TABLE OF CONTENTS

QUESTION TOPIC PAGE NO

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Q.2 ANSWER
Definition of Equivalent Unit of Production
An equivalent unit of production is an expression of the amount of work done by a manufacturer
on units of output that are partially completed at the end of an accounting period. Basically the
fully completed units and the partially completed units are expressed in terms of fully completed
units.
Equivalent units are used in the production cost reports for the producing departments of
manufacturers using a process costing system. Cost accounting is likely to present the cost
calculations per equivalent unit of production under two cost flow assumptions: weighted-
average and FIFO

Example of Equivalent Units of Production

Assume that a manufacturer uses direct labor continuously in one of its production departments.
During June, the department began with no units in inventory and then started and completed
10,000 units. In addition, it started 1,000 units but they were only 30% complete at the end of
June. The production cost report for this department will indicate that it manufactured 10,300
(10,000 + 300) equivalent units of product during June.
If the department's direct labor cost was $103,000 during the month, it's June direct labor cost
per equivalent unit will be $10 ($103,000 divided by 10,300 equivalent units). This means that
$100,000 (10,000 X $10) of labor costs will be assigned to the finished units and $3,000 (300
equivalent units X $10 labor cost per equivalent unit) will be assigned to the 1,000 partially
completed units.
Units of product in work-in-process inventory are assumed to be partially completed; otherwise,
the units would not be in work-in-process inventory. Process costing requires partially
completed units in ending work-in-process inventory to be converted to the equivalent
completed units (called equivalent units). Equivalent units are calculated by multiplying the
number of physical (or actual) units on hand by the percentage of completion of the units. If the
physical units are 100 percent complete, equivalent units will be the same as the physical units.
However, if the physical units are not 100 percent complete, the equivalent units will be less
than the physical units.

OBJECTIVES AND CALCULATIONS

The objective of using equivalent units is to be able to apportion the costs of production to
completed units and partially completed units held in work in process.

Equivalent Units Formula

Equivalent units are calculated by multiply the number of physical units in work in process by
the estimated percentage of completion of the units
Equivalent units = Number of physical units × Percentage of completion

For example, if four physical units of product are 50 percent complete at the end of the period,
an equivalent of two units has been completed (2 equivalent units = 4 physical units × 50
percent). The formula used to calculate equivalent units is as follows:

METHODS
Most companies use either the weighted average or first-in-first-out (FIFO) method to assign
costs to inventory in a process costing environment. The weighted average method includes
costs in beginning inventory and current period costs to establish an average cost per unit. The
first-in-first-out (FIFO) method keeps beginning inventory costs separate from current period
costs and assumes that beginning inventory units are completed and transferred out before the
units started during the current period are completed and transferred out.

CALCULATION EQUIVALENT UNITS USING WEIGHTED AVERAGE METHOD

As a simple example, suppose a business has 300 units of a product in work in process and
they are estimated to be 40% complete. Using the equivalent units of production formula we get:
What this example shows is that although there are 300 physical units of product in work in
process, as they are only 40% complete it is equivalent to having 120 units of finished, fully
completed product.

ESTIMATING THE PERCENTAGE OF COMPLETION

In the example above we simply stated that the estimated percentage of completion was 40%.
In practice the percentage of completion needs to be based on each factor of production such
as direct materials, direct labor, and manufacturing overheads. For example the work in process
units might be 50% complete in terms of direct materials, 40% complete in terms of direct labor,
and 10% complete in terms of manufacturing overhead.
we have 300 units in work in process, then the equivalent units are calculated as follows:

