CHAPTER 20 INVENTORY MANAGEMENT, JUST-IN-TIME, AND BACKFLUSH COSTING LEARNING OBJECTIVES Identify five categories of costs associated with goods for sale Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model Identify and reduce conflicts that can arise between EOQ decision model and models used for performance evaluation Use a supply-chain approach to inventory management Differentiate materials requirements planning (MRP) systems from just-in-time (JIT) systems for manufacturing Identify the features of a just-in-time production system Use backflush costing Describe different ways backflush costing can simplify traditional job-costing systems CHAPTER OVERVIEW Chapter 20 looks at a specific aspect of accounting for products—that of inventory Both the accounting for products from the perspective of the retailer as well as that of the manufacturer are examined Resources represented by inventory account for the largest cost in many retail companies Managers understand the effect they have upon profitability Management accountants provide necessary information for the managing of inventory Basic types of information are described within the chapter: types of costs associated with inventory, key decisions about managing goods, challenges in estimating costs and their effects, and manufacturing systems to better manage inventory The two key questions for a retailer for managing inventory are those of how much to order and when to order These same questions are crucial for a manufacturer but are placed in terms of the supply chain with the manufacturer dependent upon that retailer, causing some differences in how to manage under conditions of uncertainty The chapter provides a look at the accounting system for manufacturing products using a just-in-time (JIT) processing system The manufacturing system is described and the accounting for such a system is detailed using the concept of backflush costing This study provides another example of how the accounting system describes the underlying operations for the manufacturing of a product The just-intime system is compared to the system of materials requirements planning (MRP), a push-through systems as opposed to the demand-pull system of JIT A section on Enterprise Resource Planning has been added These systems are examined by their effect(s) on inventories managed by a company CHAPTER OUTLINE I Inventory management A Inventory management: an important part of profit planning for manufacturing and merchandising companies B Materials costs often account for more than 40% of total costs in manufacturing companies and more than 70% of total costs in retail companies II Inventory management in retail organizations A Inventory management: the planning, coordinating, and control activities related to the flow of inventory into, through, and from an organization Costs of goods sold is largest single cost item for some retailers Better decisions regarding the purchasing and managing of goods for sale can cause large percentage increases in net income when net income is small percentage of revenues B Costs associated with goods for sale Learning Objective 1: Identify five categories of costs associated with goods for sale Purchasing costs: costs of goods acquired from suppliers including incoming freight or transportation costs a Usually largest cost category of goods for sale b Affected by discounts for different purchase-order sizes and supplier credit terms Ordering costs: include costs of preparing purchase orders and receiving goods Carrying costs: costs of holding inventory of goods for sale a Include opportunity cost of investment tied up in inventory b Include costs associated with storage (space rental, insurance, obsolescence, spoilage) Stockout costs: costs arising when a customer demands a unit of product and that unit is not on hand a Costs of expediting order from supplier b Costs (opportunity costs) of lost contribution margin and customer ill-will Quality costs: costs of product or service not in conformance with a preannounced or prespecified standard 14 Chapter 20 Advances in information-gathering technology increasing reliability and timeliness a Increasing reliability and timeliness of inventory information b Reducing costs in the five cost categories Do multiple choice Assignment after L O C Major decisions in managing goods for sale Learning Objective 2: Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model How much to order of a given product a Economic order quantity (EOQ): decision model that calculates optimal quantity of inventory to order under a set of assumptions (balancing ordering and carrying costs) i Same quantity ordered at each reorder point ii Demand, ordering costs, and carrying costs known with certainty as is purchaseorder lead time: