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21/04/2017 ManagementAccounting:Chapter8

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ManagementAccounting:Concepts,
Techniques&ControversialIssues
Chapter8
JustInTime,TheoryofConstraints,andActivityBasedManagementConceptsand
Techniques1

JamesR.Martin,Ph.D.,CMA
ProfessorEmeritus,UniversityofSouthFlorida

MAAW'sTextbookTableofContents

Citation:Martin,J.R.Notdated.Chapter8:JustInTime,TheoryofConstraints,and
ActivityBasedManagementConceptsandTechniques.ManagementAccounting:
Concepts,Techniques&ControversialIssues.ManagementAndAccountingWeb.
http://maaw.info/Chapter8.htm

CONTENTS

LearningObjectives|Introduction|JustInTimeSystems|TheJITAttitude|JustIn
TimeSystems|TheJITPractices|TheTheoryofConstraints|TheGlobal
Measurements|TheFiveContinuousSteps|ThroughputAccounting|ActivityBased
Management|TheJohnsonModel|TheCAMIModel|ComparisonofJIT,TOCAND
ABM|JITVersusTOC|JITandTOCVersusABM|ControversialIssue|Appendix:
FloToyDemonstration|Footnotes|Questions|Problems|ProblemSolutions|Extra
MCQuestions|ExtraProblemforDemoorSelfStudy

LEARNINGOBJECTIVES

Afteryouhavereadandstudiedthischapter,youshouldbeableto:

1.Provideconceptdefinitionsforthetermsjustintime,thetheoryofconstraintsand
activitybasedmanagement.
2.Discusshoweachofthethreetermsinthefirstlearningobjectiverepresentsbotha
philosophyandasetofpractices.
3.Describethejustintimeelementsassociatedwithemployeeandmanagement
attitudesandexplainhowtheseelementsdifferfromtraditionalattitudes.
4.Outlineanddiscussthevariouspracticesassociatedwithjustintime.
5.Explainhowbackflushcostingdiffersfromtraditionalcostaccumulationmethods.
6.Explainhowbackflushcostingsystemsdifferforvariousinventoryvaluationmethods
includingabsorptioncosting,directcostingandthroughputcosting.
7.Discusstheoverallgoalofthetheoryofconstraintsaswellastheglobalmeasures
andrulesassociatedwiththisconcept.
8.Explainthesimilaritiesanddifferencesbetweenjustintimeandthetheoryof
constraintsintermsofphilosophyandpractice.
9.Prepareincomestatementsonathroughputcostingbasisandexplainthebehavioral
implicationsrelativetoabsorptioncostinganddirectcostingstatements.
10.Describeanddiscusstwoactivitybasedmanagementmodels.
11.Discusstherelationshipbetweenactivitybasedmanagementandthejustintimeand
theoryofconstraintsmanagementconcepts.
12.Discussthecontroversialissueoverwhetheractivitybasedmanagementis
compatiblewiththejustintimeandtheoryofconstraintsphilosophies.

INTRODUCTION

Thischapterpresentsanintroductiontothreerelatedmanagementsystemsincluding
justintime(JIT),thetheoryofconstraints(TOC)andactivitybasedmanagement
(ABM).Eachofthesesystemsrepresentsabroadphilosophyandincludesanumberof
techniquesthattendtoimproveacompany'sprofitabilityandcompetitivenessunder

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certainconditions.WhileABMisanaccountingbasedsystem,JITandTOCare
productionbasedsystems.AlthoughaccountingisnotthemainfocusofJITandTOC,
thethreesystemshaveacommonlink.Eachofthesethreebroadphilosophiesconflicts
withtraditionalaccountingtheoryandpracticeinanumberofways.Theconflictsarise
becausethenewphilosophiesembracemanyofthecharacteristicsofthecommunitarian
capitalistmodeldiscussedinChapter1,whiletraditionalaccountingtheoryandpractice
arefirmlyrootedintheindividualisticmodel.Forthisreasoneachofthesemanagement
systemsshouldbeconsideredcarefullybeforedesigning,orredesigningacost
accountingsystem.Ourgoalinstudyingtheserelativelynewsystemsisnottobecome
expertusersofthetechniquesinvolved,buttobuildafoundationforevaluatingthe
variousaccountingplanningandcontrolsystemsthatwewillstudyinsubsequent
chaptersandthatyouarelikelytoencounterinpractice.

Thechapterincludesfoursections.Thefirstthreesectionsintroducethethree
philosophiesmentionedabovealongwithsomeofthetechniquesassociatedwitheach
typeofsystem.Thefourthsectionincludesacomparisonofthesethreesystemsand
addressesthequestionoftheircompatibility.

JUSTINTIMESYSTEMS

Justintime(JIT)hastheelementsofaphilosophyaswellasvariouspracticeelements.
WhiletheJITphilosophyisapplicabletoanytypeoforganization,thepracticeelements
applymainlytorepetitivemanufacturingoperationssuchastheproductionand
assemblyofautomobilesorappliances.

AlthoughthetermJustintime(JIT)canbedefinednarrowlyasaproductionor
inventoryschedulingtechnique,itismorefrequentlydefinedasaverybroadphilosophy
thatincorporatesmanyoftheconceptsofcommunitariancapitalismthatareoutlinedin
Chapter1.JITismoreappropriatelythoughtofasaphilosophybecause,eventhoughit
includesavarietyoftechniques,itismuchmorethanacollectionofmanagement
practices.Thereisconsiderablesupportfortheargumentthatsuccessfulimplementation
ofaJITsystemrequiresanentirelydifferentmentality,orattitude,onthepartof
managementandworkersthanthetypicalattitudesunderlyingtraditionalbusiness
practicesandrelationships.Althoughaprecise,oroperationaldefinitionofJIThasnot
beendeveloped,itbasicallyinvolvestheeliminationofwasteandexcessbyacquiring
resourcesandperformingactivitiesonlyastheyareneededbycustomersatthenext
stageintheprocess.Forexample,inventorybuffersareviewedasanevilinthatthey
hideproblemssuchasdefectiveparts,productionbottlenecks,longmachinesetupsand
competitivebehaviorwithinthecompany.

AmorecomprehensivedefinitionofJITcanbedevelopedbyconsideringthemain
elementsthatareattributedtosuccessfulJITsystems.Theseelementscanbeseparated
intotwobroadcategoriesincludingattitudeandpractice.Whiletheelementsofattitude
canbeadoptedbyanyorganization,theelementsofpracticearemainlyapplicableto
companiesinvolvedinrepetitivemanufacturing.Fromanaccountingviewpoint,these
arecompaniesthatwouldnormallyusetheprocesscostaccumulationmethod.

AJITsystemrequiresanattitudethatplacesemphasisonthefollowing:

1.Cooperationwithavaluechainperspective,
2.Respectforpeopleatalllevels,
3.Qualityatthesource,
4.Simplificationorjustenoughresources,
5.Continuousimprovementand
6.Alongtermperspective.

AJITsystemalsoincorporatesthefollowingpractices:

1.Justintimepurchasing,
2.Focusedfactories,
3.Cellularmanufacturing,
4.Justintimeproduction,
5.Justintimedistribution,
6.Simplifiedaccountingand
7.Processorientedperformancemeasurements.

THEJITATTITUDE

Adiscussionofeachoftheelementsrelatedtoattitudeisprovidedinthefollowing
paragraphs.

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CooperationwithaValueChainPerspective

Acompany'svaluechainconsistoftheconnectedsetofvaluecreatingactivitiesthatare
requiredtoproduce,distributeandserviceaproductfromtheinitialsuppliersofraw
materialstothefinalconsumer.AccordingtoMichaelPorter,acompany'svaluechainis
partofalargervaluesystemthatincludesthevaluechainsofsuppliers,distributorsand
buyers.1Figure81illustratesthevaluesystemsforasingleindustryfirmanda
diversifiedfirm.Eachfirminthevaluesystemhasaseparatevaluechain,butthese
valuechainsareinterdependent.Buyers(othercompaniesorindividuals)dependon
distributorswhodependonproducerswhodependonsupplierswhointurndependon
othersuppliers.

UsingPorter'sterminology,thevaluechainforaspecificcompanystartswithageneric
valuechainillustratedinFigure82.Thecompany'svaluechainincludesan
infrastructuremadeupofphysicalassetsandvariousactivitiesthatsupporttheentire
chain.Forexample,theinfrastructureincludesactivitiessuchasgeneralmanagement,
accounting,finance,legalservices,andsecurity.Othermajorsupportactivitiesinclude
humanresourcemanagement,technologydevelopmentandprocurementorpurchasing.
Acompany'sprimaryactivitiesincludeinboundlogistics,operations,outboundlogistics,
marketing&salesandcustomerservice.Inboundlogisticsincludessubactivitiessuch
astransportation,receiving,inspectionandmaterialshandling.Operationsinvolves
manyactivitiesincludingresearch&development,productdesign,engineering,energy,
planning,scheduling,productionactivitiesandmaintenance.Outboundlogisticsrefers
toactivitiessuchasprocessingcustomerordersandoutboundtransportation.Marketing
&salesactivitiesincludeadvertising,andsalespromotion.Finally,customerservice
includessuchactivitiesascustomertraining,maintainingsparepartsandrepairservice.

Thevaluechainandvaluesystemconceptsexplicitlyrecognizetheinterrelationships,or
linkages,withintheeconomicsystem.Recognizingandexploitingthese
interdependenciesisimportantbecauseJITsystemsdependonhighlevelsof
cooperationbyeveryoneconnectedtothevaluechain,i.e.,bothinsideandoutsidethe
company.Traditionalsystemsconcentrateonthevalueaddedbyproductionactivities,
whilethevaluechainperspectivealsoincludesthevalueaddedbyvendors,distributors
andcustomerservicepersonnel.SincewasteandexcessarenotallowedinaJITsystem,
everyoneinthevaluechainmustworktogetherasateamtoensureasmooth,efficient
flowofoutput.AdvocatesoftheJITphilosophypointoutthatthecompetitionthat
typicallyoccursbetweenworkersanddepartmentsintraditionalindividualisticbased
systemsisinconsistentwiththeJITconceptbecauseitproducesexcessthataddscosts
andhidesproblems.

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RespectforPeopleatallLevels

MostoftheelementsofaJITsystemrequirethatalloftheconstituencies(employees,
customers,vendorsandmanagement)andindividualswithinthoseconstituencieshavea
highregardforeachother.Institutionalizingtheconceptofrespectforothersisnotjust
anicethingforacompanytodo,itisanimportantelementintheJITcompetitive
strategy.Forexample,traditionalmanagementsystemstendtocreateadversarial
relationshipsbetweenemployeesandmanagementthroughahierarchyofauthoritarian
supervisors.InaJITsystem,workersarecrosstrainedandempoweredtomake
decisionsthatarerestrictedtosupervisorsincompanieswithtraditionalmanagement
systems.Respecttendstobuildthetrustbetweenemployeesandmanagementthatis
neededtosuccessfullyimplementprogramsforcrosstrainingandempowerment.Such
programshelpemployeesgrowandbondwiththecompany.Thissequentialsetof
outcomesproducesmoreknowledgeableemployees,fewerlayersofmanagement,lower
laborturnover,higherqualityandlowercosts.

QualityattheSource(Jidohka)

Qualityatthesourcemeanstoidentifyandcorrectproblemswhenandwherethey
occur.TheJapaneserefertothisconceptasjidohka.InaJITsystem,everyoneinthe
companyisresponsibleforqualityandworkersusestatisticalcontrolchartsandother
techniquestomonitortheirownwork.Everyone'sattitudemustincludetheideathat
qualityismyjob,wherequalityisdefinedasconformancetospecifications,asopposed
todesignquality.2

Jidohkaalsoincludesautomatedinspectionfrequentlyreferredtoasautonomation.The
ideaistomakeinspectionpartoftheproductionprocess,ratherthanaseparateactivity,
toinsurethatdefectiveworkisnotmovedontothenextstageintheprocess.Thegoalis
tostoptheproductionlineandcorrecttheproblematthesourceoftheproblem.

