the claims were processed one or two at a
time in a product-focused cell, then payments might be possible on the same day
that the claim is submitted, rather than 10 days later. Thus, as claims came into
the cell, they would be worked on. This would be an example of “pull manufacturing (scheduling).” The cell is activated by work (demand for claim payments). The
work is “pulled” through each process step in the cell until a check is delivered
to the insurance customer. Claims payment software can also aid the process by
transmitting claim information on electronic forms over an Intranet, rather than
using paper forms.
Note to Instructors: Insurance companies, such as Aetna and Mutual Benefit Life,
are actually employing just-in-time principles in their claims payment and insurance application processes.
606
Ex. 27–4 (FIN MAN); Ex. 12–4 (MAN)
Piecework compensation is a characteristic of a traditional manufacturing philosophy that is inconsistent with just-in-time. Under just-in-time, workers are
viewed not just as laborers but as valuable assets of the company. The company
wants workers to also bring their minds to the job. Thus, workers should be
compensated for contributing to process improvements, for training themselves
to work other jobs in the cell, and for managing themselves. This might involve
an hourly rate system plus bonus incentives. Piecework payments would not pay
workers for these contributions because the pay arrangement is a very simple
“produce for pay” arrangement. Moreover, piecework encourages workers to
make product, regardless of whether there is demand for the product. Workers
do not get paid for idle time, so they will continue to work and build inventory.
However, under pull manufacturing, the cell will work only if there is demand. If
there is no demand, the cell employees should work in other cells or work on improving themselves or the process. Piecework compensation is very inconsistent
with this philosophy. Employees should not be penalized just because the cell is
operating at a slower pace (or is shut down) due to decreases in demand. The
employee has no control over the demand placed on the cell.
Management does not need to be concerned about proper motivation to work.
Under pull manufacturing, the garment will be pulled through the cell. A slow employee will slow the whole output of the cell. The other employees will either help
the slow employee or encourage the employee to catch up with the pace of the
cell.
Ex. 27–5 (FIN MAN); Ex. 12–5 (MAN)
Management is incorrect in stating that the direct labor time is equal to the lead
time. The lead time also includes the wait time and other non-value-added time
required to make the product. The different batch sizes create within-batch wait
time for each unit. Thus, the lion, which is made in batch sizes of 50 units, has a
lead time of 600 minutes, or 10 hours (50 units × 12 minutes per unit). Of this
amount, only 12 minutes are value-added. The remaining time is non-value-added
within-lot wait time. The bear has a lead time of 60 minutes, or 1 hour (5 units ×
12 minutes per unit). Of this amount, 12 minutes are value-added. The remaining
48 minutes is non-value-added within-lot wait time.
607
Ex. 27–6 (FIN MAN); Ex. 12–6 (MAN)
a. Long setup times have two negative consequences. First, a long setup time consumes
valuable machine capacity that could be used for productive purposes. Second, a long
setup time results in large production batch sizes to recover the economic cost of the
setup. As a result, a long setup will result in a large production batch, which increases
work in process inventory, which increases lead time. Large work in process inventory
commits working capital that could be used for other purposes. Long lead times reduce
the company’s ability to respond to changes in customer demand.
b. One obvious improvement would be to limit the trips to the tool room to one round trip, rather than two. However, even this could be improved upon by changing the location of the
fixtures. Changing the location of the fixtures could significantly reduce the lathe setup
time. Instead of using a tool room to control the fixtures, the appropriate fixtures for
the lathe could be located at the lathe operation. In this case, the operator would not
need to walk to a tool room and retrieve and replace fixtures (along with paperwork).
Rather, the operator would have the tools required for a setup right at the lathe location. In this situation, the company would trade off somewhat less control over fixtures
for faster setup time. Many companies are eliminating tool rooms for just this reason.
These companies are finding that tool room control is not necessary if tools are stored at
a designated location near the point of use (i.e., they won’t be lost or stolen if they have
a visible storage point). An intermediate solution is to retain the tool room and have the
operator make only one trip to the tool room to return the old fixture and retrieve the
new one.
c. Turn off machine and remove fixture from lathe ...................
Clean lathe ..................................................................................
Install new fixture and turn on machine .................................
Total setup time ..................................................................
10 minutes
25
10
45 minutes*
*Plus time for replacing and retrieving a tool at a point of use.
608
Ex. 27–7 (FIN MAN); Ex. 12–7 (MAN)
Traditional Philosophy
Value-Added
Time
141
Processing time ...................................
Within-batch wait time .........................
Move time ..............................................
Total .................................................
Value-added ratio:
1Total
Non-ValueAdded Time
1,2462
14
10
1,256
Total Time
14
1,246
10
1,270
14 minutes
= 1.1%, rounded
1,270 minutes
process time per unit:
Milling ....................................................
Finishing ...............................................
Total .................................................
2Within-batch
6 minutes
8
14 minutes
wait time:
Multiply the process time by the remaining units in the batch (waiting their turn):
14 minutes × (90 – 1) units = 1,246 minutes
Just-in-Time Philosophy
Value-Added
Non-ValueTime
Added Time Total Time
1
Processing time ...................................
14
14
2
Within-batch wait time .........................
56
56
Move time ..............................................
0
0
Total .................................................
14
56
70
14 minutes
Value-added ratio:
= 20%
70 minutes
1Total process time per unit:
Milling ....................................................
6 minutes
Finishing ...............................................
8
Total .................................................
14 minutes
2Within-batch wait time:
Multiply the process time by the remaining units in the batch (waiting their turn):
14 minutes × (5 – 1) units = 56 minutes
609
Ex. 27–8 (FIN MAN); Ex. 12–8 (MAN)
Present Approach
Value-Added
Non-ValueTime
Added Time Total Time
Processing time ...................................
341
34
2
Within-batch wait time .........................
1,496
1,496
3
Move time ..............................................
100
100
Total .................................................
34
1,596
1,630
34 minutes
Value-added ratio:
= 2.1%, rounded
1,630 minutes
1Total process time per unit:
Process Step 1 .....................................
6 minutes
Process Step 2 .....................................
4
Process Step 3 .....................................
15
Process Step 4 .....................................