Materials = 300 x 50% = 150

Labor = 300 x 40% = 120
Overheads = 300 x 10% = 30

CALCULATION OF EQUIVALENT UNITS FIFO METHOD

The following example is used to demonstrate how the equivalent units FIFO method is used to
allocate production costs between completed and partially completed units.
At the start of an accounting period a business has 2,000 units in beginning work in process.
During the accounting period a further 8,000 units are added to the production process and
6,000 units are completed and transferred out, leaving an ending balance of 4,000 units in work
in process.
If the equivalent units FIFO method is used then only the percentage of beginning WIP units
completed during the accounting period and the production costs incurred in completing those
units, are included in the calculation of the cost per equivalent unit
In this example the FIFO method is used and the beginning WIP units are partially completed at
the start of the accounting period. The production costs incurred during the accounting period
are therefore spent on the uncompleted part of the beginning WIP units.
Obviously the units started and completed during the period are 100% complete and the
equivalent units are the same as the physical units. The beginning WIP units are already
partially complete at the start of the period and are further completed during the period and
need to be converted to equivalent units. Likewise, the ending work in process units are only
partially complete at the end of the period and again, need to be converted to equivalent units.
If we assume that the state of completion of the beginning WIP units is material 90%, labor
55%, and overheads 30%, and the state of completion of the ending WIP units is material 85%,
labor 65%, and overheads 35%, then the equivalent units are calculated as follows:

Beginning WIP
Materials = 2,000 x (100% - 90%) = 200
Labor = 2,000 x (100% - 55%) = 900
Overheads = 2,000 x (100% - 30%) = 1,400

Notice that the production costs are spent on the uncompleted part of the beginning WIP.

Ending WIP
Materials = 4,000 x 80% = 3,200
Labor = 4,000 x 65% = 2,600
Overheads = 4,000 x 35% = 1,400

The production costs are spent on the completed part of the ending WIP.
The physical units can now be represented as equivalent units for each production factor.

Equivalent units FIFO method

Material Labor Overhead
Beginning WIP 200 900 1,400
Started and completed 4,000 4,000 4,000
Ending WIP 3,200 2,600 1,400
Total 7,400 7,500 6,800

ESSENTIAL DIFFERENTIATION:
The essential distinction between the two strategies is the expense found out to the stock that is
dispatched or sold by a business. In FIFO strategy, the essential supposition followed is that
stock which is obtained first or enters the business first will be quick to exit. This influences the
expense of dispatched stock on the grounds that, independent of the hour of dispatching stock,
the expenses dispensed to those inventories will be as per the most punctual inventories got. In
weighted normal technique, the stock will be dispatched based on a weighted normal of
expenses of all the stock present in a business at the hour of dispatch. It implies that for each
dispatch another expense will be determined and allotted to the stock if the business follows an
interminable arrangement of stock valuation which is more useful.

EFFECT ON MONETARY FIGURES:

The strategy for stock valuation can influence the significant monetary figures of an organization
particularly incomes and benefits. In a period of rising expansion, the benefits for an
organization will be shown expanded under FIFO strategy when contrasted with weighted
normal technique, on the grounds that the merchandise will be sold on more exorbitant costs yet
the expense of products deducted will probably be the soonest and least expensive. In a period
of diminishing expansion, the overall revenues for an organization will be higher under weighted
normal technique when contrasted with FIFO strategy in light of the fact that the expense of
products sold will be a normal figure under weighted normal strategy which will be lower if costs
are recorded under FIFO strategy.

SIMPLICITY OF EXECUTION:
FIFO strategy is simpler to carry out as it is effectively reasonable by the administration of an
organization while the execution of weighted normal technique for stock valuation is more
drawn-out and tedious exercise. Albeit, weighted normal strategy can be seen effectively there
are expanded odds of blunders while applying it, in actuality.

KEY TAKEAWAYS
At the point when it comes time for organizations to represent their stock, they ordinarily utilize
one of three distinctive essential bookkeeping strategies: the weighted normal technique, the
earliest in, earliest out (FIFO) strategy, or the toward the end in, first out (LIFO) technique.
The weighted normal technique is most regularly utilized when stock things are interlaced to the
point that it gets hard to allocate a particular expense to an individual unit.
The earliest in, earliest out (FIFO) bookkeeping strategy depends on an expense stream
supposition that eliminates costs from the stock record when a thing in somebody's stock has
been bought at different expenses, over the long run.
Cycle costing – FIFO versus weighted-normal
The weighted-normal technique may be considered less complex. Yet, the FIFO technique may
be viewed as more precise. That being said, when the foundation is laid for a FIFO cycle costing
framework, computations ought to be put forth consequently and require at least attempt on
your part. That is… if everything's set up effectively.
Underneath, I'll think about the estimations from the weighted-normal and FIFO strategies. Each
will allude to similar sources of info – Item1, Dept A, from the Process Costing exercise manual.
That way, you'll have the option to look at the two strategies one next to the other, logical, and
choose which bodes well for your organization. At that point, you can proceed onward to
additional squeezing matters.