SimplificationorJustEnoughResources

AgoalofJITsystemsistoachievezeroworkinprocessinventorybufferssothat
productsflowcontinuouslythroughthesystem.JITalsoincludesthegoalofzeroending
finishedgoodsinventory.ThisreflectstheideathatJITisademandpullsystemrather
thanaspeculativepushsystem.Customerordersdriveproduction.Theprocessstarts
withthefinalconsumerswhoplacedemandsonthesalesforce,whoplacedemandson
theproductionfacilities,whointurnplacedemandsonupstreamactivitiesthroughout
thesystem.AlthougheliminatingexcessinventoryisanimportantpartofaJITsystem,
theconceptismuchbroaderthananinventorycontrolorproductionschedulingmethod.
AJITsystemalsoemphasizessimplificationandzeroexcess(waste)inallareasof
business.Theobjectiveisforthecompanytoacquirejustenoughresourcesincluding
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vendors,humanresources,andcapacity.Thisisaverydifferentconceptfromtheidea
underlyingtraditionalsystemswhereexcessresourcesareplannedjustincase(JIC)
theyareneeded.TheJITviewisthatexcessofanykindhidesproblemssuchaslow
qualityrawmaterialsandunreliablevendors,employeesandequipment.Removethe
excessandtheproblemsbecomevisible.

AcomparisonoftheJICandJITapproachesisillustratedinFigure83.Theship
representstheCompany,thewaterrepresentstheCompany'sresourcesandtherock
formationsymbolizestheCompany'sproblems.Inthejustincaseillustrationonthe
left,theshipisperilouslyclosetotherockshiddenbelowthesurface.Inthejustintime
illustrationontheright,thewaterlevelislowered(excessresourcesremoved),revealing
therocksorproblemsthatneedtobesolved.

ContinuousImprovement(Kaizen)

TheJapaneserefertocontinuousimprovementaskaizen(pronouncedky'zen).Tothe
Japanese,kaizenmeanstostriverelentlesslytoincreasequality,efficiencyand
effectivenessinallareasoflifeincludingpersonal,family,social,andwork.Although
thisconceptdefinitionmaysoundsomewhatindividualistic,theJapaneseemphasize
smallincremental,butcumulativeholisticimprovements.Thecontinuousimprovement
approachisillustratedbytheShewhartDemingplandocheckorstudyaction(PDCA
orPDSA)cyclethatappearsinFigure84.3Theplanstepincludesidentifyinga
problem,orpotentialforimprovement,anddevelopingaplanfortheproblem'ssolution.
Thedostepincludesatrialrunoftheplannedsolutionwhichisevaluatedinthecheck
step.Correctlyevaluatingthetrialrundependsonanunderstandingofthevariationin
thesystem.Itisimportantnottoconfusecommoncauseswithspecialcausesof
variation.4Thecheckstepincludesrevisionstotheplanwheretheyappeartobeneeded.
Thefinalactionsteprepresentstheimplementationoftheplan.ThePDCAcycle
involvesusingavarietyofstatisticaltoolsandisaneverendingactivityforcompanies
thatembracethecontinuousimprovementmethodology.Someofthestatisticaltoolsare
discussedbelow.

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PDCAStatisticalTools5

Someofthestatisticaltoolsusedinthecontinuousimprovementcycleinclude:1.Pareto
diagrams,2.Fishbone,orcauseandeffectdiagrams,3.Histograms,4.Othergraphsand
charts,e.g.,piecharts,5.Controlchartsand6.Scatterdiagramsandrelatedtechniques,
e.g.,regressionandcorrelationanalysis.

Paretodiagramsshowthecausesofproblemsinbarchartformat.Theideaisto
graphicallydisplayopportunitiesforpotentialimprovement.Forexample,Figure85
illustratesthereasonsfordowntimeataparticularcell.TheseincludeAOutofparts,
BDefectivepart,CEquipmentfailure,DOperatorerrorandEPowerfailure.
Figure85revealsataglancethatnearlyfiftypercentofthedowntimeiscausedbya
shortageofpartsandanotherthirtypercentresultsfromdefectiveparts.6

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Fishbonediagramsshowasketchoftherelationshipsthatmaycontributetoa
particularproblem.Forexample,Figure86presentsanabbreviatedfishbonediagram
forthedowntimeproblemmentionedabove.Shortagesofpartsanddefectivepartsare
relatedtovendorsanddeliveryschedules.Equipmentfailuresarerelatedtothe
characteristicsoftheequipmentsuchasageandpreventivemaintenance.Operator
errors,ontheotherhandmaybecausedbyalackoftrainingorexperience.Inother
cases,thecharacteristicsoftheprocessmaybeatfault.(SeeanotherFishboneexample).

Histogramsshowthedistributionofaperformancemeasurementsuchasthenumberof
shortages,orthenumberofdefects,overaperiodoftime.Figure87illustratesthe
numberofmaterialshortagesperdayforaparticularperiod.Thechartrevealsthatthe
numberofshortagesrangesfromonetofifteenperdaywitheightrepresentingthemost
frequentnumber.

Othertypesofgraphsincludepiechartsandlinegraphs.

Piechartsareusedtoshowthevariouspartsofaproblem,processorfinancial
measurementinproportiontothewhole.Figure88illustratesthevarioustypesof
productcostsinproportiontototalfactorycosts.Theideaistoemphasizetheareaswith
thegreatestpotentialforimprovement.

Linechartsareveryusefulforshowingtrendsinnearlyanytypeofmeasurement.For
exampleFigure89illustratesthenumberofpartsshortagesoverafiftytwoweek
period.

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Controlchartsandscatterdiagramsareperhapsthemostimportantstatisticaltools
availabletoaidinthePDCAcontinuousimprovementeffort.Thatiswhytheywere
givenconsiderableattentioninChapter3.Recallthatcontrolchartsareusedto
determinewhenaprocessisstableandwhetherornotitisincontrol.Controlchartsare
alsousedinthechecksteptorevealthesuccessoftheplananddostepsinimproving
themeanoutcomeorinreducingthevariabilityoftheprocess.Scatterdiagramsandthe
relatedregressionandcorrelationtechniquesarepowerfultoolsforidentifyingcause
andeffectrelationships.ReferbacktoChapter3forareviewoftheseimportant
statisticaltools.

ALongTermPerspective

Althoughtheeffectofasmallimprovementmayseemtrivial,theconceptofcontinuous
improvementbecomesapowerfulstrategyinthelongrunasthecumulativebenefitsof
hundreds,perhapsthousandsofsmallimprovementsareobtained.Itissomewhat
analogoustoanathletetrainingfortheOlympics.Thepersontrainsdailytoobtainsmall
increasesinfitnessandskill.Afteryearsofcumulativeincrementalimprovements,the
athletemayreachworldclassstatus.Thegoalforthecompanypursuingcontinuous
improvementisalsotoachieveandmaintainaworldclasscompetitiveposition.Thus,a
longtermperspectiveisanessentialingredientoftheJITphilosophy.

THEJITPRACTICES

AbriefdiscussionofeachoftheJITpracticesisincludedinthesectionsbelow.

JustinTimePurchasing

WhentheconceptsofJITareappliedtothepurchasingfunction,alloftheelementsof
attitudediscussedabovemustbeincluded.Inaddition,theadoptionofJITpurchasing
includesthefollowingcharacteristics:

1.Establishinglongtermagreementswithvendorsondeliveryandprice.
2.Purchasingfromasmallernumberofvendorsthanintraditionalsystems.
3.Certifyingvendorsonquality,priceandscheduleattainment.
4.Increasingthefrequencyandreducingthesizeofdeliveriesfromvendors.
5.Requiringthatdeliveriesaremadetothefactoryfloorinshopreadycontainers.
6.Reducinginspectionofincomingmaterials.
7.Emphasizingzerorawmaterialsinventory.
8.Eliminatingthewarehousespaceforrawmaterials.

FocusedFactories

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Thetermfocusedfactoriesreferstosmallspecializedmanufacturingplantsthatare
dedicatedtotheproductionofasmallnumberofproducts.Thisideaappliesmainlyto
repetitivemanufacturing,butcompaniesthatproduceproductsorservicestocustomer
specificationscanalsobecomemorefocusedbyconcentratingoncertaintypesofjobs.

CellularManufacturing

Cellularmanufacturingreferstothepracticeoforganizingafactoryintomanufacturing
cellsthatarededicatedtotheproductionofasingleproduct,orafewsimilarproducts.
Amanufacturingcellisfrequentlyreferredtoasafactorywithinafactorybecauseallof
theresourcesneededtoproducetheproductarelocatedwithinthecell.Forexample,
insteadofhavingmanyproductsmovingthroughseveraldepartmentssuchascutting,
grinding,heating,assemblyandpackingasinFigure810,thefactoryisorganizedinto
separatecellsforeachproductthatincludeeachtypeofmachineryasillustratedin
Figure811.Placingthevariousmachinesclosetogetherreducestheneedforinventory
buffersandmaterialshandling.Thecellulararrangementalsorequiresfewermachine
operatorssinceasinglecrosstrainedworkercanoperateseveralmachines.Noticethat
mostofthesupervisors,workers,inventoryandforklifttrucksthatappearinFigure810
arenotincludedinFigure811.

Theadvantagesofarrangingthefactoryintocellsalsoincludeobtainingmoreaccurate
productcosts.Ofcoursethereislessproductdiversitywithinacellthanthereisina
traditionaldepartment,butthecellulararrangementhasanotherfavorableinfluenceon
productcosts.Somesupportservicessuchasproductionscheduling,engineering,
maintenanceandhumanresourcemanagementarealsodecentralizedwhichreducesthe
amountofindirectcosts.Sincethesefunctionsareperformedwithinthecell,thesecosts
becomedirectcoststotheproductsproducedinthecell.Thisreducestheneedforfirst
stagecostallocationsforthesesupportservicesandresultsinmoreaccurateproduct
costs.

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JustinTimeProduction

JITproductioniscloselyrelatedtothepracticesofdesigningfocusedfactoriesand
organizingproductionoperationsintomanufacturingcells.However,JITproduction
alsoincludesseveralotherelementsthatarelistedbelow.

1.Ademandpullsystemincludingkanbanproductioncontrol.(Thetermkanbanis
definedbelow.)
2.Emphasisonreducingproductionleadtimeorcycletime,i.e.,timefromstartto
finish.
3.Flexibilityandshortsetupsforthedifferentproductsproducedinthecell.
4.Apolicyofstoppingtheproductionlinetocorrectdefects,i.e.,jidohka.
5.Smallorzeroinventorybuffers.
6.Simplifyingandeliminatingunnecessaryresourcesandactivities,(e.g.,forklift
trucks)inadditiontoorganizingproductionfacilitiesintomanufacturingcellsasin
Figure811.
7.Failsafedevicesandpreventivemaintenance.

Theconceptandpracticeofimplementingademandpullsystemmeansproducingonly
whatisneededbythenextoperationandonlyatthetimeitisneeded.Producingmore
inventorythanimmediatelyneededisconsideredaformofwaste.Akanbanisa
Japanesewordmeaningcard.JITproductioncontrolisamanualsystemwherekanbans,
orcardsareusedtoauthorizeproductionandthemovementofmaterialsandproducts
withintheplant7.Theauthorizationkanbanscomefromdemanddownstream,thus
inventoryispulledratherthanpushedthroughtheplant.Althoughthedemandpull
conceptcanbeappliedtoalargenumberofcompanies,thekanbantypeinventory
controlsystemismainlyapplicableinrepetitiveassemblymanufacturing.Examples
includeautomobiles,logloaders,washingmachinesandTVsetstonameafew.

JITproductionalsoemphasizescontinuouslyreducingthetimerequiredtoperformthe
neededmachinesetupsandoperations,thusreducingdowntimeandproductionlead
timetoaminimum.CorrectingdefectsastheyoccurandemphasisonsmallorzeroWIP
inventoriesarecloselyrelated.Zeroinventorymeansthattherearenoinventorybuffers
toreplacedefectiveparts.Themainadvantagesofsimplificationandthejustenough
resourceconceptaretoincreaseproductivity,reducecostsandmakeproblemshighly
visiblesothattheycanbecorrectedquickly.Failsafedevicessuchaswarningbells,
timers,electriceyesandalignmenttemplatesarealsousedtopreventproblemsfrom
occurring.8Ofcourse,preventivemaintenanceisalsoamustwhenthereareno
inventorybuffers,sinceamachinebreakdowncancausedowntimefortheentireplant.

JustinTimeDistribution

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JITdistributionsystemshavemanyofthesameelementsasJITpurchasingsystems,
exceptthecompanybecomestheseller(vendor)ratherthanthepurchaser.Someof
theseelementsinclude:

1.Establishinglongtermagreementswithcustomersondeliveryandprice.
2.Sellingtoasmallernumberofcustomersthanintraditionalsystems.
3.Becomingcertifiedonquality,priceandscheduleattainment.
4.Increasingthefrequencyandreducingthesizeofdeliveriestocustomers.
5.Makingdeliveriestothecustomer'sfactoryfloorinshopreadycontainers.

TheadvantagestothesellerinaJITsystemareobtainedbyestablishinglongterm
commitmentswithasmallernumberofcustomers.Thisreducescostsanduncertainty.
Inthelongrun,JITonlyworkswhereeveryoneinthevaluesystemobtainsbenefits.