time between placing an order and its delivery iii Purchasing costs unaffected by quantity ordered iv No stockout occurs v Quality costs only considered to extent they affect ordering or carrying costs b EOQ formula: EOQ = i 2DP C D = demand in units for a specified time period ii P = relevant ordering costs per purchase order iii C = relevant carrying costs of one unit stock for the time period used for D iv EOQ increases with demand and ordering costs/decreases with carrying costs c Annual relevant total costs (RTC) for any order quantity formula i RTC = D Q x P + Q x C = DP Q + QC [Exhibit 20-1] ii Annual relevant costs at minimum amount where relevant ordering costs and relevant carrying costs are equal (EOQ) Inventory Management, Just-in-Time, and Backflush Costing 15 When to order, assuming certainty a Reorder point i Definition: quantity level of the inventory on hand that triggers a new order ii Formula: Reorder point = Number of units sold per unit of time x Purchase-order lead time [Exhibit 20-2] b Safety stock [Exhibit 20-3] i Definition: Inventory held at all times regardless of the quantity of inventory ordered using the EOQ model ii Used as a buffer against unexpected increases in demand, uncertainty about lead time and unavailability of stock from suppliers iii Computed using demand forecasts—usually based on experience iv Computed to minimize sum of annual relevant stockout costs and carrying costs III Estimating inventory-related costs and their effects A Considerations in obtaining estimates of relevant costs Obtaining accurate estimates of the EOQ cost parameters a Relevant incremental costs i Cost behavior in relation to changes in quantity of inventory held ii Alternative uses of cost factors, such as space and people b Relevant opportunity costs of capital (key input in EOQ decision model) i Choice not taken provides basis of opportunity costs ii Lost contribution margin for missed opportunity Cost of prediction error: when actual relevant costs differ from the estimated relevant cost for decision making a Three-step approach to calculation of cost of prediction error i Step 1: Compute the monetary outcome from the best action that could be taken, given the actual amount of the cost input ii Step 2: Compute the monetary outcome from the best action based on the incorrect amount of the predicted cost input 16 Chapter 20 iii Step 3: Compute the difference between the monetary outcomes from steps and b Square root in EOQ model reduces sensitivity of the ordering decision to errors in predicting its parameters Learning Objective 3: Identify and reduce conflicts that can arise between EOQ decision model and models used for performance evaluation B Evaluation of managers and goal congruence issues Opportunity cost of investment tied up in inventory a key input in EOQ decision model No opportunity costs recorded in financial accounting system so inconsistency in decision model of EOQ and performance evaluation model using financial accounting numbers Can include opportunity costs when evaluating managers, so EOQ decision model consistent with performance evaluation model Do multiple choice – Assign Exercises 20-16, 17, 18, 19, 20, and Problems 20-26, 27, 28 IV Just-in-time purchasing A Definition: purchase of goods or materials so that delivered just as needed for production B JIT purchasing and EOQ model parameters EOQ cost parameter—carrying cost a Cost of carrying inventory considered by some to be underestimated in the past b Opportunity costs of investment tied up in inventory to be considered EOQ cost parameter—placing a purchase order a Reduction in cost due to long-run purchasing arrangements defining price and quality terms over an extended period b Reduction in cost due to using electronic links to place purchase orders c Reduction in cost due to use of purchase order cards that not require traditional laborintensive procurement approval mechanisms EOQ—combination of relevant carrying costs increasing and relevant ordering costs per purchase order decreasing [Exhibit 20-4] a Smaller EOQ amounts (size of order) b More frequent orders Inventory Management, Just-in-Time, and Backflush Costing 17 C Relevant benefits and relevant costs of JIT purchasing Compared to EOQ model a EOQ model designed to only emphasize trade-off between carrying costs and ordering costs b Inventory management includes purchasing costs, stockout costs, and quality costs Illustrated by comparison of traditional policy with JIT purchasing [Exhibit 20-5] D Supplier evaluation and relevant costs of quality and timely deliveries Timely delivery of quality product crucial to JIT purchasing Selection and development of long-run supplier partnerships Consideration of relevant costs of quality and also the relevant costs of