Management Accounting - Chapter 8 PDF

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ManagementAccounting:Concepts,
Techniques&ControversialIssues
Chapter8
JustInTime,TheoryofConstraints,andActivityBasedManagementConceptsand
Techniques1
JamesR.Martin,Ph.D.,CMA
ProfessorEmeritus,UniversityofSouthFlorida
MAAW'sTextbookTableofContents
Citation:Martin,J.R.Notdated.Chapter8:JustInTime,TheoryofConstraints,and
ActivityBasedManagementConceptsandTechniques.ManagementAccounting:
Concepts,Techniques&ControversialIssues.ManagementAndAccountingWeb.
http://maaw.info/Chapter8.htm
CONTENTS
LearningObjectives|Introduction|JustInTimeSystems|TheJITAttitude|JustIn
TimeSystems|TheJITPractices|TheTheoryofConstraints|TheGlobal
Measurements|TheFiveContinuousSteps|ThroughputAccounting|ActivityBased
Management|TheJohnsonModel|TheCAMIModel|ComparisonofJIT,TOCAND
ABM|JITVersusTOC|JITandTOCVersusABM|ControversialIssue|Appendix:
FloToyDemonstration|Footnotes|Questions|Problems|ProblemSolutions|Extra
MCQuestions|ExtraProblemforDemoorSelfStudy
LEARNINGOBJECTIVES
Afteryouhavereadandstudiedthischapter,youshouldbeableto:
1.Provideconceptdefinitionsforthetermsjustintime,thetheoryofconstraintsand
activitybasedmanagement.
2.Discusshoweachofthethreetermsinthefirstlearningobjectiverepresentsbotha
philosophyandasetofpractices.
3.Describethejustintimeelementsassociatedwithemployeeandmanagement
attitudesandexplainhowtheseelementsdifferfromtraditionalattitudes.
4.Outlineanddiscussthevariouspracticesassociatedwithjustintime.
5.Explainhowbackflushcostingdiffersfromtraditionalcostaccumulationmethods.
6.Explainhowbackflushcostingsystemsdifferforvariousinventoryvaluationmethods
includingabsorptioncosting,directcostingandthroughputcosting.
7.Discusstheoverallgoalofthetheoryofconstraintsaswellastheglobalmeasures
andrulesassociatedwiththisconcept.
8.Explainthesimilaritiesanddifferencesbetweenjustintimeandthetheoryof
constraintsintermsofphilosophyandpractice.
9.Prepareincomestatementsonathroughputcostingbasisandexplainthebehavioral
implicationsrelativetoabsorptioncostinganddirectcostingstatements.
10.Describeanddiscusstwoactivitybasedmanagementmodels.
11.Discusstherelationshipbetweenactivitybasedmanagementandthejustintimeand
theoryofconstraintsmanagementconcepts.
12.Discussthecontroversialissueoverwhetheractivitybasedmanagementis
compatiblewiththejustintimeandtheoryofconstraintsphilosophies.
INTRODUCTION
Thischapterpresentsanintroductiontothreerelatedmanagementsystemsincluding
justintime(JIT),thetheoryofconstraints(TOC)andactivitybasedmanagement
(ABM).Eachofthesesystemsrepresentsabroadphilosophyandincludesanumberof
techniquesthattendtoimproveacompany'sprofitabilityandcompetitivenessunder
http://maaw.info/Chapter8.htm 1/35
certainconditions.WhileABMisanaccountingbasedsystem,JITandTOCare
productionbasedsystems.AlthoughaccountingisnotthemainfocusofJITandTOC,
thethreesystemshaveacommonlink.Eachofthesethreebroadphilosophiesconflicts
withtraditionalaccountingtheoryandpracticeinanumberofways.Theconflictsarise
becausethenewphilosophiesembracemanyofthecharacteristicsofthecommunitarian
capitalistmodeldiscussedinChapter1,whiletraditionalaccountingtheoryandpractice
arefirmlyrootedintheindividualisticmodel.Forthisreasoneachofthesemanagement
systemsshouldbeconsideredcarefullybeforedesigning,orredesigningacost
accountingsystem.Ourgoalinstudyingtheserelativelynewsystemsisnottobecome
expertusersofthetechniquesinvolved,buttobuildafoundationforevaluatingthe
variousaccountingplanningandcontrolsystemsthatwewillstudyinsubsequent
chaptersandthatyouarelikelytoencounterinpractice.
Thechapterincludesfoursections.Thefirstthreesectionsintroducethethree
philosophiesmentionedabovealongwithsomeofthetechniquesassociatedwitheach
typeofsystem.Thefourthsectionincludesacomparisonofthesethreesystemsand
addressesthequestionoftheircompatibility.
JUSTINTIMESYSTEMS
Justintime(JIT)hastheelementsofaphilosophyaswellasvariouspracticeelements.
WhiletheJITphilosophyisapplicabletoanytypeoforganization,thepracticeelements
applymainlytorepetitivemanufacturingoperationssuchastheproductionand
assemblyofautomobilesorappliances.
AlthoughthetermJustintime(JIT)canbedefinednarrowlyasaproductionor
inventoryschedulingtechnique,itismorefrequentlydefinedasaverybroadphilosophy
thatincorporatesmanyoftheconceptsofcommunitariancapitalismthatareoutlinedin
Chapter1.JITismoreappropriatelythoughtofasaphilosophybecause,eventhoughit
includesavarietyoftechniques,itismuchmorethanacollectionofmanagement
practices.Thereisconsiderablesupportfortheargumentthatsuccessfulimplementation
ofaJITsystemrequiresanentirelydifferentmentality,orattitude,onthepartof
managementandworkersthanthetypicalattitudesunderlyingtraditionalbusiness
practicesandrelationships.Althoughaprecise,oroperationaldefinitionofJIThasnot
beendeveloped,itbasicallyinvolvestheeliminationofwasteandexcessbyacquiring
resourcesandperformingactivitiesonlyastheyareneededbycustomersatthenext
stageintheprocess.Forexample,inventorybuffersareviewedasanevilinthatthey
hideproblemssuchasdefectiveparts,productionbottlenecks,longmachinesetupsand
competitivebehaviorwithinthecompany.
AmorecomprehensivedefinitionofJITcanbedevelopedbyconsideringthemain
elementsthatareattributedtosuccessfulJITsystems.Theseelementscanbeseparated
intotwobroadcategoriesincludingattitudeandpractice.Whiletheelementsofattitude
canbeadoptedbyanyorganization,theelementsofpracticearemainlyapplicableto
companiesinvolvedinrepetitivemanufacturing.Fromanaccountingviewpoint,these
arecompaniesthatwouldnormallyusetheprocesscostaccumulationmethod.
AJITsystemrequiresanattitudethatplacesemphasisonthefollowing:
1.Cooperationwithavaluechainperspective,
2.Respectforpeopleatalllevels,
3.Qualityatthesource,
4.Simplificationorjustenoughresources,
5.Continuousimprovementand
6.Alongtermperspective.
AJITsystemalsoincorporatesthefollowingpractices:
1.Justintimepurchasing,
2.Focusedfactories,
3.Cellularmanufacturing,
4.Justintimeproduction,
5.Justintimedistribution,
6.Simplifiedaccountingand
7.Processorientedperformancemeasurements.
THEJITATTITUDE
Adiscussionofeachoftheelementsrelatedtoattitudeisprovidedinthefollowing
paragraphs.
CooperationwithaValueChainPerspective
Acompany'svaluechainconsistoftheconnectedsetofvaluecreatingactivitiesthatare
requiredtoproduce,distributeandserviceaproductfromtheinitialsuppliersofraw
materialstothefinalconsumer.AccordingtoMichaelPorter,acompany'svaluechainis
partofalargervaluesystemthatincludesthevaluechainsofsuppliers,distributorsand
buyers.1Figure81illustratesthevaluesystemsforasingleindustryfirmanda
diversifiedfirm.Eachfirminthevaluesystemhasaseparatevaluechain,butthese
valuechainsareinterdependent.Buyers(othercompaniesorindividuals)dependon
distributorswhodependonproducerswhodependonsupplierswhointurndependon
othersuppliers.
UsingPorter'sterminology,thevaluechainforaspecificcompanystartswithageneric
valuechainillustratedinFigure82.Thecompany'svaluechainincludesan
infrastructuremadeupofphysicalassetsandvariousactivitiesthatsupporttheentire
chain.Forexample,theinfrastructureincludesactivitiessuchasgeneralmanagement,
accounting,finance,legalservices,andsecurity.Othermajorsupportactivitiesinclude
humanresourcemanagement,technologydevelopmentandprocurementorpurchasing.
Acompany'sprimaryactivitiesincludeinboundlogistics,operations,outboundlogistics,
marketing&salesandcustomerservice.Inboundlogisticsincludessubactivitiessuch
astransportation,receiving,inspectionandmaterialshandling.Operationsinvolves
manyactivitiesincludingresearch&development,productdesign,engineering,energy,
planning,scheduling,productionactivitiesandmaintenance.Outboundlogisticsrefers
toactivitiessuchasprocessingcustomerordersandoutboundtransportation.Marketing
&salesactivitiesincludeadvertising,andsalespromotion.Finally,customerservice
includessuchactivitiesascustomertraining,maintainingsparepartsandrepairservice.
Thevaluechainandvaluesystemconceptsexplicitlyrecognizetheinterrelationships,or
linkages,withintheeconomicsystem.Recognizingandexploitingthese
interdependenciesisimportantbecauseJITsystemsdependonhighlevelsof
cooperationbyeveryoneconnectedtothevaluechain,i.e.,bothinsideandoutsidethe
company.Traditionalsystemsconcentrateonthevalueaddedbyproductionactivities,
whilethevaluechainperspectivealsoincludesthevalueaddedbyvendors,distributors
andcustomerservicepersonnel.SincewasteandexcessarenotallowedinaJITsystem,
everyoneinthevaluechainmustworktogetherasateamtoensureasmooth,efficient
flowofoutput.AdvocatesoftheJITphilosophypointoutthatthecompetitionthat
typicallyoccursbetweenworkersanddepartmentsintraditionalindividualisticbased
systemsisinconsistentwiththeJITconceptbecauseitproducesexcessthataddscosts
andhidesproblems.
RespectforPeopleatallLevels
MostoftheelementsofaJITsystemrequirethatalloftheconstituencies(employees,
customers,vendorsandmanagement)andindividualswithinthoseconstituencieshavea
highregardforeachother.Institutionalizingtheconceptofrespectforothersisnotjust
anicethingforacompanytodo,itisanimportantelementintheJITcompetitive
strategy.Forexample,traditionalmanagementsystemstendtocreateadversarial
relationshipsbetweenemployeesandmanagementthroughahierarchyofauthoritarian
supervisors.InaJITsystem,workersarecrosstrainedandempoweredtomake
decisionsthatarerestrictedtosupervisorsincompanieswithtraditionalmanagement
systems.Respecttendstobuildthetrustbetweenemployeesandmanagementthatis
neededtosuccessfullyimplementprogramsforcrosstrainingandempowerment.Such
programshelpemployeesgrowandbondwiththecompany.Thissequentialsetof
outcomesproducesmoreknowledgeableemployees,fewerlayersofmanagement,lower
laborturnover,higherqualityandlowercosts.
QualityattheSource(Jidohka)
Qualityatthesourcemeanstoidentifyandcorrectproblemswhenandwherethey
occur.TheJapaneserefertothisconceptasjidohka.InaJITsystem,everyoneinthe
companyisresponsibleforqualityandworkersusestatisticalcontrolchartsandother
techniquestomonitortheirownwork.Everyone'sattitudemustincludetheideathat
qualityismyjob,wherequalityisdefinedasconformancetospecifications,asopposed
todesignquality.2
Jidohkaalsoincludesautomatedinspectionfrequentlyreferredtoasautonomation.The
ideaistomakeinspectionpartoftheproductionprocess,ratherthanaseparateactivity,
toinsurethatdefectiveworkisnotmovedontothenextstageintheprocess.Thegoalis
tostoptheproductionlineandcorrecttheproblematthesourceoftheproblem.
SimplificationorJustEnoughResources
AgoalofJITsystemsistoachievezeroworkinprocessinventorybufferssothat
productsflowcontinuouslythroughthesystem.JITalsoincludesthegoalofzeroending
finishedgoodsinventory.ThisreflectstheideathatJITisademandpullsystemrather
thanaspeculativepushsystem.Customerordersdriveproduction.Theprocessstarts
withthefinalconsumerswhoplacedemandsonthesalesforce,whoplacedemandson
theproductionfacilities,whointurnplacedemandsonupstreamactivitiesthroughout
thesystem.AlthougheliminatingexcessinventoryisanimportantpartofaJITsystem,
theconceptismuchbroaderthananinventorycontrolorproductionschedulingmethod.
