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1 Taching Nots Author: Bassima Hout Onlin Pub Dat: January 04, 2017 Original Pub. Dat: 2017 Subjct: Accounting, Cost Accounting, Managmnt Accounting Lvl: Basic Typ: Indirct cas Lngth: 4776 words Copyright: Organization: Toyota Corporation Gnral Motors Chryslr Ford Organization siz: Larg Rgion: Not applicabl / global businss Stat: Industry: Manufactur of motor vhicls, trailrs and smi-trailrs Originally Publishd in: Publishr: SAGE Publications: Originals DOI: Onlin ISBN:

2 This cas was prpard for inclusion in primarily as a basis for classroom discussion or slf-study, and is not mant to illustrat ithr ffctiv or inffctiv managmnt styls. Nothing hrin shall b dmd to b an ndorsmnt of any kind. This cas is for scholarly, ducational, or prsonal us only within your univrsity, and cannot b forwardd outsid th univrsity or usd for othr commrcial purposs SAGE Publications Ltd. All Rights Rsrvd. This contnt may only b distributd for us within Sals Dmo IALL. Pag 2 of 13

3 Taching Nots Cas Summary This cas xamins lan production systms and th rlatd financial statmnts prsntation and prformanc analysis. By illustrating how Toyota production grw as th Big Thr S auto manufacturrs prformanc dclind during and aftr th conomic crisis, th cas compars and contrasts lan and traditional production systms. It dmonstrats th difficulty facd by traditional production systms to adapt oprations during tough conomic conditions. It also introducs Lan incom statmnts through an xampl, which rvals hiddn production costs that impact prformanc analysis. Th cas qustions ar dsignd to lad studnts to qustion how analysis tools usd in a traditional cost accounting systm, such as th gross profit prcntag and varianc analysis, ar somtims mislading. Studnts may infr that lan incom statmnts unvil significant masurs for prformanc assssmnt. Taching Objctivs This taching not is dsignd to introduc undrgraduat and graduat studnts to lan oprations and rlatd cost accounting tchniqus in th auto manufacturing industry. Through this cas, th instructor will hlp studnts larn to idntify constraints facd by traditional production systms during conomic downturn; idntify advantags of lan oprations during conomic downturns; analyz traditional and lan Incom statmnts; assss managrial prformanc basd on both traditional and lan incom statmnts. Targt Audinc Th cas complimnts ithr an introduction to managrial accounting cours or an advancd cost accounting cours at th graduat or undr-graduat lvl. Instructors may also find it suitabl for a capston businss cours sinc th txt intgrats manufacturing oprational aspcts with using financial tools on a mass-production and lan bass. Suggstd Taching Stratgy Th cas is bst usd following a thorough discussion of traditional cost accounting concpts and analysis tools such as budgting and varianc analysis. Aftr covring th mastr budgting, flxibl budgt, and varianc analysis in any standard introduction to managrial/cost accounting txtbook, th instructor can introduc lan oprations and financial analysis tools. sually, standard txtbooks includ a brif discussion of Just-in-tim invntory philosophy. At this point: (total suggstd tim: 140 minuts) Th suggstd additional radings could b assignd as homwork bforhand thn discussd in class so studnts bgin with a focus on th succss of lan: 30 minuts; Th hart of th in-class discussion would b on th auto-industry in th S, which had to follow suit with its Japans comptitor, Toyota, in ordr to rcovr, and sustain its oprations: 30 minuts; Pag 3 of 13

