CHAPTER 10 DISCUSSION QUESTIONS 10-1 Q10-1.The purpose of a JIT system is to minimize the levels of raw materials and work in process inventory investments, while improv- ing the overall manufacturing process. The intent is to pull inventory through the system only as it is required. Q10-2.JIT seeks to eliminate all forms of waste, including production losses such as defects. Successful reduction of these problems con- tributes to product quality, and, so, is a part of TQM. Q10-3.To avoid inventory buildup, the entire JIT sys- tem shuts down whenever defects are found; so to achieve a good rate of flow, the number of defects must be small. Q10-4.Theoretically, in an ideal JIT system the EOQ is one; each time more output is needed, one more part or unit is produced. Q10-5.Although a zero inventory level is unattain- able, JIT stimulates improvement in the envi- ronmental conditions that cause inventory buildup, such as long setup times, high setup costs, poor quality, and poorly balanced work loads. Q10-6.The relationship between velocity and WIP levels is an inverse relationship; doubling the velocity means halving the WIP level, pro- vided the output rate is held constant. This is similar, but not identical, to the relationship expressed in the familiar inventory turnover ratio used in financial statement analysis. Q10-7.The strategic advantage of improving velocity throughout the company, from product research and development to shipping, is that the company can then respond faster to any changing customer need or to an opportunity for a new or altered product. Q10-8.Reducing the level of WIP also reduces the maximum number of defectives, if the defects are of a kind that will be discovered at the next work station after the units are held waiting between stations. If 100 units are waiting between stations, up to 100 defectives might be produced before the problem would be discovered; if 10 units are held waiting, no more than 10 defectives could be produced before the problem would be discovered. Q10-9.A blanket purchase order is an agreement between buyer and seller stating the total quantity expected to be needed over a period of three or six months. Q10-10.In many JIT work cells, these distinctions— between direct and indirect labor and between producing departments and some service functions—do not exist, because the same workers (the team assigned to the cell) perform all these tasks. Q10-11.In backflush costing, the work in process inventory account is not adjusted throughout the period to reflect all the costs of units in process; there are no detailed subsidiary records maintained for work in process; and a single account may be used for both raw materials and work in process. Q10-12.In backflush costing, the materials and work in process inventory accounts might be com- bined into a single account, because materi- als might be put immediately into production when they are received. Q10-13.Postdeduction is the subtraction from the work in process account of some or all ele- ments of the cost of completed work, after the work is completed. Q10-14.The periodic inventory method used by many merchandising companies is analogous to backflush costing as used by manufacturers. Q10-15.If a backflush costing system expenses all conversion costs to the cost of goods sold account, the correct amount of conversion cost is included in inventory accounts by making an end-of-period adjustment of the inventory accounts’ balances. The offsetting entry is an adjustment of the cost of goods sold account. The correct amount of conver- sion cost to be included in each inventory account is estimated when inventories are physically counted.
Transcript
CHAPTER 10
DISCUSSION QUESTIONS
10-1
Q10-1.The purpose of a JIT system is to minimizethe levels of raw materials and work inprocess inventory investments, while improv-ing the overall manufacturing process. Theintent is to pull inventory through the systemonly as it is required.
Q10-2.JIT seeks to eliminate all forms of waste,including production losses such as defects.Successful reduction of these problems con-tributes to product quality, and, so, is a part ofTQM.
Q10-3.To avoid inventory buildup, the entire JIT sys-tem shuts down whenever defects are found;so to achieve a good rate of flow, the numberof defects must be small.
Q10-4.Theoretically, in an ideal JIT system the EOQis one; each time more output is needed, onemore part or unit is produced.
Q10-5.Although a zero inventory level is unattain-able, JIT stimulates improvement in the envi-ronmental conditions that cause inventorybuildup, such as long setup times, high setupcosts, poor quality, and poorly balanced workloads.
Q10-6.The relationship between velocity and WIPlevels is an inverse relationship; doubling thevelocity means halving the WIP level, pro-vided the output rate is held constant. This issimilar, but not identical, to the relationshipexpressed in the familiar inventory turnoverratio used in financial statement analysis.
Q10-7.The strategic advantage of improving velocitythroughout the company, from productresearch and development to shipping, is thatthe company can then respond faster to anychanging customer need or to an opportunityfor a new or altered product.