AJITsystemalsoemphasizessimplificationandzeroexcess(waste)inallareasof
business.Theobjectiveisforthecompanytoacquirejustenoughresourcesincluding
vendors,humanresources,andcapacity.Thisisaverydifferentconceptfromtheidea
underlyingtraditionalsystemswhereexcessresourcesareplannedjustincase(JIC)
theyareneeded.TheJITviewisthatexcessofanykindhidesproblemssuchaslow
qualityrawmaterialsandunreliablevendors,employeesandequipment.Removethe
excessandtheproblemsbecomevisible.
AcomparisonoftheJICandJITapproachesisillustratedinFigure83.Theship
representstheCompany,thewaterrepresentstheCompany'sresourcesandtherock
formationsymbolizestheCompany'sproblems.Inthejustincaseillustrationonthe
left,theshipisperilouslyclosetotherockshiddenbelowthesurface.Inthejustintime
illustrationontheright,thewaterlevelislowered(excessresourcesremoved),revealing
therocksorproblemsthatneedtobesolved.
ContinuousImprovement(Kaizen)
TheJapaneserefertocontinuousimprovementaskaizen(pronouncedky'zen).Tothe
Japanese,kaizenmeanstostriverelentlesslytoincreasequality,efficiencyand
effectivenessinallareasoflifeincludingpersonal,family,social,andwork.Although
thisconceptdefinitionmaysoundsomewhatindividualistic,theJapaneseemphasize
smallincremental,butcumulativeholisticimprovements.Thecontinuousimprovement
approachisillustratedbytheShewhartDemingplandocheckorstudyaction(PDCA
orPDSA)cyclethatappearsinFigure84.3Theplanstepincludesidentifyinga
problem,orpotentialforimprovement,anddevelopingaplanfortheproblem'ssolution.
Thedostepincludesatrialrunoftheplannedsolutionwhichisevaluatedinthecheck
step.Correctlyevaluatingthetrialrundependsonanunderstandingofthevariationin
thesystem.Itisimportantnottoconfusecommoncauseswithspecialcausesof
variation.4Thecheckstepincludesrevisionstotheplanwheretheyappeartobeneeded.
Thefinalactionsteprepresentstheimplementationoftheplan.ThePDCAcycle
involvesusingavarietyofstatisticaltoolsandisaneverendingactivityforcompanies
thatembracethecontinuousimprovementmethodology.Someofthestatisticaltoolsare
discussedbelow.
PDCAStatisticalTools5
Someofthestatisticaltoolsusedinthecontinuousimprovementcycleinclude:1.Pareto
diagrams,2.Fishbone,orcauseandeffectdiagrams,3.Histograms,4.Othergraphsand
charts,e.g.,piecharts,5.Controlchartsand6.Scatterdiagramsandrelatedtechniques,
e.g.,regressionandcorrelationanalysis.
Paretodiagramsshowthecausesofproblemsinbarchartformat.Theideaisto
graphicallydisplayopportunitiesforpotentialimprovement.Forexample,Figure85
illustratesthereasonsfordowntimeataparticularcell.TheseincludeAOutofparts,
BDefectivepart,CEquipmentfailure,DOperatorerrorandEPowerfailure.
Figure85revealsataglancethatnearlyfiftypercentofthedowntimeiscausedbya
shortageofpartsandanotherthirtypercentresultsfromdefectiveparts.6
Fishbonediagramsshowasketchoftherelationshipsthatmaycontributetoa
particularproblem.Forexample,Figure86presentsanabbreviatedfishbonediagram
forthedowntimeproblemmentionedabove.Shortagesofpartsanddefectivepartsare
relatedtovendorsanddeliveryschedules.Equipmentfailuresarerelatedtothe
characteristicsoftheequipmentsuchasageandpreventivemaintenance.Operator
errors,ontheotherhandmaybecausedbyalackoftrainingorexperience.Inother
cases,thecharacteristicsoftheprocessmaybeatfault.(SeeanotherFishboneexample).
Histogramsshowthedistributionofaperformancemeasurementsuchasthenumberof
shortages,orthenumberofdefects,overaperiodoftime.Figure87illustratesthe
numberofmaterialshortagesperdayforaparticularperiod.Thechartrevealsthatthe
numberofshortagesrangesfromonetofifteenperdaywitheightrepresentingthemost
frequentnumber.
Othertypesofgraphsincludepiechartsandlinegraphs.
Piechartsareusedtoshowthevariouspartsofaproblem,processorfinancial
measurementinproportiontothewhole.Figure88illustratesthevarioustypesof
productcostsinproportiontototalfactorycosts.Theideaistoemphasizetheareaswith
thegreatestpotentialforimprovement.
Linechartsareveryusefulforshowingtrendsinnearlyanytypeofmeasurement.For
exampleFigure89illustratesthenumberofpartsshortagesoverafiftytwoweek
period.
Controlchartsandscatterdiagramsareperhapsthemostimportantstatisticaltools
availabletoaidinthePDCAcontinuousimprovementeffort.Thatiswhytheywere
givenconsiderableattentioninChapter3.Recallthatcontrolchartsareusedto
determinewhenaprocessisstableandwhetherornotitisincontrol.Controlchartsare
alsousedinthechecksteptorevealthesuccessoftheplananddostepsinimproving
themeanoutcomeorinreducingthevariabilityoftheprocess.Scatterdiagramsandthe
relatedregressionandcorrelationtechniquesarepowerfultoolsforidentifyingcause
andeffectrelationships.ReferbacktoChapter3forareviewoftheseimportant
statisticaltools.
ALongTermPerspective
Althoughtheeffectofasmallimprovementmayseemtrivial,theconceptofcontinuous
improvementbecomesapowerfulstrategyinthelongrunasthecumulativebenefitsof
hundreds,perhapsthousandsofsmallimprovementsareobtained.Itissomewhat
analogoustoanathletetrainingfortheOlympics.Thepersontrainsdailytoobtainsmall
increasesinfitnessandskill.Afteryearsofcumulativeincrementalimprovements,the
athletemayreachworldclassstatus.Thegoalforthecompanypursuingcontinuous
improvementisalsotoachieveandmaintainaworldclasscompetitiveposition.Thus,a
longtermperspectiveisanessentialingredientoftheJITphilosophy.
THEJITPRACTICES
AbriefdiscussionofeachoftheJITpracticesisincludedinthesectionsbelow.
JustinTimePurchasing
WhentheconceptsofJITareappliedtothepurchasingfunction,alloftheelementsof
attitudediscussedabovemustbeincluded.Inaddition,theadoptionofJITpurchasing
includesthefollowingcharacteristics:
1.Establishinglongtermagreementswithvendorsondeliveryandprice.
2.Purchasingfromasmallernumberofvendorsthanintraditionalsystems.
3.Certifyingvendorsonquality,priceandscheduleattainment.
4.Increasingthefrequencyandreducingthesizeofdeliveriesfromvendors.
5.Requiringthatdeliveriesaremadetothefactoryfloorinshopreadycontainers.
6.Reducinginspectionofincomingmaterials.
7.Emphasizingzerorawmaterialsinventory.
8.Eliminatingthewarehousespaceforrawmaterials.
FocusedFactories
Thetermfocusedfactoriesreferstosmallspecializedmanufacturingplantsthatare
dedicatedtotheproductionofasmallnumberofproducts.Thisideaappliesmainlyto
repetitivemanufacturing,butcompaniesthatproduceproductsorservicestocustomer
specificationscanalsobecomemorefocusedbyconcentratingoncertaintypesofjobs.
CellularManufacturing
Cellularmanufacturingreferstothepracticeoforganizingafactoryintomanufacturing
cellsthatarededicatedtotheproductionofasingleproduct,orafewsimilarproducts.
Amanufacturingcellisfrequentlyreferredtoasafactorywithinafactorybecauseallof
theresourcesneededtoproducetheproductarelocatedwithinthecell.Forexample,
insteadofhavingmanyproductsmovingthroughseveraldepartmentssuchascutting,
grinding,heating,assemblyandpackingasinFigure810,thefactoryisorganizedinto
separatecellsforeachproductthatincludeeachtypeofmachineryasillustratedin
Figure811.Placingthevariousmachinesclosetogetherreducestheneedforinventory
buffersandmaterialshandling.Thecellulararrangementalsorequiresfewermachine
operatorssinceasinglecrosstrainedworkercanoperateseveralmachines.Noticethat
mostofthesupervisors,workers,inventoryandforklifttrucksthatappearinFigure810
arenotincludedinFigure811.
Theadvantagesofarrangingthefactoryintocellsalsoincludeobtainingmoreaccurate
productcosts.Ofcoursethereislessproductdiversitywithinacellthanthereisina
traditionaldepartment,butthecellulararrangementhasanotherfavorableinfluenceon
productcosts.Somesupportservicessuchasproductionscheduling,engineering,
maintenanceandhumanresourcemanagementarealsodecentralizedwhichreducesthe
amountofindirectcosts.Sincethesefunctionsareperformedwithinthecell,thesecosts
becomedirectcoststotheproductsproducedinthecell.Thisreducestheneedforfirst
stagecostallocationsforthesesupportservicesandresultsinmoreaccurateproduct
costs.
JustinTimeProduction
JITproductioniscloselyrelatedtothepracticesofdesigningfocusedfactoriesand
organizingproductionoperationsintomanufacturingcells.However,JITproduction
alsoincludesseveralotherelementsthatarelistedbelow.
1.Ademandpullsystemincludingkanbanproductioncontrol.(Thetermkanbanis
definedbelow.)
2.Emphasisonreducingproductionleadtimeorcycletime,i.e.,timefromstartto
finish.
3.Flexibilityandshortsetupsforthedifferentproductsproducedinthecell.
4.Apolicyofstoppingtheproductionlinetocorrectdefects,i.e.,jidohka.
5.Smallorzeroinventorybuffers.
6.Simplifyingandeliminatingunnecessaryresourcesandactivities,(e.g.,forklift
trucks)inadditiontoorganizingproductionfacilitiesintomanufacturingcellsasin
Figure811.
7.Failsafedevicesandpreventivemaintenance.
Theconceptandpracticeofimplementingademandpullsystemmeansproducingonly
whatisneededbythenextoperationandonlyatthetimeitisneeded.Producingmore
inventorythanimmediatelyneededisconsideredaformofwaste.Akanbanisa
Japanesewordmeaningcard.JITproductioncontrolisamanualsystemwherekanbans,
orcardsareusedtoauthorizeproductionandthemovementofmaterialsandproducts
withintheplant7.Theauthorizationkanbanscomefromdemanddownstream,thus
inventoryispulledratherthanpushedthroughtheplant.Althoughthedemandpull
conceptcanbeappliedtoalargenumberofcompanies,thekanbantypeinventory
controlsystemismainlyapplicableinrepetitiveassemblymanufacturing.Examples
includeautomobiles,logloaders,washingmachinesandTVsetstonameafew.
JITproductionalsoemphasizescontinuouslyreducingthetimerequiredtoperformthe
neededmachinesetupsandoperations,thusreducingdowntimeandproductionlead
timetoaminimum.CorrectingdefectsastheyoccurandemphasisonsmallorzeroWIP
inventoriesarecloselyrelated.Zeroinventorymeansthattherearenoinventorybuffers
toreplacedefectiveparts.Themainadvantagesofsimplificationandthejustenough
resourceconceptaretoincreaseproductivity,reducecostsandmakeproblemshighly
visiblesothattheycanbecorrectedquickly.Failsafedevicessuchaswarningbells,
timers,electriceyesandalignmenttemplatesarealsousedtopreventproblemsfrom
occurring.8Ofcourse,preventivemaintenanceisalsoamustwhenthereareno
inventorybuffers,sinceamachinebreakdowncancausedowntimefortheentireplant.
JustinTimeDistribution
JITdistributionsystemshavemanyofthesameelementsasJITpurchasingsystems,
exceptthecompanybecomestheseller(vendor)ratherthanthepurchaser.Someof
theseelementsinclude:
1.Establishinglongtermagreementswithcustomersondeliveryandprice.
2.Sellingtoasmallernumberofcustomersthanintraditionalsystems.
3.Becomingcertifiedonquality,priceandscheduleattainment.
4.Increasingthefrequencyandreducingthesizeofdeliveriestocustomers.
5.Makingdeliveriestothecustomer'sfactoryfloorinshopreadycontainers.