4 3. 4. Onc studnts ar rady for concptual issus th cas is handd out. Allow studnts to group thmslvs into tams of two mmbrs and hav ach group mmbr rad th full cas: 30 minuts; Th tams discuss th cas, analyz, and answr th assignd qustions: 50 minuts: a. Q1: 5 minuts; b. Q2: 5 minuts; c. Q3-a: 15 minuts; d. Q3-b: 15 minuts;. Q3-c: 10 minuts. Th cas rubric in Taching Nots Tabl 1 can b usd for assssing and grading studnts prformanc: Taching Nots Tabl 1. Rubric for Assssmnt. Traditional production systm 0 points 0.5 points 1 point Constraints Idntifis lss than two constraints. Idntifis at last two constrains, with minimum laboration. Idntifis at last two constrains, with adquat laboration and cas xampls. Lan production systm 0 points 0.5 points 1 point Advantags Idntifis lss than four advantags. Idntifis at last four advantags, with som laboration. Idntifis mor than four advantags, with adquat laboration and cas xampls. Financial statmnts analysis: Traditional Incom Statmnt 0 points 0.5 points 1 point Gross Profit Dos Not calculat GP corrctly for th two yars. Calculats at last on yar s GP corrctly. Calculats both yars GP corrctly. Pag 4 of 13

5 Gross Profit Dos Not calculat GP corrctly for th two yars. Calculats at last on yar s GP corrctly. Calculats both yars GP corrctly. Idntify mor profitabl yar Dos Not idntify th mor profitabl yar. Idntifis th mor profitabl yar. Varianc xplanation Dos Not provid any xplanation. Explains at last thr variancs corrctly. Explains mor than thr variancs corrctly. Financial statmnts analysis: Lan Incom Statmnts 0 points 0.5 points 1 point Calculat th of ach componnt of Cost of Sals to Nt Sals Dos Not calculat all th rquird. Calculats som of th rquird. Calculats all th rquird and rounds. Idntify rlvant lan componnts changs. Dos not idntify any rlvant lan componnts. Idntifis at last thr rlvant lan componnts with som xplanation. Idntifis thr or mor rlvant lan componnts with adquat xplanation. Assss prformanc Fails to idntify th yar of bttr managrial prformanc. Idntifis th yar of bttr managrial prformanc without xplanation. Idntifis th yar of bttr prformanc with adquat xplanation. 0 points 0.5 points 1 point Pag 5 of 13

6 Incom statmnt prsntation provids a bttr basis for managrial prformanc assssmnt? Justify? Fails to idntify Lan incom statmnt. Idntifis th Lan incom statmnt without xplanation. Idntifis th Lan incom statmnt with adquat xplanation. Total 0 points 2.5 points 5 points (Maximum points = 5) Suggstd Answrs to Discussion Qustions 1. Th Big Thr auto manufacturrs faild to sustain profitabl oprations during th 2008 conomic crisis. Idntify at last TWO major constraints in thir traditional oprational systm that hindrd adapting thir production to th conomic conditions. Explain and provid xampls from th cas to support your answr. Th major constraints ar prsntd in th cas undr Auto Manufacturing Industry: Economic crisis. Th sction discusss th structural and oprational limitations of th Big Thr. Answrs for th avrag studnt might includ labor costs (AW issus) and transportation costs sinc th majority of supplirs ar scattrd at long distancs from th factoris. Othrs might suggst, sinc most of th wags would hav to paid rgardlss of any intrruption to production, th Big Thr wr forcd to kp thir production lvl dspit th drop in dmand. Th rsulting ovr-production addd to thir costs (holding costs) and rducd thir rvnus, and accountd for an additional constraint. Th challng to this qustion is for studnts to acknowldg th natur of th Big Thr s cost structur. Although labor and transportation costs ar usually classifid as variabl production costs, in this cas thir bhavior was fixd. Commitmnts with th AW and 78 of GM supplirs hindrd th auto-industry flxibility in rducing production to match th dmand. 2. Toyota was abl to sustain its profitabl oprations dspit th conomic crisis. List at last FOR advantags idntifid in its lan production systm. Provid xampls from th cas to support your answr. ndr Auto Manufacturing Industry: Economic crisis, th last two paragraphs list Toyota s advantags in sustaining its profitability throughout th conomic crisis. Studnts could intgrat th svn wasts idntifid and listd undr Lan Costing Systms with th list of Toyota s advantags discussd in th Tal of Two Auto Plants in Txas to answr this qustion. Spac Toyota s nw plant was on third smallr than that of GM; motion th parts ar mbddd within ach car to b usd in its assmbly; labor costs lss than half of hourly wags of GM; supplirs on prmiss rducing transportation costs. Th challng to this qustion is to list among Toyota s lan advantags thir long-trm stratgy in which thy focusd on customr prfrncs and family planning. In addition, undr Rcnt Economy, thr is an illustration of how Toyota s focuss on product quality by pulling th cord 2000 tims/wk. Pag 6 of 13

