Question

Just-in-time (JIT) Manufacturing Describe how adopting JIT production impacts on a costing system. Why are companies which successfully employ JIT manufacturing processes unconcerned with the choice between the variable and the absorption costing methods of accounting?

Answer 1

Just in time manufacturing system can successfully reduce the difference in the net operating income under variance and absorption costing. This system encourages companies to reduce all types of inventories i.e. materials, work in progress and finished goods.

When inventories are reduced, the differences in the net operating income is automatically reduced.

Adoption of JIT system does not change the computation of unit product cost but eliminates the inventory, thus the root cause of difference between absorption and variable costing is automatically eliminated.

It is primarily focused in reducing the times in production system and response time from suppliers.