TheadvantagestothesellerinaJITsystemareobtainedbyestablishinglongterm
commitmentswithasmallernumberofcustomers.Thisreducescostsanduncertainty.
Inthelongrun,JITonlyworkswhereeveryoneinthevaluesystemobtainsbenefits.
SimplifiedAccountingandBackflushCosting
SomeofthecharacteristicsofJITaccountingsystemsinclude:
1.Batchingdeliveries.
2.Increasingthetraceabilityofcostswithfewercostpools.
3.ReducingtheneedforABCsystems.
4.Reducingoreliminatingcostvarianceanalysis.
5.Backflushinginventorycosts.
SinceJITpurchasinginvolvesalargenumberofsmalldeliveries,thesepurchasesare
frequentlyrecordedinbatchesratherthanasindividualpurchasestosimplifyrecord
keeping.Althoughbatchingdeliveriesmayseeminconsistentwithimprovedcost
traceability,JITincreasesthetraceabilityofcostsbecausemoretransactionsinboththe
purchasingandproductionareascanbetraceddirectlytothecellsandtheproducts
producedinthosecells.Purchasingandreceivingcostsdecreasewithfewervendorsand
deliveriesmadedirectlytotheplantfloor.Withsomeservicefunctionsperformedatthe
celllevel,thereislessneedtoallocatethesecostsamongdepartmentsinfirststage
allocations.Inaddition,sincethecellsarededicatedtotheproductionofasingle
product,orafewsimilarproducts,thereislessneedforallocationsinstagetwo.As
indicatedinourdiscussionofthetwostageallocationprocess,ifonlyone,orafew
similarproductsareproducedineachdepartment,orcell,thencostdistortionsand
crosssubsidiesfromcostallocationswillnotoccur.Thus,therewillbelessneedto
developanABCsystemtoobtainaccurateproductcosts.AnothercharacteristicofJIT
accountinginvolvesadeemphasisoncostvariances.Varianceanalysisandother
financialresultsorientedmeasurementsarereplacedwithavarietyofprocessoriented
measurementsdiscussedbelow.
BackflushCosting
Backflushcostingreferstoavarietyofsimplifiedcostaccumulationmethodsthattend
tobeusedbycompaniesthatadoptJITsystems.Mostcostsystemsthatincludethe
backflushmethodareperiodicinventorysystemsbecauseperpetualinventoryrecords
areeliminated.Althoughasinglecostsystemthatincludesthebackflushmethodis
relativelyeasytounderstand,thetopicisconfusingbecausethebackflushmethodcan
beusedwithanyinventoryvaluationmethod.Tounderstandthepossibilities,consider
thatthereareonlyfourmainwaystoaccountformanufacturingcostsattheendofa
period.Thefirsttwopossibilitiesrepresentthetraditionalinventoryvaluationmethods
discussedinpreviouschapters,whilethelasttwoarenontraditionalmethodssometimes
usedbycompaniesthatadopttheJITphilosophy.Thefourpossibilitiesinclude:
1.Capitalizeallmanufacturingcostsintheinventoryasinfullabsorptioncosting.The
applicablecostsofdirectmaterials,directlabor,variableoverheadandfixedoverhead
aredeferredintheendinginventory.
2.Capitalizeonlyvariablemanufacturingcostsintheinventoryasindirectcosting,.i.e.,
chargefixedmanufacturingcoststoexpense.Onlytheapplicabledirectmaterials,direct
laborandvariableoverheadaredeferredintheendinginventory.
3.Capitalizeonlydirectmaterialscostsintheinventory,i.e.,chargeallconversioncosts
toexpense.Onlytheapplicabledirectmaterialscostsaredeferredintheending
inventory.Thismethodissometimesreferredtoasthroughputcostingbecauseit
producesthesameresultsthatareobtainedinthethroughputaccountingmethod
associatedwiththetheoryofconstraints.Throughputaccountingisexplainedbelowin
thesectiononthetheoryofconstraints.
4.Expenseallmanufacturingcosts.Nomanufacturingcostsaredeferredinthe
inventory.Thisistheoppositeoffullabsorptioncosting.
Althoughavarietyofbackflushsystemscanbedesignedforeachofthesefourmethods,
wewillconsideronlyonesystemforeachmethod.Adiscussionofallpossible
backflushaccountingsystemsiswellbeyondthescopeofthistextbookandwouldnot
addagreatdealtoyourunderstandingofthetopic.
Inbackflushsystems,theusualinventoryaccountsarereplacedwithasimplifiedsetof
accounts.Typically,theMaterialsandWorkinProcessaccountsarecombinedintoan
accountreferredtoasRawandinProcess,orRIP.ThePayrollandOverheadaccounts
arereplacedbyasingleaccountforConversionCosts.Theotheraccountsinthesystem
includethefamiliarFinishedGoodsandCostofGoodsSold(COGS)accounts.During
anaccountingperiod,purchasesofdirectmaterials,alongwithdirectlaborandoverhead
costsarechargedtothecostofgoodssoldaccountasincurred.Theusualentriesare
omittedincludingtheentriestotransferthecostofgoodsmanufacturedfromone
department,orcell,tothenextandsubsequentlytoFinishedGoods.Theperpetual
recordsillustratedinChapters4and5arenotmaintained.Instead,materialsand
conversioncostsarechargeddirectlytoCostofGoodsSold.Then,attheendofthe
period,theremainingfinishedandpartiallycompletedunitsarecountedandinventory
costsarechargedinabackwarddirectionfromCOGStoFinishedGoods,RIPand
ConversionCostaccounts.Thesesocalledbackflushedcostsareusuallybasedon
budgetedorstandardcostsperunit.
BackflushExample
AssumethattheCMCompanyproducescoffeemakers.Thebudgetedmanufacturing
costsfortheproductareindicatedbelow.
DirectMaterial $10
DirectLabor 1
VariableOverhead 4
FixedOverhead($6000/1,000) 6
Total $21
Tokeeptheexamplesimple,assumethattherearenobeginninginventoriesandthatthe
actualcostsofproductionareequaltobudgetedcosts.Duringtheperiod,theCompany:
1.Purchased$10,100worthofdirectmaterials.
2.Incurred$11,000inconversioncostsincluding$1,000directlabor,$4,000variable
overheadand$6,000fixedoverhead.
3.Incurredsellingandadministrativeexpensesof$990variableand$1,900fixed.
4.Sold990coffeemakersfor$32perunit.
5.Determinedthattheendinginventoryincluded5finishedunits,5equivalentunitsin
processand$100worthofunuseddirectmaterials.
AbackflushsystemcompatiblewithfullabsorptioncostingappearsinExhibit81.Note
thatthedirectmaterialspurchasesandconversioncostsarechargeddirectlytoCostof
GoodsSold.Thenthecostsremainingintheendinginventoriesarecharged,or
backflushed,totheRIP,ConversionCostsandFinishedGoodsaccounts.Theamount
backflushedtoRIPisfiveequivalentunitsat$10,plus$100unuseddirectmaterialsfor
$150total.TheamountbackflushedtotheConversionCostsaccountisfiveequivalent
unitsat$11or$55.Sincetherearefiveunsoldfinishedunits,theFinishedGoods
accountischargedwithfiveunitsat$21perunitor$105.Then,CostofGoodsSoldis
$20,790(10,100+11,000310or990unitsat$21)andthisamountisclosedtothe
incomesummary.Althoughthissimplifiedsystemissomewhatunorthodox,theamount
ofcostofgoodssoldisexactlythesameastheamountobtainedinatraditionalfull
absorptioncostingsystem.Althoughtheaccountsaredifferent,theresultsarethesame.
AbackflushsystemcompatiblewithdirectcostingappearsinExhibit82.Anadditional
accountisneededforperiodcosts,orfactoryexpenses,sincethefixedoverheadcosts
arenotchargedtotheinventory.Instead,thefixedmanufacturingcostsarecharged
directlytoexpense.Variablemanufacturingcostsof$15,100arechargeddirectlytocost
ofgoodssold.Then,theamountbackflushedtoRIPis$150,thesameasinExhibit81.
However,theamountbackflushedtotheConversionCostsaccountisonly$25,(i.e.,
fiveequivalentunitsat$5)andtheFinishedGoodsaccountischargedwithonly$75,
(i.e.,fiveunitsat$15).Then,theamountremaininginCostofGoodsSoldis$14,850
(i.e.,10,100+5,000250or990unitsat$15).Noticethatthetotalamountthatappears
intheincomesummaryis$20,850.Thisis$60greaterthantheamountinabsorption
costing(i.e.,20,85020,790).ComparingtheConversionCostsandFinishedGoods
accountsinExhibits81and82revealswherethe$60differenceislocated.Eachof
theseaccountscontains$30offixedoverheadinExhibit81,whileallofthefixed
overheadcostsappearontheincomesummaryinExhibit82.
AbackflushsystemcompatiblewiththroughputcostingispresentedinExhibit83.In
thisillustration,onlydirectmaterialscostsflowintocostofgoodssold,whileall
conversioncostsarechargeddirectlytoexpense.Thebackflushentryinvolvescharging
$150ofthedirectmaterialscoststoRIPasintheprevioustwoillustrations,butonly
$50toFinishedGoods,i.e.,fiveunitsat$10.TheConversionCostsaccountthat
appearsinExhibits81and82isomittedinExhibit83becausenoconversioncostsare
deferredintheinventory.Afterthebackflushentry,theamountofCOGSis$9,900,(i.e.,
10,100200,or990unitsat$10).Afterthisamountisclosed,theincomesummary
contains$20,900ofmanufacturingcosts.Thisis$50morethantheamountthatappears
inthedirectcostingillustrationinExhibit82.Ofcoursethedifferenceisthat$50of
conversioncostsarebackflushedanddeferredintheConversionCostsandFinished
GoodsaccountsinExhibit82,whilethesecostsarechargedtoexpenseinExhibit83.
Asystemwherenoneofthemanufacturingcostsaredeferredintheinventorycouldbe
designedinavarietyofways.OnesuchsystemisillustratedinExhibit84wherethe
entire$21,100ofdirectmaterialsandconversioncostsareflushedouttotheincome
summary,eventhoughtenunitsremainintheinventory.Thisisnotabackflushsystem,
sincenoneofthecostsareflushedbacktoinventoryaccounts.Insteaditmightbe
referredtoasanoabsorptionthroughputcostingsystemsincetheendingmaterialscosts
arechargedtoexpenseratherthanbackflushedtotheRIPandfinishedgoodsaccounts.
SummaryofKeyIdeas
Althoughtheconceptsillustratedabovearemorefullydevelopedinsubsequent
chapters,thisfourpartexamplewaspresentedtointroduceatroublesomebehavioral
aspectofinventoryvaluation.Akeyideatograspisthatalthoughfullabsorptioncosting
satisfiesthematchingconcept,ittendstomotivatemanagerstoproduceexcess
inventory.Why?Becauseeventhoughtotalfixedmanufacturingcostsarerelatively
constant,eachunsoldunitsoaksupsomeofthesefixedcosts.Asaresult,thefixedcosts
associatedwiththeseunitsappearonthebalancesheetasanasset,ratherthanonthe
incomestatementasanexpense.Thehigherthelevelofproduction,thegreaterthe
amountoffixedcostsdeferredintheinventory,thelowertheamountofexpenseandthe
greatertheamountofnetincome.Thus,criticscontendthatabsorptioncostingrewards
managersforproducingexcess.Directcosting,ontheotherhand,isneutralasfaras
buildinginventoryisconcernedbecausefixedmanufacturingcostsareexpensed
regardlessofthenumberofunitsproduced.Notethatthislackofbias,orneutrality
towardsproducingexcessismoreconsistentwiththeJITphilosophy.However,the
throughputcostingapproachgoesastepfurtherandpenalizesthosewhoproduceexcess
bychargingtheconversioncostsassociatedwiththeunsoldinventorytoexpense.The
noabsorptionthroughputmethodinExhibit84maximizesthepenaltyforproducing
excessandcompletelyreversesthefullabsorptioncostingbias.