7 3. Financial Statmnts Analysis: a. Traditional Incom Statmnt (Cas Tabl 1): Th gross profit and gross profit prcnt ar usful analysis tools for valuating prformanc in a traditional cost accounting systm. s th traditional incom statmnt in Cas Tabl 1 to dtrmin th following. i. Th diffrnc in dollar amount of Gross Profit ovr th two yars prsntd. Thr is no diffrnc in th Gross Profit of both yars. Som studnts might suggst that thr was no chang in prformanc ovr th two yars. Som studnts might suggst that basd on th comparativ gross profit prcnt, prvious yar s prformanc was bttr than that of th currnt yar. ii. Th Gross Profit prcnt for ach yar. Taching Nots Tabl 2 shows Gross Profit data for th traditional incom statmnt. Taching Nots Tabl 2. Gross Profit. Traditional Incom Statmnt Currnt Yar Prvious Yar Gross Profit 36,000 36,000 Nt Sals 100,000 90,000 GP iii. Som studnts might suggst that basd on th comparativ gross profit prcnt, prvious yar s prformanc was bttr than that of th currnt yar. Basd on th Gross Profit prcnt dtrmind abov, which yar dmonstrats bttr prformanc? Th Gross Profit prcnt dcrasd 10 prcnt: (36 40)/40. Th prvious yar s Incom Statmnt shows a highr gross profit. iv. Basd on your knowldg of th traditional cost accounting systm and rlatd analytical tools discussd in class. 1. Idntify for ach of th prsntd yars, whthr th variancs usd to adjust th standard Cost of Sals ar favorabl or unfavorabl. 2. Provid a brif xplanation of th notd chang in variancs abov ovr th prsntd yars. Taching Nots Tabl 3 shows unfavorabl and favorabl variancs. Pag 7 of 13

8 Taching Nots Tabl 3.nfavorabl and Favorabl Variancs. Currn t Yar Amou nt: F/* Prvio us Yar Amou nt: F/ Explanation 1 Matria l Pric Varianc (3,000) F 10,000 Quantity discount du to purchas of larg quantitis, a drop in purchas pric, or th purchas of lowr quality matrial at a lowr pric. 2 Matria l sag Varianc (2,000) F 5,000 Highr quality, skilld laborrs, and bttr factory suprvision. 3 Labor Efficin cy Varianc 7,000 (8,000) F Labor hours usd wr mor than standard, possibly du to hiring unskilld laborrs, or du to lack of adquat suprvision. 4 Labor Rat Varianc (2,000) F 9,000 Thr is a dcras in pay rats as compard to th standards. Sinc labor fficincy varianc shows unfavorabl rsults, it suggsts that unskilld laborrs might hav bn hird. 5 Ovrh ad Volum Varianc 2,000 2,000 ndr-production; undr-utilization of capacity. 6 Ovrh ad Spndi ng varianc (2,000) F 8,000 Th ovrhad rat pr unit was lss during th currnt yar as compard to th prvious yar, which could imply allocating additional rsourcs to th ovrhad in th budgt. Pag 8 of 13

9 7 Ovrh ad Efficin cy Varianc 16,000 (17,000 ) F Thr was mor consumption of cost drivr units during th currnt yar as compard to th prvious yar. : nfavorabl Varianc, F: Favorabl Varianc b. Lan Incom Statmnt (Cas Tabl 2). i. Prpar a vrtical analysis by calculating th prcntag of ach componnt of Cost of Sals to Nt Sals. (Round to th hundrdth, two dcimals). S Taching Nots Tabl 4 for vrtical analysis with th lan incom statmnt. Taching Nots Tabl 4. Vrtical Analysis on Lan Incom Statmnt. Lan Incom Statmnt Currnt Yar Prvious Yar Nt Sals 100,000 90,000 Cost of Sals: Purchass 25, , Invntory Matrial: (incras)/dcras 6, (6,000) (6.67 ) Total Matrial Costs 31, , Procssing Costs: Factory Wags 11, , Pag 9 of 13

