Accounting Chapter 16 Homework Long setup times lead to large production runs

3. A product-oriented layout can be designed to minimize materials movements and reduce (or

4. Long setup times lead to large production runs (batch sizes) in order to amortize the cost of

5. Pull or “make to order” manufacturing requires the manufacturer to build product only as it is

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

7. With supply chain management, long-term relationships are established with suppliers and

customers to improve quality, cost, and delivery. Traditional relationships are usually

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

9. The raw and in process inventory account combines the materials and work in process

CHAPTER 27 (FIN MAN); CHAPTER 12 (MAN)

COST MANAGEMENT FOR

DISCUSSION QUESTIONS

JUST-IN-TIME ENVIRONMENTS

CHAPTER 27 Cost Management for Just-in-Time Environments

DISCUSSION QUESTIONS (Concluded)

10. Direct labor and indirect labor activities become combined in a just-in-time environment.

11. A Pareto chart shows the totals of a particular attribute for a number of categories. The

12. Non-value-added activities are activities that are viewed as unnecessary from the customer’s

CHAPTER 27 Cost Management for Just-in-Time Environments

PE 27–1A (FIN MAN); PE 12–1A (MAN)

a.

V

alue-added lead time………………………

…

28 min. (16 min. + 12 min.)

Non-value-added lead time:

PE 27–1B (FIN MAN); PE 12–1B (MAN)

a.

V

alue-added lead time………………………

…

19 min. (11 min. + 8 min.)

Non-value-added lead time:

PE 27–2A (FIN MAN); PE 12–2A (MAN)

PE 27–2B (FIN MAN); PE 12–2B (MAN)

PRACTICE EXERCISES

CHAPTER 27 Cost Management for Just-in-Time Environments

PE 27–3A (FIN MAN); PE 12–3A (MAN)

a. Raw and In Process Inventory* 175,500

Accounts Payable 175,500

PE 27–3B (FIN MAN); PE 12–3B (MAN)

a. Raw and In Process Inventory* 68,250

Accounts Payable 68,250

PE 27–4A (FIN MAN); PE 12–4A (MAN)

Quality

Cost

Prevention………………………………………

…

$126,000 63% 12.6%

PE 27–4B (FIN MAN); PE 12–4B (MAN)

Quality

Cost

Prevention………………………………………

…

$288,000 32% 9.6%

PE 27–5A (FIN MAN); PE 12–5A (MAN)

Inspection activity after improvement:

PE 27–5B (FIN MAN); PE 12–5B (MAN)

Quality Cost Classification Cost Sales

Sales

Total Quality Total

Cost of Quality Report

Percent of Percent of

Percent of

Total

Quality Cost Classification

Percent of

Total Quality

Cost

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–1 (FIN MAN); Ex. 12–1 (MAN)

The CEO must not have been listening very closely at the conference. Just-in-time 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

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

EXERCISES

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–3 (FIN MAN); Ex. 12–3 (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

Ex. 27–4 (FIN MAN); Ex. 12–4 (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

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–5 (FIN MAN); Ex. 12–5 (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

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

c. Turn off machine and remove fixture from lathe………

…

10 minutes

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–6 (FIN MAN); Ex. 12–6 (MAN)

Value-Added Non-Value- Total

Time Added Time Time

Processing time………………………………

…

14 14

Value-Added Non-Value- Total

Time Added Time Time

Processing time………………………………

…

14 14

1Total process time per unit:

2Within-batch wait time:

Multiply the process time by the remaining units in the batch (waiting

their turn)

Traditional Philosophy

Just-in-Time Philosophy

1

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–7 (FIN MAN); Ex. 12–7 (MAN)

Value-Added Non-Value- Total

Time Added Time Time

Processing time……………………………

…

30 30

1Total process time per unit:

Process Step 1…………………………………

…

6 minutes

Process Step 2…………………………………

…

10

…

2Within-batch wait time:

Multiply the process time by the remaining units in the batch (waiting their turn):

3Move time:

5 moves (from raw materials to finished goods) × 8 minutes = 40 minutes

Value-Added Non-Value- Total

Time Added Time Time

Processing time……………………………

…

30 30

1Total process time per unit:

Process Step 1…………………………………

…

6 minutes

…

2Within-batch wait time:

Multiply the process time by the remaining units in the batch (waiting their turn)

Proposed Approach

Present Approach

1

2

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–8 (FIN MAN); Ex. 12–8 (MAN)

a. and b.

Elapsed

Time (a)

1:00 PM Arrives at doctor office

1:30 Waits in waiting room (5 × 6 min.) 30 min.

1:45 Waits in examining room 15

d. 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

Non-

Value-Added

Time

Value-Added

Time (b)

Activity

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–9 (FIN MAN); Ex. 12–9 (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.

b. These suppliers support the Japanese system because it provides for win-

win opportunities, whereby the customer and the supplier can both be

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.

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–10 (FIN MAN); Ex. 12–10 (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.

Team-based hiring can produce a higher probability of having an effective team

Ex. 27–11 (FIN MAN); Ex. 12–11 (MAN)

Shield 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

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–12 (FIN MAN); Ex. 12–12 (MAN)

a. The present Grill Rite 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”

b. A new system could be designed so that a custom order is introduced after cooking

the burger, rather than prior to cooking. 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

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–13 (FIN MAN); Ex. 12–13 (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

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–14 (FIN MAN); Ex. 12–14 (MAN)

$550,000

c. 1. Raw and In Process Inventory*

2. Raw and In Process Inventory*

3. Finished Goods Inventory*

4. Accounts Receivable*

Sales 249,600

249,600

172,000

128,000

44,000

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–15 (FIN MAN); Ex. 12–15 (MAN)

$168,000

2,100 hours

c. 1. Raw and In Process Inventory*

2. Raw and In Process Inventory*

3. Finished Goods Inventory*

4. Accounts Receivable*

Sales 90,300

90,300

$80 per hour

a. Budgeted Cell Conversion

Cost Rate ==

44,880

31,500

14,400

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–16 (FIN MAN); Ex. 12–16 (MAN)

a. 1. Raw and In Process Inventory* 80,600

2. Raw and In Process Inventory* 66,000

3. Finished Goods Inventory* 141,600

4. Sales* 244,375

Accounts Receivable 244,375

*$425 per unit × 575 units

b. Raw and In Process Inventory, ending balance1……………………………

…

$5,000

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–17 (FIN MAN); Ex. 12–17 (MAN)

Pareto Chart of Quality Activities

250000

Emergency equipment maintenance

Inspecting incoming materials

Preventive equipment maintenance

CHAPTER 27 Cost Management for Just-in-Time Environments

Ex. 27–18 (FIN MAN); Ex. 12–18 (MAN)

a.

Quality

Cost

Prevention $ 72,000 9% 1.8%

Appraisal 120,000 15% 3.0%

The following classifications were used to develop the cost of quality report:

Quality Activities

Correct shipment errors……………………………

…

Disposing of scrap……………………………………

…

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

Quality Cost

Activity Cost Classification

Percent

of Total

Sales

Quality Cost Classification

ACTIVE MEMORIES INC.

Cost of Quality Report

Cost Summary

Percent of

Total

Quality Cost

$120,000

88,000

External failure

Internal failure

21