ProcessOrientedPerformanceMeasurements
Asweshallseeinthechapteronstandardcosting,traditionalperformance
measurementsatthecostcenterlevelplaceemphasisonvarianceanalysisformaterial,
laborandoverhead.Theemphasisisonmeasuringlaborefficiencyandresource
utilizationbycomparingbudgetedcostswithactualcosts.JITsystemsdeemphasizeor
eliminatevarianceanalysis,particularlyatthedepartmentlevel,becauseittendsto
reducecooperationbetweendepartmentsandmotivatemanagerstoproduceexcess
inventory.9Traditionalsystemsarecriticizedbecausetheyplaceemphasisonfinancial
resultsratherthatemphasizingtheprocessesinvolvedinobtainingthoseresults.Wewill
postponeourdiscussionofthecriticismsoftraditionalstandardcostsystemsuntil
Chapter10.Thecriticismsarementionedheretohighlightoneofthemaindifferences
betweentraditionalperformancemeasurementsandJITmeasurements.Justintime
measurementstendtoemphasizeafewkeynonfinancialaspectsofperformancethat
areprocessoriented,ratherthanthefinancialresultsorientedmeasurementsthatare
generatedbytheaccrualaccountingsystem.Thepurposeoftheprocessoriented
approachistotargetthecausesofacost,orotherperformanceresult,ratherthanthe
cost,i.e.,thefinancialperformanceresultitself.Graphicdisplaysofsuchmeasurements
canbequiterevealingwhenusedasaguidetocontinuousimprovement.Some
examplesofthesemeasurementsareprovidedbelow.
JITMeasurementsforPurchasing.
1.Vendorquality,e.g.,percentageofdefects.
2.Numberofvendors.AfterimplementingJITconcepts,IBM'sLexingtonKentucky
typewriterfacilityreducedthenumberofvendorsby95%from640to32.Xerox
Corporationcutits'suppliersby94%from5,000to300.10
3.Vendorpercentageofontimedeliveries.
4.Daysofmaterialsinventoryonhand.
5.Vendorcostsavingsideasimplemented.
6.Costofqualityandnonquality(SeeMAAW'sQualitytopicpage).
Thesixmeasurementslistedaboveareimportantbecausetheyreflectpotentialwaysto
reducetheoverallcostsassociatedwithdirectmaterials.Thesemeasurementsrepresent
materialcostdriversrecognizingthatoverallmaterialcostsincludenotonlythe
purchasepriceofmaterials,butanycoststhatareassociatedwithordering,receiving,
inspecting,unpacking,moving,storing,scheduling,reworkingandreturningdefective
partstovendors.
JITMeasurementsforProduction.
1.Scheduleattainmentpercentage.Thegoalis100%.
2.Averageinventory11ordaysofworkinprocess(WIP)andfinishedgoodsinventory
onhand.Ofcoursethisshouldbelow,buttheabsoluteamountdependsonthecompany.
Forexample,atHewlettPackard'sPersonalOfficeComputerDivisioninSunnyvale
California,theWIPinventorylevelwascutfromthreeweekstothreedayswhenJIT
conceptswereimplemented.12
3.RatioofthenumberofunitsinWIPtothenumberofworkstationsoroperators.A
ratioof1indicatesthatbufferinventoryequalszero.
4.Inventoryturnover.Inventoryturnover=CostofgoodssoldAverageinventory.
Increasingtheturnoveristhegoal.Forexample,atHarleyDavidson'sYork
Pennsylvaniamotorcycleassemblyplant,inventoryturnoverincreasedfrom3.5to20
whenJITconceptswereapplied.13
5.Measuresofnonquality,e.g.defects,spoilage,reworkandscrap.Thegoalisto
obtainzerodefects,spoilageandreworkandminimumscrap.JITpracticeshelpedthe
GeneralElectricdishwasherplantinLouisvilleKentuckycutscrapandreworkbyfifty
onepercent.14
6.Firsttimethroughproductioncyclewithoutreworkpercentage.Theobjectiveis
100%
7.Productioncycletimeorleadtime=processtime+inspectiontime+movetime+
storagetime.Thegoalistoreduceproductioncycletimebyreducinginspection,move
andstoragetime.Omark'ssawchainfacilityinGuelph,Ontariowasabletoreduce
productioncycletimefromtwentyonedaystothreedayswithineighteenmonths.15
8.Ratioofprocesstimetocycletime.Aratioof1wouldindicatethatinspection,move
andstoragetimeequalzero.
9.Downtimepercentage.
10.Numberoflinestopsperday.
11.Setuptimepersetup.
12.Headcountproductivity(i.e.,averageoutputperworker=totaloutputtotal
employeesincludingindirect).
13.Productcoststrendanalysis,e.g.,percentagechangeinproductcosts.
14.Amountofspaceused.WithaJITplantlayout,anIBMplantinRaleigh,North
Carolinacuttherequiredspacefrom51,000to9,000squarefeet.16
15.Productionflowdistance.Omark'slogloaderplantinPrenticeWisconsin,wasable
tocutflowdistancefrom2,000feetto18inches.17InFlintMichigan,GeneralMotors
cuttheflowdistanceforBuickfendersfrom8,000to140feet.18
16.Overtimerequirementsandtrends.
17.Numberofimprovementsimplemented.
18.Employeesuggestionsmadeandideasimplemented.
19.Employeemorale.
20.Employeeknowledge,suchas,theaveragenumberofjobseachworkeriscapableof
performing,orthenumberofjobclassifications.AfterimplementingJIT,the
WestinghousesemiconductordivisioninYoungwoodPennsylvaniareducedthenumber
ofjobcategoriesby95%.19InajointventureofGeneralMotorsandToyota,(NUMMI)
ToyotareducedGM'sjobclassificationsfrom100to1multiskilledclassification.20
SomeadditionalmeasurementareasforJITdistributionare:
1.Customerserviceandsatisfaction.
2.Numberofcustomercomplaints.
3.Ontimedeliverypercentage.
4.Responsetimetocustomerorders.UsingahighlyautomatedJITorientedplant,Allen
Bradley'scontactorfacilityinMilwaukeeWisconsinreducedresponsetimefromseveral
weekstooneday.21
Mostofthemeasurementslistedabovecanbemonitoredgraphicallyusingthestatistical
toolsdiscussedintheprevioussection.Althoughnotalloftheperformance
measurementslistedaboveareusedbyasinglecompany,manyJITorientedcompanies
maintainlargedisplaysofkeymeasurementsinvariouslocationswithinthefactory.The
ideaistomotivateemployeesandmanagerstokeepupthecontinuousimprovement
emphasisbycelebratingthesuccessfuleffectsofpastPDCAefforts.TheJIT
performancemeasurementsystemisaveryvisualsystem.
JustinTimeandLeanEnterprise
BeforeleavingthissectionitshouldbenotedthatcompaniesusingJITpurchasing,
production,anddistributionarefrequentlyreferredtoinmanagementandaccounting
literatureasleanenterprisecompanies.However,WomackandJones(whointroduced
theleanenterprisemodelin1994),madeadistinctionbetweenaleancompanyanda
leanenterprise.AleancompanyisonethatembracestheJITorleanconceptsand
techniquesdescribedinthechapter.Aleanenterpriseisdefinedasagroupof
individuals,functions,andlegallyseparatebutoperationallysynchronizedcompanies,
allwhoembracetheJITorleanorganizationalmodel.Inaddition,justintime
productionisoftenreferredtoasleanmanufacturingortheToyotaproductionsystem.
Formoreinformationrelatedtojustintimeandleanenterpriseconceptsand
terminologyseeMAAW'ssectionsonJustInTime,LeanAccounting,Japanese
ManagementMethods,ContinuousImprovement,andQuality.
THETHEORYOFCONSTRAINTS
Thetheoryofconstraints(TOC)wasdevelopedbyEliGoldrattandoriginallypresented
inanovelentitledTheGoal.22TOCissimilartoJITinthatithaselementsofa
philosophyaswellaspractice.TheTOCphilosophyisapplicabletoanytypeof
organization,whilethepracticeelementsapplymainlytocompaniesthatproduce
productstocustomerspecifications,e.g.,ajobshop.Examplesincludethe
manufacturersofmachines,locomotivesandaircraftengines.
Conceptuallythetheoryofconstraintsisbasedontheideathatanycompanyhas
identifiableconstraints,thusmanagementshouldidentifythemostbindingconstraints
andmanagethemsothatresourcesareusedmostefficiently.Thegoalissimplytomake
money,nowandinthefuture.AccordingtoGoldratt,thewaytomakemoneyisto
maximizeaglobalmeasurereferredtoasthroughput,whileminimizingtwootherglobal
measuresreferredtoasinventoryandoperatingexpense.Themainideaistofocuson
theseglobalmeasuresratherthanfocusingonlocal,orsubsystemmeasurements.These
threemeasurementsaredefinedbelow.
THEGLOBALMEASUREMENTSOFTOC
Throughputisdefinedassalesdollarslessdirectmaterialsintheproductssold.More
specifically,directmaterialsincluderawmaterials,componentsandsubcomponents
thatarepartoftheproductsthataresold.Conceptually,throughputismoneyflowing
intothesystem.
Inventory=assetsorinvestmentintheterminologyofTOCsince,fromGoldratts
perspective,everythingisforsale.However,TOCproductinventory(i.e.,inventoryin
thetraditionalaccountingsenseoftheterm)includesonlythecostofdirectmaterials
thatremainunsoldintheformofrawmaterials,workinprocessandfinishedgoods.
NotethattheTOCdefinitionofproductinventorydoesnotincludedirectlaboror
factoryoverheadcosts,onlydirectmaterialcosts.Alllaborandoverheadcostsare
expensedasinthethroughputcostingexampleillustratedinExhibit83.Conceptually,
inventoryisallthemoneyinsidethesystem.
OperatingExpenseisdefinedasthecostsofconvertingtheinventoryintothroughput.
Operatingexpenseincludesallcostsotherthandirectmaterials,e.g.,directlaborand
factoryoverhead,aswellassellingandadministrativecosts.Conceptually,operating
expenseisthemoneyflowingoutofthesystem.Seeagraphicviewoftheseglobal
measurements.
THEFIVECONTINUOUSSTEPSTOOBTAINTHEGOAL
Althoughtheterminologyassociatedwiththetheoryofconstraintsisdifferentfromthe
traditionalaccountingterminology,thekeyconceptofTOCisrelativelyeasyto
understand.Theideaisthatthesumofthelocal,orsubsystemoptimumsdoesnotequal
thesystemoptimum.Ofcoursethisisafamiliaridearelatedtotheconceptsof
communitariancapitalism(SeeChapter1)andthejustintimecontinuousimprovement
philosophy.
Maximizingthroughput,accordingtothetheoryofconstraints,involvesthefollowing
fivecontinuoussteps:
1.Identifythecompany'smostbindingconstraint,i.e.,thefactorthatplacesthegreatest
limitationonincreasingthroughput.Thisconstraintmaybeexternalorinternal.For
example,externalconstraintsmayincludeaweakconsumerdemand,adistribution
bottleneck,orashortageofqualityrawmaterials.Internalconstraintsmaybecapacity
related.Forexample,abottleneckmachineoroperationcouldrepresentthemost
bindingconstraint.Aconstraintisanythingthatlimitsthroughput.(SeetheTOC
problemsforillustrationsrelatedtoidentifyingconstraints.)
2.Exploittheinternalconstraintsbymaximizingtheflowofworkthroughthe
constraint.Thebottleneckrepresentingthemostbindingconstraintshouldneverbeidle
becauseanhourlostatabottleneckisanhourlostfortheentiresystem.Ontheother
hand,anhoursavedatabottleneckisanhoursavedfortheentiresystem.Why?
Becauseitincreasesthroughput.Therefore,inventorybuffersareacceptableata
bottleneckoperationtoavoiddowntimefortheentiresystem.Thepressureoninternal
bottleneckscanalsoberelievedbyshiftingsomeoftheworktononbottleneck
operations.Ofcourseabottleneckoperationshouldonlybeusedtoproducewhatis
currentlyneeded.
Externalconstraints,suchasweakdemandareexploitedbyincreasedadvertising,
marketpromotionanddevelopingnewdistributionchannels,e.g.,directsales,mail
order,andwholesalers.Aconstraintcausedbyashortageofqualityrawmaterialsis
exploitedbyactionssuchaslocatingnewvendorsandcertifyingvendorsthatmeet
standardsconcerningqualityanddeliveryschedules.
3.Subordinateandsynchronizetheotherinternalconstraintswiththemostbinding
constraint.Thismeanstokeepthemworkingatthepaceofthemostbindingconstraint.