Q.3 ANSWER
Just-in-time (JIT) purchasing is a cost accounting strategy where you purchase the minimum
amount of goods to meet customer demand. Say you decide to approach your supplier about
moving to a JIT purchasing arrangement. The supplier needs to deliver smaller shipments more
frequently. You request a price quote based on new, different levels of purchasing activity.
Compare the financial impact of your current purchasing system with a JIT purchasing system.
The Just-In-Time (JIT) concept is a manufacturing workflow methodology aimed at reducing
flow times and costs within production systems and the distribution of materials.

The concept was popularized by the productivity of Japanese industry in the early 1970s within
the Toyota manufacturing plants that would meet consumer demands with minimum delays
using an approach focused on people, plants and systems.

MODERN WORLD
JIT avoids the waste associated with overproduction, waiting for material and holding excess
inventory. The original concept was created by the founder of Toyota. Just-in-Time means that
a manufacturer makes only what is needed, only when it is needed, and only in the amount that
is needed
Many manufacturers have tried to imitate Toyota without understanding the underlying concept
or motivation, which might have led to the failure of those projects. The concept behind Toyota’s
system is to work intelligently and eliminate waste so that only minimal inventory is needed.

Toyota’s founder used the American supermarket as his model for what he was trying to
achieve in the factory. When shopping for groceries, a customer takes what s/he wants from the
shelf and purchases them. The store restocks the shelf with enough new product to fill up the
shelf space. In a manufacturing situation, a worker would go to an inventory storage location
and remove the quantity of material needed for production. The inventory storage location would
then replenish just the amount of the material taken.

The just-in-time inventory model lets manufacturers reduce their overhead expenses while
always ensuring that parts are available to manufacture their products. This allows a company’s
customers to be better served, while, at the same time, lowering the cost of doing business.

Warehousing excess inventory can be very expensive. Reducing the amount of inventory can
reduce carrying costs. Companies that employ the just-in-time inventory model may be able to
reduce the number of warehouses they own, or even allow them to eliminate those warehouses
altogether.

An efficient supply chain can deliver lower costs throughout the manufacturing process, and
those lower costs can then be passed on to the customer, making the company's products more
affordable. This helps the company acquire a larger market share and outpace its competitors.

By using the JIT model, a manufacturer has a better level of control over its entire
manufacturing process, thereby, making it easier to respond quickly when the needs of
customers change. For example, a manufacturer that uses the just-in-time inventory model can
quickly increase production of an in-demand product, while reducing production on products that
are slowing down. The company will need to cut prices on any unsold inventory just to clear it
out, which reduces the perceived value of the manufacturer’s other products. The just-in-time
inventory model reduces this waste.

EXAMPLES
One example of JIT are fast-food restaurants, which use just-in-time inventory to serve their
customers on a daily basis during breakfast, lunch and dinner. Fast food restaurants have
cheese, burger patties and all the fixings in a refrigerator, but they don't start assembling and
cooking their cheeseburgers until a customer places an order.

Another example is the self-publishing industry. Authors might forgo the traditional approach to
publishing their works and self-publish. Self-published authors can take advantage of just-in-
time inventory by working with a printer that offers print-on-demand services. Print-on-demand
companies don't print the books until an order is placed.

EXPLAINATION
By reducing inventory, JIT frees up resources to employ them elsewhere in the company. A
retail store—using JIT—can renovate its warehouse space, providing additional retail floor
space without expanding the store itself.

A manufacturer can convert part of its warehouse into manufacturing space, increasing
production. JIT also allows the workforce to focus on primary tasks, from making goods to
interacting with customers rather than stocking material.

With JIT, manufacturers will know when employees are needed at different stations of assembly
to meet the demand of those stages of manufacturing. A more flexible workforce can focus on
quality production with lower defect rates, which lower costs and increase customer satisfaction.

