Strategic Management Accounting - Managing Customer Relationships

Managing Supplier (application of Just in Time)

M Ltd manufactures and distributes three types of cars (the T101, T102 and T103). Each type of car has its own production line. Due to COVID 19 situation, the company is currently facing extremely difficult market conditions and forecasts losses for the forthcoming year. Management has decided to implement Just-In- Time and hired a consultant to advise them on how to reduce costs. The accountant of the company and the consultant have provided following data. I. The budget details for next year: T101 T102 T103 S $ Direct materials (per unit) 2520 2924 3960 Direct labour (per unit) 1000 1200 1900 Total direct cost (per unit) 3640 4216 5940 Numbers Budgeted production (cars) 75000 75000 75000 Number of production runs 1500 1000 1500 Number of orders executed 2000 4000 4000 Machine hours 1000000 1800000 1700000 11. Annual overhead costs Fixed Variable $000 Set ups 39,000 12000 per production run Materials handling 52000 4000 per order executed Inspection of production run 54,000 18000 per production run Machining 14000 40 per machine hour Distribution and warehousing 12000III. Impact on following costs, if JIT manufacturing system is adopted Variable costs Direct labour Increase by 20% Set ups Decrease by 30% Materials handling Decrease by 30% Inspection Decrease by 30% Machining Decrease by 15% Fixed costs Distribution and warehousing Fully eliminated Required 1. Based on the budgeted production levels, calculate the total annual savings that would be achieved by introducing the JIT system. (10 marks)