10 Factory Salaris 2, , Factory Bnfits 7, , Srvics and Supplis 2, , Equipmnt and Dprciation 2, , Scrap 2, , Total Procssing Costs 26, , Occupancy Costs: Building Dprciation Building Srvics 2, , Total Occupancy Costs 2, , Total Manufacturing Costs: 60, , Invntory/Labor, Ovrhad: (Incras)/Dcras 4, (4,000) (4.44 ) Cost of Sals 64, , Gross profit 36, , ii. Slct th most significant componnts of cost of sals that you bliv ar notworthy Pag 10 of 13

11 for assssing Lan oprations prformanc, and commnt on thir chang (as a prcnt of Nt sals). Taching Nots Tabl 5 shows componnts of cost of sals on a lan incom statmnt. Taching Nots Tabl 5. Componnts of Cost of Sals on Lan Incom Statmnt. Cu rr nt Y ar Pr vi ou s Y ar In cr a s / Analysis of prformanc D cr a s Invntory Matrial: (incras)/d cras (6. 67 ) ( ) Th dcras in th Invntory of Matrial shows that th company is holding lss matrial, thus saving on holding costs (wast). Total Procssing Costs (3.5 9 ) Ovrall procssing costs dcrasd. Th oprations wr mor fficint whrby th factory wags and salaris dcrasd along with th scrap (wast) costs. Total Occupancy Costs (0.0 4 ) Ovrall thr is a minor dcras. Ths costs ar committd fixd costs. Pag 11 of 13

12 Invntory/La bor, Ovrhad: (Incras)/D cras Dfrrd Invntory costs dcrasd. This is th rsult of unit sals xcding unit production (JIT, pull). Cost of Sals Th incras is mainly du to xpnsing dfrrd invntory costs. iii. Gross profit (4.0 0 ) Dspit th dcras in th currnt yar-gross profit, managmnt was abl to improv its manufacturing fficincy whrby all thr componnts of th manufacturing costs abov hav shown improvmnts. In your opinion and basd on your analysis abov, which yar dmonstrats a bttr prformanc This is a challnging qustion. Studnts nd to synthsiz th lan concpts prsntd in th cas. Lan oprations focus on rducing wast. Invntory of raw matrial and finishd goods is considrd part of th wast. So its rduction would caus additional xpnss on th currnt yar Incom statmnt but savs futur holding costs. This is in lin with th long-trm lan stratgic focus. Anothr typ of wast is scrap invntory. It shows undr procssing costs that it was rducd by = Ovrall procssing costs (valu stram) costs hav also improvd by Occupancy costs rprsnt frd factory capacitis also show a minor improvmnt of Ovrall, thr is a rduction in wast, and incras in factory capacity, and a dcras in gross profit. c. Which Incom statmnt prsntation provids a bttr basis for managrial prformanc assssmnt: lan or traditional? Justify. Basd on th analyss in both parts abov, th lan incom statmnt provids a bttr prsntation for th assssmnt and valuation of managrial oprational fficincy. Wast (invntory, scrap) and procss cost rductions ar hiddn in th traditional incom statmnt which ar instrumntal in assssing lan oprational prformanc. Furthr Rading Hawkins, L. Jr., & Shirouzu, N. A tal of two auto plants: Pair of Txas factoris shows how starting frsh givs Toyota an dg ovr GM. GM Insid Nws. Rtrivd from Holstin, W. (2009, Jun 1). Who s to Blam for GM bankruptcy? Businss Wk. Rtrivd from Taylor, A., III. (2007, Jan 26). Bhind Ford s scary $12.7 billion loss. Pag 12 of 13

13 R t r i v d f r o m Pag 13 of 13