SimplifiedAccountingandBackflushCosting

SomeofthecharacteristicsofJITaccountingsystemsinclude:

1.Batchingdeliveries.
2.Increasingthetraceabilityofcostswithfewercostpools.
3.ReducingtheneedforABCsystems.
4.Reducingoreliminatingcostvarianceanalysis.
5.Backflushinginventorycosts.

SinceJITpurchasinginvolvesalargenumberofsmalldeliveries,thesepurchasesare
frequentlyrecordedinbatchesratherthanasindividualpurchasestosimplifyrecord
keeping.Althoughbatchingdeliveriesmayseeminconsistentwithimprovedcost
traceability,JITincreasesthetraceabilityofcostsbecausemoretransactionsinboththe
purchasingandproductionareascanbetraceddirectlytothecellsandtheproducts
producedinthosecells.Purchasingandreceivingcostsdecreasewithfewervendorsand
deliveriesmadedirectlytotheplantfloor.Withsomeservicefunctionsperformedatthe
celllevel,thereislessneedtoallocatethesecostsamongdepartmentsinfirststage
allocations.Inaddition,sincethecellsarededicatedtotheproductionofasingle
product,orafewsimilarproducts,thereislessneedforallocationsinstagetwo.As
indicatedinourdiscussionofthetwostageallocationprocess,ifonlyone,orafew
similarproductsareproducedineachdepartment,orcell,thencostdistortionsand
crosssubsidiesfromcostallocationswillnotoccur.Thus,therewillbelessneedto
developanABCsystemtoobtainaccurateproductcosts.AnothercharacteristicofJIT
accountinginvolvesadeemphasisoncostvariances.Varianceanalysisandother
financialresultsorientedmeasurementsarereplacedwithavarietyofprocessoriented
measurementsdiscussedbelow.

BackflushCosting

Backflushcostingreferstoavarietyofsimplifiedcostaccumulationmethodsthattend
tobeusedbycompaniesthatadoptJITsystems.Mostcostsystemsthatincludethe
backflushmethodareperiodicinventorysystemsbecauseperpetualinventoryrecords
areeliminated.Althoughasinglecostsystemthatincludesthebackflushmethodis
relativelyeasytounderstand,thetopicisconfusingbecausethebackflushmethodcan
beusedwithanyinventoryvaluationmethod.Tounderstandthepossibilities,consider
thatthereareonlyfourmainwaystoaccountformanufacturingcostsattheendofa
period.Thefirsttwopossibilitiesrepresentthetraditionalinventoryvaluationmethods
discussedinpreviouschapters,whilethelasttwoarenontraditionalmethodssometimes
usedbycompaniesthatadopttheJITphilosophy.Thefourpossibilitiesinclude:

1.Capitalizeallmanufacturingcostsintheinventoryasinfullabsorptioncosting.The
applicablecostsofdirectmaterials,directlabor,variableoverheadandfixedoverhead
aredeferredintheendinginventory.

2.Capitalizeonlyvariablemanufacturingcostsintheinventoryasindirectcosting,.i.e.,
chargefixedmanufacturingcoststoexpense.Onlytheapplicabledirectmaterials,direct
laborandvariableoverheadaredeferredintheendinginventory.

3.Capitalizeonlydirectmaterialscostsintheinventory,i.e.,chargeallconversioncosts
toexpense.Onlytheapplicabledirectmaterialscostsaredeferredintheending
inventory.Thismethodissometimesreferredtoasthroughputcostingbecauseit
producesthesameresultsthatareobtainedinthethroughputaccountingmethod
associatedwiththetheoryofconstraints.Throughputaccountingisexplainedbelowin
thesectiononthetheoryofconstraints.

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4.Expenseallmanufacturingcosts.Nomanufacturingcostsaredeferredinthe
inventory.Thisistheoppositeoffullabsorptioncosting.

Althoughavarietyofbackflushsystemscanbedesignedforeachofthesefourmethods,
wewillconsideronlyonesystemforeachmethod.Adiscussionofallpossible
backflushaccountingsystemsiswellbeyondthescopeofthistextbookandwouldnot
addagreatdealtoyourunderstandingofthetopic.

Inbackflushsystems,theusualinventoryaccountsarereplacedwithasimplifiedsetof
accounts.Typically,theMaterialsandWorkinProcessaccountsarecombinedintoan
accountreferredtoasRawandinProcess,orRIP.ThePayrollandOverheadaccounts
arereplacedbyasingleaccountforConversionCosts.Theotheraccountsinthesystem
includethefamiliarFinishedGoodsandCostofGoodsSold(COGS)accounts.During
anaccountingperiod,purchasesofdirectmaterials,alongwithdirectlaborandoverhead
costsarechargedtothecostofgoodssoldaccountasincurred.Theusualentriesare
omittedincludingtheentriestotransferthecostofgoodsmanufacturedfromone
department,orcell,tothenextandsubsequentlytoFinishedGoods.Theperpetual
recordsillustratedinChapters4and5arenotmaintained.Instead,materialsand
conversioncostsarechargeddirectlytoCostofGoodsSold.Then,attheendofthe
period,theremainingfinishedandpartiallycompletedunitsarecountedandinventory
costsarechargedinabackwarddirectionfromCOGStoFinishedGoods,RIPand
ConversionCostaccounts.Thesesocalledbackflushedcostsareusuallybasedon
budgetedorstandardcostsperunit.

BackflushExample

AssumethattheCMCompanyproducescoffeemakers.Thebudgetedmanufacturing
costsfortheproductareindicatedbelow.

DirectMaterial $10
DirectLabor 1
VariableOverhead 4
FixedOverhead($6000/1,000) 6
Total $21

Tokeeptheexamplesimple,assumethattherearenobeginninginventoriesandthatthe
actualcostsofproductionareequaltobudgetedcosts.Duringtheperiod,theCompany:

1.Purchased$10,100worthofdirectmaterials.
2.Incurred$11,000inconversioncostsincluding$1,000directlabor,$4,000variable
overheadand$6,000fixedoverhead.
3.Incurredsellingandadministrativeexpensesof$990variableand$1,900fixed.
4.Sold990coffeemakersfor$32perunit.
5.Determinedthattheendinginventoryincluded5finishedunits,5equivalentunitsin
processand$100worthofunuseddirectmaterials.

AbackflushsystemcompatiblewithfullabsorptioncostingappearsinExhibit81.Note
thatthedirectmaterialspurchasesandconversioncostsarechargeddirectlytoCostof
GoodsSold.Thenthecostsremainingintheendinginventoriesarecharged,or
backflushed,totheRIP,ConversionCostsandFinishedGoodsaccounts.Theamount
backflushedtoRIPisfiveequivalentunitsat$10,plus$100unuseddirectmaterialsfor
$150total.TheamountbackflushedtotheConversionCostsaccountisfiveequivalent
unitsat$11or$55.Sincetherearefiveunsoldfinishedunits,theFinishedGoods
accountischargedwithfiveunitsat$21perunitor$105.Then,CostofGoodsSoldis
$20,790(10,100+11,000310or990unitsat$21)andthisamountisclosedtothe
incomesummary.Althoughthissimplifiedsystemissomewhatunorthodox,theamount
ofcostofgoodssoldisexactlythesameastheamountobtainedinatraditionalfull
absorptioncostingsystem.Althoughtheaccountsaredifferent,theresultsarethesame.

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AbackflushsystemcompatiblewithdirectcostingappearsinExhibit82.Anadditional
accountisneededforperiodcosts,orfactoryexpenses,sincethefixedoverheadcosts
arenotchargedtotheinventory.Instead,thefixedmanufacturingcostsarecharged
directlytoexpense.Variablemanufacturingcostsof$15,100arechargeddirectlytocost
ofgoodssold.Then,theamountbackflushedtoRIPis$150,thesameasinExhibit81.
However,theamountbackflushedtotheConversionCostsaccountisonly$25,(i.e.,
fiveequivalentunitsat$5)andtheFinishedGoodsaccountischargedwithonly$75,
(i.e.,fiveunitsat$15).Then,theamountremaininginCostofGoodsSoldis$14,850
(i.e.,10,100+5,000250or990unitsat$15).Noticethatthetotalamountthatappears
intheincomesummaryis$20,850.Thisis$60greaterthantheamountinabsorption
costing(i.e.,20,85020,790).ComparingtheConversionCostsandFinishedGoods
accountsinExhibits81and82revealswherethe$60differenceislocated.Eachof
theseaccountscontains$30offixedoverheadinExhibit81,whileallofthefixed
overheadcostsappearontheincomesummaryinExhibit82.

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AbackflushsystemcompatiblewiththroughputcostingispresentedinExhibit83.In
thisillustration,onlydirectmaterialscostsflowintocostofgoodssold,whileall
conversioncostsarechargeddirectlytoexpense.Thebackflushentryinvolvescharging
$150ofthedirectmaterialscoststoRIPasintheprevioustwoillustrations,butonly
$50toFinishedGoods,i.e.,fiveunitsat$10.TheConversionCostsaccountthat
appearsinExhibits81and82isomittedinExhibit83becausenoconversioncostsare
deferredintheinventory.Afterthebackflushentry,theamountofCOGSis$9,900,(i.e.,
10,100200,or990unitsat$10).Afterthisamountisclosed,theincomesummary
contains$20,900ofmanufacturingcosts.Thisis$50morethantheamountthatappears
inthedirectcostingillustrationinExhibit82.Ofcoursethedifferenceisthat$50of
conversioncostsarebackflushedanddeferredintheConversionCostsandFinished
GoodsaccountsinExhibit82,whilethesecostsarechargedtoexpenseinExhibit83.

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Asystemwherenoneofthemanufacturingcostsaredeferredintheinventorycouldbe
designedinavarietyofways.OnesuchsystemisillustratedinExhibit84wherethe
entire$21,100ofdirectmaterialsandconversioncostsareflushedouttotheincome
summary,eventhoughtenunitsremainintheinventory.Thisisnotabackflushsystem,
sincenoneofthecostsareflushedbacktoinventoryaccounts.Insteaditmightbe
referredtoasanoabsorptionthroughputcostingsystemsincetheendingmaterialscosts
arechargedtoexpenseratherthanbackflushedtotheRIPandfinishedgoodsaccounts.

SummaryofKeyIdeas

Althoughtheconceptsillustratedabovearemorefullydevelopedinsubsequent
chapters,thisfourpartexamplewaspresentedtointroduceatroublesomebehavioral
aspectofinventoryvaluation.Akeyideatograspisthatalthoughfullabsorptioncosting
satisfiesthematchingconcept,ittendstomotivatemanagerstoproduceexcess
inventory.Why?Becauseeventhoughtotalfixedmanufacturingcostsarerelatively
constant,eachunsoldunitsoaksupsomeofthesefixedcosts.Asaresult,thefixedcosts
associatedwiththeseunitsappearonthebalancesheetasanasset,ratherthanonthe
incomestatementasanexpense.Thehigherthelevelofproduction,thegreaterthe
amountoffixedcostsdeferredintheinventory,thelowertheamountofexpenseandthe
greatertheamountofnetincome.Thus,criticscontendthatabsorptioncostingrewards
managersforproducingexcess.Directcosting,ontheotherhand,isneutralasfaras
buildinginventoryisconcernedbecausefixedmanufacturingcostsareexpensed
regardlessofthenumberofunitsproduced.Notethatthislackofbias,orneutrality
towardsproducingexcessismoreconsistentwiththeJITphilosophy.However,the
throughputcostingapproachgoesastepfurtherandpenalizesthosewhoproduceexcess
bychargingtheconversioncostsassociatedwiththeunsoldinventorytoexpense.The
noabsorptionthroughputmethodinExhibit84maximizesthepenaltyforproducing
excessandcompletelyreversesthefullabsorptioncostingbias.

ProcessOrientedPerformanceMeasurements

Asweshallseeinthechapteronstandardcosting,traditionalperformance
measurementsatthecostcenterlevelplaceemphasisonvarianceanalysisformaterial,
laborandoverhead.Theemphasisisonmeasuringlaborefficiencyandresource
utilizationbycomparingbudgetedcostswithactualcosts.JITsystemsdeemphasizeor
eliminatevarianceanalysis,particularlyatthedepartmentlevel,becauseittendsto
reducecooperationbetweendepartmentsandmotivatemanagerstoproduceexcess
inventory.9Traditionalsystemsarecriticizedbecausetheyplaceemphasisonfinancial
resultsratherthatemphasizingtheprocessesinvolvedinobtainingthoseresults.Wewill
postponeourdiscussionofthecriticismsoftraditionalstandardcostsystemsuntil
Chapter10.Thecriticismsarementionedheretohighlightoneofthemaindifferences

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betweentraditionalperformancemeasurementsandJITmeasurements.Justintime
measurementstendtoemphasizeafewkeynonfinancialaspectsofperformancethat
areprocessoriented,ratherthanthefinancialresultsorientedmeasurementsthatare
generatedbytheaccrualaccountingsystem.Thepurposeoftheprocessoriented
approachistotargetthecausesofacost,orotherperformanceresult,ratherthanthe
cost,i.e.,thefinancialperformanceresultitself.Graphicdisplaysofsuchmeasurements
canbequiterevealingwhenusedasaguidetocontinuousimprovement.Some
examplesofthesemeasurementsareprovidedbelow.

