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Just-in-Time Production and Activity Based Cost Systems Essay

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Updated: Dec 4th, 2020

Background

To remain efficient and financially lucrative in the contemporary global economy setting, an organization needs to adopt the accounting system that will align with a firm’s managerial principles and production strategies (Narayanaswamy, 2017). The need to make an accounting system compatible with the framework used for manufacturing is especially important given the fact that the cost-efficient approaches used in manufacturing have a direct effect on the outcomes of decision-making in resource management and the use of corporate assets, especially financial ones. At this point, the notions of the Just-in-Time (JIT) and activity-based costing (ABC) frameworks come into sharp focus as possible options for managing both production- and accounting-related issues (Al-Qudah & Al-Hroot, 2017). Despite the fact that both approaches allow for a significant improvement in the management of costs and the financial strategies used by an organization, they cannot be combined in a single framework due to the difference in values, the discrepancies regarding the interpretation of cost management and corporate efficiency, and a different interpretation of the connection between costs and improvement.

JIT System: Key Characteristics

Ensuring that close attention is paid to the rearrangement of the entire system of a firm’s functioning, JIT requires a radical change in the use of corporate resources. The very concept of JIT implies that the materials required for the completion of a particular process are delivered at the exact time to the exact place where they are needed. As a result, a massive drop in the number of expenses and losses that may be taken in the process is expected (Vogel, 2014). While seemingly simple, the model requires a redesign of a company’s production processes, Supply Chain Management (SCM), information processing and transfer, etc. One must admit, though, that, due to a massive change in the corporate values accepted in a particular company. For instance, the JIT framework also requires significant alterations in the waste management techniques, the Supply Chain Management (SCM) processes, and the manufacturing processes (Christopher, 2016).

ABC System: Key Characteristics

Focusing primarily on the financial aspect of a firm’s functioning, the ABC system provides a simpler way of arranging accounting processes and managing costs. Particularly, it provides the foundation for management decisions based on the costs analysis and essential changes to a company’s financial strategy to avoid excessive expenses. Helping identify a connection between expenses taken by an organization, its performance strategies, and the products or services that it delivers, ABC can be viewed as a means of introducing a more careful resource planning strategy for an organization (Faraji, Maghari, & Mirsepasi, 2015).

JIT and ABC as Incompatible Systems: Reasoning

A well-defined system with each component being in its place and contributing to the enhancement of a company’s productivity with the subsequent reduction of costs and increase in profit margins is crucial. The existence of the frameworks such as JIT and ABC makes it possible for firms to retain their competitiveness and introduce the idea of sustainability and lean management into their design. However, because of their limitations, neither JIT, nor ABC provides a complete protection against all possible risks in the context of the contemporary global economy (Ahmed, 2015; Martin, 1994).

Value of the Elements: Key Disparities

When considering the characteristic of JIT and ABC that do not allow combining them, one must mention the fact that each of the approaches places different values on the elements of a firm’s functioning. For example, the ABC approach will imply introducing the concept of cost tracking as the foundation for implementing any processes within the organizational framework (Martin, 1994). JIT, in turn, will require the rearrangement of all corporate processes, in general. Therefore, the two systems will require assigning different values to the elements of a company’s functioning, which will ultimately lead to the inability to arrange the said processes. Because of the focus on not only financial aspects of a company’s functioning but also on the issues associated with HRM, production, and Supply Chain Management (SCM), JIT provides a much more complex system that will require a massive shift toward valuing long-term improvement over the identification of current financial risks and creating short-term strategies that will help an organization retain its sustainability and competitiveness.

Efficiency vs. Cost Management

The difference between JIT and ABC may also disrupt a range of HRM processes occurring within an organization. For example, the application of the ABC approach may lead to a drop in the levels of cooperation between managers due to the shift of focus toward personal excellence as opposed to teamwork. The adoption of the JIT system, in turn, will require reinforcing the significance of overall performance efficiency, which will demand the active promotion of cooperation and teamwork (Martin, 1994). The issue of personal excellence, in turn, is bound to be overlooked as a result of the specified approach. Therefore, there are few chances for making ABC and JIT coexist in the context of the same organization. It could be argued that the specified strategies will complement each other. However, the necessity to give equal priority to the issues that are barely compatible within the setting of a single workplace does not seem reasonable or profitable.

