CASE STUDY

TREN ENGINE COMPONENTS

CASE HISTORY:
TREN manufactures standard engine components. It operates a costing system based on absorption
costing and standard costs, and the management control system is based on monthly variance analysis
reports. TREN has recently appointed a new CEO, who has begun to introduce changes to the
manufacturing systems. He believes in lean manufacturing principles, and has begun to establish a just-
in-time manufacturing system, with a focus on reducing inventories and production cycle times, and
eliminating waste. Discussions are in progress with major suppliers to introduce just-in-time purchasing
arrangements.

ISSUES AT HAND:
The CEO is not pleased about many of the current management 's features system of accounts.
The cost accounting System contains many errors and monthly fluctuations only occur two
weeks after each month's end. He also believes that the incorrect information is reported.
FACTS:
The aim is to eliminate any waste through a lean system. Waste is in a system of information
and the analysis causes mistakes, and inaccurate knowledge is used to make erroneous
judgments. Instead, after an mistake is detected, the knowledge will be changed , resulting in
repair costs. Fix errors are no added value, because there should have been no error and effort
is wasted to correct errors.
Clarity is also a lean knowledge portion. For all citizens who need it the knowledge must be
transparent and will thus be viewed as intuitive and useful. It would be impossible to
understand if it is delivered in a way that is hard to comprehend. Information has no value
unless it is used for its purposes. Together, waste disposal, flow efficiency and clarity of data are
qualities of an information system that give value to the information produced by the system.
ALTERNATIVES:
Lean methods should be viewed and interpreted as visible indicators of an attitude to
operations and efficiency that is more important for performance. However, many
organizations seem to treat techniques as a goal – they are wrong that the simple
implementation of structures and mechanisms (e.g. quality circles) will increase efficiency and
quality. Sustainable differences require a difficult change in thought and culture.
Lean development is generally used as a practical practice rather than a cost reduction. Simple
contribution to waste management and value added. In order to improve quality and reduce
costs, many companies use lean manufacturing. But the benefits that the majority of firms can
achieve are only a fraction if these strategies were implemented in connection with the

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creation of a real organized workplace with committed employees who are proud about their
work.
RECOMMENDATIONS:
It is important to review the information provided by the accounting systems and abandon the
cost of absorption. The use of activity-based management to track and regulate overhead costs
can be of benefit, but the principal necessity should be the inventory benefit for direct
materials amount. This means that there will be no incentive to produce at high capacity
volumes or operate at unnecessary levels of efficiency. Favourable capacity and efficiency
variances will not affect inventory costs and so will not improve management performance.
For output assessment purposes, specific knowledge elements should be given. The control of
material costs should be based on traditional methods of performance measurement for
material prices and variances of usage. At jobs, though, non-financial efficiency metrics such as
the output cycle periods and the idle time to the active time ratio of the workers can be
sufficient. The business expects to purchase from JIT for its key suppliers: the order-to - delivery
period time for buying orders can be an acceptable indicator of efficiency.

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