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Advanced Manufacturing Technology, JIT, Target Costing, and Product Life-cycle Costing
Advanced Manufacturing Technology Management accounting should support the manufacturing goals of an organization. Therefore, it’s important for management accountants to understand the manufacturing systems, production management strategies, and advanced manufacturing technology (AMT) used in their organizations. Focus study: manufacturing systems and strategies and consider the implications for the design and use of management accounting systems (MAS).
Advanced Manufacturing Technology Excellence in manufacturing can provide a competitive weapon in highly competitive markets. In order to compete effectively, companies must be capable of manufacturing innovative products of high quality at a low cost and provide first-class customer service. World-class have responded and invested in AMT such as computer-aided design (CAD), computer-aided manufacturing (CAM), robotics, computer-aided engineering (CAE), computerised numerical control machines (CNC), enterprise resource planning (ERP), systems and flexible manufacturing systems (FMS), etc.
DRURY (1992) CAD – replaces the traditional draftsman or engineer’s table with computer terminal. CAM – consist of robotics, numerically controlled machines and computer numerically controlled machines. CNC – encompasses a broad range of programmable machine tools. FMS – combination of a computer numerically controlled machine and automated material-handling equipment. CIM – series of automated subsystems within the factory. JONSSON (2000) AMT helps alter the rules of competition in industries, in effect creating an environtment in which the firm has a competitive edge based on its use of AMTs. As result of AMT, there’s less downtime required to shift between families of products or component, which is turn can result in greater productivity.
Production Management Strategies The operations and production management literature suggests a number of production management strategies. These are: 1. Materials requirement and manufacturing resources planning systems 2. Optimized production technology (OPT) 3. Just-in-time (JIT) manufacturing systems.
Production Management Strategies An MRP systems determines: (a) the quantity and timing of finished goods demanded, (b) the requirements for raw materials components and (c) subassemblies prior to each stage of production To operate an MRP system the organization must have: (a) a master production schedule (b) a bills of material file (c) an inventory file (d) a master parts file
The Just-in-Time Approach The aims of JIT are to produce the required items, at the required quality and in the required quantities, at the precise time they are required.
The Just-in-Time Approach JIT seeks to achieve the following primary goal: 1. Elimination of non-value added activities 2. Zero inventory 3. Zero defects 4. Batch sizes of one 5. Zero breakdowns 6. A 100 per cent on-time delivery services JIT production is an evolutionary process, which aims to produce the required items, at the required quality and in the required quantities, at the precise time they are required.
JIT vs Traditional Manufacturing JIT Manufacturing Throughput time Processing time + inspection time + conveyance + waiting Processing time only Optimum lot size More than one One Set-up time and costs Long set-up time and therefore high costs Zero set-up time and thereby no set-up costs The need for holding inventory A back-up exists to keep production flowing Zero inventory Quality management Provision for waste, scrap, rework, etc. Zero-defects, quality environment Number of suppliers and relationship Large number of suppliers and short-run relationships Fewer suppliers and longterm relationships Factory layout More space is needed Reduce the need for space Management accounting systems Greater emphasis on costing Greater emphasis on costmanagement Performance evaluation systems Greater emphasis on financial indicators Greater emphasis on nonfinancial indicators
The Implications of Productions Managements Strategies for The Design and Use of Cost/Management Accounting Systems 1. 2. 3. • • • MRP and cost accounting systems. MRP provides the basis for production scheduling and raw materials purchasing. (Drury, 1992) OPT and cost accounting systems. Overhead should be allocated to products based on throughput time. Management can signal to operating managers that reducing throughput time can reduce product costs. (Drury, 1992) JIT and the cost accounting system. Installing a JIT system affects: The traceability of costs; Enhances product-costing accuracy; Diminishes the need for allocation of service-center costs; Changes the behavior and relative importance of direct labor costs; Impacts job-order and process costing systems (Hansen and Mowen, 1997)
The Implications of Productions Managements Strategies for The Design and Use of Cost/Management Accounting Systems 4. 5. 6. In a JIT purchasing environment, the warehouse is no longer needed and thus materials handling costs can be reduced. JIT manufacturing, by reducing indirect costs and increasing direct costs, diminishes the need for detailed allocation of costs to various activities. In JIT environment, many services are decentralized.
Relation Between JIT Production and Automation Implementation of JIT production system can help managers eliminate waste by compressing time and space and thereby firms are capable of reducing costs of production significantly. Blackburn (1988) suggests that a successful JIT implementation gives firms the kind of flexible, balanced, yet simple production process that makes automation easier to implement.
Relation Between JIT Production and Activity-Based Costing Some argues that JIT is a substitute for short-run cost accounting data and that the physicals are more important. (Mc. Nair, Mosconi and Morris, 1989; Cooper and Kaplan, 1991; Cobb, 1993) Following these arguments one would expect that firms with a JIT production system are more likely to place emphasis on an ABC system (Hoque, 2000)
Relation Between Activity-Based Costing and Automation The changed manufacturing environment requires a firm to adapt costing systems to its particular circumstances (Gosse, 1993; Johnson, 1990; Cooper, 1996; Brinker, 1995) With automation the product is released faster, the manufacturing process is faster and the whole life of the product is shorter. Hansen and Mowen (1997) suggest that ABC system provides more than just more accurate product-cost information; it also provides information about the cost and performance of activities and resources.
Target Costing Target costing is based on three premises: Is a cost estimation approach which is widely used by Japanese companies. It consists of setting a desired market price for a new product. It’s also known as a cost reduction tool. The target costs are compared with current estimates, which are almost always higher. 1. Orientating products to customer affordability, 2. Treating product cost as an independent variable during the definition of a product’s requirements, 3. And proactively working to achieve target cost during product and process development (K. Crow, DRM Associates, 1999)
Product Life-cycling Costing The process of tracking and determining the costs of a product through its entire life-cycle, from entry to obsolescence, is termed product-life costing.
Traditional Cost Management Approach Product Requirements Product Design Process Design and Cost Estimates Make/Buy Analysis Supplier Cost Estimates Cost too high? Production Periodic Cost Reduction Source: Ken Crow, DRM Association (1999)
Target Cost Concept Product Requirements and Market Analysis Target Priceless Profit Balance Target Cost and Requirements Make/Buy Analysis Supplier Target Costing Explore Product and Process Design Alternatives and Design Products and Process Cost Projections DRMA and Value Analysis Production Continuous Cost Reduction Source: Ken Crow, DRM Association (1999)
Summary The adoption of JIT production systems gives managers a much better understanding of a product’s full costs, leading to reductions in material losses and the potential for greater improvement in overall factory productivity.