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Patell, J. M. 1987. Adapting a Cost accounting system to just-in-time manufacturing: The Hewlett-Packard Personal Office Computer Division. Accounting & Management Field Study Perspectives, edited by William J. Bruns, Jr. and Robert S. Kaplan. Harvard Business School Press: 229-267.

Summary by Anita Reed
Ph.D. Program in Accounting
University of South Florida, Spring 2002

JIT Main Page | Cost Management Main Page | Performance Measures Main Page

Motivation/Purpose – The author is interested in exploring the issues that arise and how these issues are resolved during the "introduction and evolution" of a just-in-time manufacturing process at a facility that has previously operated on a batch oriented job costing basis and the necessary changes in the "established and elaborate cost accounting system" utilized by the organization. The author views this as a problem finding study as opposed to a problem solving study with a view towards "stimulating hypotheses for future study". (p. 229).

Methodology – Field study and case study analysis. Hypothesis development.

Sample - The sample for the study was the Hewlett-Packard Personal Office Computer Division (POD) located in Sunnyvale, California. The study took place from May 1985 through June 1988. Events are traced from November 1982 through June 1988. The division is responsible for production of the system processing units for two microcomputers, and sets its own production schedules based on market forecasts prepared by the division. The output from the division is delivered to another division of Hewlett-Packard for assembly and distribution.

Contribution – The author has developed a detailed and complete description of the manufacturing process at the division and its evolution from a pure batch process to a flow process based on just-in-time production methods. In addition, the author has traced the evolution of the accounting system used to track production costs, and the accompanying changes in the way information generated by the accounting system is used in controlling the costs and managing the division. The changes in the accounting system are tied to the changes in the quality control system of the division, resulting in a need for greater interaction between the two functional areas. The author identifies two diverging trends from the case study. First, as a result of the JIT process, the granularity of accounting analysis is reduced. The cost accounting process is becoming a much less finely detailed procedure measuring costs via an ex-post averaging of accumulated expenditures over produced units instead of the previous procedure of measuring the cost of specific units or batches of units. Second, simultaneous with the reduction in granularity of accounting measurements, the measurements monitored by the quality assurance information systems are becoming increasingly fine. Use of advanced information technologies allow for the tracking of individual units and subunits, to answer the question previously answered with accounting data: what was the variance between actual production rate and standard production rate. This represents a change in focus from financial information to non-financial information. Exhibit 9-3 illustrates the uses of manufacturing and cost accounting data in the decision making process utilized at the division.

The author also illustrates the changes in the use of controllable versus non-controllable costs, with regard to the "action set and time frame" (p. 263) within which costs are controllable. The JIT quality control environment shifts attention away from whether costs are fixed or variable and instead focuses on the improvements that can be made in the production process to reduce all costs.

Other issues identified as relevant include the method adopted by the division to handle fluctuations in market conditions and how the division classifies resulting cost variances. Classifying these as labor efficiency variances allows differentiation from variance resulting from other issues and correct identification in the cost reports.

JIT has resulted in reduced inventories and shortened the time frame for both internal and external audits. The author discusses the federal income tax ramifications of FIFO and LIFO inventory methods, pointing out that LIFO firms who adopt JIT processes need to evaluate various strategies for dealing with the liquidation of LIFO layers.

Future Research Opportunities – The author identifies several possible avenues and opportunities for future research that result from the study, pointing out the simplification and streamlining of cost accounting procedures at the division. Several issues to address include the evaluation of costs and benefits of varying levels of data aggregation, better understanding of the causal structure of indirect manufacturing costs and the examination of the "interfaces between cost accounting, process control and product design" (p. 266).

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