Page 807 - Accounting Principles (A Business Perspective)

20. Using accounting for quality and cost management

be transferred out of Work in Process Inventory, into Finished Goods Inventory, and finally, into Cost of Goods
Sold. Exhibit 161 contrasts traditional versus just-in-time cost flows.

Exhibit 161: Traditional versus just-in-time cost flows

By reducing inventories, a just-in-time system offers potentially great cost savings. As noted earlier, it simplifies
the accounting system. By reducing inventories, it releases investment dollars for use elsewhere and frees space that
the inventory previously occupied. Companies also have found that reducing inventories where defective products
could be hidden helps management detect production problems more quickly. By tying JIT to quality improvement

programs, companies move toward zero defect production.
Activity-based costing and management
Suppose you go to a movie theater that has five screens showing five different movies. Jerome Justin works for

the movie theater selling tickets for all five movies. Suppose management wants to know the cost of selling tickets
per movie and asks you to assign Justin's wages to each of the five movies. How would you assign his wages?
You could simply divide Justin's wages by the number of movies and allocate 20 per cent of his salary to each
movie. Or you could figure out how many tickets he sold to each movie, and allocate his wages on the basis of ticket

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