## **Learning Outcomes**

After reading this article, you will be able to explain how Just-in-Time (JIT) production and quality management approaches affect costing systems and performance measurement. You will understand the role of JIT in reducing inventory, the adjustments required in management accounting, and the impact on variance analysis and behavioural considerations in a modern performance management environment.

## **ACCA Performance Management (PM) Syllabus**

For ACCA Performance Management (PM), you are required to understand the impact of quality initiatives and JIT systems on both costing and performance evaluation. For your revision and exams, focus on:

- The principles and objectives of Just-in-Time (JIT) and Total Quality Management (TQM)
- The effects of JIT on inventory, cost structures, and traditional costing systems
- The limitations of conventional variance analysis in a JIT environment
- The relationship between quality management, continuous improvement, and performance measurement
- Behavioural and operational implications for management control systems in a JIT/TQM context

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. What are the primary goals of implementing a Just-in-Time (JIT) production system?
2. How does JIT change the relevance or usefulness of traditional material price and usage variances?
3. Why are standard costing and conventional variance analysis sometimes considered incompatible with TQM or JIT organisations?
4. Briefly outline two adjustments required for management accounting systems when a company introduces JIT.

## **Introduction**

Modern production environments increasingly use techniques such as Just-in-Time (JIT) and Total Quality Management (TQM) to achieve high quality, low waste, and fast response to customer demand. These philosophies influence not only operations but also management accounting and performance measurement systems. Understanding the implications of JIT for costing and control is key for ACCA Performance Management candidates.

> **Key Term: Just-in-Time (JIT)**
> A production strategy where materials and components are purchased or produced only as needed for use, aiming to minimise inventory levels and waste.
>
> **Key Term: Total Quality Management (TQM)**
> An organisational approach focused on continuous improvement of processes and products, with commitment to quality at all levels.

## **JIT AND COSTING IMPLICATIONS**

Traditional costing systems and variances assume regular inventory flows, stable standard costs, and clear distinctions between fixed and variable overheads. With JIT, these assumptions become less valid due to the following changes:

- **Minimal Inventory:** JIT means raw materials, work-in-progress, and finished goods inventory are kept as low as possible. This exposes problems (like quality defects or bottlenecks) quickly, making immediate correction necessary.
- **Supplier Relationships:** Reliable, high-quality suppliers are essential. Materials must be delivered on time and be of consistent quality.
- **Waste and Defect Reduction:** JIT and TQM both emphasise "right first time" and zero defects, aiming for prevention rather than correction of errors.

### Cost System Adjustments

- **Overhead Absorption:** Traditional methods that allocate overheads based on production volumes or inventory movements become less meaningful. As inventory is kept low, overheads may be absorbed over smaller batch sizes and can lead to fluctuating unit costs.
- **Standard Costing and Variances:** Variance analysis relies on standard and actual inventory values. With little or no inventory, mix and yield variances become more sensitive, and price variances may become less relevant.
- **Inventory Valuation:** The focus shifts from valuing inventory to controlling inventory. Stock valuation becomes less significant on financial statements.

> **Key Term: Backflush Costing**
> A simplified costing approach often used with JIT, where costs are allocated to goods only after production is complete, instead of at each stage.

## **IMPACT ON PERFORMANCE MANAGEMENT AND VARIANCE ANALYSIS**

JIT and TQM environments demand rapid feedback, focus on non-financial measures, and encourage continuous improvement.

### Standard Costing in JIT/TQM Environments

- **Limited Variance Usefulness:** Many traditional variances (such as material price variance) are less important, since there are fewer purchases and deliveries, and prices may be stable due to long-term supplier contracts.
- **Focus on Quality and Delivery:** Non-financial performance indicators—such as defect rates, on-time delivery, and customer satisfaction—become more important than volume-based financial metrics.
- **Continuous Improvement:** Variances that simply compare actual to standard may discourage innovation. Instead, the focus is on reducing variances to zero over time, then setting tougher standards.

> **Key Term: Kaizen Costing**
> A continuous improvement (cost reduction) approach, emphasising small, ongoing changes rather than periodic review of standard costs.

## **BEHAVIOURAL AND OPERATIONAL CONSIDERATIONS**

Implementing JIT and TQM affects roles, incentives, and responsibilities throughout the organisation.

- **Responsibility Shift:** Employees are encouraged to participate in problem-solving and quality improvement; responsibility moves from individuals to teams.
- **Incentive Systems:** Traditional pay-for-variance bonus systems may demotivate staff in a continuous improvement culture. Team-based or quality-based incentives become more appropriate.
- **Performance Reporting:** Reports must be timely and actionable. Variances and control reports should be designed for root-cause analysis and continuous improvement, not only for enforcing compliance.

### **Worked Example 1.1**

**A company introduces JIT and finds that its material usage variance for a period is adverse, even though throughput time and defect rates have improved. Analyse why the usage variance may not be a fair indicator of performance.**

> **Answer:**
> In a JIT setting, the material usage standard may not account for new processes, changes in batch size, or deliberate changes in the mix to reduce defects. Traditional usage variances may be adverse simply because the baseline (standard) is outdated or because more scrapped material is being recorded in real-time with lower inventory. Improved throughput and reduced defects are better signs of process health in JIT than a single adverse variance.

### **Worked Example 1.2**

**A manufacturing firm’s management wants to motivate teams to reduce material cost variances after switching to JIT. What performance measures should they consider instead of traditional cost-based variances?**

> **Answer:**
> In JIT, performance measures should focus on quality and process reliability. Suggestions include tracking number of on-time deliveries, defect rates, downtime, and customer complaints handled. Creating targets for continuous reduction in defects or cycle time are more in line with JIT/TQM goals than focusing solely on material cost reductions.

### **Exam Warning**

> Always consider whether traditional costing and variance reports are appropriate to the company’s production environment. Variances disconnected from actual process goals (such as quality or lead time) can discourage participation and continuous improvement, and may reward the wrong behaviours in JIT settings.

## **Summary**

JIT and TQM systems transform how companies manage production and measure success. Performance management must shift towards non-financial indicators, continuous improvement, and rapid feedback. Traditional inventory-based variances and overhead absorption may be misleading or even counterproductive. Understanding these shifts is essential for modern management accountants.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define Just-in-Time (JIT) and Total Quality Management (TQM) and describe their main objectives
- Explain why JIT reduces inventory and requires changes in supplier management and quality control
- Discuss how JIT and TQM affect overhead absorption, cost accounting, and inventory valuation
- Identify the limitations of standard costing and traditional variance analysis in a JIT environment
- Explain the increased importance of non-financial performance measures such as quality, delivery, and customer satisfaction
- Outline the behavioural impacts and control system changes required under JIT and continuous improvement cultures

## **Key Terms and Concepts**

- Just-in-Time (JIT)
- Total Quality Management (TQM)
- Backflush Costing
- Kaizen Costing

Quality, JIT, and environmental management - JIT implications for costing and performance