
1.
Explain the difference between JIT manufacturing system and conventional system.
1.

Explanation of Solution
The difference between JIT manufacturing system and conventional system is given below:
- In JIT system, the output is produced when there is availability of demand from the customers. On the other hand, the outputs are produced as per the production schedule under conventional manufacturing system.
- JIT reduces processing delays, inventory holdings and wastage of production that ensures commitment to quality. Under the conventional manufacturing system, the inventories are maintained as a “cushion” to compensate for processing delays or wastage of production.
2.
Explain the role of
2.

Explanation of Solution
The role of management accounting regarding the implementation of JIT manufacturing system in a company are as follows:
- The implementation of JIT system would help the management accountant to estimate financial savings related with inventory reductions and manufacturing efficiencies.
- The management accountant can supply relevant cost information and assist in deciding the relevant non-financial quality indicators related with the change in the manufacturing process.
- Thus, manufacturing cycle time information and process yield data, can be collected to help in assessing the overall benefits associated with the move to JIT.
3.
Compute the annual financial benefit associated with the move made by the company to JIT.
3.

Explanation of Solution
Compute the annual financial benefit associated with the move made by the company to JIT.
Working notes:
Particulars | Amount |
New contribution margin (A) | $1,750,000 |
Old contribution margin (B) | $800,000 |
Estimated annual increase in contribution margin | $950,000 |
Compute the estimated decrease in inventory carrying Costs | |
Pre-JIT Inventory Holdings: | |
Direct Materials | $200,000 |
WIP | $250,000 |
Finished Goods | $266,667 |
Average Inventory Holdings | $716,667 |
Post-JIT Inventory Holdings: | |
Direct Materials | $100,000 |
WIP | $125,000 |
Finished Goods | $125,000 |
Average Inventory Holdings | $350,000 |
Difference in Average Inventory Holdings | $366,667 |
Multiply: Inventory Holding Cost Rate | 10% |
Estimated Decrease in Annual Inventory Holding Costs | $36,667 |
Table (1)
4.
Determine the probable first-year net financial effect of investing in the new equipment with a move to JIT. Explain whether the company should switch to JIT or not based on the financial consideration.
4.

Explanation of Solution
The projected first-year net financial effect of purchasing the replacement equipment:
Therefore, based solely on the first-year financial effect, Company D should replace the equipment and move to JIT. The total combined annual savings of $486,667 over the four-year period more than offset the $275,000 penalty in the first year.
5.
Explain the additional considerations (both qualitative and quantitative) that should be considered while making decision.
5.

Explanation of Solution
The additional considerations (both qualitative and quantitative) that should be considered while making decision are as follows:
- Explain whether the company should increase its selling price, post-JIT, if it realizes a significant increase in the quality of its product?
- JIT places significant pressures, on employees and managers alike, to constantly improve: is there an appropriate change agent in the organization to lead this effort? Does the change have the full, and visible, support of top management? Will appropriate incentives and rewards be instituted to compensate employees for their efforts? Does the company plan to include appropriate training programs to support the move to JIT?
- Whether the suppliers and customers have been consulted and included in any planning efforts regarding the implementation of JIT for the smooth flow of entire value chain?
- Has the cost of collecting, reporting, and interpreting key non-financial quality indicators been factored into the analysis?
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Chapter 17 Solutions
Loose Leaf for Cost Management: A Strategic Emphasis
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