CHAPTER 10
DISCUSSION QUESTIONS
Q10-1.The purpose of a JIT system is to minimize problem would be discovered; if 10 units are
the levels of raw materials and work in held waiting, no more than 10 defectives
process inventory investments, while improv- could be produced before the problem would
ing the overall manufacturing process. The be discovered.
intent is to pull inventory through the system Q10-9.A blanket purchase order is an agreement
only as it is required. between buyer and seller stating the total
Q10-2.JIT seeks to eliminate all forms of waste, quantity expected to be needed over a period
including production losses such as defects. of three or six months.
Successful reduction of these problems con- Q10-10.In many JIT work cells, these distinctions—
tributes to product quality, and, so, is a part of between direct and indirect labor and
TQM. between producing departments and some
Q10-3.To avoid inventory buildup, the entire JIT sys- service functions—do not exist, because the
tem shuts down whenever defects are found; same workers (the team assigned to the cell)
so to achieve a good rate of flow, the number perform all these tasks.
of defects must be small. Q10-11.In backflush costing, the work in process
Q10-4.Theoretically, in an ideal JIT system the EOQ inventory account is not adjusted throughout
is one; each time more output is needed, one the period to reflect all the costs of units in
more part or unit is produced. process; there are no detailed subsidiary
Q10-5.Although a zero inventory level is unattain- records maintained for work in process; and a
able, JIT stimulates improvement in the envi- single account may be used for both raw
ronmental conditions that cause inventory materials and work in process.
buildup, such as long setup times, high setup Q10-12.In backflush costing, the materials and work
costs, poor quality, and poorly balanced work in process inventory accounts might be com-
loads. bined into a single account, because materi-
Q10-6.The relationship between velocity and WIP als might be put immediately into production
levels is an inverse relationship; doubling the when they are received.
velocity means halving the WIP level, pro- Q10-13.Postdeduction is the subtraction from the
vided the output rate is held constant. This is work in process account of some or all ele-
similar, but not identical, to the relationship ments of the cost of completed work, after the
expressed in the familiar inventory turnover work is completed.
ratio used in financial statement analysis. Q10-14.The periodic inventory method used by many
Q10-7.The strategic advantage of improving velocity merchandising companies is analogous to
throughout the company, from product backflush costing as used by manufacturers.
research and development to shipping, is that Q10-15.If a backflush costing system expenses all
the company can then respond faster to any conversion costs to the cost of goods sold
changing customer need or to an opportunity account, the correct amount of conversion
for a new or altered product. cost is included in inventory accounts by
Q10-8.Reducing the level of WIP also reduces the making an end-of-period adjustment of the
maximum number of defectives, if the inventory accounts’ balances. The offsetting
defects are of a kind that will be discovered entry is an adjustment of the cost of goods
at the next work station after the units are sold account. The correct amount of conver-
held waiting between stations. If 100 units sion cost to be included in each inventory
are waiting between stations, up to 100 account is estimated when inventories are
defectives might be produced before the physically counted.
10-1
,10-2 Chapter 10
EXERCISES
E10-1 The expected annual savings are $40,500, consisting of $18,000 carrying costs
savings and $22,500 savings in the cost of defects, calculated as follows:
Carrying cost savings = 25% × reduction in average variable cost of WIP
= 25% × 30% × past average variable cost of WIP
= .25 × .3 × (10 × 300 × $80)
= $18,000
Savings in cost of defects
= $25 × reduction in number of defective units
(reduction in
number of (number of out-of-
= $25 × defective units × control conditions
produced per not discovered
undiscovered immediately)
out-of-control
condition)
= $25 × (30% × 300 × 5%) × (1/3 × 600)
= $25 × 4.5 × 200
= $22,500
E10-2 The average lead time will be 26 days, calculated as follows:
Reduction of vendor lead time = 1/6 × 18 days = 3 days
Because the rate of output will be unchanged, a reduction of WIP to one-third of
its present level will triple the velocity. The average order will then remain in WIP
only one-third as long, saving two-thirds of time presently being spent in WIP:
Reduction of time in WIP = 2/3 of present time in WIP
= 2/3 × 12 days
= 8 days
New lead time = present lead time – reductions
= 37 days – (3 days + 8 days)
= 26 days
This approach can be used even if the other components of total lead time,
such as the two days in final inspection, are not stated. If all the components of
total lead time are known, as in this exercise, then the new lead time can be cal-
culated by adding all its components:
(5/6 × 18) + 2 + (1/3 × 12) + 2 + 3 = 15 + 2 + 4 + 2 + 3
= 26 days
, Chapter 10 10-3
E10-3 The expected annual savings is $2,200,000, calculated as follows:
Doubling the velocity of all tasks, from receipt of order to shipment and from
ordering materials to issuing materials to production, will reduce WIP and mate-
rials inventories by half, therefore:
Reduction in materials carrying costs = 20% × materials reduction
= 20% × (1/2 × $3,000,000)
= $300,000
Reduction in WIP carrying costs = 20% × WIP reduction
= 20% × (1/2 × $5,000,000)
= $500,000
This change will also reduce customer lead time from eight weeks to four weeks.