JITMeasurementsforPurchasing.

1.Vendorquality,e.g.,percentageofdefects.
2.Numberofvendors.AfterimplementingJITconcepts,IBM'sLexingtonKentucky
typewriterfacilityreducedthenumberofvendorsby95%from640to32.Xerox
Corporationcutits'suppliersby94%from5,000to300.10
3.Vendorpercentageofontimedeliveries.
4.Daysofmaterialsinventoryonhand.
5.Vendorcostsavingsideasimplemented.
6.Costofqualityandnonquality(SeeMAAW'sQualitytopicpage).

Thesixmeasurementslistedaboveareimportantbecausetheyreflectpotentialwaysto
reducetheoverallcostsassociatedwithdirectmaterials.Thesemeasurementsrepresent
materialcostdriversrecognizingthatoverallmaterialcostsincludenotonlythe
purchasepriceofmaterials,butanycoststhatareassociatedwithordering,receiving,
inspecting,unpacking,moving,storing,scheduling,reworkingandreturningdefective
partstovendors.

JITMeasurementsforProduction.

1.Scheduleattainmentpercentage.Thegoalis100%.
2.Averageinventory11ordaysofworkinprocess(WIP)andfinishedgoodsinventory
onhand.Ofcoursethisshouldbelow,buttheabsoluteamountdependsonthecompany.
Forexample,atHewlettPackard'sPersonalOfficeComputerDivisioninSunnyvale
California,theWIPinventorylevelwascutfromthreeweekstothreedayswhenJIT
conceptswereimplemented.12
3.RatioofthenumberofunitsinWIPtothenumberofworkstationsoroperators.A
ratioof1indicatesthatbufferinventoryequalszero.
4.Inventoryturnover.Inventoryturnover=CostofgoodssoldAverageinventory.
Increasingtheturnoveristhegoal.Forexample,atHarleyDavidson'sYork
Pennsylvaniamotorcycleassemblyplant,inventoryturnoverincreasedfrom3.5to20
whenJITconceptswereapplied.13
5.Measuresofnonquality,e.g.defects,spoilage,reworkandscrap.Thegoalisto
obtainzerodefects,spoilageandreworkandminimumscrap.JITpracticeshelpedthe
GeneralElectricdishwasherplantinLouisvilleKentuckycutscrapandreworkbyfifty
onepercent.14
6.Firsttimethroughproductioncyclewithoutreworkpercentage.Theobjectiveis
100%
7.Productioncycletimeorleadtime=processtime+inspectiontime+movetime+
storagetime.Thegoalistoreduceproductioncycletimebyreducinginspection,move
andstoragetime.Omark'ssawchainfacilityinGuelph,Ontariowasabletoreduce
productioncycletimefromtwentyonedaystothreedayswithineighteenmonths.15
8.Ratioofprocesstimetocycletime.Aratioof1wouldindicatethatinspection,move
andstoragetimeequalzero.
9.Downtimepercentage.
10.Numberoflinestopsperday.
11.Setuptimepersetup.
12.Headcountproductivity(i.e.,averageoutputperworker=totaloutputtotal
employeesincludingindirect).
13.Productcoststrendanalysis,e.g.,percentagechangeinproductcosts.
14.Amountofspaceused.WithaJITplantlayout,anIBMplantinRaleigh,North
Carolinacuttherequiredspacefrom51,000to9,000squarefeet.16
15.Productionflowdistance.Omark'slogloaderplantinPrenticeWisconsin,wasable
tocutflowdistancefrom2,000feetto18inches.17InFlintMichigan,GeneralMotors
cuttheflowdistanceforBuickfendersfrom8,000to140feet.18
16.Overtimerequirementsandtrends.
17.Numberofimprovementsimplemented.
18.Employeesuggestionsmadeandideasimplemented.

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19.Employeemorale.
20.Employeeknowledge,suchas,theaveragenumberofjobseachworkeriscapableof
performing,orthenumberofjobclassifications.AfterimplementingJIT,the
WestinghousesemiconductordivisioninYoungwoodPennsylvaniareducedthenumber
ofjobcategoriesby95%.19InajointventureofGeneralMotorsandToyota,(NUMMI)
ToyotareducedGM'sjobclassificationsfrom100to1multiskilledclassification.20

SomeadditionalmeasurementareasforJITdistributionare:

1.Customerserviceandsatisfaction.
2.Numberofcustomercomplaints.
3.Ontimedeliverypercentage.
4.Responsetimetocustomerorders.UsingahighlyautomatedJITorientedplant,Allen
Bradley'scontactorfacilityinMilwaukeeWisconsinreducedresponsetimefromseveral
weekstooneday.21

Mostofthemeasurementslistedabovecanbemonitoredgraphicallyusingthestatistical
toolsdiscussedintheprevioussection.Althoughnotalloftheperformance
measurementslistedaboveareusedbyasinglecompany,manyJITorientedcompanies
maintainlargedisplaysofkeymeasurementsinvariouslocationswithinthefactory.The
ideaistomotivateemployeesandmanagerstokeepupthecontinuousimprovement
emphasisbycelebratingthesuccessfuleffectsofpastPDCAefforts.TheJIT
performancemeasurementsystemisaveryvisualsystem.

JustinTimeandLeanEnterprise

BeforeleavingthissectionitshouldbenotedthatcompaniesusingJITpurchasing,
production,anddistributionarefrequentlyreferredtoinmanagementandaccounting
literatureasleanenterprisecompanies.However,WomackandJones(whointroduced
theleanenterprisemodelin1994),madeadistinctionbetweenaleancompanyanda
leanenterprise.AleancompanyisonethatembracestheJITorleanconceptsand
techniquesdescribedinthechapter.Aleanenterpriseisdefinedasagroupof
individuals,functions,andlegallyseparatebutoperationallysynchronizedcompanies,
allwhoembracetheJITorleanorganizationalmodel.Inaddition,justintime
productionisoftenreferredtoasleanmanufacturingortheToyotaproductionsystem.
Formoreinformationrelatedtojustintimeandleanenterpriseconceptsand
terminologyseeMAAW'ssectionsonJustInTime,LeanAccounting,Japanese
ManagementMethods,ContinuousImprovement,andQuality.

THETHEORYOFCONSTRAINTS

Thetheoryofconstraints(TOC)wasdevelopedbyEliGoldrattandoriginallypresented
inanovelentitledTheGoal.22TOCissimilartoJITinthatithaselementsofa
philosophyaswellaspractice.TheTOCphilosophyisapplicabletoanytypeof
organization,whilethepracticeelementsapplymainlytocompaniesthatproduce
productstocustomerspecifications,e.g.,ajobshop.Examplesincludethe
manufacturersofmachines,locomotivesandaircraftengines.

Conceptuallythetheoryofconstraintsisbasedontheideathatanycompanyhas
identifiableconstraints,thusmanagementshouldidentifythemostbindingconstraints
andmanagethemsothatresourcesareusedmostefficiently.Thegoalissimplytomake
money,nowandinthefuture.AccordingtoGoldratt,thewaytomakemoneyisto
maximizeaglobalmeasurereferredtoasthroughput,whileminimizingtwootherglobal
measuresreferredtoasinventoryandoperatingexpense.Themainideaistofocuson
theseglobalmeasuresratherthanfocusingonlocal,orsubsystemmeasurements.These
threemeasurementsaredefinedbelow.

THEGLOBALMEASUREMENTSOFTOC

Throughputisdefinedassalesdollarslessdirectmaterialsintheproductssold.More
specifically,directmaterialsincluderawmaterials,componentsandsubcomponents
thatarepartoftheproductsthataresold.Conceptually,throughputismoneyflowing
intothesystem.

Inventory=assetsorinvestmentintheterminologyofTOCsince,fromGoldratts
perspective,everythingisforsale.However,TOCproductinventory(i.e.,inventoryin
thetraditionalaccountingsenseoftheterm)includesonlythecostofdirectmaterials
thatremainunsoldintheformofrawmaterials,workinprocessandfinishedgoods.
NotethattheTOCdefinitionofproductinventorydoesnotincludedirectlaboror

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factoryoverheadcosts,onlydirectmaterialcosts.Alllaborandoverheadcostsare
expensedasinthethroughputcostingexampleillustratedinExhibit83.Conceptually,
inventoryisallthemoneyinsidethesystem.

OperatingExpenseisdefinedasthecostsofconvertingtheinventoryintothroughput.
Operatingexpenseincludesallcostsotherthandirectmaterials,e.g.,directlaborand
factoryoverhead,aswellassellingandadministrativecosts.Conceptually,operating
expenseisthemoneyflowingoutofthesystem.Seeagraphicviewoftheseglobal
measurements.

THEFIVECONTINUOUSSTEPSTOOBTAINTHEGOAL

Althoughtheterminologyassociatedwiththetheoryofconstraintsisdifferentfromthe
traditionalaccountingterminology,thekeyconceptofTOCisrelativelyeasyto
understand.Theideaisthatthesumofthelocal,orsubsystemoptimumsdoesnotequal
thesystemoptimum.Ofcoursethisisafamiliaridearelatedtotheconceptsof
communitariancapitalism(SeeChapter1)andthejustintimecontinuousimprovement
philosophy.

Maximizingthroughput,accordingtothetheoryofconstraints,involvesthefollowing
fivecontinuoussteps:

1.Identifythecompany'smostbindingconstraint,i.e.,thefactorthatplacesthegreatest
limitationonincreasingthroughput.Thisconstraintmaybeexternalorinternal.For
example,externalconstraintsmayincludeaweakconsumerdemand,adistribution
bottleneck,orashortageofqualityrawmaterials.Internalconstraintsmaybecapacity
related.Forexample,abottleneckmachineoroperationcouldrepresentthemost
bindingconstraint.Aconstraintisanythingthatlimitsthroughput.(SeetheTOC
problemsforillustrationsrelatedtoidentifyingconstraints.)

2.Exploittheinternalconstraintsbymaximizingtheflowofworkthroughthe
constraint.Thebottleneckrepresentingthemostbindingconstraintshouldneverbeidle
becauseanhourlostatabottleneckisanhourlostfortheentiresystem.Ontheother
hand,anhoursavedatabottleneckisanhoursavedfortheentiresystem.Why?
Becauseitincreasesthroughput.Therefore,inventorybuffersareacceptableata
bottleneckoperationtoavoiddowntimefortheentiresystem.Thepressureoninternal
bottleneckscanalsoberelievedbyshiftingsomeoftheworktononbottleneck
operations.Ofcourseabottleneckoperationshouldonlybeusedtoproducewhatis
currentlyneeded.

Externalconstraints,suchasweakdemandareexploitedbyincreasedadvertising,
marketpromotionanddevelopingnewdistributionchannels,e.g.,directsales,mail
order,andwholesalers.Aconstraintcausedbyashortageofqualityrawmaterialsis
exploitedbyactionssuchaslocatingnewvendorsandcertifyingvendorsthatmeet
standardsconcerningqualityanddeliveryschedules.

3.Subordinateandsynchronizetheotherinternalconstraintswiththemostbinding
constraint.Thismeanstokeepthemworkingatthepaceofthemostbindingconstraint.
Theideaistobalancetheflowofwork,nottrytobalancetheplant.Abalancedplant
referstoatheoreticalsituationwherethereisequalcapacityateachoperationinthe
plant.Inthetheoryofconstraints,abalancedplantisviewedasimpossiblebecauseof
thevariabilityassociatedwiththevariousprocessesinvolved.Eveniftheaverage
capacityofeachprocessoroperationisthesame,i.e.,balanced,theinevitable
variabilitywouldcausesomeexcesscapacityandafloatingbottleneck.Therefore,if
outputfromanoperationisnotneededdownstream,itisacceptableforthatoperationto
betemporarilyidle.Theactiontoavoidistheproductionofexcessproductorinventory
bufferswheretheyarenotneeded.Anotherwaytoexpressthisideaistosaythatthe
utilizationofanonbottleneckoperation,orresource,shouldnotbedeterminedbyit's
owncapacity,butbythecapacityofthemostbindingconstraintinthesystem.Anhour
savedatanonbottleneckoperationdoesnotbenefitthesystem.Why?Becauseitdoes
notincreasethroughput.Thesethreestepsarereferredtoasthedrumbufferropesystem
designedtobalancetheflowofworkintheplant.Theconstraintsymbolizesthedrum
thatsetsthepace,theinventoryplacedinfrontoftheconstraintrepresentsthebuffer
thatprotectsthepace,andthepullsystemrepresentstheropethatenforcesthepace.