9
Total .................................................
34 minutes
2Within-batch wait time:
Multiply the process time by the remaining units in the batch (waiting their turn):
34 minutes × (45 − 1) units = 1,496 minutes
3Move time:
5 moves (from raw materials to finished goods) × 20 minutes = 100 minutes
Proposed Approach
Value-Added
Time
Processing time ...................................
341
Within-batch wait time .........................
Move time ..............................................
Total .................................................
34
34 minutes
Value-added ratio:
= 22.5%
151 minutes
1Total process time per unit:
Non-ValueAdded Time
1022
153
117
Total Time
34
102
15
151
Process Step 1 .....................................
6 minutes
Process Step 2 .....................................
4
Process Step 3 .....................................
15
Process Step 4 .....................................
9
Total .................................................
34 minutes
2Within-batch wait time:
Multiply the process time by the remaining units in the batch (waiting their turn):
34 minutes × (4 – 1) units = 102 minutes
3Move time: 5 moves × 3 minutes = 15 minutes
610
Ex. 27–9 (FIN MAN); Ex. 12–9 (MAN)
a. and b.
Elapsed Time (a)
1:00 p.m.
2:00
2:15
2:20
2:35
2:45
2:55
3:00
3:40
3:48
4:10
Activity
Arrives at doctor office
Waits in waiting room (12 × 5 min.)
Waits in examining room
Nurse takes readings
Waits in examining room
Doctor performs diagnosis
Waits to pay for services
Walks to pharmacy
Waits to fill prescription (5 × 8 min.)
Prescription is filled
Drives home
Total
ValueAdded
Time
NonValueAdded
Time (b)
0:60
0:15
0:05
0:15
0:10
0:10
0:05
0:40
0:08
0:22
50 min.
140 min.
Chen arrives home at 4:10 p.m.
b. Of the total elapsed time of 190 minutes, 140 minutes is non-value-added time. This
represents 73.7% of the total elapsed time (140 minutes/190 minutes).
c. The doctor requires patients to wait in order to increase the productivity of the office.
The patients represent the “work in process inventory” of the office, while the physician
and nurses are the critical productive resources. The clinical staff remains productive
because there is always a supply of patients to serve. The physician never loses productive minutes providing patient care by waiting for a patient. Unfortunately, the physician’s productivity comes at the cost of the patient. The patients must wait for the nurse
and physician before being served.
Additional causes of patient waiting are due to variation in the patient service delivery
process. If there are uncertainties or variation in service requirements, such as some patients needing more time with the doctor and others needing less, then the amount of
“work in process” will tend to increase in order to buffer the “throughput” of the office.
Likewise, doctors being called out for emergencies causes disruption in the patient flow
in the office.
611
Ex. 27–10 (FIN MAN); Ex. 12–10 (MAN)
a. The Japanese supply chain model is one based on long-term arrangements and partnership. The Japanese automobile manufacturers want their suppliers to be financially
healthy because they rely on them for innovation. The Big Three automakers, in contrast, are only concerned about getting the best short-term price from their suppliers.
The article seems to imply that the longer-term benefits from partnership are being ignored by the Big Three. As a result, they are willing to view their supplier relationships
as temporary―until the next best price comes along.
b. These suppliers support the Japanese system because it provides for win-win opportunities, whereby the customer and the supplier can both be successful. The suppliers are
concerned about their margins being squeezed down to the point that they will be unable to maintain financial viability and/or provide the level of supplier service that will
be demanded in the long-term under the conventional Big Three supplier model. Suppliers are also concerned about the uncertainty of temporary or short-term contracts.
Such demand volatility can add risk and cost to the supplier’s business over time.
c. Supply chain management is often beneficial to the customer. However, the customer
may have to trade off between short-term and longer-term benefits. For example, supply chain management provides the supplier the financial incentives to invest in process
and product innovation, invest in supply chain collaboration (such as EDI, RFID, and
Internet collaboration), and to share best practices, such as just-in-time principles,
across business entities. Such investments provide the customer access to new technologies, new ideas, more efficient processes, and ultimately lower costs and higher value for
all parties involved in the supply chain.
612
Ex. 27–11 (FIN MAN); Ex. 12–11 (MAN)
Quickie’s team approaches are very different from using a manager to hire and
evaluate employees. First, the input of many individuals goes into the hiring
decision. In this way, the viewpoints of a variety of people are brought into the
decision. Moreover, the new hire needs to “fit” with the culture of the team. Teambased hiring can produce a higher probability of having an effective team member by having a good fit. A possible concern is the team hiring only people that
are like themselves (failing to achieve racial or gender diversity). The peer evaluation may be more effective than the supervisor evaluation, since the team may be
more familiar with the team member’s input to the goals of the team. In addition,
it will be difficult to hide unwanted behavior from the team. Team members work
with each other every day and may best be able to evaluate performance. A concern would arise if the team members are not trained in making evaluations. The
process should be helpful and not threatening to the employee.
Team-based evaluation practices increase employee involvement. Employees
have input into decisions that affect the team, rather than having these decisions
handed down to them. This should increase the amount of empowerment and job
satisfaction enjoyed by the team members.
613
Ex. 27–12 (FIN MAN); Ex. 12–12 (MAN)
The production manager probably has some good points. If the accounting system does not change when an organization embraces a just-in-time strategy, then
there will likely be complaints. A conventional accounting system needs to have a
strong accounting control orientation. Under just-in-time, the accounting system
can be designed with much wider transaction control intervals. The company
could have a very wide transaction interval—such as between purchased parts
transacted in and finished goods transacted out. Thus, many transactions into
and out of intermediate work in process inventory locations would not be needed.
In addition, a raw and in process inventory account would allow the company to
eliminate separate raw materials release transactions. Eliminating accounting
controls would be foolhardy unless the company has strong visible controls.
Otherwise, there is simply too much room for waste and very large unexplained
cost variances. Under just-in-time, visible controls such as the amount of inventory, production line stoppages, statistical control charts, or emergency lights replace accounting controls.
