A note on “accounting, time and efficiency” terms in advanced management accounting study

A note on “accounting, time and efficiency” terms in advanced management accounting study

 

Briefly describe the following “accounting, time and efficiency” terms in advanced management accounting study:

 (Terms used in Chapter 21)

 

1.    What is Just-in-time (JIT) and the main features of JIT production systems (notably on manufacturing cells, multiskilled workers, total quality management, manufacturing lead time & set-up time reduction, and strong supplier relationships

2.    Financial and product-costing benefits of JIT

3.    Enterprise resource planning systems

4.    Backflush costing

5.    Managing goods for sale in retail organizations: costs associated with goods for sale, economic order quantity decision model

6.    Challenges in estimating stock-related costs and their effects

7.    JIT purchasing

8.    Theory of constraints, notably on throughput contribution

9.    Balanced scorecards and time-based measures

 

These terms connect operational design to management accounting: the goal is to increase customer-value flow, reduce non-value-added time and inventory, and measure performance beyond short-term financial results.

1. JIT production

Just-in-time (JIT) is a demand-pull production and purchasing philosophy: materials and components arrive, products are made, and goods are delivered only when required—not held as large buffers of inventory. Its purpose is to eliminate waste, shorten flow time, and expose process problems rather than hiding them in inventory.

Main features:

• Manufacturing cells: Machines and activities are arranged in product-focused cells, so a small team completes a family of products with little movement, waiting, or work-in-progress (WIP).
• Multiskilled workers: Employees are trained to operate several machines, inspect quality, perform minor maintenance, and move between tasks. This improves flexibility and reduces hand-offs.
• Total quality management (TQM): Quality is built into each stage. Defects are identified and corrected at source, because a defect passed downstream can halt a low-inventory JIT system.
• Reduced manufacturing lead time: JIT aims for rapid movement from raw material to finished sale, lowering waiting, queue, transport, and WIP time.
• Reduced set-up time: Small batch production is feasible only if machine changeovers are fast. Reduced set-up time allows frequent production of different items without excessive downtime.
• Strong supplier relationships: Suppliers make frequent, reliable, small deliveries of high-quality inputs, often sharing schedules and quality information. JIT consequently depends heavily on supplier reliability.

2. JIT benefits

Area	Benefits
Financial	Less cash tied up in raw materials, WIP, and finished goods; lower warehouse, handling, insurance, deterioration, theft, and obsolescence costs
Product cost	Less scrap, rework, inspection, material waste, and non-value-added handling; lower space and production-support costs
Operations	Shorter lead times, faster response to demand, higher quality, clearer visibility of bottlenecks, and simpler scheduling
Decision-making	Low inventories make process inefficiencies visible; management cannot conceal poor quality or unbalanced capacity in stock buffers

JIT is not automatically cheaper: shortages, unreliable logistics, poor supplier quality, or volatile demand can stop production and create costly stockouts.

3. ERP systems

An enterprise resource planning (ERP) system is integrated software and a shared database linking functions such as accounting, procurement, inventory, production planning, sales, HR, supply chain, and performance reporting. It replaces disconnected departmental records with a common, more timely “single source of truth.”

For management accounting, ERP can connect a customer order to inventory availability, purchase orders, production schedules, labour and material usage, cost records, invoicing, and profitability reports. It is particularly useful for JIT because real-time data supports replenishment, scheduling, supplier coordination, and rapid exception reporting.

4. Backflush costing

Backflush costing is a simplified costing method suited to JIT environments with minimal inventories and short production cycles. Instead of recording detailed entries every time materials move into WIP, labour is applied, goods are completed, and goods are sold, costs are assigned retrospectively—usually when finished goods are completed or sold—and “flushed back” to inventory and cost of goods sold.cin7+1

Its advantages are fewer accounting entries, lower record-keeping cost, and more timely reporting. Its limitation is lower detail and potentially less accurate interim inventory or variance information, especially where material flows are complex, inventories are material, or production cycles are long.

