Professional Documents
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DISCUSSION QUESTIONS
Q10-1.The purpose of a JIT system is to minimize problem would be discovered; if 10 units are
the levels of raw materials and work in held waiting, no more than 10 defectives
process inventory investments, while improv- could be produced before the problem would
ing the overall manufacturing process. The be discovered.
intent is to pull inventory through the system Q10-9.A blanket purchase order is an agreement
only as it is required. between buyer and seller stating the total
Q10-2.JIT seeks to eliminate all forms of waste, quantity expected to be needed over a period
including production losses such as defects. of three or six months.
Successful reduction of these problems con- Q10-10.In many JIT work cells, these distinctions—
tributes to product quality, and, so, is a part of between direct and indirect labor and
TQM. between producing departments and some
Q10-3.To avoid inventory buildup, the entire JIT sys- service functions—do not exist, because the
tem shuts down whenever defects are found; same workers (the team assigned to the cell)
so to achieve a good rate of flow, the number perform all these tasks.
of defects must be small. Q10-11.In backflush costing, the work in process
Q10-4.Theoretically, in an ideal JIT system the EOQ inventory account is not adjusted throughout
is one; each time more output is needed, one the period to reflect all the costs of units in
more part or unit is produced. process; there are no detailed subsidiary
Q10-5.Although a zero inventory level is unattain- records maintained for work in process; and a
able, JIT stimulates improvement in the envi- single account may be used for both raw
ronmental conditions that cause inventory materials and work in process.
buildup, such as long setup times, high setup Q10-12.In backflush costing, the materials and work
costs, poor quality, and poorly balanced work in process inventory accounts might be com-
loads. bined into a single account, because materi-
Q10-6.The relationship between velocity and WIP als might be put immediately into production
levels is an inverse relationship; doubling the when they are received.
velocity means halving the WIP level, pro- Q10-13.Postdeduction is the subtraction from the
vided the output rate is held constant. This is work in process account of some or all ele-
similar, but not identical, to the relationship ments of the cost of completed work, after the
expressed in the familiar inventory turnover work is completed.
ratio used in financial statement analysis. Q10-14.The periodic inventory method used by many
Q10-7.The strategic advantage of improving velocity merchandising companies is analogous to
throughout the company, from product backflush costing as used by manufacturers.
research and development to shipping, is that Q10-15.If a backflush costing system expenses all
the company can then respond faster to any conversion costs to the cost of goods sold
changing customer need or to an opportunity account, the correct amount of conversion
for a new or altered product. cost is included in inventory accounts by
Q10-8.Reducing the level of WIP also reduces the making an end-of-period adjustment of the
maximum number of defectives, if the inventory accounts’ balances. The offsetting
defects are of a kind that will be discovered entry is an adjustment of the cost of goods
at the next work station after the units are sold account. The correct amount of conver-
held waiting between stations. If 100 units sion cost to be included in each inventory
are waiting between stations, up to 100 account is estimated when inventories are
defectives might be produced before the physically counted.
10-1
10-2 Chapter 10
EXERCISES
E10-1 The expected annual savings are $40,500, consisting of $18,000 carrying costs
savings and $22,500 savings in the cost of defects, calculated as follows:
(reduction in
number of (number of out-of-
= $25 × defective units × control conditions
produced per not discovered
undiscovered immediately)
out-of-control
condition)
This approach can be used even if the other components of total lead time,
such as the two days in final inspection, are not stated. If all the components of
total lead time are known, as in this exercise, then the new lead time can be cal-
culated by adding all its components:
Doubling the velocity of all tasks, from receipt of order to shipment and from
ordering materials to issuing materials to production, will reduce WIP and mate-
rials inventories by half, therefore:
This change will also reduce customer lead time from eight weeks to four weeks.
Because customers are willing to wait up to five weeks for shipment, all ship-
ments can then be made-to-order. There will no longer be a need for finished
goods inventory. Once the existing finished goods inventory is liquidated by
sales or scrapping, the annual savings from not carrying finished goods will be:
E10-4
(1) (a) Equivalent production = 4,500 + (.50 × 20) = 4,510 units;
$300, 740
= $66.683 per unit
4, 510
(b) $300, 000
= $66.667 per unit
4, 500
(c) units started = 4,500 + 20 – 24 = 4,496 units;
$300, 000
= $66.726 per unit
4, 496
E10-4 (Concluded)
(3) Considering that the results of requirement (2) were the same (to the nearest dol-
lar) for all three methods, then method (1) (b) would be recommended because
of its ease and simplicity. Method (1) (c) is a close second choice, also because
of ease and simplicity.The details of method (1) (a) may not be justifiable in these
circumstances.