Q10-8.Reducing the level of WIP also reduces themaximum number of defectives, if thedefects are of a kind that will be discoveredat the next work station after the units areheld waiting between stations. If 100 unitsare waiting between stations, up to 100defectives might be produced before the
problem would be discovered; if 10 units areheld waiting, no more than 10 defectivescould be produced before the problem wouldbe discovered.
Q10-9.A blanket purchase order is an agreementbetween buyer and seller stating the totalquantity expected to be needed over a periodof three or six months.
Q10-10.In many JIT work cells, these distinctions—between direct and indirect labor andbetween producing departments and someservice functions—do not exist, because thesame workers (the team assigned to the cell)perform all these tasks.
Q10-11.In backflush costing, the work in processinventory account is not adjusted throughoutthe period to reflect all the costs of units inprocess; there are no detailed subsidiaryrecords maintained for work in process; and asingle account may be used for both rawmaterials and work in process.
Q10-12.In backflush costing, the materials and workin process inventory accounts might be com-bined into a single account, because materi-als might be put immediately into productionwhen they are received.
Q10-13.Postdeduction is the subtraction from thework in process account of some or all ele-ments of the cost of completed work, after thework is completed.
Q10-14.The periodic inventory method used by manymerchandising companies is analogous tobackflush costing as used by manufacturers.
Q10-15.If a backflush costing system expenses allconversion costs to the cost of goods soldaccount, the correct amount of conversioncost is included in inventory accounts bymaking an end-of-period adjustment of theinventory accounts’ balances. The offsettingentry is an adjustment of the cost of goodssold account. The correct amount of conver-sion cost to be included in each inventoryaccount is estimated when inventories arephysically counted.
10-2 Chapter 10
EXERCISES
E10-1 The expected annual savings are $40,500, consisting of $18,000 carrying costssavings and $22,500 savings in the cost of defects, calculated as follows:
Carrying cost savings = 25% × reduction in average variable cost of WIP= 25% × 30% × past average variable cost of WIP= .25 × .3 × (10 × 300 × $80)= $18,000
Savings in cost of defects= $25 × reduction in number of defective units
(reduction innumber of (number of out-of-
= $25 × defective units × control conditionsproduced per not discoveredundiscovered immediately)out-of-control
E10-2 The average lead time will be 26 days, calculated as follows:
Reduction of vendor lead time = 1/6 × 18 days = 3 days
Because the rate of output will be unchanged, a reduction of WIP to one-third ofits present level will triple the velocity. The average order will then remain in WIPonly one-third as long, saving two-thirds of time presently being spent in WIP:
Reduction of time in WIP = 2/3 of present time in WIP= 2/3 × 12 days= 8 days
New lead time = present lead time – reductions = 37 days – (3 days + 8 days)= 26 days
This approach can be used even if the other components of total lead time,such as the two days in final inspection, are not stated. If all the components oftotal lead time are known, as in this exercise, then the new lead time can be cal-culated by adding all its components:
E10-3 The expected annual savings is $2,200,000, calculated as follows:
Doubling the velocity of all tasks, from receipt of order to shipment and fromordering materials to issuing materials to production, will reduce WIP and mate-rials inventories by half, therefore:
This change will also reduce customer lead time from eight weeks to four weeks.Because customers are willing to wait up to five weeks for shipment, all ship-ments can then be made-to-order. There will no longer be a need for finishedgoods inventory. Once the existing finished goods inventory is liquidated bysales or scrapping, the annual savings from not carrying finished goods will be:
(c) units started = 4,500 + 20 – 24 = 4,496 units;
= $66.726 per unit
(2) $667, because 20 × .50 × $66.683 = $666.83.$667, because 20 × .50 × $66.667 = $666.67.$667, because 20 × .50 × $66.726 = $667.26.
$ ,,
300 0004 496
$ ,,
300 0004 500
$ ,,
300 7404 510
Chapter 10 10-3
E10-4 (Concluded)(3) Considering that the results of requirement (2) were the same (to the nearest dol-
lar) for all three methods, then method (1) (b) would be recommended becauseof its ease and simplicity. Method (1) (c) is a close second choice, also becauseof ease and simplicity.The details of method (1) (a) may not be justifiable in thesecircumstances.