failing to deliver on time Sales of high-quality merchandise has nonfinancial and qualitative benefits Illustration to compare suppliers: issues and concerns [Exhibit 20-6] Assign Exercises 20-21 and 20-22 and Problems 20-29 and 20-30 I Inventory management and supply-chain analysis [Surveys of Company Practice] Learning Objective 4: Use a supply-chain approach to inventory management A Level of inventories held by retailers influenced by demand patterns of customers and supply relationships with distributors, manufacturers, and suppliers to suppliers and so on Flow of goods, services, and information from initial sources of materials and services to delivery of products to consumers—supply chain [Chapter 1, “Enhancing the Value of Management Accounting Systems,” Exhibit 1-5] Variability of demand quantities throughout supply chain called “bullwhip effect” or “whiplash effect” and, consequently, higher levels of inventory held at all stages in supply chain Supply chain approach allows companies to coordinate their activities and reduce inventories through the supply chain—some companies have supplier or vendor-managed inventory B Inventory management and manufacturing companies Assign Problems 20-31 and 20-32 18 Chapter 20 Learning Objective 5: Differentiate materials requirements planning (MRP) systems from just-in-time (JIT) systems for manufacturing Materials requirement planning (MRP) a Definition: a “push-through” system that manufactures finished goods for inventory on the basis of demand forecasts i Inputs for MRP • Master production schedule—demand forecasts for final products taking into account specifics of quantity and timing of each item to be produced • Bill of materials—detailing of materials, components, and subassemblies for each final product • Inventory records—quantities of materials, components, and product inventories to determine the necessary outputs at each stage of production ii Output of each department pushed through the production line whether it is needed or not iii Result of push-through approach may be accumulation of inventory at workstations not yet ready to process next group b Challenge in MRP system is inventory management i Management accountant aids in MRP by maintaining accurate records of inventory and its costs ii Management accountant also helps in estimates of setup cost for production lines • Costs of setting up a production run analogous to ordering costs in EOQ model • Costs of setting up matched with size of batches to balance costs of setups with costs of carrying inventory (large costs, large batch sizes or small costs, small batch sizes) • Costs of downtime matched with running time of production line (high downtime costs, continuous production) Just-in-time (JIT) production (also called lean manufacturing production) a Definition: a “demand-pull” manufacturing system because each component in a production line is produced as soon as and only when needed by the next step in the production line Inventory Management, Just-in-Time, and Backflush Costing 19 i Demand triggers each step of the production process, starting with customer demand for finished product at the end of process and working all way back to demand for direct materials at beginning of process ii Demand-pull feature achieves close coordination among workstations in the process iii Aims to simultaneously achieve three effects • Meet customer demand in a timely way, • With high quality products, and • At the lowest possible total cost Learning Objective 6: Identify the features of a just-in-time production system b Five main features in JIT production system [Concepts in Action] i Organizing production in manufacturing cells: grouping of all different types of equipment used to make a product ii Hiring and training multi-skilled workers iii Emphasizing total quality management iv Reducing manufacturing lead time and setup time v Building strong supplier relationships c Enterprise resource planning (ERP) systems i Comprises a single database that collects and feeds data into applications supporting all of a company’s business activities ii Responds to changes in supply and demand because operating information accessible within the company and across the supply chain iii Available as standard software packages that can be customized—without customization strategic advantage may not be available d Financial benefits of JIT and relevant costs i Lower carrying costs of inventory due to lower inventories ii Greater transparency of production process iii Heightened emphasis on eliminating specific causes of rework, scrap, and waste iv Lower manufacturing lead time 20 Chapter 20 e Performance measures and control in JIT production i Personal observation timely, intuitive, and easy to understand measure of plant