Problem 4 (JIT Purchasing, Relevant Benefits, Relevant Costs) The Josefina Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. Josefina's inventory of raw steel averages P600,000. JC Tan, president of Josefina, and Patrick Argante, Josefina's controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Patrick Argante identified the following effects of adopting a JIT inventory program to virtually eliminate steel inventory: Without scheduling any overtime, lost sales due to stockouts would increase by 35,000 units per year. However, by incurring overtime premiums of P40,000 per year, the increase in lost sales could be reduced to 20,000 units. This would be the maximum amount of overtime that would be feasible for Josefina. Two warehouses presently used for steel bar storage would no longer be needed. Josefina rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of P60,000. The other warehouse is owned by Josefina and contains 12,000 square feet. Three-fourths of the space in the owned warehouse could be rented for P1.50 per square foot per year. Insurance and property tax costs totaling P14,000 per year would be eliminated. Josefina's projected operating results for the 2018 calendar year follow. Long-term capital investments by Josefina are expected to produce an annual rate of return of 20 percent. Josefina Corporation Budgeted Income Statement for the Year Ending December 31, 2018 (in thousands) is as follows: Revenues (900,000 units) P10,800; Variable costs P4,050; Fixed costs 1,450 Gross margin, P5,300. Marketing and distribution costs: variable, P900; fixed, P1,500. Required: Calculate the estimated peso savings (loss) for the Josefina Corporation that would result in 2018 from the adoption of the JIT inventory control method. Identify and explain other factors that Josefina should consider before deciding whether or not to install a JIT system.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Problem 4 (JIT Purchasing, Relevant Benefits, Relevant Costs)
The Josefina Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. Josefina's inventory of raw steel averages P600,000. JC Tan, president of Josefina, and Patrick Argante, Josefina's controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Patrick Argante identified the following effects of adopting a JIT inventory program to virtually eliminate steel inventory:
- Without scheduling any overtime, lost sales due to stockouts would increase by 35,000 units per year. However, by incurring overtime premiums of P40,000 per year, the increase in lost sales could be reduced to 20,000 units. This would be the maximum amount of overtime that would be feasible for Josefina.
- Two warehouses presently used for steel bar storage would no longer be needed. Josefina rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of P60,000. The other warehouse is owned by Josefina and contains 12,000 square feet. Three-fourths of the space in the owned warehouse could be rented for P1.50 per square foot per year. Insurance and property tax costs totaling P14,000 per year would be eliminated.
Josefina's projected operating results for the 2018 calendar year follow. Long-term capital investments by Josefina are expected to produce an annual
Revenues (900,000 units) P10,800; Variable costs P4,050; Fixed costs 1,450 Gross margin, P5,300. Marketing and distribution costs: variable, P900; fixed, P1,500.
Required:
- Calculate the estimated peso savings (loss) for the Josefina Corporation that would result in 2018 from the adoption of the JIT inventory control method.
- Identify and explain other factors that Josefina should consider before deciding whether or not to install a JIT system.
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