Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 33

Relevant Cost Analysis—Conversion to JIT As part of its commitment to quality, the J. J. Borden manufacturing company is proposing to introduce just-in-time (JIT) production methods. Managers of the company have an intuitive feel regarding the financial benefits associated with a change to JIT, but they would like to have some data to inform their decision making in this regard. You are provided with the following data:

Item	Existing Situation	After Adopting JIT
Manufacturing Costs as Percentage of Sales:
Product-level support costs	12%	5%
Variable manufacturing overhead	28%	10%
Direct materials	30%	20%
Direct manufacturing labor	22%	15%
Other Financial Data:
Sales revenue	$1,350,000	$1,650,000
Inventory of WIP	$180,000	$30,000
Other Data:
Manufacturing cycle time	60 days	30 days
Inventory financing cost (per annum)	10%	10%

Required You have been asked, in conjunction with your position as the management accountant for the company, to construct an Excel spreadsheet that can be used to estimate the financial benefits associated with the adoption of JIT.

Step 1 of 2

Management and Control of Quality

Quality is explained as a term associated with customer satisfaction. It is the total level of satisfaction any customer gets from any organization’s products or service. There are two components of quality- Design Quality and Performance Quality. There are various approaches to setting quality related expectations and among those alternatives one is the Cost of Quality (COQ) Reporting. It provides relevant cost and revenue data used for decision-making purposes.