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Accounting for just-in-time systems

10 important questions on Accounting for just-in-time systems

5 major features of a Just-in-time production system

Each component or product on a production line is produced as needed for the next step (demand pull). Kenmerken zijn:
1. manufacturing cells
2. multiskilled workers
3. total quality mgt.
4. short set-up and manufacturing lead time
5. selected vendors (=JIT purchasing)

Just-in-time purchasing

The purchase of goods or materials such that delivery immediately precedes demand or use. Vendors are to provide high-quality goods and make frequent deliveries of the exact quantities specified on a timely basis.

Product costing benefits of Just-in-time

* JIT systems reduce overhead costs
* JIT systems facilitate the direct tracing of some costs that were formerly classified as
overhead
* The use of multiskilled workers in manufacturing cells allows costs of set-up, minor
maintenance and quality inspection to become easily traced to direct cost.

Economic Order Quantity model assumptions

1. The same fixed quantity is ordered at each reorder point
2. Demand, ordering costs, carrying costs, the purchase order lead time (time between
placement and delivery of an order) are certain
3. Purchasing costs p/u are unaffected by qty ordered
4. No stockout occurs (adequate stock levels are assumed)
5. Size decisions are only considered for costs of quality where it affects ordering or carrying
costs

EOQ ignores Purchasing costs, Stockout costs, and Quality costs

Financieringskosten gemiddelde voorraad + safetystock

= (Gemiddelde EOQ + Safetystock) x gemiddelde voorraadkosten

Relevant opportunity cost of capital

It is the return forgone by investing capital in stock rather than elsewhere. It is calculated as the required rate of return multiplied by those costs per unit that vary with the number of units purchased and that are incurred at the time the units are received.

Reducing manufacturing lead time and set-up time

* Reducing manufacturing lead time enables a company to respond better to changes in
   customer demand

* Reducing set-up time makes production in smaller batches economical and worthwhile, as it
   reduces stock levels. When set-up costs are small, processing smaller batches is optimal,
   because it reduces carrying costs. When set-up costs are high, it makes sense to maintain
   continuous production

Costs associated w/ managing stock and goods for sale

1. Purchasing costs
2. Ordering costs
3. Carrying costs
4. Stockout costs
5. Quality costs

Cost of prediction error p.679

The cost of the prediction error can be calculated using a three-step procedure.

1. Calculate the monetary outcome from the best action that could have been taken, given the
     actual amount of the cost input

2. Calculate the monetary outcome from the best action, based on the incorrect amount of
    the predicted cost input (only change qty to old #)

3. Calculate the difference between monetary outcomes (m1 - m2). If outcome is negative,
     you present the cost of the prediction error as a positive value.

Backflush costing method 1 (w/ 2 trigger points)

- Direct (raw) materials purchased charged to stock Raw and In-Progress Control
- Finished goods recorded as Finished Goods Control

This method closely approximates the costs calculated using sequential tracking. There is no work in progress, so no need for a WIP stock account. Also by maintaining a Raw and In-progress Stock Control and Finished Goods Control account, a company can keep track of and control the stock of direct materials and finished goods in its plant.

The question on the page originate from the summary of the following study material:

Management Accounting 2

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Accounting for just-in-time systems

10 important questions on Accounting for just-in-time systems

5 major features of a Just-in-time production system

Just-in-time purchasing

Product costing benefits of Just-in-time

Economic Order Quantity model assumptions

Financieringskosten gemiddelde voorraad + safetystock

Relevant opportunity cost of capital

Reducing manufacturing lead time and set-up time

Costs associated w/ managing stock and goods for sale

Cost of prediction error p.679

Backflush costing method 1 (w/ 2 trigger points)

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