(4) Processing speed is very fast, with the result that work in process inventory lev-
els are kept to a very low level—both in absolute terms and in relation to total
production activity for a month.
A summary entry for all receipts of raw materials during the period. When
direct materials are used, no entry is needed, because the materials
remain in RIP.
To backflush material cost from finished goods to cost of goods sold. This
is a postdeduction. The calculation is:
E10-5 (Concluded)
Cost of Goods Sold...................................................... 1,700
Raw and in Process............................................. 200
Finished Goods ................................................... 1,500
Conversion cost in RIP is adjusted from the $2,300 of May 1 to the $2,100
estimate at May 31. Conversion cost in finished goods is adjusted from the
$6,500 of May 1 to the $5,000 estimate at May 31. The offsetting entry is
made to the cost of goods sold account, where all conversion costs were
charged during May.
E10-6 The journal entries involving RIP and/or finished goods are:
A summary entry for all receipts of raw materials during the period. When
direct materials are used, no entry is needed, because the materials
remain in RIP.
To backflush material cost from finished goods to cost of goods sold. This
is a postdeduction. The calculation is:
E10-6 (Concluded)
Raw and in Process...................................................... 600
Finished Goods ................................................... 500
Cost of Goods Sold............................................. 100
Conversion cost in RIP is adjusted from the $1,200 of June 1 to the $1,800
estimate at June 30. Conversion cost in finished goods is adjusted from
the $4,000 at June 1 to the $3,500 estimate at June 30. The offsetting entry
is made to the cost of goods sold account, where all conversion costs
were charged during June.
A summary entry for all receipts of raw materials during the period. When
direct materials are used, no entry is needed, because they remain a part
of RIP.
Conversion cost in RIP is adjusted from the $1,000 of March 1 to the $1,300
estimate at March 31. The offsetting entry is made to the cost of goods
sold account, where all conversion costs were charged during March.
Chapter 10 10-7
A summary entry for all receipts of raw materials during the period. When
direct materials are used, no entry is needed, because they remain a part
of RIP.
Conversion cost in RIP is adjusted from the $1,400 of April 1 to the $1,800
estimate at April 30. The offsetting entry is made to the cost of goods sold
account, where all conversion costs were charged during April.
A summary entry for all receipts of raw materials during the period. When
direct materials are used, no entry is needed, because they remain a part
of RIP.
To backflush material cost from RIP to Cost of Goods Sold. This is a postd-
eduction. The calculation is:
E10-9 (Concluded)
Raw and in Process...................................................... 800
Cost of Goods Sold............................................. 800
Conversion cost in RIP is adjusted from the $1,300 of May 1 to the $2,100
estimate at May 31. The offsetting entry is made to the cost of goods sold
account, where all conversion costs were charged during May.
E10-10
(1) The most recent purchase involved a quantity greater than the total materials in
ending inventories, and that purchase gives a cost of materials of
$420,000/1,400, or $300 per unit of output; therefore,
(2) The conversion cost per unit is calculated by dividing the total conversion cost
by (a) the number of units started, (b) the number completed, or (c) the number
completed plus the number of partially converted units in the RIP ending inven-
tory (not an equivalent units calculation):
(3) The three possible amounts for the conversion cost of the 50 units in finished
goods ending inventory are:
E10-11
(1) A $300 materials cost per unit was calculated in requirement (1) of the previous
exercise; therefore,
Materials cost of RIP ending inventory = 220 units × $300 per unit = $66,000
(2) The three possible amounts for the conversion cost of the RIP ending inventory
of 20 units, 50% converted, are:
It seems inconsistent to assign 50% conversion costs to RIP when the units in
RIP were counted as whole physical units in the denominator of the conversion
cost per unit calculation in requirement 2(c) of E10-10, and when they were not
counted at all in the denominator of the calculation in requirement 2(b) of E10-
10. But the total dollar difference assigned to RIP is immaterial. Whatever the
amount of conversion costs assigned to RIP and finished goods, the remainder
of total conversion costs simply remains in cost of goods sold.
PROBLEMS
P10-1
(1) The expected annual savings are $720,000, consisting of $384,000 carrying
costs savings and $336,000 savings in the cost of defects, calculated as follows:
(reduction in number
= $60 × of defective units × (number of flaws not
produced per discovered immediately)
undiscovered flaw)
(2) Likely benefits that are not assessable from the information given include the
following:
(a) Faster cycle time resulting from the higher velocity of WIP. (Because the rate
of final output will not change, velocity will change inversely with the change
in WIP levels.) The faster cycle time will improve the speed with which orders
can be filled, thus increasing customer satisfaction and perhaps increasing
perceived product value so that prices can be raised (or price cuts delayed
or avoided).