performance ii Financial performance measures iii Nonfinancial performance measures of time, inventory, and quality iv Feedback that is rapid and meaningful necessary to detect and solve problems quickly due to lack of buffer from inventories Do multiple choice f JIT’s effect on costing systems i Reduces overhead costs ii Facilitates direct tracing of some costs usually classified as indirect C Backflush costing: job costing system that dovetails with JIT production Learning Objective 7: Use backflush costing Backflush costing: costing system that omits recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods a Absence of inventories makes unimportant choices about cost-flow assumptions or inventory costing methods important b Rapid conversion of direct materials into finished goods that are immediately sold simplifies job costing; JIT production leads to large reduction in work in process Learning Objective 8: Describe different ways backflush costing can simplify traditional job-costing systems Simplified normal or standard job costing a Traditional systems use sequential tracking to track costs sequentially as products pass through four stages in a cycle going from purchase of direct materials to sale of finished goods i Stage A: Purchase of direct materials ii Stage B: Production resulting in work in process iii Stage C: Completion of a good finished unit of product Inventory Management, Just-in-Time, and Backflush Costing 21 iv Stage D: Sale of a finished good b Trigger point: refers to a stage in the cycle going from purchase of direct material (Stage A) to sale of finished goods (Stage D) at which journal entries are made in the accounting system Examples to illustrate backflush costing a Assumptions of no direct materials variances and no work in process b Examples differ in number and placement of trigger points c Three examples from text i Example with three trigger points [Exhibits 20-7 and 8, Panel A] • Stage A: Purchase of direct materials (raw materials) • Stage C: Completion of good finished units of product • Stage D: Sale of finished goods ii Example with two trigger points [Exhibits 20-7 and 8, Panel B] • Stage A: Purchase of direct materials (raw materials){only inventory account} • Stage D: Sale of finished goods iii Example with two trigger points [Exhibits 20-7 and 8, Panel C] • Stage C: Completion of goods finished units of product • Stage D: Sale of finished goods Examples to illustrate backflush costing: comparison to sequential tracking a Example 1: Costs reported similarly to sequential tracking when WIP minimal i Two inventory accounts: (1) Materials and In-Process and (2) Finished Goods ii Actual conversion costs recorded in Conversion Costs (allocated to products at trigger points) iii Steps to assign costs to units sold and to inventories 22 Chapter 20 • Step 1: Record the direct materials purchased during the accounting period • Step 2: Record conversion costs incurred during the accounting period • Step 3: Determine the number of good finished units manufactured during the accounting period • Step 4: Compute the normal or standard costs per finished unit • Step 5: Record the cost of good finished goods completed during the accounting period  Name—backflush costing—comes from this step  Costs not recorded sequentially with flow of product through production  Output trigger point reaches back and pulls standard costs into entry • Step 6: Record the cost of goods sold during the accounting period • Step 7: Record underallocated or overallocated conversion costs iv Accounting for variances—basically same under all standard costing systems b Example 2: Costs reported similarly to sequential tracking when WIP and finished goods minimal i One inventory account: Inventory—combines direct materials and any direct materials in WIP and finished goods ii Conversion costs treated as period costs, not inventoried iii Accounting justified for two reasons • To remove incentive for managers to produce for inventory • To increase focus of managers on selling units c Example 3: Costs reported similarly to sequential tracking when direct materials and WIP minimal i Could be used with only one trigger point—Stage D: Sale of finished goods ii Could be used with only one trigger point—Stage D: Sale of finished goods— maintains no inventory accounts so used with JIT system with minimal inventories Special consideration of backflush costing a Accounting procedures illustrated in Examples 1, 2, and not strictly adhere to generally accepted accounting principles (use constraint of materiality) b Adjusting entries used to account for material amounts in inventory, if needed c Adopting of backflush costing not limited to JIT production methods Inventory Management, Just-in-Time, and Backflush Costing 23 d Absence