(4) Processing speed is very fast, with the result that work in process inventory lev-els are kept to a very low level—both in absolute terms and in relation to totalproduction activity for a month.
Raw and in Process...................................................... 456,000Accounts Payable................................................ 456,000
A summary entry for all receipts of raw materials during the period. Whendirect materials are used, no entry is needed, because the materialsremain in RIP.
Finished Goods ............................................................ 455,000Raw and in Process............................................. 455,000
To backflush material cost from RIP to finished goods. This is a postde-duction. The calculation is:
Material in May 1 RIP balance ................... $ 19,000Material received during May .................... 456,000
$475,000Material in May 31 RIP, per physical count 20,000Amount to be backflushed ........................ $455,000
Cost of Goods Sold...................................................... 461,000Finished Goods ................................................... 461,000
To backflush material cost from finished goods to cost of goods sold.Thisis a postdeduction. The calculation is:
Material in May 1 finished goods ............. $ 16,000Material backflushed to finished goods... 455,000
$471,000Material in May 31 finished goods, perphysical count ............................................ 10,000
Amount to be backflushed ................................. $461,000
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E10-5 (Concluded)Cost of Goods Sold...................................................... 1,700
Raw and in Process............................................. 200Finished Goods ................................................... 1,500
Conversion cost in RIP is adjusted from the $2,300 of May 1 to the $2,100estimate at May 31. Conversion cost in finished goods is adjusted from the$6,500 of May 1 to the $5,000 estimate at May 31. The offsetting entry ismade to the cost of goods sold account, where all conversion costs werecharged during May.
E10-6 The journal entries involving RIP and/or finished goods are:
Raw and in Process...................................................... 222,000Accounts Payable................................................ 222,000
A summary entry for all receipts of raw materials during the period. Whendirect materials are used, no entry is needed, because the materialsremain in RIP.
Finished Goods ............................................................ 221,500Raw and in Process............................................. 221,500
To backflush material cost from RIP to finished goods. This is a postde-duction. The calculation is:
Material in June 1 RIP balance ................. $ 10,500Material received during June................... 222,000
$232,500Material in June 30 RIP, per physical count 11,000Amount to be backflushed ....................... $221,500
Cost of Goods Sold...................................................... 223,500Finished Goods ................................................... 223,500
To backflush material cost from finished goods to cost of goods sold.Thisis a postdeduction. The calculation is:
Material in June 1 finished goods ............ $ 8,000Material backflushed from RIP.................. 221,500
$229,500Material in June 30 finished goods, per
physical count ................................... 6,000Amount to be backflushed ........................ $223,500
Chapter 10 10-5
E10-6 (Concluded)Raw and in Process...................................................... 600
Finished Goods ................................................... 500Cost of Goods Sold............................................. 100
Conversion cost in RIP is adjusted from the $1,200 of June 1 to the $1,800estimate at June 30. Conversion cost in finished goods is adjusted fromthe $4,000 at June 1 to the $3,500 estimate at June 30.The offsetting entryis made to the cost of goods sold account, where all conversion costswere charged during June.
E10-7 Journal entries involving the RIP account are:Raw and in Process...................................................... 200,000
A summary entry for all receipts of raw materials during the period. Whendirect materials are used, no entry is needed, because they remain a partof RIP.
Finished Goods ............................................................ 199,800Raw and in Process............................................. 199,800
To backflush material cost from RIP to Finished Goods. This is a postde-duction. The calculation is:
Material in March 1 RIP balance ............... $ 9,000Material received during March................. 200,000
$209,000Material in March 31 RIP, per physical count 9,200Amount to be backflushed ........................ $199,800
Raw and in Process...................................................... 300Cost of Goods Sold............................................. 300
Conversion cost in RIP is adjusted from the $1,000 of March 1 to the $1,300estimate at March 31. The offsetting entry is made to the cost of goodssold account, where all conversion costs were charged during March.
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Chapter 10 10-7
E10-8 Journal entries involving the RIP accounts are:Raw and in Process...................................................... 367,000
A summary entry for all receipts of raw materials during the period. Whendirect materials are used, no entry is needed, because they remain a partof RIP.
