How Cost Allocation is different in JIT System?

The chief difference between the types of cost allocations under jit and traditional environment is that of converting most of the overhead costs to direct costs. The primary reason for this change is the machine cell. Because a machine cell is designed to produce either a single product or a single component that goes into a similar product line. Therefore all the costs generated by the machine cell can be charged directly to the only product it produces. When a company completely change over to the use of machine cells in all locations, the costs related to all the cells can now be charged directly to products, which leaves few costs of any kind to be allocated through a more traditional overhead cost pool. the result of this change results in more accurate product costs. Specifically, the costs that can now be charged directly to product are:

• Depreciation. The depreciation cost of each machine in a machine cell can be charged directly to a product. It may be possible to depreciate a machine based on its actual use, rather than charging off a specific amount per month, since this allocation variation shifts costs to a product more accurately.

• Electricity. The power used by the machine in a cell can be separately metered and then charged directly to the products that pass through the cell. Any excess electricity cost charged to the facility as a whole still has to be charged to an overhead cost pool for allocation.

• Material handling. Most materials handling costs in a JIT system are eliminated since machine operators move parts around within their machine cells. Only costs for materials handling between cells should be charged to an overhead cost pool for allocation.

• Operating supplies. Supplies are used mostly within the machine cells, so the majority of items in this expense category can be separately tracked by individual cell and charged to products.

• Repairs and maintenance. Nearly all the maintenance costs a company incurs are for machinery and they are all grouped into machine cells. By having the maintenance staff, charge their time and materials to these cells, these costs can be charged straight to products. Only maintenance work on the facility is still charged to an overhead cost pool.

• Supervision. If supervision is by machine cell, the cost of the supervisor can be split among the cells supervised. However, the cost of general facility management as well as of any support staff, must still be charged to an overhead cost pool.

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