The direct labor reporting can be eliminated. Under JIT accounting, the direct labor employees are assigned to production cells. Their wages are treated as part
of the cell’s conversion costs and are not separately traced or reported. The traditional financial measures should be supplemented with nonfinancial measures,
such as schedule attainment, lead time, quality, machine uptime (availability),
safety, and setup time. The nonfinancial measures can be collected and reported
immediately without the need for additional effort to translate the numbers into
financial terms. In addition, cost of quality or value-added/non-value-added activity analyses can provide financial information that can be used by the production
department manager.
614
Ex. 27–13 (FIN MAN); Ex. 12–13 (MAN)
a. Budgeted Cell Conversion Cost Rate =
$998,400
= $520 per hour
1,920 hours
b. Budgeted Cell Conversion Cost per Unit =
9 minutes
× $520 per hour
60 minutes
= $78 per unit
c. 1. Raw and In Process Inventory ............................................
Accounts Payable .............................................................
1,100 units × $70 = $77,000
77,000
2. Raw and In Process Inventory ............................................
Conversion Costs .............................................................
1,100 units × $78 = $85,800
85,800
3. Finished Goods Inventory ...................................................
Raw and In Process Inventory .......................................
1,100 units × ($78 + $70)
162,800
4. Accounts Receivable ............................................................
Sales ..................................................................................
262,500*
77,000
85,800
162,800
262,500
*1,050 units × $250 per unit
Cost of Goods Sold ...............................................................
Finished Goods Inventory...............................................
(1,050 × $148)
615
155,400
155,400
Ex. 27–14 (FIN MAN); Ex. 12–14 (MAN)
a. Budgeted Cell Conversion Cost Rate =
$120,000
= $60 per hour
2,000 hours
b. Budgeted Cell Conversion Cost per Unit =
15 minutes
× $60 per hour
60 minutes
= $15 per unit
c. 1. Raw and In Process Inventory ............................................
Accounts Payable .............................................................
650 units × $24 = $15,600
15,600
2. Raw and In Process Inventory ............................................
Conversion Costs .............................................................
650 units × $15 = $9,750
9,750
3. Finished Goods Inventory ...................................................
Raw and In Process Inventory .......................................
640 units × ($24 + $15)
24,960
4. Accounts Receivable ............................................................
Sales ..................................................................................
40,950*
15,600
9,750
24,960
40,950
*630 units × $65
Cost of Goods Sold ...............................................................
Finished Goods Inventory...............................................
(630 × $39)
616
24,570
24,570
Ex. 27–15 (FIN MAN); Ex. 12–15 (MAN)
a. 1. Raw and In Process Inventory ............................................
Accounts Payable ............................................................
40,800*
40,800
*600 units × $68
2. Raw and In Process Inventory ............................................
Conversion Costs ............................................................
42,750*
42,750
*[($42,500/170 hours) × (18 min./60 min.)] = $75 per unit
$75 per unit × 570 units = $42,750
3. Finished Goods Inventory ...................................................
Raw and In Process Inventory .......................................
80,080*
80,080
*($68 + $75) × 560 units
4. Sales ......................................................................................
Accounts Receivable .......................................................
140,400*
140,400
*$260 per unit × 540 units
Cost of Goods Sold ...............................................................
Finished Goods Inventory ..............................................
77,220*
77,220
*($68 + $75) × 540 units
b. Raw and In Process Inventory, ending balance ......................
$3,4701
Finished Goods Inventory, ending balance .............................
$2,8602
1$40,800
+ $42,750 − $80,080, or
Materials $68 per unit × (600 units − 570 units) ...............
Production ($68 + $75) × (570 units − 560 units) ............
Total ...........................................................................................
2$80,080
$2,040
1,430
$ 3,470
− $77,220, or
($68 + $75) × (560 units − 540 units) ...........................
617
$2,860
Ex. 27–16 (FIN MAN); Ex. 12–16 (MAN)
a. The present Mister Burger service delivery system is an example of a push system. Special orders are “pushed” through the system. The order is placed at the beginning of the
process and the hamburger is cooked, dressed, and then delivered to the “inventory” of
finished hamburgers placed under the hot lamps. Customers are sold burgers from this
finished goods inventory. Under this system, the customer wait time would be small only if the customer ordered a “standard” burger from the inventory. If the customer ordered a special order, then he or she would have to wait for the complete cook and dress
cycle to be completed.
b. A new system could be designed so that the order is introduced at the end of the process, rather than the beginning. In this way, hamburgers are made to order without the
use of finished goods inventory. Under this process, assume a customer ordered a hamburger with ketchup and pickles only. The order would be received at the dressing station. Here, a food preparer would take a hamburger off the grill and place ketchup and
pickles on the burger using materials at the dressing station (termed point-of-use materials). The hamburger that is pulled from the grill would create a signal (the space on
the grill) for a new hamburger to be placed on the grill. In this way, hamburgers that
are cooking do not have orders assigned to them. Rather, they are available to be pulled
by the food preparer to satisfy customer orders. Under this system, the lead time for
cooking the hamburger is eliminated from the customer wait time. The customer has
only to wait for the burger to be dressed. The attractiveness of this approach is that customers can have the burgers “their way” without using finished goods inventory to provide fast response.
A variation on this answer is to have plain hamburgers pulled directly off the grill by
the customer order (as above) but place the dressing stations among the customers. In
this way, the customers dress their own burgers after purchasing them.
Note to Instructors: You may recognize that the first system described in this exercise is similar to the method invented by McDonald’s, while Wendy’s used the
second method. McDonald’s recently indicated that it was switching its method
to work more like Wendy’s because of its superior service characteristics. You
might also note that Dell’s manufacturing strategy is very similar to Wendy’s. It
produces computers to order using pull signals. This allows Dell to build the
computer to a user specification, yet still deliver it within a matter of days.
618
619
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Dollars
Ex. 27–17 (FIN MAN); Ex. 12–17 (MAN)
Pareto Chart of Quality Activities
300,000
250,000
200,000
150,000
100,000
50,000
0
Ex. 27–18 (FIN MAN); Ex. 12–18 (MAN)
a.
INTEGRITY MEMORY CIRCUITS INC.
Cost of Quality Report
Cost Summary
Quality Cost
Classification
Prevention ........................