Finished Goods ............................................................ 365,400Raw and in Process............................................. 365,400
To backflush material cost from RIP to Finished Goods. This is a postde-duction. The calculation is:
Material in April 1 RIP balance.................. $ 29,600Material received during April................... 367,000
$396,600Material in April 30 RIP, per physical count 31,200Amount to be backflushed ........................ $365,400
Raw and in Process...................................................... 400Cost of Goods Sold............................................. 400
Conversion cost in RIP is adjusted from the $1,400 of April 1 to the $1,800estimate at April 30.The offsetting entry is made to the cost of goods soldaccount, where all conversion costs were charged during April.
E10-9 Journal entries involving the RIP accounts are:Raw and in Process .................................................... 246,000
A summary entry for all receipts of raw materials during the period. Whendirect materials are used, no entry is needed, because they remain a partof RIP.
Cost of Goods Sold...................................................... 247,000Raw and in Process............................................. 247,000
To backflush material cost from RIP to Cost of Goods Sold.This is a postd-eduction. The calculation is:
Material in May 1 RIP balance ................... $ 11,000Material received during May .................... 246,000
$257,000Material in May 31 RIP, per physical count 10,000Amount to be backflushed ........................ $247,000
E10-9 (Concluded)Raw and in Process...................................................... 800
Cost of Goods Sold............................................. 800
Conversion cost in RIP is adjusted from the $1,300 of May 1 to the $2,100estimate at May 31. The offsetting entry is made to the cost of goods soldaccount, where all conversion costs were charged during May.
E10-10
(1) The most recent purchase involved a quantity greater than the total materials inending inventories, and that purchase gives a cost of materials of$420,000/1,400, or $300 per unit of output; therefore,
Materials cost of finished goods ending inventory= 50 units × $300 per unit = $15,000
(2) The conversion cost per unit is calculated by dividing the total conversion costby (a) the number of units started, (b) the number completed, or (c) the numbercompleted plus the number of partially converted units in the RIP ending inven-tory (not an equivalent units calculation):
(a) $290,160 ÷ 3,000 = $96.72 conversion cost per unit(b) $290,160 ÷ 3,100 = $93.60 conversion cost per unit(c) $290,160 ÷ 3,120 = $93.00 conversion cost per unit
(3) The three possible amounts for the conversion cost of the 50 units in finishedgoods ending inventory are:
50 units @ $96.72 = $4,836 of conversion cost50 units @ $93.60 = $4,680 of conversion cost50 units @ $93.00 = $4,650 of conversion cost
(1) A $300 materials cost per unit was calculated in requirement (1) of the previousexercise; therefore,
Materials cost of RIP ending inventory = 220 units × $300 per unit = $66,000
(2) The three possible amounts for the conversion cost of the RIP ending inventoryof 20 units, 50% converted, are:
20 units × 50% × $96.72 = $967.20 of conversion cost20 units × 50% × $93.60 = $936 of conversion cost20 units × 50% × $93.00 = $930 of conversion cost
It seems inconsistent to assign 50% conversion costs to RIP when the units inRIP were counted as whole physical units in the denominator of the conversioncost per unit calculation in requirement 2(c) of E10-10, and when they were notcounted at all in the denominator of the calculation in requirement 2(b) of E10-10. But the total dollar difference assigned to RIP is immaterial. Whatever theamount of conversion costs assigned to RIP and finished goods, the remainderof total conversion costs simply remains in cost of goods sold.
(2) Likely benefits that are not assessable from the information given include thefollowing:(a) Faster cycle time resulting from the higher velocity of WIP. (Because the rate
of final output will not change, velocity will change inversely with the changein WIP levels.) The faster cycle time will improve the speed with which orderscan be filled, thus increasing customer satisfaction and perhaps increasingperceived product value so that prices can be raised (or price cuts delayedor avoided).
(b) If, as a result of the shorter cycle time, total lead time becomes less than thetime customers are willing to wait for an order, then the company would nolonger need to maintain a finished goods inventory. This possibility wouldresult in additional savings in floor space and other inventory carrying costs.
(The value of the floor space freed up by eliminating 40% of WIP storage is notan additional benefit; inventory carrying costs include storage costs, so thevalue of the floor space is included in the carrying cost savings calculated inrequirement (1).)