of audit trails focus of criticism e Compatible with activity-based costing i Simplifying production process makes more of the costs direct and reduces extent of overhead cost allocations ii Using ABC systems gives more accurate budgeted conversion costs per unit for different products in backflush costing Do multiple choice – 10 Assign Exercise 20-23, 24, 25, and Problems 20-33, 34, 35, and 36 CHAPTER QUIZ SOLUTIONS: 1.b 24 Chapter 20 2.d 3.b 4.a 5b 6.a 7.b 8.d 9.d 10.c CHAPTER QUIZ Which of the following categories of costs are important when managing inventories of goods for sale according to the authors of the text? a b c d purchasing, ordering, supply, spoilage, and opportunity purchasing, stockout, carrying, ordering, and quality buying, holding, invoicing, opportunity, and investment supply, obsolescence, holding, stockout, and transportation-in The following data apply to questions 2-6 Liberty Celebrations, Inc., manufactures a line of flags The annual demand for its flag display is estimated to be 100,000 units The annual cost of carrying one unit in inventory is $1.60, and the cost to initiate a production run is $50 There are no flag displays on hand but Liberty had scheduled 60 equal production runs of the display sets for the coming year, the first of which is to be run immediately Liberty Celebrations has 250 business days per year Assume that sales occur uniformly throughout the year and that production is instantaneous [CMA Adapted} If Liberty Celebrations does not maintain a safety stock, the estimated total carrying cost for the flag displays for the coming year is a $2,667 b $2,000 c $1,600 d $1,333 [CMA Adapted] The estimated total setup cost for the flag displays for the coming year is a $2,000 b $3,000 c $8,000 d $12,500 [CMA Adapted] If Liberty Celebrations were to schedule 30 equal production runs of the flag display for the coming year, instead of 60 equal runs, the sum of carrying costs and setup costs for the coming year would increase (decrease) by a $(166) b $-0- c $166 d $1,500 [CMA Adapted] The number of production runs per year of the flag displays that would minimize the sum of carrying costs and setup costs for the coming year is a 50 b 40 c 30 d 20 [CMA Adapted] A safety stock of a 3-day supply of flag displays would increase Liberty Celebration’s planned average inventory in units by a 1,200 b 800 c 400 d zero Which of the following is not a major feature of a just-in-time production system? a b c d Workers are trained to be multi-skilled Emphasis is placed on increasing setup time and manufacturing lead time Production is organized in manufacturing cells Total quality management is aggressively pursued Inventory Management, Just-in-Time, and Backflush Costing 25 The following data apply to questions 8–10 Sit-On-It began operations in January 2002 Sit-On-It manufactures vehicular seat covers using a just-intime production system supported by a backflush costing system This system has two trigger points: (1) the purchase of raw materials, and (2) the sale of finished good units Standard unit costs are $40 for raw materials and $25 for conversion costs Sit-On-It writes off any under- or overallocated conversion costs immediately The following data were available for January 2002: Production in good units Sales of good units Purchases of raw materials [20,000 units at $40] Conversion costs incurred 19,800 19,750 $800,000 $496,000 The journal entry to record the manufacture of finished good units is a Finished Goods Control Inventory: Raw and In-Process Control Conversion Costs Allocated 1,287,000 b Finished Goods Control Conversion Cost Variance Inventory: Raw and In-Process Control Conversion Costs Control 1,287,000 1,000 c Inventory: Raw and In-Process Control Conversion Costs Allocated Conversion Cost Variance Various assets and liabilities 792,000 495,000 792,000 496,000 800,000 495,000 1,000 1,296,000 d No entry The January ending total for all inventory balances is a $16,250 b $12,250 c $11,250 d $10,000 c $1,286,000 d $1,296,000 10 The January cost of goods sold is a $1,283,750 26 Chapter 20 b $1,284,750 WRITING/DISCUSSION EXERCISES Identify five categories of costs associated with goods for sale Compare costs included for “Cost of Goods Sold” in financial accounting with costs associated with goods for sale in the chapter In financial accounting, costs included in the “Cost of Goods Sold” section of a multiple-step income statement would be the purchase costs as described in this chapter The other four categories of ordering costs, carrying costs, stockout costs, and quality costs would not be found within the “Cost of Goods Sold” category for financial accounting Ordering and carrying costs would be included in operating expense Stockout costs of expediting might be chargeable to the customer or absorbed in operating costs Lost contribution margins are an opportunity cost and not included in the normal accounting system Quality costs could be added to “purchase costs” in some instances or be part of operating costs Balance ordering costs with carrying costs using the economic-order-quantity (EOQ) decision model Using an exercise or illustration from the text, show the costs of carrying and ordering for different order quantities to highlight how EOQ balances those costs Using the Self-Study Problem at the end of the chapter, the following could be shown: Number of Deliveries Carrying costs [(5200 ÷ # of Del.)