Appraisal ..........................
Internal failure .................
External failure ................
Total ............................
Quality Cost
Percent of Total
Quality Cost
$ 67,500
130,500
243,000
459,000
$ 900,000
7.5%
14.5
27.0
51.0
100.0%
Percent of Total
Sales
1.5%
2.9
5.4
10.2
20.0%
The following classifications were used to develop the cost of quality report:
Quality Activities
Activity Cost
Correct shipment errors ..........................................
Disposing of scrap ....................................................
Emergency equipment maintenance ......................
Employee training ....................................................
Final inspection ........................................................
Inspecting incoming materials ................................
Preventive equipment maintenance .......................
Processing customer returns ...................................
Scrap reporting ........................................................
Supplier development ..............................................
Warranty claims.......................................................
Total ..........................................................................
$ 108,000
126,000
81,000
27,000
103,500
27,000
22,500
90,000
36,000
18,000
261,000
$900,000
Quality Cost
Classification
External failure
Internal failure
Internal failure
Prevention
Appraisal
Appraisal
Prevention
External failure
Internal failure
Prevention
External failure
b. The majority of the company’s quality efforts are in correcting quality problems. This
is evident by the high percentage of quality costs associated with internal and external
failure (78% of total quality costs). The highest cost activities are warranty claims,
which indicates significant field failures for the product. Emergency equipment
maintenance is an internal failure because it indicates that the company is failing to
preventively maintain the equipment. Emergency repairs create significant disruptions
and quality problems.
620
621
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Dollars
Ex. 27–19 (FIN MAN); Ex. 12–19 (MAN)
Pareto Chart of Quality Activities
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Ex. 27–20 (FIN MAN); Ex. 12–20 (MAN)
a.
COUNTRYWIDE CABLE COMPANY
Cost of Quality Report
Quality Cost
Classification
Prevention .............................
Appraisal ...............................
Internal failure ......................
External failure .....................
Total .................................
1 $306,000
Quality Cost
$306,000
108,000
12,000
174,000
$600,000
Cost Summary
Percent of Total Percent of Total
Quality Cost
Sales
15.3%1
5.4
0.6
8.7
30.0%
51.0%
18.0
2.0
29.0
100.0%
÷ $2,000,000
b.
COUNTRYWIDE CABLE COMPANY
Value-Added/Non-Value-Added Activity Analysis
Category
Value-added ..........................
Non-value-added ..................
Total .................................
Amount
$414,000
186,000
$600,000
Percent
69%
31
100%
The following classifications were used to develop the reports:
Quality
Activities
Activity
Cost
Billing error correction .............. $ 30,000
Cable signal testing ...................
108,000
Reinstalling service (installed
incorrectly the first time).........
78,000
Repairing satellite equipment ...
12,000
Repairing underground cable
connections to the customer..
24,000
Replacing old technology cable
with higher quality cable .........
132,000
Replacing old technology signal
switches with higher quality
switches ...................................
144,000
Responding to customer home
repair requests.........................
42,000
Training employees....................
30,000
Total ............................................
$600,000
Quality Cost
Classification
VA/NVA
External failure
Appraisal
Non-value-added
Value-added
External failure
Internal failure
Non-value-added
Non-value-added
External failure*
Non-value-added
Prevention
Value-added
Prevention
Value-added
External failure
Prevention
Non-value-added
Value-added
*This is an external failure because the underground cable connection needs to
be repaired after receiving notification of disrupted service from a customer.
622
Ex. 27–20 (FIN MAN); Ex. 12–20 (MAN)
Concluded
c. The reports indicate that Countrywide Cable Company’s total costs of quality are 30%
of total sales. In addition, 51% of the activity cost goes toward prevention activities. As
a result, Countrywide Cable is able to avoid high internal and external failure activities.
Only 31% of the activities are non-value-added, compared to 69% that are valueadded. Although there is some room for improvement, the company appears to be effectively managing its quality activities.
623
Ex. 27–21 (FIN MAN); Ex. 12–21 (MAN)
a.
Activity
Receiving claim.........................................................
Adjusting claim ........................................................
Paying claim .............................................................
Total ..........................................................................
Cost
$ 30,000
130,000
40,000
$200,000
Percent of
Total Process
15%
65
20
100%
The “adjusting claim” activity is the most significant activity in this process.
b.
Average process cost per paid claim:
$200,000
= $40.00 per paid claim
5,000 claims
c.
Activity
Receiving claim............................
Adjusting claim ...........................
Paying claim ................................
Total .............................................
Activity Cost
Prior to
Improvement
$ 30,000
130,000
40,000
$200,000
Activity Cost
After
Activity Cost
Improvement Savings (Cost)
$ 33,600*
$ (3,600)
45,500**
84,500
40,000
—
$119,100$ 80,900
*$30,000 × 112%
**$130,000 × (1 – 65%)
Note: Sometimes an activity cost within a process will need to increase in order
to realize additional benefits in another part of a process, as illustrated here.
d.
Average process cost per paid claim:
$119,100
= $23.82 per paid claim
5,000 claims
624
Ex. 27–22 (FIN MAN); Ex. 12–22 (MAN)
a.
Percent of
Activity
Preparing materials request ....................................
Requesting, receiving, and selecting
vendor bids .........................................................
Preparing purchase order .......................................
Preparing receiving ticket .......................................
Matching M/R, R/T, and invoice ............................
Correcting reconciliation differences .....................
Preparing and delivering vendor payment ............
Total process activity cost .......................................
Cost
Total Process
$ 40,000 8%
120,000
25,000
35,000
50,000
180,000
50,000
$500,000100%
24
5
7
10
36
10
“Requesting, receiving, and selecting vendor bids” and “correcting reconciliation
differences” total 60% of the total process cost. This indicates that these two activities are good candidates for improvement effort.
b.
Average process cost per payment:
c.
Activity
Preparing materials request
Requesting, receiving, and
selecting vendor bids .............
Preparing purchase order ..........
Preparing receiving ticket ..........
Matching M/R, R/T, and invoice
Correcting reconciliation
differences ..............................
Preparing and delivering
vendor payment .....................
