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JIT efforts are commonly viewed as being directed toward the elimination of waste. The goal is to add value to the product and reduce or eliminate activities that do not. Although many firms are skeptical at first, JIT has been too successful to ignore. In fact, dramatic improvements in quality, reduced lead-time, higher productivity, and customer responsiveness led one industry spokesman to state, "The last firm to consider JIT might just as well turn out the lights."
Just-in-time techniques are now being practiced by all major U.S. automobile manufacturers and a wide range of other companies including GE, Black and Decker, Omark Industries, Hewlett-Packard, Goodyear, Harley-Davidson, Motorola, AT&T, Xerox, Intel, Borg Warner, Dynatork, Shea Manufacturing, Westinghouse, John Deere, A-P Parts, Day Co., and Mercury Marine.
But cost accounting systems that made sense years ago when they were established are now counterproductive in a just-in-time environment today's automated factories.
Key features of traditional cost accounting that tend to impair JIT implementation are:
1. Reliance on standards.
2. Emphasis on variance and efficiency computations.
3. Preoccupation with direct labor.
4. Extensive inventory tracking.
5. Overhead allocations based on direct labor.
6. Inappropriate measures of performance.
How can these shortcomings be addressed and reconciled to provide meaningful measures of JIT effectiveness?
REPLACING STANDARDS
The use of standards and standard cost accounting is widespread in manufacturing to compute variances and efficiencies. One company, AT&T, recently shifted its accounting emphasis in JIT shops from efficiency measures to a cost ratio called "incurred to standard." Its New River Valley Works (AT&T operations in the New River Valley were recently transferred to Dallas, Texas) in Radford, Virginia, maintains different shops making micro electronic components for the communications industry. Each shop receives a monthly report listing and totaling the allocated and shop expenses. This total is divided by the multiple of units produced and standard cost per unit determined by industrial engineering. When the incurred-to-standard ratio is less than or equal to one, full cost recovery is assumed.
This approach to developing a key performance measure is a considerable improvement over earlier methods. Traditional emphasis on labor efficiency, for example, tends to penalize JIT shops which produce "to demand" only and use nonproduction time to make quality and productivity improvements. The success of...