President/CEO to her Controller: "On the golf course yesterday I overheard John Jeffers, the CEO for Octal, say that the problem with many manufacturing companies today is their antiquated manufacturing cost accounting systems. It appears to me that our

Question

cost accounting system has served us well as our company has grown and should continue to serve us well as we move into JIT production with our new flexible manufacturing system." As the Controller, respond to the President/CEO.

Answer 1

As Controller, I would respond that the existing cost accounting system was developed to support both a different management philosophy and a different production environment. Management was previously concerned mainly with obtaining an acceptable level of quality (which included a level of defective product) at the lowest price possible. The just-in-time environment strives for zero defects and requires a quality product to be delivered from our vendors on time. This allows us to obtain considerable cost savings, as we are able to eliminate the cost of inspection and storage of incoming goods, but it requires that we have a different sort of relationship with our suppliers. The present cost accounting system reports a purchase price variance, but what we need now is reporting of nonfinancial information relating to quality and delivery. Similarly, our previous objective in the production area was to achieve the greatest efficiencies in each operation. In order to achieve this, the cost accounting system reported a labor efficiency variance. The new environment takes a macro approach rather than the former micro approach, and we must modify the accounting system to parallel the production environment.