Costs and Improvement: Difference in Priorities

Similarly, the incorporation of both the ABC principles and the JIT standards is highly likely to introduce confusion into the framework of any organization due to the need to prioritize different aspects of the corporate processes. As a result, a company may choose between efficiency and cost management as opposed to sustaining both in the context of its organizational environment. The idea of a continuous improvement lies at the core of the JIT framework in the form of Total Quality Management (TQM) principles (Martin, 1994).The TQM approach, in its turn, requires substantial and continuous investments in the professional development of staff members. Therefore, the use of the approaches toward cost management suggested by the ABC model, particularly, the concept of reducing costs and minimizing waste, may imply significant restrictions in the choice of a corporate financial strategy for encouraging improvements.

Variability and Inventory Production

It is remarkable that the interpretation of variability is what brings JIT and ABC closer, at the same time pointing to significant differences between the proposed systems Both JIT and ABC allow recognizing the importance of variability, yet the latter focuses primarily on the effects of cost variations on the overall financial performance of an organization while the former deploys ti fully. The specified difference can be regarded as one of the key manifestations of why ABC and JIT cannot be combined within the setting of a single organization. Seeing how different the concept of variability as it is seen through the lens of JIT is from the one in the ABC interpretation, there are few opportunities for marrying the two strategies and creating a vision that will embrace the phenomenon of variability fully. As a result, the understanding of how costs change in a particular market in which an organization operates will be practically impossible to develop (Madan & Ranganath, 2014).

Capacity Management: Incompatibility

In addition to different interpretations of variability, ABC and JIT suggest different ideas of capacity management. While JIT with its model aimed at the continuous improvement leads to the necessity to adopt the system of constrained optimization, ABC opens opportunities for an uninhibited process of optimizing a firm’s cost management process (Wauna & Obwogi, 2015). The fact that the JIT system requires integrating the techniques of managing workflow into the process of capacity enhancement suggests a close focus on HRM issues and the necessity to invest in employees and their development, whereas the ABC framework is linked directly to the assessment of unused capacity expenses as the means of reinforcing the capacity levels and improving the overall financial performance of an organization (Maiga, Nilsson, & Jacobs, 2014). Therefore, combining the two systems does not seem a possibility.

Conclusion

Although the idea of handling both production- and accounting related issues with the same high degree of efficacy seems rather alluring, it can hardly be implemented when making the systems of JIT and ABC collide. The fact that JIT revolves around the concept of an unceasing improvement, whereas ABC requires a reconsideration of an existing cost management model, suggests that the two frameworks are likely to conflict with each other in a setting of an organization. Therefore, even a detailed stipulation of the corporate policy and the usage of all corporate resources cannot contribute to creating a system in which ABC will be compatible with JIT. Consequently, the choice of an appropriate model based on which an organization will structure its management of financial resources will have to be justified by specific properties of a firm. The combination of ABC and JIT, however, is not only unviable but also potentially dangerous to the competitiveness and overall existence of an organization, especially when placed in the competitive setting of the global economy.

References

Ahmed, A. D. (2016). Effect of inventory management on financial performance: Evidence from Nigerian conglomerate companies. World Academy of Science, Engineering and Technology, International Journal of Social, Behavioral, Educational, Economic, Business and Industrial Engineering, 10(9), 3182-3186.

Al-Qudah, L. A. M., & Al-Hroot, Y. A. K. (2017). Implementing Activity-Based Costing Technique (ABC) and its impact on profitability: A study of listed manufacturing companies in Jordan. International Journal of Economics and Financial Issues, 7(2), 271-276.

Christopher, M. (2016). Logistics & supply chain management (5th ed.). New York, NY: FT Press.

Faraji, T., Maghari, A., & Mirsepasi, N. (2015). A framework for assessing cost management system changes: The case of activity-based costing implementation at food industry. Management Science Letters, 5(4), 413-418.

Madan, A. K., & Ranganath, M. S. (2014, January). Application of selective inventory control techniques for cutting tool inventory modeling and inventory reduction – A case study. In International Conference of Advance Research and Innovation (ICARI). New Delhi, India: ICARI, pp. 978-93.

Maiga, A. S., Nilsson, A., & Jacobs, F. A. (2014). Assessing the interaction effect of cost control systems and information technology integration on manufacturing plant financial performance. The British Accounting Review, 46(1), 77-90.

Martin, J. R. (1994). A controversial-issues approach to enhance management accounting education. Journal of Accounting Education, 12(1), 59-75. Web.

Narayanaswamy, R. (2017). Financial accounting: A managerial perspective (6th ed.). Sonepat: PHI.

Vogel, H. L. (2014). Entertainment industry economics: A guide for financial analysis. Cambridge, UK: Cambridge University Press.

Wauna, S., & Obwogi, J. (2015). An assessment of the effects of inventory management procedures on performance of Kengen. International Journal of Scientific and Research Publications, 5(10), 977-991.

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