Theideaistobalancetheflowofwork,nottrytobalancetheplant.Abalancedplant
referstoatheoreticalsituationwherethereisequalcapacityateachoperationinthe
plant.Inthetheoryofconstraints,abalancedplantisviewedasimpossiblebecauseof
thevariabilityassociatedwiththevariousprocessesinvolved.Eveniftheaverage
capacityofeachprocessoroperationisthesame,i.e.,balanced,theinevitable
variabilitywouldcausesomeexcesscapacityandafloatingbottleneck.Therefore,if
outputfromanoperationisnotneededdownstream,itisacceptableforthatoperationto
betemporarilyidle.Theactiontoavoidistheproductionofexcessproductorinventory
bufferswheretheyarenotneeded.Anotherwaytoexpressthisideaistosaythatthe
utilizationofanonbottleneckoperation,orresource,shouldnotbedeterminedbyit's
owncapacity,butbythecapacityofthemostbindingconstraintinthesystem.Anhour
savedatanonbottleneckoperationdoesnotbenefitthesystem.Why?Becauseitdoes
notincreasethroughput.Thesethreestepsarereferredtoasthedrumbufferropesystem
designedtobalancetheflowofworkintheplant.Theconstraintsymbolizesthedrum
thatsetsthepace,theinventoryplacedinfrontoftheconstraintrepresentsthebuffer
thatprotectsthepace,andthepullsystemrepresentstheropethatenforcesthepace.
4.Recognizetheideasaboveindevelopingperformancemeasurementsystems.The
performancemeasurementsshouldemphasizetheefficiencyandeffectivenessofthe
totaloperation,ortotalsystem,nottheefficiencyofindividualoperations,or
subsystems.Again,thegoalistomaximizethroughput.
5.Increasethecapacityofthemostbindingconstrainedresource.
6.Identifythenewmostbindingconstraint,i.e.,startover.
OptimizedProductionTechnology(OPT23)
ThemainideasunderlyingtheTOCphilosophywereoriginallypresentedinanovel
entitledTheGoalasindicatedabove(Seesummary).Althoughthebookisenjoyableto
read,thosewhowantaquickdescriptionofTOCmayfinditsomewhatfrustrating.The
characterwhoseemstohavealltheanswers(Jonahtheconsultant)usestheSocratic
approachtohelpenlightenthecharacterwhoseemstoneedtheanswers(Alextheplant
manager).JonahgivesAlexsomeverypointedquestions,butAlexmustdeducethe
answersforhimself.(SeethesummaryofWhatisThisThingcalledtheTheoryof
ConstraintsformoreonwhyGoldrattusestheSocraticapproach).
OtherbooksbyGoldrattandGoldrattandFox24andaseriesofarticlesbyFoxand
othersaremorerevealing.Fromthesesourceswehavelearnedthattherearetenrules
associatedwithOPTwhichistheproductionschedulingroutine,orpracticepartofthe
theoryofconstraints.Thetenrulesarelistedbelow.
RulesThatRelatetoScheduling25
1.Theutilizationofanonbottleneckresourceshouldbedeterminedbysomeother
constraintinthesystem,notthecapacityofthenonbottleneckresource.
2.Activatingaresourceisnotnecessarilythesameasutilizingaresource.Forexample,
iftheresourceisusedtoproduceinventorythatisnotneededdownstream,theresource
hasbeenactivated,butnotutilized.Utilizationreferstoincreasingthroughput.
3.Timelostatabottleneckistimelostforthewholesystem.Whenthebottleneck
operationisdown,theentiresystemisdown.
4.Timesavedatanonbottleneckisanillusion.
RulesThatRelatetoDeterminingBatchSizes
5.Theoptimumsizeoftheprocessbatchisnotthesameasthesizeofthetransferbatch.
Someunitsmaybemovedasneededbythenextoperation(tobalancetheflow),before
theentirebatchisfinished.
6.Theprocessbatchsizeshouldnotbefixed,butshouldvaryfromonemachinetothe
next.Againtheideaistobalancetheflowofwork.
7.Thecapacityofthevariousoperationsandthepriorityofthejobsshouldbe
consideredsimultaneously.Themainideaconveyedbythisruleisthatthevariability
withineachoperationneedstobeconsideredwhenschedulingproductionbecausethe
combinationofstatisticalfluctuations(variability)anddependenteventstendstocause
floatingbottlenecks.Thecapacityofeachoperationshouldbedefinedintermsofa
distributionofperformance,notjustamean,oranupperlimit.SchedulinginOPTis
performedbyaproprietaryprogramreferredtoas"thebrain".Thisschedulingalgorithm
isdesignedmainlyforjobshopswhereasimplekanbanapproachisnotfeasible.
8.Potentialproblemareascanbeidentifiedandminimized.Forexample,providinga
bufferinventoryatabottleneckprotectsthebottleneckfromproblemsupstreaminthe
productionprocess.
RulesThatRelatetoPerformanceMeasurements
9.Donotattempttobalancetheplantbecauseabalancedplantistheoretically
impossibleduetotherandomvariationassociatedwitheachoperationandprocess.
Attemptingtobalancetheplantwillcausefloatingbottlenecksandmakeitdifficult,it
notimpossible,tomanagetheplant(SeetheMatchBowlorDiceGamenote).
10.Donottrytooptimizetheoutputofeachseparateworkcenterbecausethiswillonly
insuresuboptimizationofthesystem.Tryingtoproduceasmuchaspossibleateach
operationwillcausesomeworkcenterstoproduceinventorythatcannotbeturnedinto
throughputbythesystem,i.e.,theywillbeactivated,butnotutilized.
Applyingtheconceptsandrulesofthetheoryofconstraintshashelpedmanycompanies
dramaticallyimproveperformance.Forexample,usingtheTOCapproach
,Valmont/ALS,ajobshopsteelfabricatorinBrenhamTexas,increasedincomeby154
percenteventhoughsalesdecreasedby2percent.Theseresultswereobtainedby
simultaneouslyincreasinginventoryturnoverby39percentanddecreasingoperating
expensesby17percent.26
THROUGHPUTACCOUNTING
Asindicatedabove,theTOCapproachtreatsallcosts,otherthandirectmaterials,as
operatingexpenses,orperiodcosts.Therefore,productinventorycosts(i.e.,workin
processinventoryandfinishedgoodsinventory)anddirectmaterialscostsare
synonymousintheTOCmethodology.Tostrengthenyourunderstandingofthismethod,
considerthethroughputcostingillustrationpresentedinExhibit85.TheCMCompany
exampleusedearlierinthebackflushillustrationsisusedagainforcomparative
purposes.
ObservefromExhibit85thatalthoughthefinalresultsarethesameasinthe
throughputcostingbackflushsystemillustratedinExhibit83,directmaterialscosts
flowthroughtheinventoryaccountsinamoreconventionalway.Purchasesof$10,100
arechargedtotheRIPaccount.Then$9,950istransferredtofinishedgoods
representingthe995completedunitsat$10perunit.Thecostofthe990unitssoldis
transferredfromfinishedgoodstotheCOGSaccountandthenthis$9,900isclosedto
theincomesummary.Conversioncostsarechargedtooperatingexpense,orperiodcosts
andsubsequentlyclosedtotheincomesummaryasinExhibit83.Thisseriesofentries
leaves$150intheRIPaccount,$50infinishedgoodsand$20,900ontheincome
summary.Notethatthesearethesameamountsthatareobtainedinthebackflush
systeminExhibit83.
ComparativeIncomeStatements
AbbreviatedincomestatementsarepresentedinExhibit86toprovideacomparisonof
throughputcostingwiththetraditionalinventoryvaluationmethods.Ofcourse,salesof
$31,680(990unitsat$32)arethesameineachstatement.Sellingandadministrative
expenses(S&A)of$2,890arealsothesameineachstatement,althoughthevariable
andfixedexpensesareseparateindirectcosting.Thekeydifferencesbetweenthethree
statementsinvolvetheamountsforcostofgoodssold,theterminologyandtheamounts
foroperatingincome.Costofgoodssoldis$21perunitinabsorptioncosting($10of
directmaterialplus$11ofconversioncosts),only$15perunitindirectcosting(i.e.,the
$6forfixedoverheadisexcluded)and$10inthroughputcosting,(i.e.,excludingthe
$11ofconversioncosts).TheCOGSamountsappearinExhibits81,82and83or85.
ReferringtoExhibit86,observethatSaleslessCOGSrepresentsthroughputinthe
throughputcostingstatementwhilethefamiliartermsgrossprofitandmanufacturing
marginareapplicableintheabsorptionanddirectcostingstatements.Comparing
operatingincomeacrossthethreestatementsreinforcestheconceptualdifferences
discussedearlierinthebackflushexamples.Thedifferencesinoperatingincomecanbe
reviewedquicklybyexaminingtheendinginventoryamountsinExhibits81,82and
83or85.Theamountsdeferredare$310inabsorptioncosting,$250indirectcosting
andonly$200inthroughputcosting.Ofcoursethedifferencesintheamountsdeferred
explaintheincomedifferences.Forabsorptionanddirectcostingtheyare310250=
8,0007,940=$60.Fordirectandthroughputcostingtheyare250200=7,940
7,890=$50.
Ifthe$200ofendingdirectmaterialscostswereclosed(flushed)toexpense,thenthe
throughputcostingstatementwouldshow$11,200forfactoryoperatingexpensesand
$7,690foroperatingincome.Thisresultconformstothenoabsorptionexamplein
Exhibit84.
Exhibit86
ComparativeIncomeStatements
AbsorptionCosting DirectCosting ThroughputCosting
Sales $31,680 Sales $31,680 Sales $31,680
LessCOGS:* LessCOGS:** LessCOGS:***
BFG 0 BFG 0 BFG 0
COGM 20,895 COGM 14,925 COGM 9,950
LessEFG 105 20,790 LessEFG 75 14,850 LessEFG 50 9,900
Grossprofit 10,890 Manfmargin 16,830 Throughput 21,780
LessS&Aexpense 2,890 LessVarS&A 990 LessOperExpense:
OperatingIncome $8,000 Contributionmargin 15,840 Factory 11,000
LessFixedcosts 7,900 S&A 2,890 13,890
OperatingIncome $7,940 OperatingIncome $7,890
SeetheExhibit86CostofGoodsSoldCalculations*,**,and***.
Thebehavioralimplicationsassociatedwiththethreemethodsarefairlyeasytosee.
First,considerthatthedirectcostingstatementrevealstheamountofoperatingincome
thatwillresultundereachofthethreemethodswhenthenumberofunitsproducedis
equaltothenumberofunitssold.IntheCMCompanyexample,1,000unitsare
produced(995finishedunits,plusfiveequivalentunitsinprocess),butonly990units
aresold.Ifonly990unitshadbeenproduced,eachstatementwouldshowoperating
incomeof$7,940.However,theinventoryincreaseoftenunitscausedabsorption
costingincometobe$60greaterthanitwouldhavebeenifthecompanyhadproduced
only990unitsandcausedthroughputcostingincometobe$50less.FromtheJITor
TOCpointofview,absorptioncostingprovidesthewrongsignal,i.e.,producemore,
whilethroughputcostingprovidestherightsignal,i.e.,produceonlywhatthecompany
cansell.FormoreinformationrelatedtothetheoryofconstraintsseeMAAW'sTOC
section.
ACTIVITYBASEDMANAGEMENT
Theconceptofactivitybasedmanagement(ABM)evolvedfromtheCAMIconceptual
designdiscussedintheChapters1and7andthecontributionsofmanypractitionersand
researchers.AsindicatedinthebriefdiscussionoftheconceptinChapter1,ABMisa
broadumbrellatermthatincludesactivitymanagement,activitycostingandactivity
basedproductcosting,aswellasmanyoftheconceptsassociatedwithjustintimeand
thetheoryofconstraints.Fromanaccountingperspective,activitybasedmanagement
representsthepotentialconnectionbetweenaccountingandtheJITandTOC
philosophies.ABMrepresentsanattempttointegrateallofthenewaccountingand
managementconceptsintooneeffectivesystem.AlthoughABMhasbeendefinedina
numberofways,wewilllookattwoimportantmodelsofABMthatareconceptually
different.ForconveniencewewillrefertothemastheJohnsonmodelandtheCAMI
model.
THEJOHNSONMODEL
AnactivitybasedmanagementmodelispresentedinFigure812basedonaframework
providedbyH.ThomasJohnson.27TherearesixkeyelementsinJohnson'sABM
model.Asillustratedinthepreviouschapter,activitycostingincludes:1)defining
activities,2)identifyingtheactivitydriversandmeasurestorepresentthemand3)
assigningcoststotheseactivities.Activitybasedproductcostingaddsthefourth
elementthatinvolvesusingtheactivitymeasurestoassigntheactivitycoststocost
objectssuchasproducts,services,distributionchannelsandcustomers.Activity
managementincludesthefirsttwoelements,essentiallyignoreselements3and4,i.e.,
thefinancial,orcostelements,andaddstwoprocessorientedelements.Theseinclude5)
thedevelopmentofnonfinancialperformancemeasurementsand6)usingthese
measurementstomonitorthecompany'scontinuousimprovementefforts.Theemphasis
ontherighthandside,orcostside,ofFigure812isonprovidingcostinformationfor
thestrategicmanagementdecisionsdiscussedinthepreviouschapter,(e.g.,product
pricingetc.)whiletheemphasisonthelefthandside,orprocessside,isoneliminating
wasteandimprovingprocesses,productsandservicesfromthecustomerspointofview.
