Just in time and modern manufacturing environments : implications for cost accounting
A work standard is a fortress against improvement of quality and productivity.
With such damming statements about traditional cost accounting and its elements, one must wonder if cost accounting has any value, and indeed, why it is used at all. But cost accounting does have value and is needed. Accounting is an organization’s information collection mechanism, and as such is a vital and necessarily integrated support system for any firm.
Objectives of cost accounting
To understand the role of cost accounting in the manufacturing environment, its objectives and outputs must be recognized. Cost accounting has three primary outputs: pricing information, inventory valuation data, and cost control evidence.
Determining the accurate cost of a product is necessary for finding optimal pricing for that product and, more importantly, whether that product can be profitable. Inventory in many firms is a significant asset, an is important in determining the financial position of the company. Accurate inventory calculations are needed as bases for management decision making and for reporting via financial statements to stockholders and various governmental agencies. The in formation gathered by cost accounting must provide management with data useful for determining cost control measures and necessary manufacturing improvement actions.
With the end goals of cost accounting in mind, the objectives of cost accounting can be understood. The four objectives are
- to report accurate information
- to have the information reported in a timely fashion.
- to provide this information at a reasonable cost.
- to be flexible enough to adapt to different informational needs.
These objectives take on even greater importance when seen in light of continuous and increasing manufacturing competition, dynamic governmental regulations, and introduction and implementation of new manufacturing philosophies and structures.
Cost accounting, for all its lofty goals and purposes, must be kept in perspective. According to Hall, “cost allocations and attributions are judgment calls” Cost accounting can be a rough measure, and there is no reason to believe that several cost accountants would approach the same costing issue in the same. Or even a similar, manner. Another concern is that “one can measure to death and still not know much. “
Historical basis for current cost accounting practice
Modern accounting practices are anything but “modern” most were developed in the early part of this century and were ingrained by World War II. The cost accounting methods designed then were developed for measurement of mass production of few standardized items with a high direct labor content. The goal was to watch direct labor activities and costs closely, since typically direct labor was the largest cost determinant, The cost accounting systems designed for use in such environments worked well and were accurate, But today’s manufacturing environments do not often have the same cost structure.
Other characteristics of the “old” manufacturing model that cost accounting systems were developed to measure and support include:
- Relatively low cost labor
- Capital (equipment), when used, intended to facilitate, rather than replace, labor
- Throughput controlled primarily by direct labor
- Production costs varying greatly with production quantity
- Most other costs associated with a product highly correlated with direct labor input
- Labor the highest cost determinant of a product
- Product highly standardized with few products, options, and variations
- Product life cycles long, new product development and introduction infrequent
- Slowly changing technology
- Record – keeping and analysis manual
- Foreign competition typically not a major factor.
To meet the cost – accounting objectives of the manufacturing environment, several simplifying assumpsults while simplifying manual recordkeeping, One assumption was that all product costs were variable, Fixed costs were small enough to be considered insignificant, and so applicable to overhead. Another as the basis for applying other conversion costs. Because indirect and overhead costs typically were consumed in proportion to direct labor input. Also, only one overhead application rate was utilized throughout the plat because these costs were small enough that it was uneconomical to accumulate more accurate costs at each cost center level.
Today the highest value-added element is no longer labor, but overhead, Overhead can run as high as 20 times that of direct labor in many contemporary manufacturing situations. Wantuck shows that overhead as a percentage of product value has steadily increased from 1850 to 1980, and it appears that this trend has not abated.
Accounting theorists and users have only now started to rethink and reformulate accounting systems to correspond to this and other fundamental manufacturing changes. Many of the big eight accounting consulting firms are working on projects to define structures and systems for modern accounting
What other new elements exist in modern manufacturing? Technological Improvements first led to many individual capital investment decisions on the shop floor, resulting in a patchwork of capital projects, In time, This piecemeal approach and vertically integrated technical systems. Coherent company and factory wide management philosophies and structures were designed to support these technological process improvements.
What were the implications cost for accounting? The high-ticket cost element switched from direct labor to equipment, because labor moved away from producing items to supporting machines that produced items. Labor then became more of a fixed cost rather than variable and so must be treated as such. Labor employment flexibility once enjoyed by managers no longer holds, and so overhead must be applied in a more accurate and suitable manner. The alternative to the direct labor hour basis is the time- in- system basis. That is, overhead can be applied on the basis cycle time or flow time for a product in the manufacturing process.
Cost Accounting for just-in-time
New Cost-accounting methods are being developed for the radically different type of manufacturing called just-in-time (JIT) , The structure of which departs from traditionally accepted orientations as a quality and production control system, Before describing cost accounting for JIT, tradional cost accounting structures must be understood.
Two Traditional Costing Methods
There are basically two kinds of cost accounting systems, job order costing and process costing. Both have many variations, and in some cases hybrid system exist.
The Full cost of something is exactly what it costs for example, if you pay $250 for a television set, its full cost to you is $250, But determining the full cost for manufacturing that television set is not so simple or exact, As mentioned earlier, costing can be a rough
Resulting Accounting Implications
Since the costing system changes from traditional job order costing to modified process costing, the cost accountants have much less information to track due to fewer stations and transactions.
New measurement systems must represent the strategies and technology and other characteristics of a firm. As such, The accountants must see that the cost accounting system continually evolves as these strategies and other
Conclusions
Traditional cost accounting was expected to be a support system for manufacturing and other business activities, Unfortunately, Outdated cost- accounting system have often become barriers to quality and productivity. Managers must be aware if the implications of decisions made based on the accounting data presented to them
Acknowledgments
The author would like to acknowledge the support of the APICS student chapter faculty advisors at the University of Wisconsin/Madison, Professors John p.