(3) Costs and other negatives to be compared with the savings include:(a) The increased likelihood of shutdowns due to work locations being starved
for WIP; lower WIP levels at each station represent lower safety stocks, sostockouts are more likely at all locations.
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Chapter 10 10-11
(b) The cost of starting a larger number of batches or lots into production,which includes the cost of processing more work orders, production orders,and material requisitions. (To reduce average WIP size, either smallerbatches must be started at shorter intervals, or protracted stockouts mustbe allowed to occur; otherwise, the average size of WIP will not drop.)
(c) The cost of handling more loads of materials. If lot sizes are small enoughto require only one load per lot both before and after the change, then alarger number of lots will result in a larger total number of loads.
(d) The cost of performing a larger number of setups to permit running a largernumber of batches or lots of smaller size. Ideally, as part of the JIT imple-mentation, setup cost will be driven down to eliminate this problem.
P10-2(1) Protech could achieve an average lead time on these orders of 42 days, calcu-
lated as follows:
Reduction of time in WIP = 3/4 of present time in WIP= 3/4 × (360 days ÷ 10)= 3/4 × 36 days= 27 days
Reduction of vendor lead time = 1/3 × 27 days = 9 days
New lead time = present lead time – reductions= 78 days – (27 days + 9 days)= 42 days
Note: It is not stated that Protech defines WIP and WIP turnover in a way thatexcludes the two days spent in receiving and the three days spent in finalinspection.To check that the average cycle time of 360 days/10, or 36 days, doesexclude those steps (so that there is no double-counting), note that a cycle timeof 36 days, when added to the other intervals mentioned, gives the stated totallead time of 78 days: 6 + 27 + 2 + 36 + 3 + 4 = 78.
(2) The advantages of shorter lead time include:(a) The value of the floor space freed up by eliminating three-fourths of WIP
storage.(b) Improvement in the speed with which orders can be filled, which should
increase customer satisfaction and perhaps increase perceived productvalue so that prices can be raised (or price cuts delayed or avoided).
(c) If the new 42-day total lead time is less than the time customers are willingto wait for an order, then the company would no longer need to maintain afinished goods inventory. This possibility would result in additional savingsin floor space and other inventory carrying costs.
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P10-2 (Concluded)(3) Costs and other negatives to be compared with the savings include:
(a) The increased likelihood of shutdowns due to work locations being starvedfor WIP; lower WIP levels at each station represent lower safety stocks, sostockouts are more likely at all locations.
(b) The cost of starting a larger number of batches or lots into production,which includes the cost of processing more work orders, production orders,and material requisitions. (Reducing average WIP size generally requiresstarting smaller batches at shorter intervals.)
(c) The cost of handling more loads of materials. If lot sizes are small enoughto require only one load per lot both before and after the change, then alarger number of lots will result in a larger total number of loads.
(d) The cost of performing a larger number of setups to permit running a largernumber of batches, or lots, of smaller size. Ideally, as part of the JIT imple-mentation, setup cost will be driven down to eliminate this problem.
(e) The time and effort that may be required to induce vendors to reduce theirlead time by one-third.
P10-3(1) (a) Raw and in Process............................................. 850,000
A summary entry for all receipts of raw materials during the period.When direct materials are used, no entry is needed, because theyremain a part of RIP.
(b) Factory Overhead Control .................................. 13,000Supplies....................................................... 13,000Indirect materials are recorded as used.
(d) Cost of Goods Sold............................................. 60,000Factory Overhead Control .................................. 120,000Marketing Expenses Control .............................. 130,000 Administrative Expenses Control ...................... 90,000
Conversion costs in the inventory accounts are adjusted to the esti-mates made in the June 30 physical count. For RIP, the adjustment isfrom the $1,600 of June 1 to $1,900 on June 30; for Finished Goods, theadjustment is from the $180,000 of June 1 to $178,000 on June 30.Theoffsetting entry is made to the cost of goods sold account, where allconversion costs were charged during June.