/2] x $5.00 Ordering costs – # of Del x $250 Sum of costs EOQ 7.2 $2,166 $1,857 $1,800 $1,787 $1,590 $1,500 $3,666 $1.750 $3,607 $1,800 $3,600 * $2,000 $3,787 $2,250 $3,840 As noted in the text problem, the number of deliveries would be eight because deliveries have to be made in total, not in part The company would use eight deliveries rather than seven deliveries in consideration of stockouts Identify and reduce conflicts that can arise between EOQ decision model and models used for performance evaluation Why aren’t opportunity costs included in the accounting system? One of the key management accounting guidelines in Chapter was “different costs for different purposes.” The characteristics that define and govern financial accounting lead to accounting for what was Management accounting includes financial accounting though it extends beyond that particular arena to provide relevant information for making decisions, both of a financial and a nonfinancial nature The “accounting system” would not include accounting for what might have been Management accountants would include such opportunity costs in reports to managers for making decisions in which those costs were relevant Inventory Management, Just-in-Time, and Backflush Costing 27 Use a supply-chain approach to inventory management Isn’t it risky to share so much information with a supplier (in using the supply-chain approach to inventory management)? A business faces the tension of sharing too much information, becoming vulnerable to competitors, and of not sharing enough information, driving up costs and risking the loss of customers By using the guideline of cost-benefit, managers may make decisions as to the potential costs in a given situation against the possible benefits in deciding what information to share and how much In the situation of inventory management and supply-chain analysis, the benefit of reducing the level of uncertainty and the level of inventory may outweigh the cost of information that may be revealed to a competitor about costs and operations Differentiate materials requirements planning (MRP) systems from just-in-time (JIT) systems for manufacturing Can a company adopt a just-in-time system for inventory management and have a materials requirements planning approach to operations? Does the inventory management system become a broad management tool also? Materials requirements planning and just-in-time were originally considered for managing inventory Because inventory is an integral part of the manufacturing system, these approaches expanded to company-wide planning and control activities Inventory management requires the answers to the key questions—how much (quantity) and when (timing) MRP is one side of the coin—the need to good planning—and JIT is the other side of the same coin—the need to good execution A company has to understand which system is most appropriate to their use Hybrid systems can be developed using aspects of each of the two, MRP or JIT Identify the features of a just-in-time production system In this chapter, just-in-time was used to describe purchasing, an approach to inventory management, and a production system In previous chapters, activity-based was the term used to describe various company activities, such as costing, budgeting, and management When looking at the major features of either of these ways of planning and control, what should guide top management in deciding to implement a new approach to managing some aspect or all of the organization? As noted in the text, “tone at the top” is critical to the success of plans and activities undertaken within the organization Support must come from top management who can allocate the necessary resources and establish policies as to rewards and incentives A helpful guideline for top management in investigating a different approach is that of cost-benefit The cost of implementing a new system must be exceeded by the benefit it would generate for the organization In some instances, wiser use of the current system would generate far more benefit for little cost 28 Chapter 20 Use backflush costing Discuss the use of the term “backflush” to describe this costing system As noted in Step for assigning costs to units completed (Example illustrating backflush costing in the chapter), the output trigger point “reaches back and pulls the standard costs of direct materials from Inventory: Raw and In-process and the standard conversion costs for manufacturing the finished goods.” Journal entries would have been made for conversion costs actually incurred (Dr Conversion Costs Control; Cr Various accounts) The completion point is the first point in the accounting system to recognize conversion costs as part of the cost of the product—a delayed costing The delay occurs in recording changes to the status of a product being produced until good finished units appear When the good finished units appear, budgeted or standard costs are used to “work backward” to“ flush out” manufacturing costs for the units produced The credit to Conversion Costs Allocated in the entry at completion reflects the use of budgeted or standard costs Comparing the Conversion Costs Allocated account to the Conversion Costs Control account determines the variance Entries may have been made when direct materials were purchased if that was a trigger point If the purchase of direct materials was not a trigger point, an entry would not have been made for their purchase (Example with the one trigger point is such a case.) This accounting is appropriate when the lag time between the receipt of the direct materials and the output of the completed unit is very short The accounting for purchases of direct materials is not suspended under backflush, but is abbreviated to reflect the change in the production process Similarly, the lack of journalization for work in process is not omission but recognition that inventories are almost nonexistent Describe different ways backflush costing can simplify traditional job-costing systems How can backflush costing account for the conversion of a raw material into a finished product when only one journal entry is made in the costing system? Significant changes to the production process, such as adoption of just-in-time, should signal possible changes to the accounting system that tells the story of that process Backflush costing developed in response to streamlined production processes Companies wanted a simple accounting system rather than detailed tracking of direct costs through each step of the production process With changes to the production process that virtually eliminated inventories, managers did not want to spend resources tracking costs through the accounts Work in Process, Finished Goods, and Cost of Goods Sold Also, backflush costing and sequential tracking produce approximately the same results when inventory is present, provided inventories maintain stable values Managers wanted to eliminate nonvalue-added activities from the cost accounting systems and sequential tracking was nonvalue-added accounting activity Generally accepted accounting principles not require companies track work in process when the amounts involved are immaterial Backflush costing does require that each product have a set of budgeted or standard costs in order to be used Inventory Management, Just-in-Time, and Backflush Costing 29 SUGGESTED READINGS Alles, M., Datar, S and Lambert, R., “Moral Hazard and Management Control in Just-in-Time Settings,” Journal of Accounting Research (Vol 33 Supplement 1995) p.177 [28p] Balakrishnan, R., Linsmeier, T and Venkatchalam, M., “Financial Benefits from JIT Adoption: Effects of Customer Concentration and Cost Structure,” Accounting Review (April 1996) p.183 [23p] Barsky, N and Ellinger, A., “Unleashing the Value in the Supply Chain,” Strategic Finance (January 2001) p.32 [5p] Bradford, M and Roberts, D., “Does Your ERP System Measure Up?” Strategic Finance (September 2001) p.30 [4p] Bradford, M., Mayfield, T and Toney, C., “Does ERP Fit in a LEAN World?” Strategic Finance (May 2001) p.28 [6p] Clinton, D and Lummus, R., “ERP in Institutional Manufacturing,” Management Accounting Quarterly (Summer 2000) p.18 [7p] Culbertson, S., “Control System Approach to e-Commerce Fulfillment: Hewlett-Packard’s Experience,” Journal of Business Forecasting Methods and Systems (Winter 2000/2001) p.10 [6p] Eshelman, R., Juras, P and Taylot, T., “When Small Companies Implement Big Systems,” Strategic Finance (February 2001) p.28 [5p] Foster, G and Horngren, C., “JIT: Cost Accounting and Cost Management Issues,” Management Accounting (June 1987) p.19 [7p] Hornyak, S., “The Big E-Payback,” Management Accounting (February 1999) p.22 [5p] Jeffrey, S., “The Power of B2B e-Commerce,” Strategic Finance (September 1999) p.22 [6p] Jones, D., “JIT & the EOQ Model—Odd Couple No More!” Management Accounting (February 1991) p.54 [4p] Karmarkar, U., “Getting Control of Just-in-Time,” Harvard Business Review (September-October 1989) p.122 [10p] Krumwiede, K and Jordan, W., “Reaping the Promise of Enterprise Resource Systems,” Strategic Finance (October 2000) p.48 [4p] Logan, H., “Controlling the Uncontrollable,” Strategic Finance (April 2001) p.56 [6p] Messmer, M., “How JIT Staffing Can Add Value to Your Accounting Department,” Management Accounting (October 1996) p.28 [4p] Swenson, D and Cassidy, J., “The Effect of JIT on Management Accounting,” Journal of Cost Management (Spring 1993) p.39 [9p] Yates, J., “Corporate Purchasing Cards,” Management Accounting (November 1998) p.45 [4p] 30 Chapter 20 [...]