Total process activity cost ..........
$500,000
= $20.00 per payment
25,000 payments
Activity Cost
Prior to
Improvement
$ 40,000
120,000
25,000
35,000
50,000
180,000
50,000
$500,000
Activity Cost
After
Improvement
$ 40,000
30,000*
25,000
35,000
50,000
60,000**
50,000
$290,000
Activity Cost
Savings
$
—
90,000
—
—
—
120,000
—
$210,000
*$120,000 × (1 – 75%)
15%
**$180,000 ×
45%
d.
Average process cost per payment:
$290,000
= $11.60 per payment
25,000 payments
625
PROBLEMS
Prob. 27–1A (FIN MAN); Prob. 12–1A (MAN)
1. Safety Glow’s purchasing policy is very short-sighted. It does not involve developing
partnerships with suppliers. Safety Glow should consider changing its arm’s length policy and work on building long-term supply chain strategy with its suppliers. With a
supply chain strategy, Safety Glow can begin to consider more than just the price of its
glass. It can work with the supplier on quality, responsive delivery, electronic data interchange invoicing, supplier raw materials logistical support, sharing of research and
development effort, and sharing of production schedules, to name a few. The arm’s
length approach is, in the long term, more costly, even if it squeezes the last penny out
of each supplier. The arm’s length approach reduces the possibility of working on issues that go across organizational boundaries (such as electronic data interchange,
sharing demand forecasts, or more frequent just-in-time deliveries), which hold the
promise of reducing the total delivered cost.
2. The hidden costs beyond the price include the costs associated with the higher inventory
required by Continental's delivery schedule. These inventory costs include additional
space, handling, obsolescence, financing, and materials management costs. These costs
were not considered because they are not obvious. They are also difficult to determine.
The price is obvious, so it is easy to build a purchasing policy around "getting the best
price." This policy ignores the additional internal costs of the higher inventory imposed
by Continental's delivery schedule. These are costs incurred by other parts of the organization, not purchasing. In a functional organization, purchasing would respond by
saying that the additional internal inventory costs are not its problem. Those are costs
incurred in another manager's responsibility center. Of course, this is part of the problem of such simple "low-price bid" policies.
3. If the financing costs are 8%, then the additional cost of the inventory could be determined as follows:
At the beginning of April, the new shipment of 27,000 pounds arrives. Assuming that
the glass supply runs out by the end of the quarter, the average inventory for the quarter is:
Beginning of April ......................................................................
End of June .................................................................................
Total .....................................................................................
Average pounds in inventory for the quarter..........................
626
27,000
0
27,000
÷
2
13,500
Prob. 27–1A (FIN MAN); Prob. 12–1A (MAN)
Concluded
The inventory carrying cost can be estimated as follows:
Average pounds in inventory for the quarter....................
Price per pound ....................................................................
Total inventory investment .................................................
Interest rate per quarter (8% ÷ 4) ......................................
Inventory financing cost per quarter .................................
13,500
×
$20
$270,000
×
2%
$ 5,400
Inventory financing cost per quarter .................................
Number of pounds ordered for the quarter ......................
Additional cost per pound ...................................................
$ 5,400
÷ 27,000 lbs.
$
0.20/lb.
The financing cost is 2% of the average quarterly inventory value, or $5,400 per
quarter. This translates into an additional 20¢ per pound ($5,400 ÷ 27,000 lbs.)
purchased during the quarter. Thus, just considering the financing cost by itself
makes Emory Glass the "real" low-cost bidder.
Note to Instructors: As a point of comparison, the financing cost for Emory Glass’
daily deliveries is less than a cent per pound ($3,023 × 2% = $60.46; $60.46 ÷
27,000 lbs. = $0.0022), because the average daily inventory investment would be
only $3,023 [(300 lbs./2) × $20.15].
627
Prob. 27–2A (FIN MAN); Prob. 12–2A (MAN)
1. Value-added time:
Hand soldering of PC board .........................................
Stereo assembly ..............................................................
Time to inspect one unit ................................................
Pack and label ................................................................
Total ............................................................................
6 min.
18
5
8
37 min.
Non-value-added time:
Wait time:
Within-batch wait time—PC board soldering
(49 × 6 min.) ...............................................................
Within-batch wait time—final assembly
(49 × 18 min.) .............................................................
Within-batch wait time—testing (49 × 5 min.) ............
Within-batch wait time—shipping (49 × 8 min.) ........
Test setup ........................................................................
Total wait time ...........................................................
294 min.
882
245
392
30
1,843 min.
Move time:
Move from PC board assembly to final assembly10 min.
Move from final assembly to testing.............................
Total move time .........................................................
15
25
Total non-value-added time ..........................................
1,868 min.
Total lead time (37 min. + 1,868 min.)..........................
1,905 min.
Value-added ratio: 37 ÷ 1,905 = 1.9%
2. The existing process is very wasteful. The company could improve the pro-cess by
changing the layout from a process orientation to a product orientation. Each stereo
model could be formed into a production cell. Each cell would have PC card assembly,
final assembly, and shipping next to each other. In this way, the batch sizes could be reduced significantly. Workers could practice one-at-a-time processing and merely pass a
single completed assembly through the cell. The work content would need to be made
more balanced before implementing this solution. As a result, the move time and within-batch wait time would be eliminated. The company could also initiate total quality
principles. Moving toward zero defects would allow the company to reduce testing activities (and time), and as a result, the setup time for the test area might be eliminated
or reduced.
628
Prob. 27–3A (FIN MAN); Prob. 12–3A (MAN)
1. Budgeted Cell Conversion Cost Rate =
$720,000
= $288 per hour
2,500 hours
2. Budgeted cell conversion cost per unit: $288 per hr. × (25 min./60 min.)
= $120 per unit
3. a. Raw and In Process Inventory ............................................
Accounts Payable .............................................................
515 units × $115 per unit
59,225
b. Raw and In Process Inventory ............................................
Conversion Costs .............................................................
500 units × $120 per unit
60,000
c. Finished Goods Inventory ...................................................
Raw and In Process Inventory .......................................
490 units × ($115 + $120) = $115,150
115,150
d. Accounts Receivable ............................................................