(b) If, as a result of the shorter cycle time, total lead time becomes less than the
time customers are willing to wait for an order, then the company would no
longer need to maintain a finished goods inventory. This possibility would
result in additional savings in floor space and other inventory carrying costs.
(The value of the floor space freed up by eliminating 40% of WIP storage is not
an additional benefit; inventory carrying costs include storage costs, so the
value of the floor space is included in the carrying cost savings calculated in
requirement (1).)
(3) Costs and other negatives to be compared with the savings include:
(a) The increased likelihood of shutdowns due to work locations being starved
for WIP; lower WIP levels at each station represent lower safety stocks, so
stockouts are more likely at all locations.
Chapter 10 10-11
(b) The cost of starting a larger number of batches or lots into production,
which includes the cost of processing more work orders, production orders,
and material requisitions. (To reduce average WIP size, either smaller
batches must be started at shorter intervals, or protracted stockouts must
be allowed to occur; otherwise, the average size of WIP will not drop.)
(c) The cost of handling more loads of materials. If lot sizes are small enough
to require only one load per lot both before and after the change, then a
larger number of lots will result in a larger total number of loads.
(d) The cost of performing a larger number of setups to permit running a larger
number of batches or lots of smaller size. Ideally, as part of the JIT imple-
mentation, setup cost will be driven down to eliminate this problem.
P10-2
(1) Protech could achieve an average lead time on these orders of 42 days, calcu-
lated as follows:
Note: It is not stated that Protech defines WIP and WIP turnover in a way that
excludes the two days spent in receiving and the three days spent in final
inspection.To check that the average cycle time of 360 days/10, or 36 days, does
exclude those steps (so that there is no double-counting), note that a cycle time
of 36 days, when added to the other intervals mentioned, gives the stated total
lead time of 78 days: 6 + 27 + 2 + 36 + 3 + 4 = 78.
P10-2 (Concluded)
(3) Costs and other negatives to be compared with the savings include:
(a) The increased likelihood of shutdowns due to work locations being starved
for WIP; lower WIP levels at each station represent lower safety stocks, so
stockouts are more likely at all locations.
(b) The cost of starting a larger number of batches or lots into production,
which includes the cost of processing more work orders, production orders,
and material requisitions. (Reducing average WIP size generally requires
starting smaller batches at shorter intervals.)
(c) The cost of handling more loads of materials. If lot sizes are small enough
to require only one load per lot both before and after the change, then a
larger number of lots will result in a larger total number of loads.
(d) The cost of performing a larger number of setups to permit running a larger
number of batches, or lots, of smaller size. Ideally, as part of the JIT imple-
mentation, setup cost will be driven down to eliminate this problem.
(e) The time and effort that may be required to induce vendors to reduce their
lead time by one-third.
P10-3
(1) (a) Raw and in Process............................................. 850,000
Accounts Payable ....................................... 850,000
A summary entry for all receipts of raw materials during the period.
When direct materials are used, no entry is needed, because they
remain a part of RIP.
P10-3 (Continued)
(f) Factory Overhead Control .................................. 83,000
Cash ............................................................. 54,000
Accounts Payable ....................................... 29,000
P10-3 (Concluded)
(2) The three completed accounts are
P10-4
(1) (a) Raw and in Process............................................. 620,000
Accounts Payable ....................................... 620,000
A summary entry for all receipts of raw materials during the period.
As direct materials are used, no entry is needed, because they
remain a part of RIP.
(b) Factory Overhead Control .................................. 10,000
Supplies....................................................... 10,000
Indirect materials are recorded as used.
P10-4 (Continued)
P10-4 (Concluded)
(2) The three completed accounts are
P10-5
P10-5 (Concluded)
(2) Conditions that should exist in order for a company to install just-in-time inven-
tory successfully include the following:
(a) Top management must be committed and provide the necessary leader-
ship support in order to ensure a company-wide, coordinated effort.
(b) A detailed system for integrating the sequential operations of the manu-
facturing process needs to be developed and implemented. Raw materials
must arrive when needed for each subassembly, so that the production
process functions smoothly.
(c) Accurate sales forecasts are needed for effective finished goods planning
and production scheduling.
(d) Products should be designed to use standardized parts to reduce manu-
facturing time and reduce costs.
(e) Reliable vendors who can deliver quality raw materials on time with mini-
mum lead time must be obtained.