4.Recognizetheideasaboveindevelopingperformancemeasurementsystems.The
performancemeasurementsshouldemphasizetheefficiencyandeffectivenessofthe
totaloperation,ortotalsystem,nottheefficiencyofindividualoperations,or
subsystems.Again,thegoalistomaximizethroughput.

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5.Increasethecapacityofthemostbindingconstrainedresource.

6.Identifythenewmostbindingconstraint,i.e.,startover.

OptimizedProductionTechnology(OPT23)

ThemainideasunderlyingtheTOCphilosophywereoriginallypresentedinanovel
entitledTheGoalasindicatedabove(Seesummary).Althoughthebookisenjoyableto
read,thosewhowantaquickdescriptionofTOCmayfinditsomewhatfrustrating.The
characterwhoseemstohavealltheanswers(Jonahtheconsultant)usestheSocratic
approachtohelpenlightenthecharacterwhoseemstoneedtheanswers(Alextheplant
manager).JonahgivesAlexsomeverypointedquestions,butAlexmustdeducethe
answersforhimself.(SeethesummaryofWhatisThisThingcalledtheTheoryof
ConstraintsformoreonwhyGoldrattusestheSocraticapproach).

OtherbooksbyGoldrattandGoldrattandFox24andaseriesofarticlesbyFoxand
othersaremorerevealing.Fromthesesourceswehavelearnedthattherearetenrules
associatedwithOPTwhichistheproductionschedulingroutine,orpracticepartofthe
theoryofconstraints.Thetenrulesarelistedbelow.

RulesThatRelatetoScheduling25

1.Theutilizationofanonbottleneckresourceshouldbedeterminedbysomeother
constraintinthesystem,notthecapacityofthenonbottleneckresource.

2.Activatingaresourceisnotnecessarilythesameasutilizingaresource.Forexample,
iftheresourceisusedtoproduceinventorythatisnotneededdownstream,theresource
hasbeenactivated,butnotutilized.Utilizationreferstoincreasingthroughput.

3.Timelostatabottleneckistimelostforthewholesystem.Whenthebottleneck
operationisdown,theentiresystemisdown.

4.Timesavedatanonbottleneckisanillusion.

RulesThatRelatetoDeterminingBatchSizes

5.Theoptimumsizeoftheprocessbatchisnotthesameasthesizeofthetransferbatch.
Someunitsmaybemovedasneededbythenextoperation(tobalancetheflow),before
theentirebatchisfinished.

6.Theprocessbatchsizeshouldnotbefixed,butshouldvaryfromonemachinetothe
next.Againtheideaistobalancetheflowofwork.

7.Thecapacityofthevariousoperationsandthepriorityofthejobsshouldbe
consideredsimultaneously.Themainideaconveyedbythisruleisthatthevariability
withineachoperationneedstobeconsideredwhenschedulingproductionbecausethe
combinationofstatisticalfluctuations(variability)anddependenteventstendstocause
floatingbottlenecks.Thecapacityofeachoperationshouldbedefinedintermsofa
distributionofperformance,notjustamean,oranupperlimit.SchedulinginOPTis
performedbyaproprietaryprogramreferredtoas"thebrain".Thisschedulingalgorithm
isdesignedmainlyforjobshopswhereasimplekanbanapproachisnotfeasible.

8.Potentialproblemareascanbeidentifiedandminimized.Forexample,providinga
bufferinventoryatabottleneckprotectsthebottleneckfromproblemsupstreaminthe
productionprocess.

RulesThatRelatetoPerformanceMeasurements

9.Donotattempttobalancetheplantbecauseabalancedplantistheoretically
impossibleduetotherandomvariationassociatedwitheachoperationandprocess.
Attemptingtobalancetheplantwillcausefloatingbottlenecksandmakeitdifficult,it
notimpossible,tomanagetheplant(SeetheMatchBowlorDiceGamenote).

10.Donottrytooptimizetheoutputofeachseparateworkcenterbecausethiswillonly
insuresuboptimizationofthesystem.Tryingtoproduceasmuchaspossibleateach
operationwillcausesomeworkcenterstoproduceinventorythatcannotbeturnedinto
throughputbythesystem,i.e.,theywillbeactivated,butnotutilized.

Applyingtheconceptsandrulesofthetheoryofconstraintshashelpedmanycompanies
dramaticallyimproveperformance.Forexample,usingtheTOCapproach

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,Valmont/ALS,ajobshopsteelfabricatorinBrenhamTexas,increasedincomeby154
percenteventhoughsalesdecreasedby2percent.Theseresultswereobtainedby
simultaneouslyincreasinginventoryturnoverby39percentanddecreasingoperating
expensesby17percent.26

THROUGHPUTACCOUNTING

Asindicatedabove,theTOCapproachtreatsallcosts,otherthandirectmaterials,as
operatingexpenses,orperiodcosts.Therefore,productinventorycosts(i.e.,workin
processinventoryandfinishedgoodsinventory)anddirectmaterialscostsare
synonymousintheTOCmethodology.Tostrengthenyourunderstandingofthismethod,
considerthethroughputcostingillustrationpresentedinExhibit85.TheCMCompany
exampleusedearlierinthebackflushillustrationsisusedagainforcomparative
purposes.

ObservefromExhibit85thatalthoughthefinalresultsarethesameasinthe
throughputcostingbackflushsystemillustratedinExhibit83,directmaterialscosts
flowthroughtheinventoryaccountsinamoreconventionalway.Purchasesof$10,100
arechargedtotheRIPaccount.Then$9,950istransferredtofinishedgoods
representingthe995completedunitsat$10perunit.Thecostofthe990unitssoldis
transferredfromfinishedgoodstotheCOGSaccountandthenthis$9,900isclosedto
theincomesummary.Conversioncostsarechargedtooperatingexpense,orperiodcosts
andsubsequentlyclosedtotheincomesummaryasinExhibit83.Thisseriesofentries
leaves$150intheRIPaccount,$50infinishedgoodsand$20,900ontheincome
summary.Notethatthesearethesameamountsthatareobtainedinthebackflush
systeminExhibit83.

ComparativeIncomeStatements

AbbreviatedincomestatementsarepresentedinExhibit86toprovideacomparisonof
throughputcostingwiththetraditionalinventoryvaluationmethods.Ofcourse,salesof
$31,680(990unitsat$32)arethesameineachstatement.Sellingandadministrative
expenses(S&A)of$2,890arealsothesameineachstatement,althoughthevariable
andfixedexpensesareseparateindirectcosting.Thekeydifferencesbetweenthethree
statementsinvolvetheamountsforcostofgoodssold,theterminologyandtheamounts
foroperatingincome.Costofgoodssoldis$21perunitinabsorptioncosting($10of
directmaterialplus$11ofconversioncosts),only$15perunitindirectcosting(i.e.,the
$6forfixedoverheadisexcluded)and$10inthroughputcosting,(i.e.,excludingthe
$11ofconversioncosts).TheCOGSamountsappearinExhibits81,82and83or85.

ReferringtoExhibit86,observethatSaleslessCOGSrepresentsthroughputinthe
throughputcostingstatementwhilethefamiliartermsgrossprofitandmanufacturing
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marginareapplicableintheabsorptionanddirectcostingstatements.Comparing
operatingincomeacrossthethreestatementsreinforcestheconceptualdifferences
discussedearlierinthebackflushexamples.Thedifferencesinoperatingincomecanbe
reviewedquicklybyexaminingtheendinginventoryamountsinExhibits81,82and
83or85.Theamountsdeferredare$310inabsorptioncosting,$250indirectcosting
andonly$200inthroughputcosting.Ofcoursethedifferencesintheamountsdeferred
explaintheincomedifferences.Forabsorptionanddirectcostingtheyare310250=
8,0007,940=$60.Fordirectandthroughputcostingtheyare250200=7,940
7,890=$50.

Ifthe$200ofendingdirectmaterialscostswereclosed(flushed)toexpense,thenthe
throughputcostingstatementwouldshow$11,200forfactoryoperatingexpensesand
$7,690foroperatingincome.Thisresultconformstothenoabsorptionexamplein
Exhibit84.

Exhibit86
ComparativeIncomeStatements
AbsorptionCosting DirectCosting ThroughputCosting
Sales $31,680 Sales $31,680 Sales $31,680
LessCOGS:* LessCOGS:** LessCOGS:***
BFG 0 BFG 0 BFG 0
COGM 20,895 COGM 14,925 COGM 9,950
LessEFG 105 20,790 LessEFG 75 14,850 LessEFG 50 9,900
Grossprofit 10,890 Manfmargin 16,830 Throughput 21,780
LessS&Aexpense 2,890 LessVarS&A 990 LessOperExpense:
OperatingIncome $8,000 Contributionmargin 15,840 Factory 11,000
LessFixedcosts 7,900 S&A 2,890 13,890
OperatingIncome $7,940 OperatingIncome $7,890
SeetheExhibit86CostofGoodsSoldCalculations*,**,and***.

Thebehavioralimplicationsassociatedwiththethreemethodsarefairlyeasytosee.
First,considerthatthedirectcostingstatementrevealstheamountofoperatingincome
thatwillresultundereachofthethreemethodswhenthenumberofunitsproducedis
equaltothenumberofunitssold.IntheCMCompanyexample,1,000unitsare
produced(995finishedunits,plusfiveequivalentunitsinprocess),butonly990units
aresold.Ifonly990unitshadbeenproduced,eachstatementwouldshowoperating
incomeof$7,940.However,theinventoryincreaseoftenunitscausedabsorption
costingincometobe$60greaterthanitwouldhavebeenifthecompanyhadproduced
only990unitsandcausedthroughputcostingincometobe$50less.FromtheJITor
TOCpointofview,absorptioncostingprovidesthewrongsignal,i.e.,producemore,
whilethroughputcostingprovidestherightsignal,i.e.,produceonlywhatthecompany
cansell.FormoreinformationrelatedtothetheoryofconstraintsseeMAAW'sTOC
section.

ACTIVITYBASEDMANAGEMENT

Theconceptofactivitybasedmanagement(ABM)evolvedfromtheCAMIconceptual
designdiscussedintheChapters1and7andthecontributionsofmanypractitionersand
researchers.AsindicatedinthebriefdiscussionoftheconceptinChapter1,ABMisa
broadumbrellatermthatincludesactivitymanagement,activitycostingandactivity
basedproductcosting,aswellasmanyoftheconceptsassociatedwithjustintimeand
thetheoryofconstraints.Fromanaccountingperspective,activitybasedmanagement
representsthepotentialconnectionbetweenaccountingandtheJITandTOC
philosophies.ABMrepresentsanattempttointegrateallofthenewaccountingand
managementconceptsintooneeffectivesystem.AlthoughABMhasbeendefinedina
numberofways,wewilllookattwoimportantmodelsofABMthatareconceptually
different.ForconveniencewewillrefertothemastheJohnsonmodelandtheCAMI
model.

THEJOHNSONMODEL

AnactivitybasedmanagementmodelispresentedinFigure812basedonaframework
providedbyH.ThomasJohnson.27TherearesixkeyelementsinJohnson'sABM
model.Asillustratedinthepreviouschapter,activitycostingincludes:1)defining
activities,2)identifyingtheactivitydriversandmeasurestorepresentthemand3)
assigningcoststotheseactivities.Activitybasedproductcostingaddsthefourth

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elementthatinvolvesusingtheactivitymeasurestoassigntheactivitycoststocost
objectssuchasproducts,services,distributionchannelsandcustomers.Activity
managementincludesthefirsttwoelements,essentiallyignoreselements3and4,i.e.,
thefinancial,orcostelements,andaddstwoprocessorientedelements.Theseinclude5)
thedevelopmentofnonfinancialperformancemeasurementsand6)usingthese
measurementstomonitorthecompany'scontinuousimprovementefforts.Theemphasis
ontherighthandside,orcostside,ofFigure812isonprovidingcostinformationfor
thestrategicmanagementdecisionsdiscussedinthepreviouschapter,(e.g.,product
pricingetc.)whiletheemphasisonthelefthandside,orprocessside,isoneliminating
wasteandimprovingprocesses,productsandservicesfromthecustomerspointofview.
Theactivitymanagementelements1,2,and5provideabasisforunderstandingthe
processesandworkperformedwithinthecompany.Thisunderstandingisaprerequisite
forusingtheplandocheckactioncontinuousimprovementapproachillustratedin
Figure84.ThePDCAapproachandothertools(e.g.,controlchartsetc.)arepartof
element6.