Theactivitymanagementelements1,2,and5provideabasisforunderstandingthe
processesandworkperformedwithinthecompany.Thisunderstandingisaprerequisite
forusingtheplandocheckactioncontinuousimprovementapproachillustratedin
Figure84.ThePDCAapproachandothertools(e.g.,controlchartsetc.)arepartof
element6.
ThereisonekeyideainJohnson'sframeworkthatseparatesitfromtraditional
accountingcontrolsystems.TheprocesssideoftheABMmodelisnotconnectedtothe
costsideatthebottominFigure812.Theperformancemeasurements(Element5)that
areusedtomanageprocesses(Element6)arenotfinancial,orcostbasedmeasurements.
Johnsonemphasizesthattheideaistomanageactivities,notcosts.Why?Because
managingcoststendstoleadtodysfunctionalbehavior,suchasreducingneeded
expendituresfortrainingandmaintenance.Ontheotherhand,managingactivities
placestheemphasisonworkingcontinuouslytoreducewasteandimprovecustomer
value.ThisisthepotentiallinkfromactivitybasedaccountingtotheJITphilosophy,but
inJohnson'smodelitisnotadirectlinkbecausetheaccountingelementsinFigure812
(i.e.,elements3and4)arenotpartoftheactivitymanagementsubsystem.
THECAMIMODEL
AdifferentillustrationoftheABMmodelisprovidedintheCAMIglossaryofactivity
basedmanagement.28AsimilarillustrationispresentedinFigure813.Thisillustration
mainlyemphasizesthedifferencebetweenABCandABM.AlthoughtheABCmodelis
onedimensional,theABMmodelistwodimensional.TheverticalviewinFigure813
isreferredtoasthecostassignmentdimensionofactivitybasedcosting.Thisisthe
sameviewofABCpresentedinFigure71inthepreviouschapter.However,moving
fromABCtoABMrequiresaddingthehorizontalview,orprocessdimension.
Managingactivitiesrequiresanalyzingtheprocesseswithineachactivityand
developingperformancemeasurementstomonitorthecompany'scontinuous
improvementefforts.
ABMincludesthestrategiccostinformationprovidedbyABCfordecisionssuchas
productintroduction,productpricing,makeversusbuy,productdiscontinuanceand
investmentmanagement.ButABMalsoincludesnonfinancial,processoriented
informationneededtomeasureandmonitorthesourcesofcompetitivevalue.
AlthoughtheCAMIandJohnsonmodelsmayappeartobeconsistentfromthe
illustrationsinFigures812and813,thereisafundamentaldifference.IntheCAMI
model,bothnonfinancialinformationandcostinformationareusedtomanage
activities29,whileintheJohnsonmodel,costinformationisexcludedforthispurpose.
Figure812canberevisedtorepresenttheCAMImodelbysimplyaddinglinesfrom
activitycostingtoelements5and6asillustratedinFigure814.However,from
Johnson'sperspective,thisisnotagoodidea.30
TheconflictbetweentheJohnsonandCAMImodelscannotberesolvedinatextbook.
However,anycompanythatcontemplateschangingfromatraditionalcostbasedcontrol
system,toasystemcompatiblewiththeJITandTOCphilosophiesshouldconsider
whethernonfinancialinformationcancoexistwithfinancialinformationattheactivity
managementlevel.Inotherwords,canabalancedperformancemeasurementsystembe
developedwheremanagersdonotoveremphasizeeitherthenonfinancialorfinancial
sideofthebusiness?
FormoreinformationonactivitybasedmanagementseeMAAW'sABMsection.
COMPARISONOFJIT,TOCANDABM
JITVERSUSTOC
PhilosophicallyJIT,TOCandABMaremuchthesame.Allthreeconceptsemphasize
continuousimprovementbysystematicallyremovingwastefromthesystem.However,
fromapracticeperspectivetheseconceptsarequitedifferent.Justintimeemphasizes
focusedfactories,acellularplantlayoutandkanbaninventorycontrol.Thesepractice
elementsareapplicableinrepetitiveproductionorassemblyoperations.Thetheoryof
constraints,ontheotherhand,emphasizesaschedulingalgorithmthatbalancestheflow
ofworkthroughajobshopwiththeinevitablebottlenecksandotherconstraints.While
JITplacesemphasisonzeroinventories,TOCallowsforinventorybuffersatbottleneck
operations.However,thisdoesnotrepresentaconflictbetweenthetwoapproaches
becausethemanualkanbansystemandtheTOCcomputerschedulingroutinearenot
competing.TheJITkanbansystemisapplicableinacontinuousflow,orprocess
environment,whiletheTOCschedulingalgorithmisapplicableinajoborder
environment.BothJITandTOCemphasizeasimplifiedaccountingsystem.Avarietyof
simplifiedbackflushaccountingmethodsevolvedfromtheJITconcepts,while
throughputaccountingwasdevelopedfromthetheoryofconstraints.Thecombination
ofthesetwoideasproducesathroughputcostingbackflushsystem(SeeExhibit83)that
isconsistentwithbothphilosophiesbecauseitencouragesmanagerstoproduceonly
whatisneeded.AlthoughJITandTOCaredifferent,thereappeartobenofundamental
conflictsbetweentheunderlyingphilosophiesorpractices.
JITANDTOCVERSUSABM
Althoughactivitybasedmanagementincludesthecontinuousimprovementconcept,the
mainpracticeelementofABMfocusesonactivityaccounting,i.e.,activitycostingand
activitybasedproductcosting.Therefore,activitybasedmanagementisalsoaccounting
basedmanagement.AswelearnedinChapter7,ABC(thecostassignmentdimensionof
ABM)generatesaccurateproductcostsbytracingcoststoactivitiesandfromactivities
toproductsusingavarietyofactivitymeasures.Thisenhancedemphasisonaccounting
createsafundamentaldifferencebetweenABMandtheothertwoapproaches.JITand
TOCbothfocusonimprovingthecompany'sprocesses,reducingwasteandbalancing
theflowofwork.Accountingisnotthecenterofattention.Infact,accountingplaysa
diminishedroleinJITandTOCsystems.AccurateproductcostsareobtainedinJIT
throughafocusedplant,cellularlayoutanddecentralizedservices.Ontheotherhand,
productcostingappearstobeanonissueinthetheoryofconstraintswherethegoalisto
simultaneouslyincreasethroughputwhilereducinginventoryandoperatingexpenses.
CONTROVERSIALISSUE31
Thisdiscussionhasleadustoaninterestingandveryimportantcontroversialquestion.
AreJITandTOCproductionandsimplifiedaccountingsystemscompatiblewithABM?
Someoftheargumentsoneachsideofthisissueareprovidedbelow.
Criticsofactivitybasedcostingcontendthatreorganizingafactoryintodedicatedcells
thatarefocusedonproducingafewsimilarproductseliminatestheneedforelaborate
ABCsystems.Simplifiedbackflushsystemssatisfytheaccountingrequirements,
thereforeusingABCwithJITisjustaanotherformofwaste.WhileABCmayprovide
moreaccurateproductcostsinaTOCjobshopenvironment,theriskof
overemphasizingfinancialmeasurementsattheexpenseofnonfinancialmeasurements
istoogreat.Theperformancemeasurementsystemshouldplaceemphasisonmanaging
theprocessesandworkthatpeopledo,notonthefinancialresults.Ifthecostaccounting
systemisthecenterofattention,managerswillbedistractedfromthecriticalsuccess
factorssuchascycletime,quality,flexibilityandresponsivenesstocustomerneeds.
ProponentsofABMarguethattheJITandTOCcontinuousimprovementconceptsare
importantandarepartoftheABMmethodology.However,althoughJITpracticesare
designedtoimproveprocesses,cycletime,qualityandotheraspectsofperformance,
theycannotreplace,oreliminatetheneedformanagementdecisionsupportsystems.
Activitybasedproductcostingprovidestheinformationneededtodeterminewhich
products,distributionchannelsandcustomersareprofitable.Activitycostinghelps
identifywherethegreatestbenefitscanbeobtainedfromPDCAcontinuous
improvementefforts.Inaddition,activitycostingrevealsthefinancialconsequencesof
thoseimprovements.Backflushcostingandnonfinancialperformancemeasurements
cannotsatisfytheseneeds.ABMprovidesthepotentialforabalancedintegratedsystem
thatcansupplyallofmanagement'sinformationneeds.
Althoughitisnotlikelythatthiscontroversialissuewillberesolvedinthenearfuture,
therearesomesurveyandcasestudyresultsindicatingthatABCcancoexistwiththe
leanenterpriseconcepts.Forexample,inasurveyconductedbyDavidGalleyof
GeneralMotors,seventyeightoftheninetymanufacturingplantsthatusedABCalso
usedJIT.32Thesesurveyresultsmayappeartoprovidestrongsupportfortheviewthat
ABCisconsistentwithJIT.However,theseresultsdonotindicatetheextenttowhich
nonfinancialandfinancialmeasurementswereintegratedforthepurposeofactivity
management.Itispossiblethatmany,perhapsmost,ofthesecompaniesdonotmix
ABCwithJIT.AsindicatedinChapter7,themajorityofABCsystemsreportedhave
beenstandalonemicrocomputerbasedapplicationsthataredesignedtosupport
intermediatetermstrategicdecisionssuchaspricingandproductmix.Ontheother
hand,JITsystemstendtoberealtimevisualsystemsdesignedtosupportdaytoday
operations.Formostcompanies,anoperationalABMmodelmaylookmorelikethe
compromisemodelinFigure815wheredottedlinesreplacethesolidlinesfrom
elements5and6totheactivitycostingsubsystem.Thisrevisioninthemodel
symbolizesthatactivitybasedcostinformationisusefulforidentifyingpotential
improvements,butnotdominantforprocessperformancemeasurementpurposes.The
keytodevelopingeffectiveperformancemeasurementsystemsistheexplicit
recognitionthatthedominantmeasurementwillsimultaneouslymeasureandinfluence
performance.Whilethisisnotanewidea,itisbecomingmoreimportantasan
increasingnumberofcompaniesembracetheteamoriented,systemoriented,lean
enterpriseconcepts.Althoughthepotentialforconflictbetweenaccountingbased
measurementsandtheleanenterpriseconceptsofJITandTOCwillalwaysexist,a
conflictisnotinevitableifsystemsdesignerscaneffectivelyincorporatetheinteractive
natureofbehaviorandmeasurementintotheirmodels.(SeetheSurveytopicformore
recentsurveyresults).
APPENDIXFLOTOYDEMONSTRATIONORGAME
ThepurposeoftheFloToydemonstration,orgame33,istofacilitateaclassroom
demonstrationtoshowthedifferencebetweenthejustintimepullsystemandthe
traditionalpushsystem.IntheJITpullsystemeveryoneworkstogetherasateam.Inthe
traditionalpushsystemeveryoneworksasanindividual.
TheproductisreferredtoasaFloToyandissomethingthatachildmightplaywithin
thebathtub.Itincludestwostyrofoamcupsthataretapedtogether.However,assembly
includesplacingareddotononecup,ablueontheothercupandthenanoperationto
tapethecupstogether.
Therearesixorsevenworkersonateamdependingonwhethertheteamis
demonstratingapushsystemorapullsystem.
1.Amaterialhandler.
2.Adirectlaborerthatplacesareddotoncups.
3.Adirectlaborerthatplacesabluedotoncups.
4.Adirectlaborerthattapesthecups(onereddotandonebluedot)together.
5.Apackaging/shippingperson.
6.Inspectorinpushsystem,butnotinpullsystem.
7.Arecordkeeper.Keepsmeasurementsonboard.(Seebelow)
Thematerialhandlersuppliesworkers2and3withcupsandmovesthecompleted
products(cupswithdots)toworker3.Thedemonstrationmightalsoincludeacustomer,
perhapsawholesaler.
Thedemonstrationcouldincludetwoproductionorassemblylines,(onebasedona
pushsystemandtheotherbasedontheJITpullsystem)orthesamegroupcouldstart
withthepushmindsetandthenswitchtothepullmindset.
RulesforthePushSystemLine
1.Eachpersonworksashardastheycantoproduce.
2.Nooneinterfereswiththeotherworkers'performance.
3.Eachworkerattemptstoproduceasmuchaspossibleandpushittothenextwork
stationtomeetaquotaortoobtainincentivepay.Everyoneignoresdefects,i.e.,offsize
cups,excepttheinspector.