To make JIT workable, management must rethink the entire work flow of the company, from the
intake of raw materials to the final finished product. At the same time, supply-chain relationships
might require multiple suppliers, closer locations, and suppliers that can provide materials with
minimal notice.

One negative is the problem that smaller orders will be needed for JIT. Therefore, new
negotiations may be needed because of minimum order requirements. Even if a slightly higher
price is paid, the cost difference could be offset by the low cost of inventory.

An entirely different mindset will be needed throughout the company. The complete workforce
must understand the entire JIT process and shift to where they are needed, as work flow
recedes and surges to meet customer demand swings. This will take a sizable commitment of
both time and money at first—plus allegiance—to stay the course in implementing JIT. If not, the
system will never gain traction within the company.
The prime goal of JIT is for zero inventories across the organization and its supply chain. This
completely utilizes the organizational capabilities and maximizes ROI. The system was so
successful in Japan it was copied by many US companies, notably Hewlett-Packard.

Successfully implementation is dependent on creating a business wide initiative, encouraging

staff engagement and formulating a policy and strategy that can be mobilized.

JIT AND COST ACCOUNTING

JIT’s most significant influence on a company and its cost management system is the
concentration on non-value added processes, defined as "any activity or procedure that is
performed within a company that does not add value to a product" (p. 20). For example, in a
production line, only the time spent processing adds value to a product. Inspection time and
storage time add cost but no value, thus are non-value added processes. In many companies,
the process time is less than 10% of the total manufacturing lead time and cost, leaving the
other 90% of the lead time adding cost but no value to the product. The JIT philosophy is that
reducing the lead time will reduce the total costs.

The impact of JIT on traditional cost accounting is that the causes of costs, or cost drivers, now
need to be identified for the non value-added activities so they can be reduced or eliminated.
Identification of drivers allows the simplification of product designs, resulting in more efficient
processes.

Another effect of JIT on cost management systems is the reduction in the number of cost
elements for a product. Standard cost systems maintained many product cost elements, such
as direct materials and direct labor, to control production costs. With JIT however, the cost
drivers associated with production costs are identified so the product costs can be reduced
through design and process improvements which removes the requirement of defining multiple
cost elements. The focus moves from the reporting of cost elements to the elimination and
prevention of costs. Furthermore, the reduction of cost elements reduces the costs related to
their calculations, maintenance, and control
A key characteristic of JIT is the use of manufacturing cells, where a product is produced start to
finish without revisiting the stockroom, thus reducing travel distances and inventory between
machines. Each cell within the system represents a "factory within a factory".

Traditional cost accounting systems apply indirect manufacturing costs based on direct labor
hours or dollars charged to a specific product. Under JIT, there are two significant differences:

1. The total of all related costs are applied to the day’s production, not to particular jobs and
tasks.

2. JIT applies total conversion costs based on velocity, defined as "the theoretical number of
units that can be produced within a cell over a given period", through a manufacturing cell. A
day’s production cost is calculated by multiplying the number of units produced in a day by the
costs associated with the hours used for production, including the non-value hours.
Another major influence of JIT is the increase in the amount of production cost that can be
directly applied to a product, which is a result of cellular manufacturing.

A fundamental goal of JIT is the reduction of total product cost through eliminating allocations
wherever possible, because as the number of allocations increase, the reliability for decision
making purposes decreases. Elimination of allocations is accomplished through manufacturing
cells producing singular or similar products.

IMPACT OF JIT ON MODERN DAY BUSINESSES

The traditional measures of direct labor efficiency, utilization, productivity, and machine
utilization used to monitor improvement and motivate personnel, are deemed inappropriate in
JIT. These measures promote excess inventory levels. Additionally, using standards for
performance measures does not promote continuous improvement since people are usually
satisfied once standards are attained.

Performance measures deemed appropriate for a cost management system under JIT includes
nonfinancial indicators that are consistent with the identification of true cost drivers and with the
JIT concentration on quality and lead times.