ThereisonekeyideainJohnson'sframeworkthatseparatesitfromtraditional
accountingcontrolsystems.TheprocesssideoftheABMmodelisnotconnectedtothe
costsideatthebottominFigure812.Theperformancemeasurements(Element5)that
areusedtomanageprocesses(Element6)arenotfinancial,orcostbasedmeasurements.
Johnsonemphasizesthattheideaistomanageactivities,notcosts.Why?Because
managingcoststendstoleadtodysfunctionalbehavior,suchasreducingneeded
expendituresfortrainingandmaintenance.Ontheotherhand,managingactivities
placestheemphasisonworkingcontinuouslytoreducewasteandimprovecustomer
value.ThisisthepotentiallinkfromactivitybasedaccountingtotheJITphilosophy,but
inJohnson'smodelitisnotadirectlinkbecausetheaccountingelementsinFigure812
(i.e.,elements3and4)arenotpartoftheactivitymanagementsubsystem.

THECAMIMODEL

AdifferentillustrationoftheABMmodelisprovidedintheCAMIglossaryofactivity
basedmanagement.28AsimilarillustrationispresentedinFigure813.Thisillustration
mainlyemphasizesthedifferencebetweenABCandABM.AlthoughtheABCmodelis
onedimensional,theABMmodelistwodimensional.TheverticalviewinFigure813
isreferredtoasthecostassignmentdimensionofactivitybasedcosting.Thisisthe
sameviewofABCpresentedinFigure71inthepreviouschapter.However,moving
fromABCtoABMrequiresaddingthehorizontalview,orprocessdimension.
Managingactivitiesrequiresanalyzingtheprocesseswithineachactivityand
developingperformancemeasurementstomonitorthecompany'scontinuous
improvementefforts.

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ABMincludesthestrategiccostinformationprovidedbyABCfordecisionssuchas
productintroduction,productpricing,makeversusbuy,productdiscontinuanceand
investmentmanagement.ButABMalsoincludesnonfinancial,processoriented
informationneededtomeasureandmonitorthesourcesofcompetitivevalue.

AlthoughtheCAMIandJohnsonmodelsmayappeartobeconsistentfromthe
illustrationsinFigures812and813,thereisafundamentaldifference.IntheCAMI
model,bothnonfinancialinformationandcostinformationareusedtomanage
activities29,whileintheJohnsonmodel,costinformationisexcludedforthispurpose.
Figure812canberevisedtorepresenttheCAMImodelbysimplyaddinglinesfrom
activitycostingtoelements5and6asillustratedinFigure814.However,from
Johnson'sperspective,thisisnotagoodidea.30

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TheconflictbetweentheJohnsonandCAMImodelscannotberesolvedinatextbook.
However,anycompanythatcontemplateschangingfromatraditionalcostbasedcontrol
system,toasystemcompatiblewiththeJITandTOCphilosophiesshouldconsider
whethernonfinancialinformationcancoexistwithfinancialinformationattheactivity
managementlevel.Inotherwords,canabalancedperformancemeasurementsystembe
developedwheremanagersdonotoveremphasizeeitherthenonfinancialorfinancial
sideofthebusiness?

FormoreinformationonactivitybasedmanagementseeMAAW'sABMsection.

COMPARISONOFJIT,TOCANDABM

JITVERSUSTOC

PhilosophicallyJIT,TOCandABMaremuchthesame.Allthreeconceptsemphasize
continuousimprovementbysystematicallyremovingwastefromthesystem.However,
fromapracticeperspectivetheseconceptsarequitedifferent.Justintimeemphasizes
focusedfactories,acellularplantlayoutandkanbaninventorycontrol.Thesepractice
elementsareapplicableinrepetitiveproductionorassemblyoperations.Thetheoryof
constraints,ontheotherhand,emphasizesaschedulingalgorithmthatbalancestheflow
ofworkthroughajobshopwiththeinevitablebottlenecksandotherconstraints.While
JITplacesemphasisonzeroinventories,TOCallowsforinventorybuffersatbottleneck
operations.However,thisdoesnotrepresentaconflictbetweenthetwoapproaches
becausethemanualkanbansystemandtheTOCcomputerschedulingroutinearenot
competing.TheJITkanbansystemisapplicableinacontinuousflow,orprocess
environment,whiletheTOCschedulingalgorithmisapplicableinajoborder
environment.BothJITandTOCemphasizeasimplifiedaccountingsystem.Avarietyof
simplifiedbackflushaccountingmethodsevolvedfromtheJITconcepts,while
throughputaccountingwasdevelopedfromthetheoryofconstraints.Thecombination
ofthesetwoideasproducesathroughputcostingbackflushsystem(SeeExhibit83)that
isconsistentwithbothphilosophiesbecauseitencouragesmanagerstoproduceonly
whatisneeded.AlthoughJITandTOCaredifferent,thereappeartobenofundamental
conflictsbetweentheunderlyingphilosophiesorpractices.

JITANDTOCVERSUSABM

Althoughactivitybasedmanagementincludesthecontinuousimprovementconcept,the
mainpracticeelementofABMfocusesonactivityaccounting,i.e.,activitycostingand
activitybasedproductcosting.Therefore,activitybasedmanagementisalsoaccounting
basedmanagement.AswelearnedinChapter7,ABC(thecostassignmentdimensionof
ABM)generatesaccurateproductcostsbytracingcoststoactivitiesandfromactivities
toproductsusingavarietyofactivitymeasures.Thisenhancedemphasisonaccounting
createsafundamentaldifferencebetweenABMandtheothertwoapproaches.JITand
TOCbothfocusonimprovingthecompany'sprocesses,reducingwasteandbalancing
theflowofwork.Accountingisnotthecenterofattention.Infact,accountingplaysa
diminishedroleinJITandTOCsystems.AccurateproductcostsareobtainedinJIT
throughafocusedplant,cellularlayoutanddecentralizedservices.Ontheotherhand,
productcostingappearstobeanonissueinthetheoryofconstraintswherethegoalisto
simultaneouslyincreasethroughputwhilereducinginventoryandoperatingexpenses.

CONTROVERSIALISSUE31

Thisdiscussionhasleadustoaninterestingandveryimportantcontroversialquestion.
AreJITandTOCproductionandsimplifiedaccountingsystemscompatiblewithABM?
Someoftheargumentsoneachsideofthisissueareprovidedbelow.

Criticsofactivitybasedcostingcontendthatreorganizingafactoryintodedicatedcells
thatarefocusedonproducingafewsimilarproductseliminatestheneedforelaborate
ABCsystems.Simplifiedbackflushsystemssatisfytheaccountingrequirements,
thereforeusingABCwithJITisjustaanotherformofwaste.WhileABCmayprovide
moreaccurateproductcostsinaTOCjobshopenvironment,theriskof
overemphasizingfinancialmeasurementsattheexpenseofnonfinancialmeasurements
istoogreat.Theperformancemeasurementsystemshouldplaceemphasisonmanaging
theprocessesandworkthatpeopledo,notonthefinancialresults.Ifthecostaccounting
systemisthecenterofattention,managerswillbedistractedfromthecriticalsuccess
factorssuchascycletime,quality,flexibilityandresponsivenesstocustomerneeds.

ProponentsofABMarguethattheJITandTOCcontinuousimprovementconceptsare
importantandarepartoftheABMmethodology.However,althoughJITpracticesare
designedtoimproveprocesses,cycletime,qualityandotheraspectsofperformance,
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theycannotreplace,oreliminatetheneedformanagementdecisionsupportsystems.
Activitybasedproductcostingprovidestheinformationneededtodeterminewhich
products,distributionchannelsandcustomersareprofitable.Activitycostinghelps
identifywherethegreatestbenefitscanbeobtainedfromPDCAcontinuous
improvementefforts.Inaddition,activitycostingrevealsthefinancialconsequencesof
thoseimprovements.Backflushcostingandnonfinancialperformancemeasurements
cannotsatisfytheseneeds.ABMprovidesthepotentialforabalancedintegratedsystem
thatcansupplyallofmanagement'sinformationneeds.

Althoughitisnotlikelythatthiscontroversialissuewillberesolvedinthenearfuture,
therearesomesurveyandcasestudyresultsindicatingthatABCcancoexistwiththe
leanenterpriseconcepts.Forexample,inasurveyconductedbyDavidGalleyof
GeneralMotors,seventyeightoftheninetymanufacturingplantsthatusedABCalso
usedJIT.32Thesesurveyresultsmayappeartoprovidestrongsupportfortheviewthat
ABCisconsistentwithJIT.However,theseresultsdonotindicatetheextenttowhich
nonfinancialandfinancialmeasurementswereintegratedforthepurposeofactivity
management.Itispossiblethatmany,perhapsmost,ofthesecompaniesdonotmix
ABCwithJIT.AsindicatedinChapter7,themajorityofABCsystemsreportedhave
beenstandalonemicrocomputerbasedapplicationsthataredesignedtosupport
intermediatetermstrategicdecisionssuchaspricingandproductmix.Ontheother
hand,JITsystemstendtoberealtimevisualsystemsdesignedtosupportdaytoday
operations.Formostcompanies,anoperationalABMmodelmaylookmorelikethe
compromisemodelinFigure815wheredottedlinesreplacethesolidlinesfrom
elements5and6totheactivitycostingsubsystem.Thisrevisioninthemodel
symbolizesthatactivitybasedcostinformationisusefulforidentifyingpotential
improvements,butnotdominantforprocessperformancemeasurementpurposes.The
keytodevelopingeffectiveperformancemeasurementsystemsistheexplicit
recognitionthatthedominantmeasurementwillsimultaneouslymeasureandinfluence
performance.Whilethisisnotanewidea,itisbecomingmoreimportantasan
increasingnumberofcompaniesembracetheteamoriented,systemoriented,lean
enterpriseconcepts.Althoughthepotentialforconflictbetweenaccountingbased
measurementsandtheleanenterpriseconceptsofJITandTOCwillalwaysexist,a
conflictisnotinevitableifsystemsdesignerscaneffectivelyincorporatetheinteractive
natureofbehaviorandmeasurementintotheirmodels.(SeetheSurveytopicformore
recentsurveyresults).

APPENDIXFLOTOYDEMONSTRATIONORGAME

ThepurposeoftheFloToydemonstration,orgame33,istofacilitateaclassroom
demonstrationtoshowthedifferencebetweenthejustintimepullsystemandthe

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traditionalpushsystem.IntheJITpullsystemeveryoneworkstogetherasateam.Inthe
traditionalpushsystemeveryoneworksasanindividual.

TheproductisreferredtoasaFloToyandissomethingthatachildmightplaywithin
thebathtub.Itincludestwostyrofoamcupsthataretapedtogether.However,assembly
includesplacingareddotononecup,ablueontheothercupandthenanoperationto
tapethecupstogether.

Therearesixorsevenworkersonateamdependingonwhethertheteamis
demonstratingapushsystemorapullsystem.

1.Amaterialhandler.
2.Adirectlaborerthatplacesareddotoncups.
3.Adirectlaborerthatplacesabluedotoncups.
4.Adirectlaborerthattapesthecups(onereddotandonebluedot)together.
5.Apackaging/shippingperson.
6.Inspectorinpushsystem,butnotinpullsystem.
7.Arecordkeeper.Keepsmeasurementsonboard.(Seebelow)

Thematerialhandlersuppliesworkers2and3withcupsandmovesthecompleted
products(cupswithdots)toworker3.Thedemonstrationmightalsoincludeacustomer,
perhapsawholesaler.

Thedemonstrationcouldincludetwoproductionorassemblylines,(onebasedona
pushsystemandtheotherbasedontheJITpullsystem)orthesamegroupcouldstart
withthepushmindsetandthenswitchtothepullmindset.

RulesforthePushSystemLine

1.Eachpersonworksashardastheycantoproduce.
2.Nooneinterfereswiththeotherworkers'performance.
3.Eachworkerattemptstoproduceasmuchaspossibleandpushittothenextwork
stationtomeetaquotaortoobtainincentivepay.Everyoneignoresdefects,i.e.,offsize
cups,excepttheinspector.
4.Workerspeedandefficiencyisthemainperformancemeasurement.
5.Individualexcellenceisimportant.