4.Workerspeedandefficiencyisthemainperformancemeasurement.
5.Individualexcellenceisimportant.
RulesfortheJITPullSystemLine
1.Eachworkerproducesonlywhatisneededbythenextstation,i.e.,onlywhenthe
nextworker'skanbanisempty.(Somecoloredpapercouldbeusedtoindicatethe
kanbans).
2.Eachworkerpaysattentiontoanytroubletheotherworkersarehavingandhelps
themoutwhentheyhaveidletime.
3.Performanceisevaluatedonthebasisoftheoutputofthegroup,nottheindividual.
Performanceisbasedona.)amountofinventoryinthesystem,b.)cycletime,c.)
amountofrework,d.)productqualityande.)teamwork.
4.Stopifadefectisfound,i.e.,donotworkonoffsizecups.Qualityiseveryworkers
job.Thereisnoinspector.
Recordkeeperforeachsystem.
1.Measurethecycletime.Markaunitofrawmaterial(cup)andtimehowlongittakes
togettofinishedgoods.
2.Measureproductquality.
3.Measureteamwork.(Subjective)
4.Measuretotaloutput.
5.Measuretotalinventoryinworkinprocessandfinishedgoodsattheendofthe
designatedtime.
6.Alsomeasurecustomersatisfactionifthereisacustomer.
FOOTNOTES
1TheseconceptsarediscussedindepthbyPorter,M.1985.CompetitiveAdvantage.The
FreePressandPorter,M.E.1998.CompetitiveAdvantage:CreatingandSustaining
SuperiorPerformance.TheFreePress.JohnShankwasinstrumentalinpopularizingthe
valuechainconceptinAccounting.SeeShank,J.1989.Strategiccostmanagement:
Newwine,orjustnewbottles?JournalofManagementAccountingResearch(Fall):47
65.FormoreonthevaluechainseeDonelan,J.G.andE.A.Kaplan.1998.ValueChain
Analysis:AStrategicApproachToCostManagement.JournalofCostManagement
(March/April):715.(Summary).SeetheBusinessFlowChartillustrationforasimilar
idea.
2AChevroletautomobilereflectshighconformancequalityifitmeetsthespecifications
ofaChevrolet.Higherdesignqualityisreflectedbythedesignspecificationsofa
Cadillacautomobile.However,aCadillaccouldhavelowerconformancequalitythana
ChevroletiftheCadillacdidnotconformtoCadillacdesignspecifications.SeeMorse,
W.J.1983.Measuringqualitycosts.CostandManagement(JulyAugust):1620.
(Summary).
3ThePDCAcycleissometimesreferredtoastheDemingWheel.SeeImai,M.1986.
Kaizen:TheKeyToJapan'sCompetitiveSuccess.McGrawHillPublishingCompany:
60.(Summary).
4RecallfromChapter3thatvariationresultingfromcommoncausesrepresentsthe
predictablerandomvariationinastablesystem.Animprovementrepresentsafavorable
changeinthemeanoutcome,orareductionintherandomvariationwithinthesystem.
5ThefivetoolspresentedinthissectionandseveralothersarediscussedbyImaiin
Kaizen:TheKeyToJapan'sCompetitiveSuccess.(Summary).Forotherillustrations,
seeHayes,R.,S.WheelwrightandK.Clark.1988.DynamicManufacturing:Creating
theLearningOrganization.NewYork:TheFreePressandSchonberger,R.1990.
BuildingaChainofCustomers:LinkingBusinessFunctionstoCreateTheWorldClass
Company.TheFreePress.
6ForanexpandedapplicationoftheParetoconceptseeTatikondaet.al.,1999.
Succeedingwith80/20rule.ManagementAccounting(February):4044.
7ThekanbansystemwasdevelopedbyTaiichiOhnoatToyotaMotorCompanyin
1952.WhilethetermskanbanandToyotasystemarecommoninJapan,American
companiesuseavarietyofothertermsfortheirdemandpulltypeproductionsystems.
Forexample,theWeatherfordplantof3MCompanyusestheterm"NipandTuck"
whileOmarkIndustriesreferstotheirsystemas"ZIPS"(ZeroInventoryProduction
System).SeeImai,Kaizen:87(Summary)andWaters,C.R.1984.Whyeverybody's
talkingaboutjustintime.INC(March):7790andBailes,J.C.andI.K.Kleinsorge.
1992.CuttingwastewithJIT.ManagementAccounting(June):2832.Formoreon
OregonCuttingSystem's(formerlyOmark)useofJITconceptsseeBailes,J.,I.
KleinsorgeandL.White.1992.Howsupportservicescanuseprocesscontrol.
ManagementAccounting(October):4551.
8TheJapaneserefertotheuseoffailsafedevicesormistakeproofingaspokayoke.See
Chase,R.B.andD.M.Stewart.1994.Makeyourservicefailsafe.SloanManagement
Review(Spring):3544.
9Severalillustrationsinsubsequentchaptersrevealwhythisistrue,includingChapters
9,10and12.
10SeeSchonberger,R.J.1986.WorldClassManufacturing.TheFreePress:232and
235.ForacomparisonoftraditionalbatchmeasurementsversusJIT(leanenterprise)
measurementsseeSchonberger,R.J.2003.Howlean/TQhelpsdetercookingthebooks.
JournalofCostManagement(May/June):514.(Summary).
11Iftheinventorylevelsdonotfluctuateagreatdealfrommonthtomonth,theaverage
inventoryisbasedonthesumofthebeginningandendofyearinventoriesdividedby2.
Ifthereisagreatdealofvariationininventorylevelsfrommonthtomonth,thenabetter
measureoftheaverageinventoryisfoundbysummingthemonthlybeginning
inventoriesplustheendofyearinventoryanddividingby13.
12SeeSchonberger.1986.WorldClassManufacturing:229.
14SeeSchonberger:1986.WorldClassManufacturing:230.
15SeeSchonberger:230.AlsoseeSchonberger,R.J.1987.WorldClassManufacturing
Casebook:ImplementingJITandTQC.NewYork:TheFreePress:34.
17SeeWaters,C.R.1984.Whyeverybody'stalkingaboutjustintime.INC(March):
77.
18SeeSchonberger:1986.WorldClassManufacturing:234
19SeeSchonberger:1986.WorldClassManufacturing:233.
20SeeHof,R.D.andJ.B.Treece.1989.TheteamuphasitallExceptsales.Business
Week(August14):79.
22SeeGoldratt,E.M.andJ.Cox.1984.TheGoal:AProcessofOngoingImprovement.
NorthRiverPress.Revisededitionswerepublishedin1986and1992.(Summary)
Goldratt,E.M.1990.WhatisthisthingcalledTheoryofConstraints.NewYork:North
RiverPress.(Summary).
23OPTisatrademarkofCreativeOutputIncorporated.
24SeeGoldratt,E.M.andR.Fox.1986.TheRace.NewYork:NorthRiverPress
Goldratt,E.M.1990.WhatisthisthingcalledTheoryofConstraintsandhowshouldit
beimplemented?NewYork:NorthRiverPress.(Summary)andGoldratt,E.M.1990.
TheHaystackSyndrome:SiftingInformationOutoftheDataOcean.NewYork:North
RiverPress.(Summary).
25ThetenrulesarediscussedbyFox,B.1982.OPTanswerforAmericapartII.
Inventories&Production(November/December):1019.
26SeeKoziol,D.S.1988.Howtheconstrainttheoryimprovedajobshopoperation.
ManagementAccounting(May):4449.
27SeeJohnson,H.T.1989.Professors,CustomersandValue:BringingAGlobal
PerspectiveToManagementAccountingEducation.ProceedingsoftheThirdAnnual
ManagementAccountingSymposium(AmericanAccountingAssociation).(Summary)
andJohnson,H.T.1992.RelevanceRegained:FromTopDownControltoBottomup
Empowerment.NewYork:TheFreePress.(Summary).
28SeeRaffish,N.andP.B.B.Turney.1991.Glossaryofactivitybasedmanagement.
JournalofCostManagement(Fall):5363.ForsomerecentimprovementsintheCAM
ImodelseeEuske,K.J.andA.Vercio.2007.EnhancingtheABCcross.Management
AccountingQuarterly(Summer):4861.
29SeeTurney,P.B.B.1991.CommonCents:TheABCPerformanceBreakthrough.
CostTechnology:89,140and217.
30FormoreonJohnson'sideasseeJohnson,H.T.1990.Beyondproductcosting:A
challengetocostmanagement'sconventionalwisdom.JournalofCostManagement.
(Fall):1521.(Summary).Inaddition,seeMAAW'sRelevanceRegainedtopic.
31Forthesourcesofsomeoftheargumentsoneachsideofthisissue,seeMartin,J.R.
1994.Acontroversialissuesapproachtoenhancemanagementaccountingeducation.
JournalofAccountingEducation(Winter)5975.(Summary).
32SeeCooper,R.1994.Theroleofactivitybasedsystemsinsupportingthetransition
totheleanenterprise.AdvancesInManagementAccounting.(3):123Cooper,R.1996.
Activitybasedmanagementandtheleanenterprise.JournalofCostManagement
(Winter):614.(Summary).
33ThisdemonstrationisbasedonapresentationmadebyJohnY.LeeattheWestern
RegionalmeetingoftheAmericanAccountingAssociationinMay1991.
QUESTIONS
(SeetheJITquestionsforalonger,butsimilarsetofquestionswithlinkstofind
answers.)
1.Definethe"JustInTime"concept.
2.Is"JustInTime"aphilosophyorjustacollectionoftechniques?Explainyour
answer.
3.Explainthedifferencebetweenavaluesystemandavaluechain.
4.Howdoesthevaluechainconceptdifferfromthetraditionalvalueaddedconcept?
5.Discussthevaluechainintermsoftheconceptsofcooperationandteamwork.
6.Whatdowemeanbytheterm"qualityatthesource"?
7.Whatisthedifferencebetweendesignqualityandqualityofconformance
8.ComparetheconceptsofJustInTime(JIT)andJustInCase(JIC)intermsofthe
acquisitionandutilizationofresources.
9.DiscusstheJITandJICconceptsintermsofconcealingandexposingproblems.
10.DiscusstheconceptofcontinuousimprovementandtheShewardDemingPlanDo
CheckAction(PDCA)cycle.
11.Describeseveralstatisticaltoolsusedtoachievecontinuousimprovement.
12.ListseveraloftheJITpracticesthatcanbeappliedtothepurchasingfunction.
13.Whywouldacompanywanttoreducethenumberofitsvendorsorsuppliers?
14.Howdoestherelationshipbetweenacompanyanditssupplierschangewhenthe
companiesconvertfromatraditionalrelationshiptoaJITrelationship?
15.HowdothesuppliersbenefitfromJITpurchasing?
16.Whatisafocusedfactory?
17.Whatdoestheterm"cellularmanufacturing"mean?
18.Howdoescellularmanufacturingtendtoreducecosts?
19.Howdoescellularmanufacturingtendtoimproveproductcosting?
20.ListseveraloftheJITpracticesthatcanbeappliedtotheproductionfunction.
21.Explainthedifferencebetweenademandpullproductionsystemandapushsystem.
22.ListsomeofthecharacteristicsofaJITaccountingsystem.
23.Whatdowemeanbytheterm"backflushcosting"?
24.Whatdoestheterm"throughput"meanandwhatis"throughputcosting"?
25.Brieflycomparethebehavioralimplicationsassociatedwithtraditionalinventory
valuationmethodsandthroughputcosting.
26.DiscussthedifferencebetweentraditionalperformancemeasurementsandJIT
measurements.
27.ListsomeoftheJITperformancemeasurementsrelatedtopurchasing.
28.ListsomeoftheJITperformancemeasurementsrelatedtoproduction.
(SeetheTOCquestionsforamuchlongersetofquestionswithlinkstofindanswers.)
29.DiscusstheTheoryofConstraints(TOC)intermsoftherelatedconceptsof
throughput,inventoryandoperatingexpense.(SeeTheGlobalMeasurementsofTOC).
30.WhatarethefivestepsassociatedwithTOC?(SeeTheFiveContinuousSteps).
31.Whatis"OptimizedProductionTechnology"orOPT?
32.CompareJITandTOC.(SeetheABMquestionsforalonger,butsimilarsetof
questionswithlinkstofindanswers.)
33.HowdoesActivityBasedManagement(ABM)differfromActivityBasedCosting
(ABC)?
34.DiscussthedifferencebetweentheJohnsonABMmodelandtheCAMImodel.
(SeetheCAMIandtheJohnsonModels).