... opportunity costs in reports to managers for making decisions in which those costs were relevant Inventory Management, Just- in- Time, and Backflush Costing 27 4 Use a supply-chain approach to inventory management Isn’t it risky to share so much information with a supplier (in using the supply-chain approach to inventory management) ? A business faces the tension of sharing too much information, becoming vulnerable... accepted accounting principles do not require companies track work in process when the amounts involved are immaterial Backflush costing does require that each product have a set of budgeted or standard costs in order to be used Inventory Management, Just- in- Time, and Backflush Costing 29 SUGGESTED READINGS Alles, M., Datar, S and Lambert, R., “Moral Hazard and Management Control in Just- in- Time Settings,”... 28 Chapter 20 6 Use backflush costing Discuss the use of the term backflush to describe this costing system As noted in Step 5 for assigning costs to units completed (Example 1 illustrating backflush costing in the chapter) , the output trigger point “reaches back and pulls the standard costs of direct materials from Inventory: Raw and In- process and the standard conversion costs for manufacturing... characteristics that define and govern financial accounting lead to accounting for what was Management accounting includes financial accounting though it extends beyond that particular arena to provide relevant information for making decisions, both of a financial and a nonfinancial nature The accounting system” would not include accounting for what might have been Management accountants would include such opportunity... inventory in units by a 1 ,200 b 800 c 400 d zero 7 Which of the following is not a major feature of a just- in- time production system? a b c d Workers are trained to be multi-skilled Emphasis is placed on increasing setup time and manufacturing lead time Production is organized in manufacturing cells Total quality management is aggressively pursued Inventory Management, Just- in- Time, and Backflush Costing. .. trigger point—Stage D: Sale of finished goods— maintains no inventory accounts so used with JIT system with minimal inventories 5 Special consideration of backflush costing a Accounting procedures illustrated in Examples 1, 2, and 3 do not strictly adhere to generally accepted accounting principles (use constraint of materiality) b Adjusting entries used to account for material amounts in inventory, ... broad management tool also? Materials requirements planning and just- in- time were originally considered for managing inventory Because inventory is an integral part of the manufacturing system, these approaches expanded to company-wide planning and control activities Inventory management requires the answers to the key questions—how much (quantity) and when (timing) MRP is one side of the coin—the... purchasing, stockout, carrying, ordering, and quality buying, holding, invoicing, opportunity, and investment supply, obsolescence, holding, stockout, and transportation -in The following data apply to questions 2-6 Liberty Celebrations, Inc., manufactures a line of flags The annual demand for its flag display is estimated to be 100,000 units The annual cost of carrying one unit in inventory is $1.60, and. .. competitors, and of not sharing enough information, driving up costs and risking the loss of customers By using the guideline of cost-benefit, managers may make decisions as to the potential costs in a given situation against the possible benefits in deciding what information to share and how much In the situation of inventory management and supply-chain analysis, the benefit of reducing the level of uncertainty... resources tracking costs through the accounts Work in Process, Finished Goods, and Cost of Goods Sold Also, backflush costing and sequential tracking produce approximately the same results when inventory is present, provided inventories maintain stable values Managers wanted to eliminate nonvalue-added activities from the cost accounting systems and sequential tracking was nonvalue-added accounting activity