RulesfortheJITPullSystemLine

1.Eachworkerproducesonlywhatisneededbythenextstation,i.e.,onlywhenthe
nextworker'skanbanisempty.(Somecoloredpapercouldbeusedtoindicatethe
kanbans).
2.Eachworkerpaysattentiontoanytroubletheotherworkersarehavingandhelps
themoutwhentheyhaveidletime.
3.Performanceisevaluatedonthebasisoftheoutputofthegroup,nottheindividual.
Performanceisbasedona.)amountofinventoryinthesystem,b.)cycletime,c.)
amountofrework,d.)productqualityande.)teamwork.
4.Stopifadefectisfound,i.e.,donotworkonoffsizecups.Qualityiseveryworkers
job.Thereisnoinspector.

Recordkeeperforeachsystem.

1.Measurethecycletime.Markaunitofrawmaterial(cup)andtimehowlongittakes
togettofinishedgoods.
2.Measureproductquality.
3.Measureteamwork.(Subjective)
4.Measuretotaloutput.
5.Measuretotalinventoryinworkinprocessandfinishedgoodsattheendofthe
designatedtime.
6.Alsomeasurecustomersatisfactionifthereisacustomer.

FOOTNOTES
1TheseconceptsarediscussedindepthbyPorter,M.1985.CompetitiveAdvantage.The
FreePressandPorter,M.E.1998.CompetitiveAdvantage:CreatingandSustaining
SuperiorPerformance.TheFreePress.JohnShankwasinstrumentalinpopularizingthe
valuechainconceptinAccounting.SeeShank,J.1989.Strategiccostmanagement:
Newwine,orjustnewbottles?JournalofManagementAccountingResearch(Fall):47
65.FormoreonthevaluechainseeDonelan,J.G.andE.A.Kaplan.1998.ValueChain
Analysis:AStrategicApproachToCostManagement.JournalofCostManagement

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(March/April):715.(Summary).SeetheBusinessFlowChartillustrationforasimilar
idea.
2AChevroletautomobilereflectshighconformancequalityifitmeetsthespecifications
ofaChevrolet.Higherdesignqualityisreflectedbythedesignspecificationsofa
Cadillacautomobile.However,aCadillaccouldhavelowerconformancequalitythana
ChevroletiftheCadillacdidnotconformtoCadillacdesignspecifications.SeeMorse,
W.J.1983.Measuringqualitycosts.CostandManagement(JulyAugust):1620.
(Summary).

3ThePDCAcycleissometimesreferredtoastheDemingWheel.SeeImai,M.1986.
Kaizen:TheKeyToJapan'sCompetitiveSuccess.McGrawHillPublishingCompany:
60.(Summary).

4RecallfromChapter3thatvariationresultingfromcommoncausesrepresentsthe
predictablerandomvariationinastablesystem.Animprovementrepresentsafavorable
changeinthemeanoutcome,orareductionintherandomvariationwithinthesystem.

5ThefivetoolspresentedinthissectionandseveralothersarediscussedbyImaiin
Kaizen:TheKeyToJapan'sCompetitiveSuccess.(Summary).Forotherillustrations,
seeHayes,R.,S.WheelwrightandK.Clark.1988.DynamicManufacturing:Creating
theLearningOrganization.NewYork:TheFreePressandSchonberger,R.1990.
BuildingaChainofCustomers:LinkingBusinessFunctionstoCreateTheWorldClass
Company.TheFreePress.

6ForanexpandedapplicationoftheParetoconceptseeTatikondaet.al.,1999.
Succeedingwith80/20rule.ManagementAccounting(February):4044.

7ThekanbansystemwasdevelopedbyTaiichiOhnoatToyotaMotorCompanyin
1952.WhilethetermskanbanandToyotasystemarecommoninJapan,American
companiesuseavarietyofothertermsfortheirdemandpulltypeproductionsystems.
Forexample,theWeatherfordplantof3MCompanyusestheterm"NipandTuck"
whileOmarkIndustriesreferstotheirsystemas"ZIPS"(ZeroInventoryProduction
System).SeeImai,Kaizen:87(Summary)andWaters,C.R.1984.Whyeverybody's
talkingaboutjustintime.INC(March):7790andBailes,J.C.andI.K.Kleinsorge.
1992.CuttingwastewithJIT.ManagementAccounting(June):2832.Formoreon
OregonCuttingSystem's(formerlyOmark)useofJITconceptsseeBailes,J.,I.
KleinsorgeandL.White.1992.Howsupportservicescanuseprocesscontrol.
ManagementAccounting(October):4551.

8TheJapaneserefertotheuseoffailsafedevicesormistakeproofingaspokayoke.See
Chase,R.B.andD.M.Stewart.1994.Makeyourservicefailsafe.SloanManagement
Review(Spring):3544.

9Severalillustrationsinsubsequentchaptersrevealwhythisistrue,includingChapters
9,10and12.

10SeeSchonberger,R.J.1986.WorldClassManufacturing.TheFreePress:232and
235.ForacomparisonoftraditionalbatchmeasurementsversusJIT(leanenterprise)
measurementsseeSchonberger,R.J.2003.Howlean/TQhelpsdetercookingthebooks.
JournalofCostManagement(May/June):514.(Summary).

11Iftheinventorylevelsdonotfluctuateagreatdealfrommonthtomonth,theaverage
inventoryisbasedonthesumofthebeginningandendofyearinventoriesdividedby2.
Ifthereisagreatdealofvariationininventorylevelsfrommonthtomonth,thenabetter
measureoftheaverageinventoryisfoundbysummingthemonthlybeginning
inventoriesplustheendofyearinventoryanddividingby13.

12SeeSchonberger.1986.WorldClassManufacturing:229.

13SeeSchonberger.1986.WorldClassManufacturing:233.

14SeeSchonberger:1986.WorldClassManufacturing:230.

15SeeSchonberger:230.AlsoseeSchonberger,R.J.1987.WorldClassManufacturing
Casebook:ImplementingJITandTQC.NewYork:TheFreePress:34.

16SeeSchonberger.1986.WorldClassManufacturing:231.

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17SeeWaters,C.R.1984.Whyeverybody'stalkingaboutjustintime.INC(March):
77.

18SeeSchonberger:1986.WorldClassManufacturing:234

19SeeSchonberger:1986.WorldClassManufacturing:233.

20SeeHof,R.D.andJ.B.Treece.1989.TheteamuphasitallExceptsales.Business
Week(August14):79.

21SeeSchonberger.1986.WorldClassManufacturing:234.

22SeeGoldratt,E.M.andJ.Cox.1984.TheGoal:AProcessofOngoingImprovement.
NorthRiverPress.Revisededitionswerepublishedin1986and1992.(Summary)
Goldratt,E.M.1990.WhatisthisthingcalledTheoryofConstraints.NewYork:North
RiverPress.(Summary).

23OPTisatrademarkofCreativeOutputIncorporated.

24SeeGoldratt,E.M.andR.Fox.1986.TheRace.NewYork:NorthRiverPress
Goldratt,E.M.1990.WhatisthisthingcalledTheoryofConstraintsandhowshouldit
beimplemented?NewYork:NorthRiverPress.(Summary)andGoldratt,E.M.1990.
TheHaystackSyndrome:SiftingInformationOutoftheDataOcean.NewYork:North
RiverPress.(Summary).

25ThetenrulesarediscussedbyFox,B.1982.OPTanswerforAmericapartII.
Inventories&Production(November/December):1019.

26SeeKoziol,D.S.1988.Howtheconstrainttheoryimprovedajobshopoperation.
ManagementAccounting(May):4449.

27SeeJohnson,H.T.1989.Professors,CustomersandValue:BringingAGlobal
PerspectiveToManagementAccountingEducation.ProceedingsoftheThirdAnnual
ManagementAccountingSymposium(AmericanAccountingAssociation).(Summary)
andJohnson,H.T.1992.RelevanceRegained:FromTopDownControltoBottomup
Empowerment.NewYork:TheFreePress.(Summary).

28SeeRaffish,N.andP.B.B.Turney.1991.Glossaryofactivitybasedmanagement.
JournalofCostManagement(Fall):5363.ForsomerecentimprovementsintheCAM
ImodelseeEuske,K.J.andA.Vercio.2007.EnhancingtheABCcross.Management
AccountingQuarterly(Summer):4861.

29SeeTurney,P.B.B.1991.CommonCents:TheABCPerformanceBreakthrough.
CostTechnology:89,140and217.

30FormoreonJohnson'sideasseeJohnson,H.T.1990.Beyondproductcosting:A
challengetocostmanagement'sconventionalwisdom.JournalofCostManagement.
(Fall):1521.(Summary).Inaddition,seeMAAW'sRelevanceRegainedtopic.

31Forthesourcesofsomeoftheargumentsoneachsideofthisissue,seeMartin,J.R.
1994.Acontroversialissuesapproachtoenhancemanagementaccountingeducation.
JournalofAccountingEducation(Winter)5975.(Summary).

32SeeCooper,R.1994.Theroleofactivitybasedsystemsinsupportingthetransition
totheleanenterprise.AdvancesInManagementAccounting.(3):123Cooper,R.1996.
Activitybasedmanagementandtheleanenterprise.JournalofCostManagement
(Winter):614.(Summary).

33ThisdemonstrationisbasedonapresentationmadebyJohnY.LeeattheWestern
RegionalmeetingoftheAmericanAccountingAssociationinMay1991.

QUESTIONS

(SeetheJITquestionsforalonger,butsimilarsetofquestionswithlinkstofind
answers.)

1.Definethe"JustInTime"concept.

2.Is"JustInTime"aphilosophyorjustacollectionoftechniques?Explainyour
answer.

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3.Explainthedifferencebetweenavaluesystemandavaluechain.

4.Howdoesthevaluechainconceptdifferfromthetraditionalvalueaddedconcept?

5.Discussthevaluechainintermsoftheconceptsofcooperationandteamwork.

6.Whatdowemeanbytheterm"qualityatthesource"?

7.Whatisthedifferencebetweendesignqualityandqualityofconformance

8.ComparetheconceptsofJustInTime(JIT)andJustInCase(JIC)intermsofthe
acquisitionandutilizationofresources.

9.DiscusstheJITandJICconceptsintermsofconcealingandexposingproblems.

10.DiscusstheconceptofcontinuousimprovementandtheShewardDemingPlanDo
CheckAction(PDCA)cycle.

11.Describeseveralstatisticaltoolsusedtoachievecontinuousimprovement.

12.ListseveraloftheJITpracticesthatcanbeappliedtothepurchasingfunction.

13.Whywouldacompanywanttoreducethenumberofitsvendorsorsuppliers?

14.Howdoestherelationshipbetweenacompanyanditssupplierschangewhenthe
companiesconvertfromatraditionalrelationshiptoaJITrelationship?

15.HowdothesuppliersbenefitfromJITpurchasing?

16.Whatisafocusedfactory?

17.Whatdoestheterm"cellularmanufacturing"mean?

18.Howdoescellularmanufacturingtendtoreducecosts?

19.Howdoescellularmanufacturingtendtoimproveproductcosting?

20.ListseveraloftheJITpracticesthatcanbeappliedtotheproductionfunction.

21.Explainthedifferencebetweenademandpullproductionsystemandapushsystem.

22.ListsomeofthecharacteristicsofaJITaccountingsystem.

23.Whatdowemeanbytheterm"backflushcosting"?

24.Whatdoestheterm"throughput"meanandwhatis"throughputcosting"?

25.Brieflycomparethebehavioralimplicationsassociatedwithtraditionalinventory
valuationmethodsandthroughputcosting.

26.DiscussthedifferencebetweentraditionalperformancemeasurementsandJIT
measurements.

27.ListsomeoftheJITperformancemeasurementsrelatedtopurchasing.

28.ListsomeoftheJITperformancemeasurementsrelatedtoproduction.

(SeetheTOCquestionsforamuchlongersetofquestionswithlinkstofindanswers.)

29.DiscusstheTheoryofConstraints(TOC)intermsoftherelatedconceptsof
throughput,inventoryandoperatingexpense.(SeeTheGlobalMeasurementsofTOC).

30.WhatarethefivestepsassociatedwithTOC?(SeeTheFiveContinuousSteps).

31.Whatis"OptimizedProductionTechnology"orOPT?

32.CompareJITandTOC.(SeetheABMquestionsforalonger,butsimilarsetof
questionswithlinkstofindanswers.)

33.HowdoesActivityBasedManagement(ABM)differfromActivityBasedCosting
(ABC)?

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34.DiscussthedifferencebetweentheJohnsonABMmodelandtheCAMImodel.
(SeetheCAMIandtheJohnsonModels).