35.AretheconceptsofJITandTOCcompatible?Explainyouranswer.
36.IstheABMconceptcompatiblewithJITandTOC?Explainyouranswer.(See
ControversialIssue).
37.Ifacompanychangedfromatraditionalplantlayoutandproductionsystemtoa
justintimeplantlayoutandproductionsystem,therewouldbenoneedforactivity
basedcosting?Comment.
38.IsaJITproductionsystemmorelikejobordercostingorprocesscosting?Explain.
39.AretheconceptsofJITandTOCapplicabletoajobcostsystem?
40.HowdoesconvertingfromatraditionalpurchasingsystemtoaJITpurchasing
systemreducepurchasingandreceivingcosts?
41.HowdoesconvertingfromatraditionalproductionsystemtoaJITproduction
systemreducecosts?
42.SwitchingfromatraditionalsystemtoaJITsysteminvolvesseveralchanges
includingaphysicalchangeintheplantlayout,achangeintherelationshipswith
suppliersandcustomers(internalandexternal),andamentalchangeonthepartof
managementandworkers?Brieflydiscussthementalchangesneeded.Whichtypeof
change(physicalormental)doyouthinkwouldbethemostdifficulttoachieve?Why?
(Thefollowingarticleishelpfulinansweringthepreviousquestionandseveralofthe
otherquestionsabove.Goodson,R.E.2002.Readaplantfast.HarvardBusiness
Review(May):105113.(Howtherapidplantassessment(RPA)processcantellyouifa
factoryistrulyleaninaslittleas30minutes.Theprocessincludestwotools:TheRPA
ratingsheetincludes11categoriesforassessingleanness,andtheRPAquestionnaire
includes20yesornoquestions).(Summary).
43.RelatetheJIT,TOCandABMconceptsdiscussedinthischaptertothetwotypesof
capitalismdiscussedinChapter1.
PROBLEMS
PROBLEM81
Matchthefollowingstatisticaltoolswiththeappropriatedescriptions.
Statisticaltools:
1.Paretodiagram.
2.Fishbonediagram.
3.Histogram.
4.Linegraph.
5.Controlchart.
6.Scatterdiagram.
Descriptions:
A.Agraphicaldisplayshowingtrends.
B.Abarchartshowinghowthefrequencyofaproblemmeasurementisdistributedover
time.
C.Agraphusedtomeasurevariability.
D.Abarchartshowingthefrequencyofdifferenttypesofproblems.
E.Agraphicaltechniqueusedtoidentifycauseandeffectrelationships.
F.Anillustrationshowingthecausesofaparticulartypeofproblem.
PROBLEM82
Matchthetraditionalpushsystem(A)andJITpullsystem(B)withthefollowing
characteristics.
1.Maintaininglargeinventoriesofworkinprocessandfinishedgoods.
2.Vendorsdelivermaterialstotheareaintheplantwheretheywillbeplacedinto
production.
3.Greateremphasisoninterdependenciesbetweenproductionareas.
4.Greateremphasisonindividualperformance.
5.Largewellstockedwarehouse.
6.Tendtoemphasizedepartmentalidlecapacityvariances.
7.Emphasisonqualityatthesource.
8.Emphasisonproducingproductsasneededbythenextoperationorcustomer.
9.Emphasisonmaximizingtheoutputofeachworker.
10.Emphasisonvisualmeasurementstoauthorizeproductionandmonitorperformance
PROBLEM83
Matchthemanufacturingtraditionalsystem(A)andJITsystem(B)withtheconcepts
andcharacteristicsbelow.
1.Tendtoemphasizespecializedworkersratherthancrosstrainedworkers.
2.Smallnumberofsuppliers.
3.Littleornoinspectionofincomingrawmaterials.
4.Purchaselargequantitiesofrawmaterialstoreceivequantitydiscounts.
5.Manysmalldeliveriesfromsuppliers.
6.Arrangeequipmentintheproductionsequenceratherthanbyfunctionalarea.
7.Usetopdownmanagementwithmanysupervisors.
8.Emphasizefailsafedevicestoeliminatedefectsandspoilage.
9.Emphasizelargeproductionbatchsizestominimizemachinesetupcostperunit.
10.Tendtodecentralizesupportservices.
PROBLEM84
Usingthelistbelow,identifythecostgeneratingactivitiesthatyoubelievewouldbe
reducedwhenacompanychangesfromatraditionalmanufacturingsystemtoaJIT
system.Explainhoworwhyeachoftheactivitiesyouchoosewoulddecrease.
ReceivingActivities:
Unpackingincomingshipments.
Countingandinspecting.
Thepaperworkinvolved,e.g,fillingoutthereceivingreport.
MovingandHandlingActivities:
Movingmaterialsfromreceivingtowarehouse.
Movingmaterialsfromwarehousetoproductionareas.
Movingmaterialsbetweenproducingdepartments.
Movingmaterialsfromfinishingtowarehouse.
StorageActivitiesandCosts:
Pickersandothermaterialshandlers.
Depreciation.
Utilities.
Insurance.
Supervision.
PROBLEM85
MatchJIT(J)andTOC(T)withthefollowingconceptsorcharacteristics.
1.Moreapplicabletoaprocesscostenvironment.
2.Moreapplicabletoajobordercostenvironment.
3.Allowsforsomeinventorybuffers.
4.Emphasisonamanualinventorycontrolsystem.
5.Usesacomputerschedulingalgorithm.
6.Usesthroughputaccounting.
7.Usesmanufacturingcells.
8.Definesinventorycostsintermsofdirectmaterialsonly.
9.WasdevelopedinJapan.
10.WasdevelopedbyEliGoldratt
PROBLEM86
AssumethattheARTPROCompanyproducesaproductwithbudgetedmanufacturing
costsasindicatedbelow.
DirectMaterial $40
DirectLabor 5
VariableOverhead 15
FixedOverhead($200,000/10,000) 20
Total $80
Therearenobeginninginventoriesandtheactualcostsofproductionareequalto
budgetedcosts.Duringtheperiod,theARTPROCompany:
1.Purchased$402,000worthofdirectmaterials.
2.Incurred$400,000inconversioncostsincluding$50,000directlabor,$150,000
variableoverheadand$200,000fixedoverhead.
3.Determinedthattheendinginventoryincluded300finishedunits,200equivalent
unitsinprocessand$2,000worthofunuseddirectmaterial.
Required:
PartI.AssumethattheARTPROCompanyusesabackflushsystembasedonfull
absorptioncosting.Thecompanychargesallmanufacturingcoststocostofgoodssold
asincurred.Attheendoftheperiodabackflushentryismadetochargeanappropriate
amountofcosttotherawandinprocess(RIP),conversioncostsandfinishedgoods
accounts.TheRIPaccountisusedonlyformaterials.RecordthefollowingusingT
accountsorjournalentries:
1.Thematerialpurchasesduringtheperiod.
2.Theconversioncostsincurredduringtheperiod.
3.Thebackflushentryneededattheendoftheperiod.
PartII.RecordthesameentriesasinPartIexceptassumethecompanyusesabackflush
systembasedondirectcostin
PartIII.RecordthesameentriesasinPartsIandIIexceptassumethecompanyusesa
backflushsystembasedonthroughputcosting.
PartIV.AssumethattheARTPROCompanysold9,500unitsduringtheperiodat$100
perunitandthatsellingandadministrativeexpensesare$50,000($30,000fixed,20,000
variable).Calculateoperatingincomeforeachofthethreecostsystemsaboveand
explainthedifference.
PROBLEM87
1.Whichofthefollowingstatementsistrue?BothABCandJIT
a.placeemphasisonsimplification.
b.providemoreaccurateproductcoststhantraditionalsystems.
c.emphasizequalityimprovements.
d.alloftheabove.
e.noneoftheabove.
2.Whichofthefollowingconceptsortechniquesis(are)consistentwiththeJIT
philosophy?
a.Usingstatisticalcontrolchartsattheprocesslevel.
b.Usingateamapproachtoperformancemeasurements.
c.Usingoverheadvarianceanalysisattheprocesslevel.
d.aandb.
e.aandc.
3.WhichoftheactionsstatedbelowisnotconsistentwithJITpurchasing?
a.Reducedinspectionofincomingmaterials.
b.Morefrequentdeliveriesfromvendors.
c.Longtermagreementswithvendors.
d.Vendorcertificationandeducationonqualityrequirements.
e.Increasednumberofvendorstoobtaincompetitiveprices.
4.AJITproductionsystemwouldnotincludeanemphasison
a.maximizingthequantityofoutputateachstageoftheproductionprocess.
b.producingproductsasneededbythenextstageoftheproductionprocess.
c.decentralizationofsupportservices.
d.aandb.
e.aandc.
5.InthelanguageofJITwhichtwoofthefollowingtermsrefertofindingand
correctingdefectsastheyoccur?
a.kaizenandjidoka.
b.autonomationandkanban.
c.kaizenandkanban.
d.Kanbanandjidoka.
e.jidokaandautonomation.
6.Departmentaloverheadratesarelikelytobe
a.moreaccurateinajustintimeproductionsystemthaninatraditionalproduction
system.
b.moreaccurateinatraditionalproductionsystemthaninaJITsystem.
c.equallyaccurateorinaccurateinbothsystems.
d.usedinatraditionalsystembutnotinaJITsystem.
e.Noneoftheabove.
7.Thevaluechainconceptreferstothelinkedsetofvalueaddingactivitiesperformed
a.withinanorganization.
b.withinanorganization,plusthecapitaladdedbystockholders.
c.fromsuppliersthroughanorganization'sproductionactivities.
d.fromsuppliersthroughanorganization'sdistributionactivities.
e.fromsuppliersthroughanorganization'scustomerserviceactivities.
8.Rearrangingafactoryfromatraditionallayouttoacellularlayouttendsto
a.reducetheneedforinventorybuffers.
b.reducethenumberofmachineoperatorsneeded.
c.convertsomeindirectproductcoststodirectproductcosts.
d.aandb.
e.alloftheabove.
9.Activitybasedmanagement(ABM)includessixelements:1.Defineactivities,2.
identifydriversandactivitymeasures,3.assigncoststoactivities,4.assigncoststocost
objectssuchasproducts,5.developperformancemeasurementsand6.manage
processesandwork.Whichoftheseelementsarepartof"activitymanagement"
accordingtoH.ThomasJohnsonsABMframework?
a.1through6.
b.1through4.
c.allbut4.
d.allbut3and4.
e.only5and6.
10.IntheTheoryofConstraints,throughputis
a.Saleslessdirectmaterialscosts.
b.Saleslessbottleneckcosts.
c.Saleslessvariablemanufacturingcosts.
d.Saleslessoperatingexpenses.
e.Saleslesscontributionmargin.
11.Whichoftheaccountingsystemsbelowtendstocausethegreatestbehavioralbias
towardscreatingexcessresourceswithinacompany?
a.throughputcosting.
b.absorptioncosting.
c.directcosting.
d.jobordercosting.
e.processcosting.
12.Whichofthefollowingproductioncontrolsystemsismoreappropriateinan
environmentwherejobsareproducedtocustomersspecifications?
a.Activitybasedcostingsystems.
b.Throughputcostingsystems.
c.JITkanbansystems.
d.OPTschedulingsystems.
e.Pushsystems
PROBLEM88
TheSlatCompanyproducesSlatwall.Thebudgetedmanufacturingcostsforthe
productareindicatedbelow.
DirectMaterial $8
DirectLabor 2
VariableOverhead 4
FixedOverhead($120,000/20,000) 6
Total $20
Therearenobeginninginventoriesandtheactualcostsofproductionareequalto
budgetedcosts.
Duringtheperiod,theCompany:
Purchased$160,000worthofdirectmaterials.
Produced20,000unitsincurring$240,000inconversioncostsincluding$40,000direct
labor,$80,000variableoverheadand$120,000fixedoverhead.
Sold18,000unitsofslatwallfor$40perunitreceivingtotalrevenueof$720,000.
Incurredsellingandadministrativeexpensesof$30,000variableand$50,000fixed.
Determinedthattheendinginventoryincluded2,000finishedunits,zeroequivalent
unitsinprocessandzerounuseddirectmaterials.
1.SlatCompanysbeforetaxnetincomebasedonabsorptioncostingis
a.$240,000b.$252,000c.$256,000d.$268,000e.$280,000
2.SlatCompanysbeforetaxnetincomebasedondirectcostingis
a.$240,000b.$252,000c.$256,000d.$268,000e.$280,000
3.SlatCompanysbeforetaxnetincomebasedonthroughputcostingis
a.$240,000b.$252,000c.$256,000d.$268,000e.$280,000
ProblemSolutions
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