Because customers are willing to wait up to five weeks for shipment, all ship-
ments can then be made-to-order. There will no longer be a need for finished
goods inventory. Once the existing finished goods inventory is liquidated by
sales or scrapping, the annual savings from not carrying finished goods will be:
Reduction in finished goods carrying costs
= 20% × finished goods reduction
= 20% × (100% × $7,000,000)
= $1,400,000
Total savings = $300,000 + $500,000 + $1,400,000 = $2,200,000
(This exercise is based closely on an actual case of a partial JIT implementation.
The name of the company and dollar amounts have been altered.)
E10-4
(1) (a) Equivalent production = 4,500 + (.50 × 20) = 4,510 units;
$300, 740
= $66.683 per unit
4, 510
(b) $300, 000
= $66.667 per unit
4, 500
(c) units started = 4,500 + 20 – 24 = 4,496 units;
$300, 000
= $66.726 per unit
4, 496
(2) $667, because 20 × .50 × $66.683 = $666.83.
$667, because 20 × .50 × $66.667 = $666.67.
$667, because 20 × .50 × $66.726 = $667.26.
DISCUSSION QUESTIONS
Q10-1.The purpose of a JIT system is to minimize problem would be discovered; if 10 units are
the levels of raw materials and work in held waiting, no more than 10 defectives
process inventory investments, while improv- could be produced before the problem would
ing the overall manufacturing process. The be discovered.
intent is to pull inventory through the system Q10-9.A blanket purchase order is an agreement
only as it is required. between buyer and seller stating the total
Q10-2.JIT seeks to eliminate all forms of waste, quantity expected to be needed over a period
including production losses such as defects. of three or six months.
Successful reduction of these problems con- Q10-10.In many JIT work cells, these distinctions—
tributes to product quality, and, so, is a part of between direct and indirect labor and
TQM. between producing departments and some
Q10-3.To avoid inventory buildup, the entire JIT sys- service functions—do not exist, because the
tem shuts down whenever defects are found; same workers (the team assigned to the cell)
so to achieve a good rate of flow, the number perform all these tasks.
of defects must be small. Q10-11.In backflush costing, the work in process
Q10-4.Theoretically, in an ideal JIT system the EOQ inventory account is not adjusted throughout
is one; each time more output is needed, one the period to reflect all the costs of units in
more part or unit is produced. process; there are no detailed subsidiary
Q10-5.Although a zero inventory level is unattain- records maintained for work in process; and a
able, JIT stimulates improvement in the envi- single account may be used for both raw
ronmental conditions that cause inventory materials and work in process.
buildup, such as long setup times, high setup Q10-12.In backflush costing, the materials and work
costs, poor quality, and poorly balanced work in process inventory accounts might be com-
loads. bined into a single account, because materi-
Q10-6.The relationship between velocity and WIP als might be put immediately into production
levels is an inverse relationship; doubling the when they are received.
velocity means halving the WIP level, pro- Q10-13.Postdeduction is the subtraction from the
vided the output rate is held constant. This is work in process account of some or all ele-
similar, but not identical, to the relationship ments of the cost of completed work, after the
expressed in the familiar inventory turnover work is completed.
