Summary by Suzanne Character
Masters of Accountancy Program
University of South Florida, Fall 2001
The purpose of this article is to explain how traditional accounting systems conflict with just-in-time (JIT) systems. Deluzio suggests ways to bring management accounting systems more in line with JIT. He believes that companies will need to turn to the Japanese concepts if they want to become competitive. JIT concepts help to achieve the goal of quality products on a timely basis.
In adopting JIT, senior management must be supportive. They must also be the driving force behind the implementation. If the accounting system doesn’t change, the JIT program could fail. Traditional accounting doesn’t measure the important elements of a JIT factory. This could result in dysfunctional behavior.
Traditional accounting management systems were developed to satisfy the needs of external users such as the SEC and the IRS. Due to all the controls that were put in place to satisfy an unqualified opinion, “the accounting function took on the role of watchdog. Traditional accounting works against the manufacturing group in several ways. Two examples:
Workers have to engage in non-value added activities so that accountants can track manufacturing costs, and
Controlled stockrooms are needed for excess inventory.
Even though controls are placed on the manufacturing process, workers are still evaluated based on the output produced. Also, feedback in traditional accounting systems is not provided on a timely basis.
In a JIT system the accountants should be focused on working with the manufacturing group rather than against them. To do this, management accountants must first be educated about JIT techniques. Then they can evaluate their current system by asking themselves several questions. Some of these questions include:
Who uses the information that our system provides?
Do people ask for a certain type of data, or do we just put what we want out there?
Is the information useful to the manufacturing group?
Are the measures reflective of continuous improvement?
Is the information provided on a timely basis?
As JIT is implemented, the management accounting system should change right along with the organization. Many of the basic principles from the traditional system will eventually become useless.
One of the most important changes will be the impact on the overhead structure once the attention becomes focused on the factory floor. Rather than the manufacturing group being supported by centralized functional departments such as purchasing and quality control where the goals and interests weren’t always in line with the production people, individuals are assigned to a particular JIT cell. They are responsible for the needs of the cell. There is a feeling of ownership, responsibility and control. The result is improved problem detection, feedback and resolution.
Product costing is also improved because support costs can be directly associated with a manufacturing cell. This will help to eliminate waste and reduce overhead costs. Product costing becomes more reliable since fewer overhead costs need to be allocated.
The overhead costs in JIT are called cell and support costs. Cell costs are fixed and variable costs that can be directly traced to a manufacturing cell. Examples are cell management salary, labor costs and supplies. Support costs must be allocated to a particular cell. Examples of these are plant depreciation, taxes and insurance. The allocation is easier in JIT because of lower costs and a simplified shop floor layout.
In a traditional environment the production process is controlled by shop orders. In a typical production flow, raw materials are first purchased, then received, and stored in a centralized stockroom. Each shop order represents a batch and is generated to instruct which subassemblies are needed. Downfalls of this process include obsolescence, defects, travel time, lead-time, and a lack of visibility and control over what is happening on the shop floor.
In the JIT environment parts are taken from the raw material state all the way to the finished product, one at a time. Shop orders and large stockrooms filled with inventory are eliminated because the finished product is then shipped directly to the customer.
There are many ways to track the continuous improvement of JIT that are nonfinancial. Productivity can be measured by dividing total good units produced by total shop hours to get the units produced per man-hour. Other examples are customer service trends, reduction in inventory, decreasing quality defects, scrap reduction, and an increase in employee suggestions. The purchase function can be measured by considering on-time deliveries and quality of materials rather than purchase price variances. Posting the results of the continuous improvement projects should encourage the employees to participate in the program.
There are also some risks to the implementation of JIT processes. Initially, there will be a negative effect on profit and loss statements that are based on traditional accounting. The cost of production will be distorted as inventory levels are reduced. Additionally, the plant rearrangements and clean-up will result in higher expenses.
Accountants need to understand the difference between the negative “accounting” effects and positive operational results.
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