Swenson, D. W. and J. Cassidy. 1993. The effect of JIT on management accounting. Journal of Cost Management (Spring): 39-47.

Summary by Christina Witkowski
Master of Accountancy Program
University of South Florida, Summer 2001

Japanese Management Main Page | JIT Main Page

The purpose of this article is to report the results of a survey based on 22 companies that use JIT, and to discuss how the implementation of JIT affects a company’s manufacturing system and the role of management accountants.

Survey Results

The survey included 22 companies in various industries that converted to just-in-time. A summary of their findings is presented below.

The Effect of JIT on Manufacturing Processes

The survey results in the exhibit above show that the implementation of JIT reduced scrap, rework, setup time, and total inventory. The cost accounting systems and performance measurement systems were less complex for most of the 22 firms surveyed after the JIT implementations. There was also a positive correlation between setup time, total inventory, and scrap and rework when the companies converted to JIT.

Traditionally, companies have used material requirements planning (MRP) as an inventory control system. After the implementation of JIT, oddly, the use of MRP went up. Experts believe that the reason for this is that advanced systems require a hybrid between a push system, like MRP, and a pull system, like JIT. MRP coordinated the material planning and purchasing as well as monitors the plants ability to meet the production demand schedule. The point where many JIT systems depart from MRP is the release of work orders. From there the system becomes a pull system. A pull system is where the operator receives a part only when it is needed as opposed to material availability or a schedule. Therefore, WIP cannot accumulate over a specified level.

JIT promotes quality. The cost of quality can be divided into 4 groups:

External Failure (defective products sold to customers, returned goods, etc.)
Internal Failure (scrap, rework, downtime, etc.)
Appraisal/Detection (inspection, etc.)
Prevention (quality training, quality engineering, SPC activities, etc.)

JIT emphasizes the preventative measures. Firms often discover that when they invest in preventative measures, it reduces the other quality costs by more than the increase in the preventative costs.

The Effect on Management Accountants

JIT is supposed to simplify record keeping. In that respect, many authors have proposed several techniques to eliminate some accounting transactions. An example is the introduction of a backflush cost accounting system that eliminates transactions to record the movement of raw material into WIP. The backflush system reports movements of inventory when it is finished or, even in some cases, sold. WIP inventory is updated only after taking a physical count. The move toward simplification became apparent when 8 of the 22 companies surveyed went to a backflush system and then further reduced record keeping requirements by changing to process costing from job order. The problem with the backflush system is that it is used mainly for external reporting and does very little to help make internal decisions. Management accountants need to take a broader role. They need to not only identify inventory values, but to also identify performance measurements that effect activity costs, particularly nonfinancial measures such as setup times, quality, cycle times, etc.

Conclusion

With the execution of JIT, the 22 surveyed companies have shown great improvements in many areas. These areas are mainly in the nonfinancial part of the company that is not normally measured. For management accountants to keep up with an ever-changing environment, they must find a way to better inform internal users of these nonfinancial measures.

_____________________________________________

Related summaries:

Baggaley, B. and B. Maskell. 2003. Value stream management for lean companies, Part I. Journal of Cost Management (March/April): 23-27. (Summary).

Baggaley, B. and B. Maskell. 2003. Value stream management for lean companies, Part II. Journal of Cost Management (May/June): 24-30. (Summary).

Borthick, A. F., P. L. Bowen, and M. C. Sullivan. 1998. Controlling JIT II: Making the system monitor itself. Journal of Cost Management (July/August): 33-41. (Summary).

Carr, L. P. and C. D. Ittner. 1992. Measuring the cost of ownership. Journal of Cost Management (Fall): 42-51. (Summary).

Carr, L. P., W. C. Lawler and J. K. Shank. 2002. Reconfiguring the value chain: Levi's personal pair. Journal of Cost Management (November/December): 9-17. (Summary).

Castellano, J. F. and R. Burrows. 2011. Relevance lost: The practice/classroom gap. Management Accounting Quarterly (Winter): 41-48. (Summary).

Clinton, B. D., and H. Ko-Cheng. 1997. JIT and the balanced scorecard: Linking manufacturing control to management control. Management Accounting (September): 18-24. (Summary).

Crusoe, J., G. Schmelzle, and T. E. Buttross. 1999. The hidden costs of adopting JIT manufacturing. Journal of Cost Management (December): 23-26. (Summary).

Davenport, T. H. and J. Glaser. 2002. Just-in-time delivery comes to knowledge management. Harvard Business Review (July): 107-111. (Summary).

Deluzio, M. C. 1993. Management accounting in a just-in-time environment. Journal of Cost Management (Winter): 6-15. (Summary).

Deluzio, M. C. 1993. The tools of just-in-time. Journal of Cost Management (Summer): 13-20. (Summary).

Foster, G. and C. T. Horngren. 1987. Cost accounting and cost management in a JIT environment. Management Accounting (June): 19-25. (Summary).

Fullerton, R. R. 2003. Performance measurement and reward systems in JIT and non-JIT firms. Cost Management (November/December): 40-47. (Summary).

Fullerton, R. R. and C. S. McWatters. 2002. The role of performance measures and incentive systems in relation to the degree of JIT implementation. Accounting, Organizations and Society 27(8): 711-735. (Summary).

Kalagnanam, S. S. and R. M. Lindsay. 1998. The use of organic models of control in JIT firms: Generalising Woodward's findings to modern manufacturing practices. Accounting, Organizations and Society 24(1): 1-30. (Summary).

Kapanowski, G. 2016. Lean fundamentals for accountants. Cost Management (January/February): 5-14. (Summary).

Lee, J. Y. and J. K. Winch. 1998. From push to pull: Management's control system modification for manufacturing change. Advances in Management Accounting (6): 75-92. (Summary).

Lessner, J. 1989. Performance measurement in a just-in-time environment: Can traditional performance measurements still be used? Journal of Cost Management (Fall): 23-28. (Summary).

Martin, J. R. Not dated. Lean concepts and terms. Management And Accounting Web. Lean Concepts and Terms Summary

Martin, J. R. Not dated. Profit Beyond Measure graphics and notes. Management And Accounting Web. Johnson Broms Graphics Notes

Martin, J. R. Not dated. What is lean accounting? Management And Accounting Web. Lean Accounting

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

O'Brien, J. and K. Sivaramakrishnan. 1994. Accounting for JIT: A cycle time-based approach. Journal of Cost Management (Fall): 63-70. (Summary).

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 R. S. Kaplan. Harvard Business School Press: 229-267. (Summary).

Swenson, D. W. and J. Cassidy. 1993. The effect of JIT on management accounting. Journal of Cost Management (Spring): 39-47. (Summary).

Vollmann, T. 1990. Changing manufacturing performance measurements. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 53-62. (Summary).