Sales ..................................................................................
475 units × $400 per unit
190,000
Cost of Goods Sold ...............................................................
Finished Goods Inventory...............................................
475 × ($115 + $120)
111,625
59,225
60,000
115,150
190,000
111,625
4. Raw and In Process Inventory: $59,225 + $60,000 – $115,150 = $4,075
Finished Goods Inventory: $115,150 – $111,625 = $3,525
or
15 units × $235 = $3,525
5. JIT accounting is different from traditional accounting in a number of respects. Most
importantly, JIT accounting is simplified and uses minimal control. As a result, the
number of transactions are reduced, and the control intervals between adjacent work in
process transaction points are widened. In many JIT operations, there are no separate
materials or work in process inventories. Rather, purchased materials are charged to an
account that combines raw materials and work in process, termed the "raw and in process inventory" account. Direct labor is frequently eliminated as a cost category and is
instead included as a conversion cost of the cell. The cell conversion cost is applied to
the raw and in process inventory account. Indirect labor can frequently be assigned to a
production cell. As a result, these costs do not need to be allocated, since they are included directly in the cell's conversion cost. Often, nonfinancial performance measures,
such as lead time or quality measures, are used to monitor performance.
629
to
630
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Dollars
Prob. 27–4A (FIN MAN); Prob. 12–4A (MAN)
1.
Pareto Chart of Quality Activities
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Prob. 27–4A (FIN MAN); Prob. 12–4A (MAN) Continued
The following classifications are used in answering (2) and (3):
Activity
Activity
Cost
Correcting errors identified by
election commission ............ $ 38,400
Correcting jams .......................... 57,600
Correcting scan errors .............. 33,600
Loading ....................................... 12,000
Logging-in control codes (for
later reconciliation) ............... 14,400
Program scanner ........................
7,200
Rerunning job due to scan
reading errors ....................... 18,000
Scanning ..................................... 31,200
Verifying scan accuracy via
reconciling totals .................. 12,000
Verifying scanner accuracy
with test run .......................... 15,600
Total ....................................... $240,000
Cost of Quality
Classification
Value-Added/
Non-Value-Added
Classification
External failure
Internal failure
Internal failure
Not a quality cost
Non-value-added
Non-value-added
Non-value-added
Value-added
Appraisal
Not a quality cost
Value-added
Value-added
Internal failure
Not a quality cost
Non-value-added
Value-added
Appraisal
Value-added
Prevention
Value-added
2. Percent of total activity cost for each quality cost (and nonquality cost) classification:
Quality Cost Classification
Activity Cost
Percent of Total
Department Cost
Prevention .....................................................
Appraisal.......................................................
Internal failure .............................................
External failure ............................................
Not a cost of quality .....................................
Total ..........................................................
$ 15,600
26,400
109,200
38,400
50,400
$240,000
6.5%
11.0
45.5
16.0
21.0
100.0%
631
Prob. 27–4A (FIN MAN); Prob. 12–4A (MAN) Concluded
3. Percentages of total activity cost that are value- and non-value-added:
Activity Cost
Value-added ........................................................
Non-value-added ................................................
$ 92,400
147,600
$240,000
Percent of Total
Department Cost
38.5%
61.5
100.0%
4. The department has 61.5% of its total costs as non-value-added. This is a very significant amount. Internal failure represents 45.5% of the total costs. This represents significant opportunity for cost savings. In addition, the external failure costs of 16% of the
total may understate the true damage caused by external failure. The potential dissatisfaction and political ill will are not accounted for in this analysis.
632
Prob. 27–1B (FIN MAN); Prob. 12–1B (MAN)
1. Hawg Wild’s purchasing policy is very short-sighted. It does not involve developing
partnerships with suppliers. Hawg Wild should consider changing its arm’s length policy and work on building long-term supply chain strategy with its suppliers. With a
supply chain strategy, Hawg Wild can begin to consider more than just the price of its
frames. It can work with the supplier on quality, responsive delivery, electronic data interchange invoicing, supplier raw materials logistical support, sharing of research and
development effort, and sharing of production schedules, to name a few. The arm’s
length approach is, in the long term, more costly, even if it squeezes the last penny out
of each supplier. The arm’s length approach reduces the possibility of working on issues that go across organizational boundaries (such as electronic data interchange,
sharing forecast information, or more frequent just-in-time deliveries), which hold the
promise of reducing the total delivered cost.
2. The hidden costs beyond the price include the costs associated with the higher inventory
required by Iron Horse Frames’ delivery schedule. These inventory costs include additional space, handling, obsolescence, financing, and materials management costs. These
costs were not considered because they are not obvious. They are also difficult to determine. The price is obvious, so it is easy to build a purchasing policy around "getting
the best price." This policy ignores the additional internal costs of the higher inventory
imposed by Iron Horse Frames’ delivery schedule. These are costs incurred by other
parts of the organization, not purchasing. In a functional organization, purchasing
would respond by saying that the additional internal inventory costs are not its problem. Those are costs incurred in another manager's responsibility center. Of course, this
is part of the problem of such simple "low-price bid" policies.
633
Prob. 27–1B (FIN MAN); Prob. 12–1B (MAN) Concluded
3. If the financing costs are 10%, then the additional cost of the inventory could be determined as follows:
At the beginning of July, the new shipment of 7,200 frames arrives. Assuming that the
frame supply runs out by the end of the quarter, the average inventory for the quarter
is:
Beginning of July .......................................................................
End of September .......................................................................
Total ......................................................................................
Average frames in inventory for the quarter ..........................
7,200
0
7,200
÷
2
3,600
The inventory carrying cost can be estimated as follows:
Average frames in inventory for the quarter ..........................
Price per frame ...........................................................................
Total inventory investment .......................................................
Interest rate per quarter (10% ÷ 4) ..........................................
Inventory financing cost per quarter .......................................
3,600
×
$260
$936,000
×
2.5%
$ 23,400
Inventory financing cost per quarter .......................................
Number of frames ordered for the quarter .............................
Additional cost per frame ..........................................................
