Turbo-Oven,Inc.is considering a move to cellular manufacturing.Management of the company has requested from you,as the management accountant,to supply it with information that will help inform the decision as to whether or not such a move is desirable.Your research into past performance of the company as well as extensive discussion with the manager of operations and the sales manager produced the following information.

Question

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Required:
(1)In terms of the above information,provide for management of the company a rationale as to why you included each of the following items:
a.increase in sales total sales revenue
b.decrease in direct materials cost as a percentage of sales
c.decrease in holdings of Work-in-Process (WIP)inventory
(2)Provide an estimate of each of the following financial effects associated with the proposed move to a cellular manufacturing layout:
a.change in total (out-of-pocket)manufacturing costs
b.reduction in WIP inventory holdings
c.net financial effect of the change,per year
(3)In general,what types of costs would need to be incurred in order to reap the benefits outline above in (2)?
Please see Feedback for answers.
 Feedback: (1a)Under a cellular manufacturing one observes a more streamlined manufacturing process,which leads to reduced manufacturing cycle times,improved quality,and faster customer-response times.This quicker response and delivery time to customers along with improved product quality usually translates into increased sales volume and market share,and ultimately increased profitability.
(1b)Cellular manufacturing is characterized by continuous product flow,similar to the concept underlying JIT.Under this situation,workers are able to detect a production problem earlier-that is,before there is a loss of significant production due to the problem.In fact,in many Japanese plants,"downstream" workers are empowered to stop a production line whenever a quality problem is detected.Such early intervention increases the amount of first-pass yield or,equivalently,reduces the need for rework costs,which saves the organization direct materials cost (as well as labor and variable manufacturing overhead)costs.
(1c)Under a cellular manufacturing plant layout,the production process is streamlined,by design.That is,manufacturing takes place within dedicated cells that are flexible and able to produce a variety of outputs with short set-up times.One consequence of this is the elimination of inventory build-ups,which occur under conventional (batch)processing.Under conventional layouts,work-in-process buffer stocks are typically held to allow for quality problems and to prevent downtime for downstream activities.The elimination of such inventories,including WIP,results in both out-of-pocket and opportunity cost savings.(2a)Under the proposed plant layout option,total (out-of-pocket)manufacturing costs are expected to decrease by $10,000 per year,as follows: (1)total out-of-pocket manufacturing cost = $1,400,000 x 25% = $350,000 per year,and (2)revised out-of-pocket manufacturing cost = $1,700,000 x 20% = $340,000 per year.
(2b)The proposed change to cellular manufacturing is expected to reduce Work-in-Process inventories by approximately $160,000 during each year (given).At an opportunity cost (i.e. ,cost of capital)of 12%,the annual cost savings associated with a reduction in holding of WIP inventory is estimated to be 12% x $160,000 = $19,200.
(2c)The net financial benefit,per year,associated with the change to a cellular manufacturing layout is estimated to be $329,200,as follows: 11ea6e70_bd5a_8569_8f54_f3545b95b968_TB1699_00 (3)In general,organizations invest in physical assets,human capital,and information systems.Thus,any costs of the change to a cellular manufacturing layout may affect spending in each of these areas.In terms of employee-related costs,there will most likely be significant (and on- going)education and training costs,as employees adapt to the new system,and become proficient at performing an expanded set of actions that are typically required under a cellular manufacturing layout.In terms of systems,the management accounting and control system will likely need to be revised to including key nonfinancial performance indicators,such as
customer-response time (CRT)and process cycle efficiency (PCE).Further,as pointed out in the chapter,a mechanism for determining when these performance measures are "in control" would likely be needed as part of the new control system.Finally,there will likely be significant capital expenditures associated with property (both tangible and intangible)needed to implement cellular manufacturing.The management accountant can help here by gathering and reporting to management relevant information for capital-investment analysis,as discussed previously in Chapter 12 of the text.