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Impact of JIT on overheads

The costs of material handling, facilities, and quality inspection decline when a jit system is installed. In addition, the reduction of all types of inventory results in a massive reduction in the amount of space required for the warehouse facility. Since all costs associated with the warehouse are assigned to the overhead cost pool, the amount of overhead is reduced when the costs of staff, equipment, fixed assets, facilities, and rent associated with the warehouse are sharply cut back.

There is also a shift of costs from the overhead cost pool to direct costs when machine cells are introduced. The reason for this change is that a machine cell generally produces only a small range of products, making it easy to assign the entire cost of each machine cell to these items. This means that the depreciation, maintenance, labour and utility costs of each cell can be charged straight to a product, which is preferable to the traditional approach of sending these costs to an overhead cost pool from which they are assigned to products in much less identified manner. Though this change does not represent a cost increase or reduction, it does increase the reliability of allocation for many more costs than that was previously the case.

Despite the shift of many overhead costs to direct costs, there is still an overhead cost pool left over that must be allocated to products. However, given the large number of changes implemented as part of the JIT system, cost accountants may find that there are now better allocation bases available than the traditional direct labour allocation. For example, the amount of time a product takes in each work cell may be a better measure for allocating costs, instead of amount of space occupied in the work cells that create each product. No matter what allocation system is used, it is some what different from the old system, so there is a shift
in the allocation of costs between different products.

In short, overhead costs decline as some costs are eliminated, while other costs shift between products as more costs are charged directly to products and the remaining overhead costs are charged out using different allocation methods.
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