Management And Accounting Web

McIlhattan, R. D. 1987. How cost management systems can support the JIT philosophy. Management Accounting (September): 20-26.

Summary by Amy Alspach
Master of Accountancy Program
University of South Florida, Fall 2000

Cost Management Main Page | JIT Main Page | Japanese Management Main Page

The purpose of this article is to identify the changes that need to be made to traditional cost management systems in order to support the JIT philosophy. JIT impacts the following:

JIT’s most significant influence on a company and its cost management system is the concentration on non-value added processes, defined as "any activity or procedure that is performed within a company that does not add value to a product" (p. 20). For example, in a production line, only the time spent processing adds value to a product. Inspection time and storage time add cost but no value, thus are non-value added processes. In many companies, the process time is less than 10% of the total manufacturing lead time and cost, leaving the other 90% of the lead time adding cost but no value to the product. The JIT philosophy is that reducing the lead time will reduce the total costs.

The impact of JIT on traditional cost accounting is that the causes of costs, or cost drivers, now need to be identified for the non value-added activities so they can be reduced or eliminated. Identification of drivers allows the simplification of product designs, resulting in more efficient processes.

Another effect of JIT on cost management systems is the reduction in the number of cost elements for a product. Standard cost systems maintained many product cost elements, such as direct materials and direct labor, to control production costs. With JIT however, the cost drivers associated with production costs are identified so the product costs can be reduced through design and process improvements which removes the requirement of defining multiple cost elements. The focus moves from the reporting of cost elements to the elimination and prevention of costs. Furthermore, the reduction of cost elements reduces the costs related to their calculations, maintenance, and control.

A key characteristic of JIT is the use of manufacturing cells, where a product is produced start to finish without revisiting the stockroom, thus reducing travel distances and inventory between machines. Each cell within the system represents a "factory within a factory".

Traditional cost accounting systems apply indirect manufacturing costs based on direct labor hours or dollars charged to a specific product. Under JIT, there are two significant differences:

1. The total of all related costs are applied to the day’s production, not to particular jobs and tasks.

2. JIT applies total conversion costs based on velocity, defined as "the theoretical number of units that can be produced within a cell over a given period", through a manufacturing cell. A day’s production cost is calculated by multiplying the number of units produced in a day by the costs associated with the hours used for production, including the non-value hours.

A second major influence of JIT is the increase in the amount of production cost that can be directly applied to a product, which is a result of cellular manufacturing.

A fundamental goal of JIT is the reduction of total product cost through eliminating allocations wherever possible, because as the number of allocations increase, the reliability for decision making purposes decreases. Elimination of allocations is accomplished through manufacturing cells producing singular or similar products.

The traditional measures of direct labor efficiency, utilization, productivity, and machine utilization used to monitor improvement and motivate personnel, are deemed inappropriate in JIT. These measures promote excess inventory levels. Additionally, using standards for performance measures does not promote continuous improvement since people are usually satisfied once standards are attained.

Performance measures deemed appropriate for a cost management system under JIT (Table 1) includes nonfinancial indicators that are consistent with the identification of true cost drivers and with the JIT concentration on quality and lead times.

The simplification of design and processes through JIT results in better management, which in turn results in better quality and service, and less cost. This concept also applies to cost management systems. In simplifying the complex traditional cost accounting system, everyone in the organization can make use of the system, making it a cost management system.

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