understanding of how those numbers translate into real-world performance. The widespread current emphasis on only past financial performance leads to an unbalanced situation with regard to other perspectives.
Benefits
The principal benefit of implementing a balanced scorecard is to align key performance measures with a clear strategy at all levels of the organization using a double feedback loop of inter- nal and external data. Management works from a forward-look- ing, comprehensive picture of business operations. BSC
methodology gives an easily understood common structure that makes personal communications clearer. It also helps people at all levels of the organization understand business goals and strategies.
While your organization may not use BSC, there are certain- ly several useful concepts that can apply to management activi- ties within a more traditional cost structure.
Traditional production systems tend to be push systems.
When one workstation completes a task, the output is either pushed to the next workstation or inventoried. Completion of the task triggers the start of production of the next unit and is not related to what is needed for subsequent stations. Inventory overrun happens if downstream workstations cannot cope with the workload pushed on them. Since managers usually want to get maximum use from production facilities in order to appear efficient, the result often means production of excessive work- in-progress inventory.
In contrast, JIT is a pull system. A workstation gets an order and then requests the needed items for its production from the preceding workstation. In essence, a customer order starts pro- duction. The customer can be either the ultimate buyer or anoth- er workstation in the production process. A workstation pulls the required items for its production from the preceding
workstation. The preceding workstation then withdraws the required items from the work station preceding it to produce the exact quantity needed to replace the with- drawn items, and so on.
JIT attempts to limit work-in-process inventory by enforcing a fixed maxi- mum inventory level between each two produc- tion stages. If a worksta-
tion’s output inventory level is full, it stops production until it gets the next request. JIT production systems can eliminate a large number of non-value-added costs. First, excess inventory costs—the purchase, storage, and carrying costs—are largely eliminated. JIT also cuts down on time-wasting activities, like waiting for output, moving inventory around, machine setup, and inspecting work in process. Production is organized in man-
JIT Results If your business model will support JIT, there are
impressive cost savings available. In one not atypical installation, the com- pany was able to cut the number of vendors by 67%.The restructured production process reduced rework and scrap by 44%. Machine setup times dropped by 47%.The key was that total inventory was cut almost in half, reduced by 46%.
ufacturing cells with multiskilled workers who can perform a variety of operations and tasks. The ability to understand and substitute for each other allows for wider participation in brain- storming work improvement suggestions. In fact, JIT grew out of TQM management ideas. JIT vendors are selected based on delivery time and quality, since JIT depends on short purchas- ing cycles and good quality to prevent redos. JIT also gives managers a more direct tracing of costs such as setup costs that were formerly classified as overhead. JIT accounting entries are even designed to cut costs through an approach known as backflush costing.
Backflush Costing Uses
In traditional product costing, costs track sequentially.
Transaction recording is timed with the physical sequences of purchases and production. Such a system is expensive to oper- ate and maintain, especially if costs are tracked to individual operations and products, as in job order costing.
JIT production uses an alternative recording method known as backflush costing. This approach delays recording cost data until production is complete. Backflush costing looks to remove non-value-added activities from costing systems. Typically two trigger points are set to record cost data, when raw materials are purchased and when finished goods are either completed or sold. Thus, the cost of tracking work in process disappears.
For many companies, this is a major benefit, since most managers do not find it worthwhile to spend money to track costs through work in process, finished goods, and cost of goods sold that can be captured through other means. This is especial- ly true when production is under statistical process controls.
Think back to the discussion in Chapter 6 of the effects of absorption versus variable costing. In just-in-time production systems, inventory of work in process is typically small com- pared with the costs of goods produced and sold. Using back- flush costing means that when inventories are small, the majori- ty of production costs flow into cost of goods sold and not into inventory accounts. This makes the income statement show a
higher COGS and lower revenue while the balance sheet shows lower assets.
Problems with JIT
JIT is a system balanced on a very short straw. Disruptions of inventory delivery for whatever reason can cause significant delays. The risk is largely an opportunity cost in lost revenue and lost production. Backflush costing also yields less compre- hensive cost data than conventional cost systems.