Prepared by:

Suneet

JUST-IN-TIME (JIT) &BACKFLUSH ACCOUNTING

JUST-IN-TIME (JIT)

BACKGROUND

It was first developed and perfected within the Toyota manufacturing plants by Taiichi Ohno as a means of meeting consumer demands with minimum delays.

Taiichi Ohno is frequently referred to as the father of JIT.

DEFINITION

`Just-in-time' is a management philosophy and not a technique.

It originally referred to the production of goods to meet customer demand exactly, in time, quality and quantity, whether the `customer' is the final purchaser of the product or another process further along the production line.

WASTE REDUCTION

Reduce waste in operations from

overproduction

waiting time

transportation

inventory waste

processing

motion/movement

product defects

BENEFITS OF JIT

Reduction in inventories Improved quality Shorter lead times Lower production costs Increased productivity Increased machine utilization Greater flexibility

JIT AND DEMAND-PULL

Customer

Supplier

Supplier

Supplier

Supplier

Final Assembly

Fabric

Fabric

Fabric

Fabric Subass

Subass

Call (Kanban) & Pull

Call (Kanban) & PullCall (Kanban) & Pull

KANBAN ? developed at Toyota 1950s to manage line material flows. Kanban ( Kan=card, Ban= signal ) simple movement system

“cards” to signal & communicate reorder information boxes/containers to take “lots” of parts from one work

station to another (client-server). Server only delivers components to client work station as

& when needed (called/pulled). minimise storage in the production area. Workstations only produce/deliver components when

called (they receive card + empty container). The work-station produces enough to fill the container Kanban = an authorization to produce more inventory We thus limit the amount of inventory in process

C

SdL )(1 +=

k capacity of container Expected demand during lead time + safety stock=

k = No. of kanbans in card set d = Average No. of units demanded over the periodL = lead time to replenish order (same units of time as demand)S = Safety stock as % of demand during lead timeC = Container size

• Each container = minimum replenishment lot size.

• Calculate lead time required to produce a "container"

HOW MANY KANBAN ?

BACK FLUSH ACCOUNTING

DEFINITION

CIMA defines it as “cost accounting system, which focuses on the output of an organization and then works back to attribute costs to stock and cost of sales”.

Traditional costing systems use sequential tracking, i.e., costing methods are synchronized with physical sequences of purchases and production.

Back flush costing is the reversal of traditional costing, where traditional costing flow from accounting of inputs to outputs but back flush starts accounting only from outputs and then works back to apply manufacturing costs to units sold and to inventories. In this, cost of inventories are at the time of sale only. Costs are then flushed back through the accounting system. It is attractive for low inventory companies which results from JIT.

It eliminates WIP account. There are reason for justification, they are as follows.

i) To remove incentive for managers to produce for inventory.

ii) To increase the focus of the managers on plant-wide goal rather than on individual sub-unit goals.

PROCEDURES

The procedures in back flush costing may vary greatly from company to company, as there are various forms of this costing that can be used.

Back flush costing may eliminate work-in-process accounts and instead flush all of the costs back at the end of the production run being costed.

Back flush costing may also record raw materials at a standard cost

when they are purchased, while recording conversion costs at their actual costs.

Back flush costing is also used by eliminating the finished goods

inventory account and instead recognize the finished goods at the point of sale.

WHEN APPROPRIATE?

Back flush costing is most appropriate when used to complement a just-in-time inventory management system or to compliment an activity-based costing system.

This is due to the fact that back flush costing simplifies the costing process in these situations. However, users of this type of system must keep in mind that it does not always conform to generally accepted accounting principles (GAAP) and that this type of system can be criticized because it does not leave a sequential audit trail.

In spite of these concerns, back flush costing may still be the most appropriate system for certain just-in-time inventory management situations. This is especially true if it is used in conjunction with activity-based costing

ADVANTAGES

Less entries have to be passed so it saves time. (major benefit)

Less costly as less documentation have to be maintained.

It uses JIT environment which saves holding cost of inventory

DISADVANTAGES One of the main disadvantages of the system is that it only

works under some quite strict requirements. If these are not met, the system will become unbalanced and may be quite unusable, or a nightmare to maintain

Standard costs must be reliably estimated and variances kept to a minimum

The premise of the system is that a sale triggers the manufacturing process, therefore

Build up of work in progress or finished goods needs to be avoided

Another drawback is that detailed information for management purposes may not be available where needed, and the production control therefore need to be all the stronger.

The cost accounts used in back-flush accounting may be more difficult to reconcile to financial accounts needed for reporting

It does not strictly adhere to generally accepted accounting principles( GAAP) of external reporting.

Absence of audit trails leads to critics.

It does not pinpoint the use of resources at each step of the production process.

It is suitable only for JIT production system with virtually no direct material inventory and minimum WIP inventories. It is less feasible otherwise.

TRADITIONAL COSTING

MaterialsInventory

ManufacturingOverhead

DirectLabor

Direct Materials

Work in ProcessInventory

Finished GoodsInventory

Cost ofGoods Sold

ConversionCosts (Direct

Labor &Manufacturing

Overhead)

Direct Materials

Work in ProcessInventory

Finished GoodsInventory

Cost ofGoods Sold

BACKFLUSH COSTING