$ 23,400
÷ 7,200 frames
$
3.25 per frame
The financing cost is 2.5% of the average quarterly inventory value, or $23,400 per
quarter. This translates into an additional $3.25 per frame ($23,400 ÷ 7,200 frames)
purchased during the quarter. Thus, just considering the financing cost by itself makes
Forever Frames the "real" low-cost bidder.
Note to Instructors: As a point of comparison, the financing cost for Forever Frames’
daily deliveries is approximately 4¢ per frame ($10,480 × 2.5% = $262; $262 ÷ 7,200
frames = $0.0364), because the average daily inventory investment would be only
$10,480 [(80/2) × $262].
634
Prob. 27–2B (FIN MAN); Prob. 12–2B (MAN)
1. Value-added time:
Stamping .........................................................................
Appliance assembly ........................................................
Time to test one unit ......................................................
Pack and shipment labeling ..........................................
Total ............................................................................
4 min.
20
6
12
42 min.
Non-value-added time:
Wait time:
Within-batch wait time—stamping (79 × 4 min.) .......
Within-batch wait time—final assembly
(79 × 20 min.) .............................................................
Within-batch wait time—testing (79 × 6 min.) ............
Within-batch wait time—shipping (79 × 12 min.) ......
Stamping setup ...............................................................
Total wait time ...........................................................
Move time:
Move from stamping to final assembly ........................
Move from final assembly to testing.............................
Total move time .........................................................
Total non-value-added time ..........................................
Total lead time (42 min. + 3,454 min.)..........................
316 min.
1,580
474
948
100
3,418 min.
12 min.
24
36 min.
3,454 min.
3,496 min.
Value-added ratio: 42 min. ÷ 3,496 min. = 1.2%
2. The existing process is very wasteful. The company could improve the pro-cess by
changing the layout from a process orientation to a product orientation. Each appliance
model could be formed into a production cell. Each cell would have stamping, final assembly, and shipping next to each other. In this way, the batch sizes could be reduced
significantly. Workers could practice one-at-a-time processing and merely pass a single
completed assembly through the cell. As a result, the move time and within-batch wait
time would be eliminated. The company could also initiate total quality principles. Moving toward zero defects would allow the company to reduce inspecting activities. A
product-dedicated flow would also eliminate the need to perform stamping machine
setups, since all the stampings would be the same for a given product model.
635
Prob. 27–3B (FIN MAN); Prob. 12–3B (MAN)
1. Budgeted Cell Conversion Cost Rate =
$150,000
= $50 per hour
3,000 hours
2. Budgeted conversion cost per unit = $50 per hr. × (18 min./60 min.)
= $15 per unit
3. a. Raw and In Process Inventory ............................................
Accounts Payable .............................................................
840 units × $ 75 per unit
b. Raw and In Process Inventory ...........................................
Conversion Costs .............................................................
830 units × $15
c. Finished Goods Inventory ...................................................
Raw and In Process Inventory .......................................
815 units × ($75 + $15) = $73,350
d. Accounts Receivable ............................................................
Sales ..................................................................................
810 units × 210 per unit
Cost of Goods Sold ...............................................................
Finished Goods Inventory...............................................
810 × ($75 + $15) = $72,900
63,000
63,000
12,450
12,450
73,350
73,350
170,100
170,100
72,900
72,900
4. Raw and In Process Inventory: $63,000 + $12,450 – $73,350 = $2,100
Finished Goods Inventory: $73,350 – $72,900 = $450
or
5 units × $90 = $450
5. JIT accounting is different from traditional accounting in a number of respects. Most
importantly, JIT accounting is simplified and uses minimal control. As a result, the
number of transactions are reduced, and the control intervals between adjacent work in
process transaction points are widened. In many JIT operations, there are no separate
materials or work in process inventories. Rather, purchased materials are charged to an
account that combines raw materials and work in process, termed the "raw and in process inventory" account. Direct labor is frequently eliminated as a cost category and is
instead included as a conversion cost of the cell. The cell conversion cost is also applied
to the raw and in process inventory account. Indirect labor can frequently be assigned
to a production cell. As a result, these costs do not need to be allocated, since they are
included directly in the cell's conversion cost. Often, nonfinancial performance
measures, such as lead time or quality measures, are used to monitor performance.
636
637
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Dollars
Prob. 27–4B (FIN MAN); Prob. 12–4B (MAN)
1.
Pareto Chart of Quality Activities
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
Prob. 27–4B (FIN MAN); Prob. 12–4B (MAN) Continued
The following classifications are used in answering (2) and (3):
Activity
Activity
Cost
Correcting invoice errors ............. $ 18,000
Disposing of incoming
materials with poor quality
22,500
Disposing of scrap .........................
49,500
Expediting late production ...........
54,000
Final inspection .............................
31,500
Inspecting incoming
materials ....................................
9,000
Inspecting work in process ...........
45,000
Preventive machine
maintenance ..............................
31,500
Producing product ........................ 162,000
Responding to customer
quality complaints ....................
27,000
Total ........................................... $450,000
Cost of Quality
Classification
Value-Added/
Non-Value-Added
Classification
External failure
Non-value-added
Internal failure
Internal failure
Internal failure
Appraisal
Non-value-added
Non-value-added
Non-value-added
Value-added
Appraisal
Appraisal
Value-added
Value-added
Prevention
Not a quality cost
Value-added
Value-added
External failure
Non-value-added
2. Percent of total activity cost for each quality cost (and nonquality cost) classification:
Quality Cost Classification
Activity Cost
Percent of Total
Department Cost
Prevention .....................................................
Appraisal.......................................................
Internal failure .............................................
External failure ............................................
Not a cost of quality .....................................
Total ..........................................................
$ 31,500
85,500
126,000
45,000
162,000
$450,000
7.00%
19.00
28.00
10.00
36.00
100.00%
638
Prob. 27–4B (FIN MAN); Prob. 12–4B (MAN)
Concluded
3. Percentages of total activity cost that are value- and non-value-added:
Activity Cost
Value-added ............................................
Non-value-added ....................................
Total ....................................................
