Chapter 17, Problem 66P

1.

To determine

Explain the difference between JIT manufacturing system and conventional system.

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.

To determine

Explain the role of management accounting regarding the implementation of JIT manufacturing system in a company.

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.

To determine

Compute the annual financial benefit associated with the move made by the company to JIT.

Explanation of Solution

Compute the annual financial benefit associated with the move made by the company to JIT.

$\begin{array}{c}\begin{array}{l}\text{Annual Net Financial}\\ \text{Benefit }\left(\text{Cost}\right)\text{of }\\ \text{Switching to JIT}\end{array}\}=\left(\begin{array}{l}\text{Estimated annual}\\ \text{ increase in }\\ \text{contribution margin}\end{array}\right)+\left(\begin{array}{l}\text{Estimated Decrease in}\\ \text{Annual Inventory }\\ \text{Holding Costs}\end{array}\right)-\left(\begin{array}{l}\text{Increase in}\\ \text{ Annual}\\ \text{ Lease Cost}\end{array}\right)\\ =\$950,000+\$36,667-\left(\$1,000,000-\$500,000\right)\\ =\$950,000+\$36,667-\$500,000\\ =\$486,667\end{array}$

Working notes:

Particulars	Amount
New contribution margin (A)$\left[\left(\text{\$70 }-\text{ \$35}\right)\text{per unit× 50,000 units}\right]$	$1,750,000
Old contribution margin (B)$\left[\left(\text{\$70 }-\text{ \$35}\right)\text{per unit× 40,000 units}\right]$	$800,000
Estimated annual increase in contribution margin	$950,000
Compute the estimated decrease in inventory carrying Costs
Pre-JIT Inventory Holdings:
Direct Materials $\left[\left(\frac{40,000}{12\text{ mos}\text{.}}\right)\text{× 4 mos}\text{.× \$15 per unit}\right]$	$200,000
WIP$\left[\left(\frac{40,000}{12\text{ mos}\text{.}}\right)\text{× 3 mos}\text{.× \$25 per unit}\right]$	$250,000
Finished Goods $\left[\left(\frac{40,000}{12\text{ mos}\text{.}}\right)\text{× 2 mos}\text{.× \$25 per unit}\right]$	$266,667
Average Inventory Holdings	$716,667
Post-JIT Inventory Holdings:
Direct Materials $\left[\left(\frac{50,000}{12\text{ mos}\text{.}}\right)\text{× 2 mos}\text{.× \$12 per unit}\right]$	$100,000
WIP$\left[\left(\frac{50,000}{12\text{ mos}\text{.}}\right)\text{× 1}\text{.5 mos}\text{.× \$20 per unit}\right]$	$125,000
Finished Goods $\left[\left(\frac{50,000}{12\text{ mos}\text{.}}\right)\text{× 1 mos}\text{.× \$30 per unit}\right]$	$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.

To determine

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.

Explanation of Solution

The projected first-year net financial effect of purchasing the replacement equipment:

        $\begin{array}{c}\begin{array}{l}\text{Projected first }\\ \text{year financial effect}\end{array}\}=\left(\begin{array}{l} \text{Annual net financial}\\ \text{ benefit of switching }\\ \text{to JIT}\end{array}\right)-\left(\begin{array}{l}\text{Penalty for breaking }\\ \text{existing lease agreement }\end{array}\right)\\ =\$486,667-\$275,000\\ =\$211,667\end{array}$

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.

To determine

Explain the additional considerations (both qualitative and quantitative) that should be considered while making decision.

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?