ratio used in financial statement analysis. Q10-14.The periodic inventory method used by many
Q10-7.The strategic advantage of improving velocity merchandising companies is analogous to
throughout the company, from product backflush costing as used by manufacturers.
research and development to shipping, is that Q10-15.If a backflush costing system expenses all
the company can then respond faster to any conversion costs to the cost of goods sold
changing customer need or to an opportunity account, the correct amount of conversion
for a new or altered product. cost is included in inventory accounts by
Q10-8.Reducing the level of WIP also reduces the making an end-of-period adjustment of the
maximum number of defectives, if the inventory accounts’ balances. The offsetting
defects are of a kind that will be discovered entry is an adjustment of the cost of goods
at the next work station after the units are sold account. The correct amount of conver-
held waiting between stations. If 100 units sion cost to be included in each inventory
are waiting between stations, up to 100 account is estimated when inventories are
defectives might be produced before the physically counted.
10-1
,10-2 Chapter 10
EXERCISES
E10-1 The expected annual savings are $40,500, consisting of $18,000 carrying costs
savings and $22,500 savings in the cost of defects, calculated as follows:
Carrying cost savings = 25% × reduction in average variable cost of WIP
= 25% × 30% × past average variable cost of WIP
= .25 × .3 × (10 × 300 × $80)
= $18,000
Savings in cost of defects
= $25 × reduction in number of defective units
(reduction in
number of (number of out-of-
= $25 × defective units × control conditions
produced per not discovered
undiscovered immediately)
out-of-control
condition)
= $25 × (30% × 300 × 5%) × (1/3 × 600)
= $25 × 4.5 × 200
= $22,500
E10-2 The average lead time will be 26 days, calculated as follows:
Reduction of vendor lead time = 1/6 × 18 days = 3 days
Because the rate of output will be unchanged, a reduction of WIP to one-third of
its present level will triple the velocity. The average order will then remain in WIP
only one-third as long, saving two-thirds of time presently being spent in WIP:
Reduction of time in WIP = 2/3 of present time in WIP
= 2/3 × 12 days
= 8 days
New lead time = present lead time – reductions
= 37 days – (3 days + 8 days)
= 26 days
This approach can be used even if the other components of total lead time,
such as the two days in final inspection, are not stated. If all the components of
total lead time are known, as in this exercise, then the new lead time can be cal-
culated by adding all its components:
(5/6 × 18) + 2 + (1/3 × 12) + 2 + 3 = 15 + 2 + 4 + 2 + 3
= 26 days
, Chapter 10 10-3
E10-3 The expected annual savings is $2,200,000, calculated as follows:
Doubling the velocity of all tasks, from receipt of order to shipment and from
ordering materials to issuing materials to production, will reduce WIP and mate-
rials inventories by half, therefore:
Reduction in materials carrying costs = 20% × materials reduction
= 20% × (1/2 × $3,000,000)
= $300,000
Reduction in WIP carrying costs = 20% × WIP reduction
= 20% × (1/2 × $5,000,000)
= $500,000
This change will also reduce customer lead time from eight weeks to four weeks.
Because customers are willing to wait up to five weeks for shipment, all ship-
ments can then be made-to-order. There will no longer be a need for finished
goods inventory. Once the existing finished goods inventory is liquidated by
sales or scrapping, the annual savings from not carrying finished goods will be:
Reduction in finished goods carrying costs
= 20% × finished goods reduction
= 20% × (100% × $7,000,000)
= $1,400,000
Total savings = $300,000 + $500,000 + $1,400,000 = $2,200,000
(This exercise is based closely on an actual case of a partial JIT implementation.
The name of the company and dollar amounts have been altered.)
E10-4
(1) (a) Equivalent production = 4,500 + (.50 × 20) = 4,510 units;
$300, 740
= $66.683 per unit
4, 510
(b) $300, 000
= $66.667 per unit
4, 500
(c) units started = 4,500 + 20 – 24 = 4,496 units;
$300, 000
= $66.726 per unit
4, 496
(2) $667, because 20 × .50 × $66.683 = $666.83.
$667, because 20 × .50 × $66.667 = $666.67.
$667, because 20 × .50 × $66.726 = $667.26.