The simplification of design and processes through JIT results in better management, which in
turn results in better quality and service, and less cost. This concept also applies to cost
management systems. In simplifying the complex traditional cost accounting system, everyone
in the organization can make use of the system, making it a cost management system.
Just-in-time (JIT) is a production technique that was first pioneered by Toyota, to minimize the
need for excess inventory through linking production to demand. In a nutshell, JIT means that a
product is only ordered or manufactured once an order has been placed. This way, a business
can operate with a minimum of stock and labour, greatly reducing the associated costs of
sourcing, making and holding excess inventory, as well as the cost of writing off spoiled or
obsolescent items.

For some businesses, there are situations and circumstances in their day-to-day operations that
require the holding or manufacturing of more inventory than may be needed for current orders.
JIT makes it possible for a business to operate with the realistic bear minimum. When used well,
this translates to a valuable combination of lower inventory costs, less production waste and all-
around greater efficiency.

CRITICAL ANALYSIS OF JIT

At the end key features and benefits of JIT to see if it has something to offer your business.

Less reliance on forecasting

Traditionally, businesses stock as much inventory as they think is needed to meet demand,
based on forecasts for the coming year or quarter. And of course, this works fine if the forecasts
are accurate, and demand doesn’t fluctuate too much. But if forecasts are off and demand is
unpredictable, then a business can be left with spiraling costs and significant inventory losses.

Because JIT means that production is linked to real-time demand, businesses are able to
operate without a heavy reliance on forecasting. And while forecasting still has a significant role
to play in deciding which products are available for order, actual inventory levels can be
restricted to only what is necessary to supply demand.

Lower warehouse costs

One of the benefits of operating with minimum stock levels, is a reduction in storage and
handling costs. Obviously, the more inventory being stored, the more associated costs there
are. Everything from the size of warehouse space needed, to the amount of staff required to run
it can be reduced when JIT is successfully used.

Less spoilage and waste

Inventory spoilage and obsolescence is an ongoing headache for inventory managers. No
business likes to write off and discard stock they invested capital in and while there is no total fix
for this, techniques like JIT go a long way to reduce the impact of waste on the bottom line.

As JIT dictates that production is triggered by demand, as opposed to forecasting, a business’

efficiency can be positively affected by its use. JIT helps to streamline all aspects of production
by ensuring that manufacturing or ordering are only activated to meet demand. In a nutshell, this
means that staff and machinery are only working to meet an actual order. This in turn keeps the
inventory ratio high, so a business’ efficiency has an ‘on-paper’ indicator.

Higher Return On Total Assets ratio (ROTA)

The ROTA ratio, one of the metrics used to determine a business’ efficiency and profitability, is
positively affected by the successful use of lean techniques like just-in-time. Put simply, this
ratio works out how effectively a business is turning investment into profit. When inventory
levels are lower and profits are healthy, this ratio will show a positive result for the business.

Reduced all around inventory costs

When it comes to inventory costs, just-in-time offers businesses an alternative path. Instead of
investing capital in an abundance of stock, supply is linked more directly to demand. This frees
up businesses, allowing them to refocus their capital in other areas like growth and
diversification.

The Walmart Example

One of the firms that effectively uses JIT effectively is Walmart. Indeed, though it is certainly not
a small business, Walmart probably uses JIT better than any company on Earth. Walmart’s
inventory management is one of the biggest contributors to the company's success. It's called a
"cross-docking system" which means that suppliers’ trucks and Walmart’s trucks meet at the
company’s warehouses. Products get loaded from supplier trucks to Walmart's trucks, which
then deliver the goods to the stores.

This method greatly minimizes warehouse storage needs and costs. Walmart's trucks literally
"cross-dock" with supplier trucks and deliver goods straight to stores, just in time for employees
to stock the shelves of depleted items. It may be one of the world's most efficient just-in-time
systems. But, a just-in-time inventory system is not exactly what it seems. There are many
misconceptions about what JIT is, and a small business would do well to weigh the pros and
cons before adopting this complex inventory system.

In the face of current economic crunch, companies are looking for the ways to cope with the
situation by opting for cost reduction and quality products at the same time. Referring back to
Japanese manufacturing success in 1980s, companies find the TQM and just-in-time (JIT)
inventory management systems are some of most popular ways to have lower cost and high
quality products (Daniel and Reitsperger 1996). Slack et al. (2007) defined JIT as an operations
concept, which focuses on meeting the demand while offering the perfect quality and zero
waste.