5. Retail goods and EOQ

For a retailer, goods for sale are purchased inventory intended for resale rather than internally manufactured output. Relevant stock-related costs include:

• Purchase cost: Supplier price, less trade discounts; freight-in and other costs needed to bring goods to saleable condition may also be included in inventory cost.
• Ordering and receiving costs: Purchasing administration, supplier communication, delivery receiving, inspection, invoice processing, and handling.
• Carrying/holding costs: Warehouse rent, handling, insurance, security, deterioration, obsolescence, shrinkage/theft, and the opportunity cost of capital tied up in stock.
• Stockout costs: Lost contribution, lost customer goodwill, emergency delivery costs, and possible lost future sales.
• Quality costs: Inspection, returns, markdowns, warranty-like service, disposal, and supplier-quality failures.

The economic order quantity (EOQ) model selects the order size that minimizes relevant annual ordering plus holding costs:

EOQ = Square root of (2DS/ H)

where D = annual demand, S = ordering cost per order, and H = annual holding cost per unit. EOQ reflects a trade-off: larger orders reduce the number of orders but increase average inventory; smaller orders do the reverse. Holding costs commonly include storage, handling, insurance, taxes, obsolescence, theft, and financing cost.

6. Estimating stock costs

Estimating stock-related costs is difficult because many are indirect or uncertain:

• The opportunity cost of capital depends on the appropriate cost of funds and changing interest rates.
• Obsolescence, deterioration, theft, returns, and markdowns depend on uncertain demand and product life cycles.
• Warehousing may be a fixed committed cost in the short run, so allocating it per unit may overstate the cost saved by holding less inventory.
• Ordering cost may fall with automation or rise with supplier disruption; it is not always constant per order.
• Stockout costs include difficult-to-observe lost sales and long-term reputational damage.

Poor estimates produce poor EOQ and replenishment decisions. Overstating holding cost causes too-small, overly frequent orders and higher ordering or stockout costs; understating it causes excess inventory, cash lock-up, markdowns, and obsolescence. EOQ is therefore a useful benchmark, not a mechanical rule—its assumptions include reasonably stable demand, known costs, reliable delivery, and no major quantity discounts.

7. JIT purchasing

JIT purchasing applies JIT principles upstream: purchase small quantities frequently, timed to arrive just before production or sale. It seeks to minimize raw-material inventory while maintaining uninterrupted operations.

It requires accurate demand information, dependable transport, suppliers capable of short lead times, consistent quality, electronic data sharing, and often long-term collaborative supplier arrangements. The buyer may reduce inventory and inspection costs, while the supplier gains more predictable demand and closer customer integration—but both parties become more exposed to disruptions.

8. Theory of constraints

The theory of constraints (TOC) holds that a system’s overall performance is constrained by its most limiting resource or policy—the bottleneck. Improving a non-bottleneck does not necessarily improve total output; management should instead identify the constraint, use it effectively, align other activities to it, increase its capacity where worthwhile, and then repeat when the constraint shifts.

In throughput accounting, throughput contribution is generally:

Throughput contribution=Sales revenue−totally variable costs

In many textbook applications, direct materials are treated as the only truly variable cost, so:

Throughput contribution=Sales revenue−Direct materials cost

Labour and most overheads are normally treated as operating costs in the short term, rather than variable unit costs. For a bottleneck decision, compare products using throughput contribution per bottleneck hour, not simply contribution per unit. A product with lower unit contribution may be preferable if it generates more throughput per scarce machine hour.

9. Balanced scorecards and time

A balanced scorecard (BSC) converts strategy into linked financial and non-financial measures across four perspectives:

Perspective	Typical time-related measures
Financial	Cash-to-cash cycle time, inventory days, return on investment, cost reduction
Customer	Order-to-delivery lead time, on-time delivery percentage, customer response time
Internal processes	Manufacturing cycle time, set-up time, defect-resolution time, throughput time
Learning and growth	Employee cross-training time, time to develop capability, improvement-project completion time

Time measures matter because speed can affect customer satisfaction, inventory investment, quality, capacity, and ultimately financial performance. Kaplan and Norton identify customer concerns as including time, quality, performance/ service, and cost; lead time can be measured from receiving the order to delivering the product or service. For new products, it becomes time-to-market.

The BSC should not reward speed alone. For example, reducing delivery lead time by rushing defective goods would damage quality and customer outcomes. Good scorecards therefore pair time indicators with quality, cost, and customer measures.

 

Videos to study: v1: Theory of constraints and throughput accounting;