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P10-3 (Concluded)(2) The three completed accounts are
Raw and in Process Finished Goods6/1 41,600 (h) 844,000 6/1 370,000 (i) 852,000(a) 850,000 (h) 844,000 (j) 2,000(j) 300 6/30 360,0006/30 47,900
Cost of Goods Sold6/1 -0-(d) 60,000(g) 897,000(i) 852,000(j) 1,7006/30 1,810,700
P10-4(1) (a) Raw and in Process............................................. 620,000
A summary entry for all receipts of raw materials during the period.As direct materials are used, no entry is needed, because theyremain a part of RIP.
(b) Factory Overhead Control .................................. 10,000Supplies....................................................... 10,000
(d) Cost of Goods Sold............................................. 50,000Factory Overhead Control .................................. 90,000Marketing Expenses Control .............................. 90,000Administrative Expenses Control ...................... 70,000
(f) Factory Overhead Control .................................. 33,000Cash............................................................. 26,000Accounts Payable....................................... 7,000
Chapter 10 10-15
P10-4 (Continued)
(g) Cost of Goods Sold............................................. 656,000Factory Overhead Control ......................... 656,000
Overhead is expensed to the cost of goods sold account.
(h) Finished Goods ................................................... 615,000Raw and in Process.................................... 615,000
To backflush material cost from RIP to Finished Goods. This is apost-deduction. The calculation is:
Material in May 1 RIP balance .......... $ 30,000Material received during May ........... 620,000
$650,000Material in May 31 RIP,
per physical count.................... 35,000Amount to be backflushed ............... $615,000
(i) Cost of Goods Sold............................................. 605,000Finished Goods .......................................... 605,000
To backflush material cost from Finished Goods to Cost of GoodsSold. The calculation is:
Material in May 1 Finished Goods ... $ 150,000Material cost transferred from RIP .. 615,000
$ 765,000
Material in May 31 Finished Goods,per physical count.................... 160,000
Amount to be backflushed ............... $ 605,000
(j) Raw and in Process............................................. 800Finished Goods ................................................... 4,000
Cost of Goods Sold.................................... 4,800
Conversion costs in the inventory accounts are adjusted to the esti-mates made in the May 31 physical count. For RIP, the adjustment isfrom the $1,300 of May 1 to $2,100 on May 31; for Finished Goods, theadjustment is from the $130,000 of May 1 to $134,000 on May 31. Theoffsetting entry is made to the cost of goods sold account, where allconversion costs were charged during May.
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P10-4 (Concluded)(2) The three completed accounts are
Raw and in Process Finished Goods5/1 31,300 (h) 615,000 5/1 280,000 (i) 605,000(a) 620,000 (h) 615,000(j) 800 (j) 4,0005/31 37,100 5/31 294,000
(1) Contribution margin of lost sales (20,000 units):Revenue ($10,800 ÷ 900 units) .................................... $ 12.00Variable costs:
Cost of sales ($4,050 ÷ 900) ............................... $ 4.50Marketing and administrative ($900 ÷ 900) ....... 1.00
Total variable cost ...................................... $ 5.50Unit contribution margin.............................................. $ 6.50Volume of lost sales..................................................... × 20,000
Total contribution margin of lost sales ............. $(130,000)Overtime premiums (overtime cost is less than the additional contribution margin of lost sales):
15,000 × $6.50 = $97,500 > $40,000.................... $ (40,000)Rental savings .............................................................. 60,000Rental income from owned warehouse
(12,000 × .75 × $1.50).......................................... 13,500Elimination of insurance and property taxes ............ 14,000
Opportunity cost of funds released from inventory investment:
Investment in inventory ...................................... $ 600,000
.20 120,000Interest before tax
Estimated before-tax dollar savings........................... $ 37,500
..
121 40−
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Chapter 10 10-17
P10-5 (Concluded)(2) Conditions that should exist in order for a company to install just-in-time inven-
tory successfully include the following:(a) Top management must be committed and provide the necessary leader-
ship support in order to ensure a company-wide, coordinated effort.(b) A detailed system for integrating the sequential operations of the manu-
facturing process needs to be developed and implemented. Raw materialsmust arrive when needed for each subassembly, so that the productionprocess functions smoothly.
(c) Accurate sales forecasts are needed for effective finished goods planningand production scheduling.
(d) Products should be designed to use standardized parts to reduce manu-facturing time and reduce costs.
(e) Reliable vendors who can deliver quality raw materials on time with mini-mum lead time must be obtained.