SETBACKS OF JIT
However, implementation of JIT has posed many setbacks to the firms who are actually
following this philosophy. For example, Japanese faced several problems while implementing
this philosophy such as suppliers have been blamed for inconsistency in the delivery process
due to traffic problems. Some experts also blamed that JIT philosophy switches the
responsibility of this inefficiency from more powerful and large manufacturing companies to
smaller, lesser powerful vendors. JIT is also vulnerable in the management of natural
catastrophes such as earthquakes, floods, storms etc. as evidenced by the Great Hanshin
Earthquake in Japan when deliveries were stopped to the facilities of Toyota although the
factories were not damaged at all (Daniel and Reitsperger 1996).

Beyond these above mentioned barriers to the successful implementation of JIT approach,
companies may also find problems due to gaps between the communication facilities available
to manufactures and suppliers. Proper training of the employees as well as the top management
involvement is the important factors for the successful implementation of JIT (Minahan 1996).
Presence of accurate data including the accurate and reliable forecast of demand is a key for
JIT to operate smoothly (Francis 1989). Given the potentials of the JIT, implementation of this
philosophy will be of great help to Pakistani companies in this current economic downturn.
JIT unfortunately comes with a number of potential disadvantages, which can have a significant
impact on the company if they occur.

Risk of running out of stock: By not carrying much stock, it is imperative you have the correct
procedures in place to ensure stock can become readily available, and quickly. To do this, you
need to have a good relationship with your supplier(s). You may need to form an exclusive
agreement with suppliers that specifies supplying goods within a certain time frame, prioritising
your company. JIT means that you become extremely reliant on the consistency of your supply
chain. What if your supplier struggles with your requirements, or goes out of business? Can you
get the products quickly from somewhere else?

Lack of control over time frame: Having to rely on the timeliness of suppliers for each order
puts you at risk of delaying your customers’ receipt of goods. If you don’t meet your customers’
expectations, they could take their business elsewhere, which would have a huge impact on
your business if this occurs often.

More planning required: With JIT inventory management, it’s imperative that companies
understand their sales trends and variances in close detail. Most companies have seasonal
sales periods, meaning a number of products will need a higher stock level at certain times of
the year due to higher demand. Therefore, you need to factor that into planning for inventory
levels, ensuring suppliers are able to meet different volume requirements at different times.

If run properly, JIT inventory management is seen as one of (if not the) best ways of managing
inventory. While it is not without risks, it has significant rewards, and is ideal for those who are
able to plan carefully in advance, and build strong relationships with suppliers.
But JIT systems are not all easily managed. JIT can leave you vulnerable to:

Supply shocks. JIT leaves manufacturers venerable to supply shocks. Both supply or demand
shocks can cause a major problem in JIT. A large demand shock or a supply shock can lead to
the inability to meet current demand.

Price Shocks. In JIT, prices for parts involved in the production process are assumed to
remain constant. When there are price shocks, the company’s profit margin can be greatly
affected.

More Complex than You Think

Implementing JIT is extremely complex, since management must rethink the entire workflow of
the business. Everything from the delivery of raw materials to delivery of the finished product
needs to be re-thought and re-designed. These actions involve multiple entities up and down
the supply chain, who you may be asking to change their practices with little advance notice.

These logistics issues can be particularly difficult for small businesses and may require you to
break up large orders over a longer stretch of time – and even among several smaller
manufacturers. While it may be helpful to cross-train staff in different areas, you'd likely have to
help your employees understand more of the entire process and shift them to where they are
needed as workflow ebbs and surges to meet customer demand swings.

This overhaul can require a larger commitment of time and money, two resources most small
businesses simply don't have in great supply. And, depending on your business needs, and for
the reasons listed, JIT may not work for your company. This means that you'll have devoted
considerable time, money, and labor to implementing a system that may not be right for your
business.

CONCLUSION
So, consider carefully before you implement a JIT inventory system. Carefully consider who
your suppliers are, and what they'd be willing to do, as well as you and your employees'
technical expertise. Avoiding implementing the wrong inventory system for your business can be
just as important as implementing the correct one