Managerial Accounting and the Business Environment

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Prologue

Managerial Accounting and
the Business Environment

Study Suggestions

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The prologue describes important aspects of the contemporary business environment. While there are no written assignments, you should be familiar with the major ideas as background for your study of managerial accounting.

HIGHLIGHTS

A.In many industries, a company that does not continually improve will find itself quickly overtaken by competitors. The text discusses four major approaches to improvement—Just-In-Time (JIT), Total Quality Management (TQM), Process Reengineering, and the Theory of Constraints (TOC). These approaches can be combined.

B.The Just-In-Time (JIT) approach is based on the insight that reducing inventories can be the key to improving operations. Work in process inventories (i.e., inventories of partially completed goods) create a number of problems:

1.Work in process inventories tie up funds and take up space.

2.Work in process inventories increase the throughput time, which is the amount of time required to make a product. If a company has two weeks of work in process inventories, then it takes two weeks longer to complete a unit than if there were no work in process inventories. Long throughput time makes it difficult to respond quickly to customers and can be a major competitive disadvantage.

3.When work in process inventories are large, partially completed products are stored for long periods of time before being passed to the next workstation. Therefore, defects introduced at a workstation may not be noticed for quite some time. If a machine is out of calibration or incorrect procedures are being followed, many defective units will be produced before the problem is discovered. And when the defects are finally discovered, it may be very difficult to track down the source of the problem.

4.Because of long throughput time, units may be obsolete or out of fashion by the time they are finally completed.

5.Large work in process inventories encourage sloppy procedures and mask inefficiencies and problems in the production process. When inventories are reduced, these problems are uncovered and can be identified and dealt with.

C.Under JIT, inventories are reduced to the absolute minimum levels possible.

1.“Just in time” means that raw materials are received just in time to go into production, subassemblies are completed just in time to be assembled into products, and products are completed just in time to be shipped to customers.

2.In JIT, the flow of goods is controlled by a “pull” approach; work is initiated only in response to customer orders. In contrast, under conventional systems parts and material are “pushed” forward to the next workstation regardless of need. There is also a tendency in conventional systems to seek to “keep everyone busy.” The result in both cases is a needless buildup of inventory.

3.A JIT company should strive for zero defects. If any units in an order are defective, the whole production process would have to be restarted to replace the defective units. This would make it impossible to deliver the order on time.

D.Many benefits result from a JIT system. The most important are:

1.Funds that were tied up in inventories can be used for more productive purposes.

2.Areas used to store inventories are made available for more productive uses.

3.Throughput time is reduced, resulting in greater potential output and quicker response to customer needs.

4.Defect rates are reduced, resulting in less waste and greater customer satisfaction.

E.Total Quality Management (TQM) is an approach to continuous improvement that focuses on the customer and that involves systematic problem-solving using teams of front-line workers. Specific TQM tools include benchmarking and the Plan-Do-Check-Act Cycle.

1.Benchmarking involves studying how a successful “world-class”...
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