35.AretheconceptsofJITandTOCcompatible?Explainyouranswer.

36.IstheABMconceptcompatiblewithJITandTOC?Explainyouranswer.(See
ControversialIssue).

37.Ifacompanychangedfromatraditionalplantlayoutandproductionsystemtoa
justintimeplantlayoutandproductionsystem,therewouldbenoneedforactivity
basedcosting?Comment.

38.IsaJITproductionsystemmorelikejobordercostingorprocesscosting?Explain.

39.AretheconceptsofJITandTOCapplicabletoajobcostsystem?

40.HowdoesconvertingfromatraditionalpurchasingsystemtoaJITpurchasing
systemreducepurchasingandreceivingcosts?

41.HowdoesconvertingfromatraditionalproductionsystemtoaJITproduction
systemreducecosts?

42.SwitchingfromatraditionalsystemtoaJITsysteminvolvesseveralchanges
includingaphysicalchangeintheplantlayout,achangeintherelationshipswith
suppliersandcustomers(internalandexternal),andamentalchangeonthepartof
managementandworkers?Brieflydiscussthementalchangesneeded.Whichtypeof
change(physicalormental)doyouthinkwouldbethemostdifficulttoachieve?Why?

(Thefollowingarticleishelpfulinansweringthepreviousquestionandseveralofthe
otherquestionsabove.Goodson,R.E.2002.Readaplantfast.HarvardBusiness
Review(May):105113.(Howtherapidplantassessment(RPA)processcantellyouifa
factoryistrulyleaninaslittleas30minutes.Theprocessincludestwotools:TheRPA
ratingsheetincludes11categoriesforassessingleanness,andtheRPAquestionnaire
includes20yesornoquestions).(Summary).

43.RelatetheJIT,TOCandABMconceptsdiscussedinthischaptertothetwotypesof
capitalismdiscussedinChapter1.

PROBLEMS

PROBLEM81

Matchthefollowingstatisticaltoolswiththeappropriatedescriptions.

Statisticaltools:

1.Paretodiagram.
2.Fishbonediagram.
3.Histogram.
4.Linegraph.
5.Controlchart.
6.Scatterdiagram.

Descriptions:

A.Agraphicaldisplayshowingtrends.
B.Abarchartshowinghowthefrequencyofaproblemmeasurementisdistributedover
time.
C.Agraphusedtomeasurevariability.
D.Abarchartshowingthefrequencyofdifferenttypesofproblems.
E.Agraphicaltechniqueusedtoidentifycauseandeffectrelationships.
F.Anillustrationshowingthecausesofaparticulartypeofproblem.

PROBLEM82

Matchthetraditionalpushsystem(A)andJITpullsystem(B)withthefollowing
characteristics.

1.Maintaininglargeinventoriesofworkinprocessandfinishedgoods.
2.Vendorsdelivermaterialstotheareaintheplantwheretheywillbeplacedinto
production.

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3.Greateremphasisoninterdependenciesbetweenproductionareas.
4.Greateremphasisonindividualperformance.
5.Largewellstockedwarehouse.
6.Tendtoemphasizedepartmentalidlecapacityvariances.
7.Emphasisonqualityatthesource.
8.Emphasisonproducingproductsasneededbythenextoperationorcustomer.
9.Emphasisonmaximizingtheoutputofeachworker.
10.Emphasisonvisualmeasurementstoauthorizeproductionandmonitorperformance

PROBLEM83

Matchthemanufacturingtraditionalsystem(A)andJITsystem(B)withtheconcepts
andcharacteristicsbelow.

1.Tendtoemphasizespecializedworkersratherthancrosstrainedworkers.
2.Smallnumberofsuppliers.
3.Littleornoinspectionofincomingrawmaterials.
4.Purchaselargequantitiesofrawmaterialstoreceivequantitydiscounts.
5.Manysmalldeliveriesfromsuppliers.
6.Arrangeequipmentintheproductionsequenceratherthanbyfunctionalarea.
7.Usetopdownmanagementwithmanysupervisors.
8.Emphasizefailsafedevicestoeliminatedefectsandspoilage.
9.Emphasizelargeproductionbatchsizestominimizemachinesetupcostperunit.
10.Tendtodecentralizesupportservices.

PROBLEM84

Usingthelistbelow,identifythecostgeneratingactivitiesthatyoubelievewouldbe
reducedwhenacompanychangesfromatraditionalmanufacturingsystemtoaJIT
system.Explainhoworwhyeachoftheactivitiesyouchoosewoulddecrease.

ReceivingActivities:

Unpackingincomingshipments.
Countingandinspecting.
Thepaperworkinvolved,e.g,fillingoutthereceivingreport.

MovingandHandlingActivities:

Movingmaterialsfromreceivingtowarehouse.
Movingmaterialsfromwarehousetoproductionareas.
Movingmaterialsbetweenproducingdepartments.
Movingmaterialsfromfinishingtowarehouse.

StorageActivitiesandCosts:

Pickersandothermaterialshandlers.
Depreciation.
Utilities.
Insurance.
Supervision.

PROBLEM85

MatchJIT(J)andTOC(T)withthefollowingconceptsorcharacteristics.

1.Moreapplicabletoaprocesscostenvironment.
2.Moreapplicabletoajobordercostenvironment.
3.Allowsforsomeinventorybuffers.
4.Emphasisonamanualinventorycontrolsystem.
5.Usesacomputerschedulingalgorithm.
6.Usesthroughputaccounting.
7.Usesmanufacturingcells.
8.Definesinventorycostsintermsofdirectmaterialsonly.
9.WasdevelopedinJapan.
10.WasdevelopedbyEliGoldratt

PROBLEM86

AssumethattheARTPROCompanyproducesaproductwithbudgetedmanufacturing
costsasindicatedbelow.
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DirectMaterial $40
DirectLabor 5
VariableOverhead 15
FixedOverhead($200,000/10,000) 20
Total $80

Therearenobeginninginventoriesandtheactualcostsofproductionareequalto
budgetedcosts.Duringtheperiod,theARTPROCompany:

1.Purchased$402,000worthofdirectmaterials.

2.Incurred$400,000inconversioncostsincluding$50,000directlabor,$150,000
variableoverheadand$200,000fixedoverhead.

3.Determinedthattheendinginventoryincluded300finishedunits,200equivalent
unitsinprocessand$2,000worthofunuseddirectmaterial.

Required:

PartI.AssumethattheARTPROCompanyusesabackflushsystembasedonfull
absorptioncosting.Thecompanychargesallmanufacturingcoststocostofgoodssold
asincurred.Attheendoftheperiodabackflushentryismadetochargeanappropriate
amountofcosttotherawandinprocess(RIP),conversioncostsandfinishedgoods
accounts.TheRIPaccountisusedonlyformaterials.RecordthefollowingusingT
accountsorjournalentries:

1.Thematerialpurchasesduringtheperiod.

2.Theconversioncostsincurredduringtheperiod.

3.Thebackflushentryneededattheendoftheperiod.

PartII.RecordthesameentriesasinPartIexceptassumethecompanyusesabackflush
systembasedondirectcostin

PartIII.RecordthesameentriesasinPartsIandIIexceptassumethecompanyusesa
backflushsystembasedonthroughputcosting.

PartIV.AssumethattheARTPROCompanysold9,500unitsduringtheperiodat$100
perunitandthatsellingandadministrativeexpensesare$50,000($30,000fixed,20,000
variable).Calculateoperatingincomeforeachofthethreecostsystemsaboveand
explainthedifference.

PROBLEM87

1.Whichofthefollowingstatementsistrue?BothABCandJIT

a.placeemphasisonsimplification.
b.providemoreaccurateproductcoststhantraditionalsystems.
c.emphasizequalityimprovements.
d.alloftheabove.
e.noneoftheabove.

2.Whichofthefollowingconceptsortechniquesis(are)consistentwiththeJIT
philosophy?

a.Usingstatisticalcontrolchartsattheprocesslevel.
b.Usingateamapproachtoperformancemeasurements.
c.Usingoverheadvarianceanalysisattheprocesslevel.
d.aandb.
e.aandc.

3.WhichoftheactionsstatedbelowisnotconsistentwithJITpurchasing?

a.Reducedinspectionofincomingmaterials.
b.Morefrequentdeliveriesfromvendors.
c.Longtermagreementswithvendors.
d.Vendorcertificationandeducationonqualityrequirements.
e.Increasednumberofvendorstoobtaincompetitiveprices.

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4.AJITproductionsystemwouldnotincludeanemphasison

a.maximizingthequantityofoutputateachstageoftheproductionprocess.
b.producingproductsasneededbythenextstageoftheproductionprocess.
c.decentralizationofsupportservices.
d.aandb.
e.aandc.

5.InthelanguageofJITwhichtwoofthefollowingtermsrefertofindingand
correctingdefectsastheyoccur?

a.kaizenandjidoka.
b.autonomationandkanban.
c.kaizenandkanban.
d.Kanbanandjidoka.
e.jidokaandautonomation.

6.Departmentaloverheadratesarelikelytobe

a.moreaccurateinajustintimeproductionsystemthaninatraditionalproduction
system.
b.moreaccurateinatraditionalproductionsystemthaninaJITsystem.
c.equallyaccurateorinaccurateinbothsystems.
d.usedinatraditionalsystembutnotinaJITsystem.
e.Noneoftheabove.

7.Thevaluechainconceptreferstothelinkedsetofvalueaddingactivitiesperformed

a.withinanorganization.
b.withinanorganization,plusthecapitaladdedbystockholders.
c.fromsuppliersthroughanorganization'sproductionactivities.
d.fromsuppliersthroughanorganization'sdistributionactivities.
e.fromsuppliersthroughanorganization'scustomerserviceactivities.

8.Rearrangingafactoryfromatraditionallayouttoacellularlayouttendsto

a.reducetheneedforinventorybuffers.
b.reducethenumberofmachineoperatorsneeded.
c.convertsomeindirectproductcoststodirectproductcosts.
d.aandb.
e.alloftheabove.

9.Activitybasedmanagement(ABM)includessixelements:1.Defineactivities,2.
identifydriversandactivitymeasures,3.assigncoststoactivities,4.assigncoststocost
objectssuchasproducts,5.developperformancemeasurementsand6.manage
processesandwork.Whichoftheseelementsarepartof"activitymanagement"
accordingtoH.ThomasJohnsonsABMframework?

a.1through6.
b.1through4.
c.allbut4.
d.allbut3and4.
e.only5and6.

10.IntheTheoryofConstraints,throughputis

a.Saleslessdirectmaterialscosts.
b.Saleslessbottleneckcosts.
c.Saleslessvariablemanufacturingcosts.
d.Saleslessoperatingexpenses.
e.Saleslesscontributionmargin.

11.Whichoftheaccountingsystemsbelowtendstocausethegreatestbehavioralbias
towardscreatingexcessresourceswithinacompany?

a.throughputcosting.
b.absorptioncosting.
c.directcosting.
d.jobordercosting.
e.processcosting.

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12.Whichofthefollowingproductioncontrolsystemsismoreappropriateinan
environmentwherejobsareproducedtocustomersspecifications?

a.Activitybasedcostingsystems.
b.Throughputcostingsystems.
c.JITkanbansystems.
d.OPTschedulingsystems.
e.Pushsystems

PROBLEM88

TheSlatCompanyproducesSlatwall.Thebudgetedmanufacturingcostsforthe
productareindicatedbelow.

DirectMaterial $8
DirectLabor 2
VariableOverhead 4
FixedOverhead($120,000/20,000) 6
Total $20

Therearenobeginninginventoriesandtheactualcostsofproductionareequalto
budgetedcosts.

Duringtheperiod,theCompany:
Purchased$160,000worthofdirectmaterials.
Produced20,000unitsincurring$240,000inconversioncostsincluding$40,000direct
labor,$80,000variableoverheadand$120,000fixedoverhead.
Sold18,000unitsofslatwallfor$40perunitreceivingtotalrevenueof$720,000.
Incurredsellingandadministrativeexpensesof$30,000variableand$50,000fixed.
Determinedthattheendinginventoryincluded2,000finishedunits,zeroequivalent
unitsinprocessandzerounuseddirectmaterials.

1.SlatCompanysbeforetaxnetincomebasedonabsorptioncostingis

a.$240,000b.$252,000c.$256,000d.$268,000e.$280,000

2.SlatCompanysbeforetaxnetincomebasedondirectcostingis

a.$240,000b.$252,000c.$256,000d.$268,000e.$280,000

3.SlatCompanysbeforetaxnetincomebasedonthroughputcostingis

a.$240,000b.$252,000c.$256,000d.$268,000e.$280,000

ProblemSolutions

ExtraMCQuestions

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