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Swenson, D. W. and J. Cassidy. 1993. The effect of JIT on management accounting. Journal of Cost Management (Spring): 39-47.

Summary by Christina Witkowski
Master of Accountancy Program
University of South Florida, Summer 2001

Japanese Management Main Page | JIT Main Page



The purpose of this article is to report the results of a survey based on 22 companies that use JIT, and to discuss how the implementation of JIT affects a company’s manufacturing system and the role of management accountants.

Survey Results

The survey included 22 companies in various industries that converted to just-in-time. A summary of their findings is presented below.

Characteristic Survey Finding
Mean number of years sampled firms have used JIT 4
Mean percent of operations converted to JIT 63%
Percent of firms using MRP before JIT 86%
Percent of firms currently using MRP along with JIT 95%
Firms modifications to material planning and
control software following the implementation of JIT:
No change 2
Minor modifications 12
Major modifications 3
New package 5
Complexity of materials planning and control information requirements following the implementation of JIT:
No change 1
Less complex 13
More complex 8
Complexity of cost accounting system following the implementation of JIT: Less complex 16
More complex 6
Mean percent of vendors meeting JIT requirements 67%
Mean reduction in scrap and rework following JIT 44%
Mean reduction in setup time following JIT 47%
Mean reduction in inventory following JIT 46%
Complexity of performance measurement system following the implementation of JIT Less complex 17
More complex 5


Type of Cost Accounting System in use Before JIT After JIT
Job order 14 6
Process 4 12
Hybrid system 2 2

The Effect of JIT on Manufacturing Processes

The survey results in the exhibit above show that the implementation of JIT reduced scrap, rework, setup time, and total inventory. The cost accounting systems and performance measurement systems were less complex for most of the 22 firms surveyed after the JIT implementations. There was also a positive correlation between setup time, total inventory, and scrap and rework when the companies converted to JIT.

Traditionally, companies have used material requirements planning (MRP) as an inventory control system. After the implementation of JIT, oddly, the use of MRP went up. Experts believe that the reason for this is that advanced systems require a hybrid between a push system, like MRP, and a pull system, like JIT. MRP coordinated the material planning and purchasing as well as monitors the plants ability to meet the production demand schedule. The point where many JIT systems depart from MRP is the release of work orders. From there the system becomes a pull system. A pull system is where the operator receives a part only when it is needed as opposed to material availability or a schedule. Therefore, WIP cannot accumulate over a specified level.

JIT promotes quality. The cost of quality can be divided into 4 groups:

External Failure (defective products sold to customers, returned goods, etc.)
Internal Failure (scrap, rework, downtime, etc.)
Appraisal/Detection (inspection, etc.)
Prevention (quality training, quality engineering, SPC activities, etc.)

JIT emphasizes the preventative measures. Firms often discover that when they invest in preventative measures, it reduces the other quality costs by more than the increase in the preventative costs.

The Effect on Management Accountants

JIT is supposed to simplify record keeping. In that respect, many authors have proposed several techniques to eliminate some accounting transactions. An example is the introduction of a backflush cost accounting system that eliminates transactions to record the movement of raw material into WIP. The backflush system reports movements of inventory when it is finished or, even in some cases, sold. WIP inventory is updated only after taking a physical count. The move toward simplification became apparent when 8 of the 22 companies surveyed went to a backflush system and then further reduced record keeping requirements by changing to process costing from job order. The problem with the backflush system is that it is used mainly for external reporting and does very little to help make internal decisions. Management accountants need to take a broader role. They need to not only identify inventory values, but to also identify performance measurements that effect activity costs, particularly nonfinancial measures such as setup times, quality, cycle times, etc.

Conclusion

With the execution of JIT, the 22 surveyed companies have shown great improvements in many areas. These areas are mainly in the nonfinancial part of the company that is not normally measured. For management accountants to keep up with an ever-changing environment, they must find a way to better inform internal users of these nonfinancial measures.

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