$279,000
171,000
$450,000
Percent of Total
Department Cost
62%
38
100%
4. The company has 62% of its total costs as value-added. However, there is still room for
significant improvement. Internal failure represents 28% of the total costs. This represents significant opportunity for cost savings. In addition, the external failure costs of
10% of the total may understate the true damage caused by external failure. The potential dissatisfaction, ill will, and lost future sales are not accounted for in this analysis.
639
SPECIAL ACTIVITIES
SA 27–1 (FIN MAN); SA 12–1 (MAN)
The controller should confront the plant manager. The plant manager is attempting to skew the sampling results by giving the sampled items special treatment.
The original intent of the sampling plan is to represent the average performance
of the manufacturing process. Thus, the tagged items should receive no better
treatment than the average product being produced. The plant manager’s memo
will cause the lead times reported to central management to be much better than
they actually are. Thus, it is possible that salespersons and marketing personnel
will begin to make shipping commitments to customers based on the reported
lead times. Since the plant is unable to perform for all products at the reported
levels, customers may be left angry when the commitments are not met.
The controller should first insist that the plant manager issue a new memo to all
employees, reversing the first memo. The controller should help the plant manager see that skewing the results will provide only a short-term benefit. Eventually, this action will come back to haunt as the real performance of the plant becomes evident to customers and top management. Top management will be very
displeased with a deliberate attempt on the part of the plant manager to “cook the
numbers.” If the plant manager fails to agree to this, the controller may need to
report this incident to the company’s chief financial officer.
It would be unethical for the controller to fail to address this issue. The Standards
of Ethical Conduct for Practitioners of Management Accounting and Financial
Management states that the management accountant must communicate information fairly and objectively and disclose all fully relevant information that could
reasonably be expected to influence the intended user’s understanding of the information.
640
SA 27–2 (FIN MAN); SA 12–2 (MAN)
Alvarez’s claim that the inventory doesn’t cost the company anything is likely not
true. At the very minimum, inventory requires working capital to be used. The financing cost associated with the working capital represents a cost to the company. In addition, the inventory requires space, insurance, security, and movement. Thus, these additional costs will be incurred to store the inventory. Beyond
the carrying (interest) and storage costs are the costs associated with obsolescence. The company may be required to write off some of the space heaters or
mark them down significantly to sell them. These markdowns are also a cost associated with the inventory. All of this can make the cost of inventory very high.
Cross should suggest that Alvarez use just-in-time manufacturing principles. The
production process could be scheduled using pull techniques. This would mean
that the plant produces products only when there are orders. Products would not
be manufactured for inventory. In addition, the plant manager should work to develop supplier partnerships. One of the objectives of the partnership would be to
improve supplier shipment reliability, so that materials inventory could be at a
minimum. Lastly, the CEO should consider revising the performance measures
used in the plant. The unit cost performance measures drive the plant manager to
produce as much as possible in order to absorb fixed costs. Rather, the plant
manager should be evaluated on meeting customer shipment requirements, making high-quality product, using short lead times, and reducing scrap and wasted
employee effort.
SA 27–3 (FIN MAN); SA 12–3 (MAN)
All three charts indicate a steadily deteriorating situation. It seems clear that Zenith Concepts is not employing just-in-time strategies. The inventory is growing
steadily, yet the company is unable to meet delivery commitments. Essentially,
Zenith Concepts is attempting to forecast demand but is doing a poor job of it. As
a result, Zenith Concepts continues to build inventory, but it has the wrong mix
for the actual demand. Thus, inventory keeps on growing with the wrong products. The company seems constantly short of the products that are actually demanded. The lead times continue to expand, making the problem even worse. The
long lead times force the company to rely even more on forecasts, which in turn
leads to even worse schedule performance. The company's performance is trending downward. A just-in-time approach will begin to correct this problem.
641
SA 27–4 (FIN MAN); SA 12–4 (MAN)
MIDLAND COMPANY
Value-Added/Non-Value-Added Activities Report
Activity
Total Cost
Percent
of Total
Classification
Non-ValueAdded Costs
Processing sales orders ............
Disposing scrap .........................
Expediting work orders .............
Producing parts ..........................
Resolving supplier quality
problems ................................
Reissuing corrected
purchase orders ....................
Expediting customer orders......
Total .......................................
Percent of non-value-added
costs to total costs ...............
$198,000
189,000
153,000
135,000
22%
21
17
15
VA
NVA
NVA
VA
$189,000
153,000
108,000
12
NVA
108,000
81,000
36,000
$900,000
9
4
100%
NVA
NVA
81,000
36,000
$567,000
62%
The activity information can be separated into the value-added and non-valueadded components. When this is done, it becomes clear that the company has a
large percentage of non-value-added activities. Sixty-three percent of Midland's
factory overhead effort is non-value-added. Activities such as expediting, disposing of scrap, resolving problems, and reissuing orders are indicators of process
delays, interruptions, rework, and mistakes. As such, the company should be motivated to improve its processes in order to reduce the amount of non-valueadded activity included in its cost structure.
The general ledger report provides information only about where money is spent,
such as salaries or supplies, not how the resources were used. Thus, the general
ledger information may not motivate improvement efforts, since the non-valueadded activities are less visible in the general ledger.
642
SA 27–5 (FIN MAN); SA 12–5 (MAN)
This would be a good assignment for groups of students to report back to the
class. Each of the groups will likely go to different restaurants at different times
of the day and will have different results. The results could be shared with the
class, and “averages” could be determined for the various non-value-added categories. The following types of activities will likely be noted in students’ reports:
Waiting to be seated
Being seated
Waiting to give drink order
Giving drink order
Waiting to receive drink
Giving meal order
Waiting for meal order
Eating meal
Waiting for check (after meal is finished)
Reviewing check (appraisal)
Waiting to pay with credit card
Waiting to get receipt and credit card back
Walking out of restaurant
Non-value-added
Value-added
Non-value-added
Value-added
Non-value-added
Value-added
Non-value-added
Value-added
Non-value-added
Value-added
Non-value-added
Non-value-added
Value-added
It is useful to note that the restaurant experience involves conversation during
the “non-value-added” wait time. Naturally, this is part of the fun of restaurants.
Thus, this analysis is an extreme interpretation of effectiveness and efficiency in
this industry.
643