Trimester 2, 2017 | ACC804 Advanced Management Accounting

Week 5 Lecture Illustration Example

Example: 1 Just-in-time purchasing, cost savings: manufacturer

(Adapted from Langfield-Smith, 2012, p. 727)
Required:
1. Calculate the annual financial impact on year profit of the decision to adopt the JIT system.
2. Recalculate the financial impact of adopting the JIT system I the following information changes:
the cost of remodeling the receiving dock is $750,000 and freed-up funds can be invested at 6 per
cent.

1 Annual financial impact:

Return on released funds [($3 600 000 $600 000) 8%]
Savings in insurance and property taxes
Lease revenue (30 000 square metres 75% $40)
Depreciation on remodelled facilities ($600 000 10 years)
Savings in warranty and repair costs
Salary savings*
Added stockout costs
Increase in profits due to the JIT system
* Note: The cost of the two transferred employees is excluded because Pacific Player
will continue to have these individuals on the payroll.

2 The effects of changing cost and rate of investment on the annual savings of adopting JIT is
as follows:
Return on released funds [($3 600 000 $600 000) 6%]
Savings in insurance and property taxes
Lease revenue (30 000 square metres 75% $40)
Depreciation on remodelled facilities ($750 000 10 years)
Savings in warranty and repair costs
Salary savings*
Added stockout costs
Increase in profits due to the JIT system
 Example: 2 Target Costing: manufacturing company
(Adapted from Langfield-Smith, 2012, p. 777)
Required:
1. Determine PEs target cost per unit assuming that the current profit margin remains unchanged.
2. If the JIT system is implemented, will PE meet the target cost?
3. Outline other steps that the company could undertake to further reduce the product cost.

1 Pharsalia Electronics current profit on sales is _____ per cent [____________________].

Therefore, the target cost for the new product must be ______ less _____ per cent, or
______ [__________________________].

2 The proposed changes to the just-in-time manufacturing process at Pharsalia Electronics will
bring costs down to _________ per unit, which is below the _________ target cost limit.
Revised costs under the JIT manufacturing process are calculated as follows:
Increase/
Current (Decrease) Revised

Material:
Purchased components
All other

Manufacturing activities:
Cutting, shaping and drilling
Bending and finishing
Setups
Material handling
Inspection

Other:
Finished goods warehousing
Selling
Customer service*

Total cost
*50% reduction

3 Pharsalia could undertake an ABM exercise to identify non-value adding time. There could
be an attempt at reducing set up time. Typically this is undertaken at the time of adopting a
JIT approach since there will now be far more set ups. Selling costs per unit are now more
than 10% of sales price. An analysis of these may reveal ways to save some of these costs.
 Example: 3 Life cycle costing: manufacturer
(Adapted from Langfield-Smith, 2012, p. 774-775)

Required:
1. Assess the profitability of the EESS in years 1, 2 and 3 using the conventional approach, which
includes manufacturing costs only.
2. Assess the profitability of the EESS based on its life cycle costs.
3. Given this information, what action should lacopetta take when considering future products?

1 Conventional profitability analysis:

Year 1 Year 2 Year 3
Sales revenue
Less Cost of goods sold
Gross profit

2 Life cycle profitability analysis:

Year 0 Year 1 Year 2 Year 3 Total
Sales revenue
Less
Manufacturing cost
Research and development
Product design
Process design
Tooling costs
Marketing costs
Warranty claims
After-sales service
Total product costs
Net profit / (loss)

3 Iacopetta should insist that products are evaluated across their entire life cycle. (This
should include an assessment of the projected life cycle revenues and costs, prior to the
acceptance of the proposed project.)