COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan Chapter 16 Lean Accounting COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license Study Objectives Describe the basic features of lean manufacturing Explain the basics of lean accounting Describe features and characteristics costing for multiple products Lean Manufacturing • An operating approach designed to eliminate waste and maximize customer value • Characterized by delivering – – – – – The right product… In the right quantity… With the right quality (zero-defect)… At the exact time the customer needs it… At the lowest possible cost Lean Manufacturing • Principles of Lean Thinking: – Precisely specify value by each particular product – Identify the “value stream.” – Make value flow without interruption – Let the customer pull value from the producer – Pursue perfection Lean Manufacturing Value by Product • Value is determined by the customer • The value of a product to customer is the difference between realization and sacrifice – Realization is what a customer receives – Sacrifice is what the customer gives up for the basic and special product features, quality, brand name, and reputation Lean Manufacturing Value Stream (con’t) • The value stream is made up of all activities, both value-added and nonvalue-added, required to bring a product group or service from its starting point to a finished product in the hands of the customer Lean Manufacturing Value Stream (con’t) • Non-value-added activities are the source of waste – Activities avoidable in the short run – Activities unavoidable in the short run due to current technology or production methods • Types of value streams – Order fulfillment – New product value stream – Sales and marketing value stream Lean Manufacturing Lean Manufacturing Identifying value streams • Two-dimensional matrix – Activities/processes on one dimension – Products on the second dimension Lean Manufacturing Value flow • Reduced setup/changeover times – Reduces waste due to move time and wait time – Enables production of smaller batches in greater variety • Cellular manufacturing – Chosen over departmental structure because it reduces lead time, decreases product cost, improves quality, and increases on-time delivery – Cells contain all the operations in close proximity that are needed to produce a family of products 10 Lean Accounting • Accounting practice should closely follow changes in the operation of a business • Traditional cost management systems may not work well in the lean environment Changes in structural and procedural activities for lean manufacturing change – Product-costing – Operational control 17 Lean Accounting Traceability of Overhead Costs • In a lean environment, many overhead costs assigned to products using either driver tracing or allocation are now directly traceable to products • Increasing directly traceable costs yields increased accuracy of product costing 18 Lean Accounting The only allocation used regularly is facility costs 19 Lean Accounting Multiple Products 20 Lean Accounting Multiple Products (con’t) • Product costs for value streams are calculated using an actual average cost • Average costs are usually calculated weekly and are based on actual costs Total value stream cost of period Value stream = product cost Units shipped of period 21 Lean Accounting Value Stream Reporting • Costs are collected and reported by value stream • Each value stream is treated as a standalone business unit • The income statement should reflect the profit/loss by each value stream 22 Lean Accounting ROS = Return on Sales = Profit ÷Sales a • Costs outside the value streams (sustaining costs) are reported in a separate column • To avoid distorting the current week’s performance, inventory reductions are reported separately from the value stream contributions 23 Lean Accounting Decision Making • Using the average product cost for a value stream means that the individual product costs are not known • A fully specified and accurate product cost is not needed for many decisions • Drawbacks – The analysis fails to consider the indirect costs – Many of the decisions that focus on analysis of profitability of value streams are short-term in nature 24 Lean Accounting Performance Measurement • Box Scorecard – Compares operational, capacity, and financial metrics with prior week performances and with a future desired state – Trends over time and the expectation of achieving some desired state in the near future are the means used to motivate constant performance improvement • Lean control uses a mixture of financial and nonfinancial measures for the value stream 25 Lean Accounting 26 Lean Accounting Implementation • Value stream maps – Visualize the sources of waste in a manufacturing facility – Helps the company to design better production procedures to eliminate such wastes 27 Lean Accounting Implementation (con’t) • Service Sector – The root cause of wastes in service companies resides in the functionally organized batch-andqueue processes – Using a pull approach to determining the level of output with customer demand is equally applicable to service businesses 28 Appendix: Multiple Products Features and Characteristics Costing • Used to calculate product costs when products in a value stream are heterogeneous • Recognizes that the cost of a product is determined by the rate of flow of the product through the value stream Production Rate: Model C: 60/10 = Model D: 60/12 = Costs: Material: $82 Conversion: $195/hr Unit Cost: Model C: $82 + ($195/6) = $114.50 Model D: $82 + ($195/5) = $121.00 29 Appendix: Multiple Products Two features determine the rate of flow: wheel size and materials used Average Material + Conversion × Conversion = Unit Cost Ratio Cost Cost Model C: $82 Model D: $82 + $32.5 × 1.00 = $114.5 + $32.5 × 1.20 = $121.0 30 COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan End Chapter 16 COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks used herein under license 31 ... quality control • Inventory management • Activity-based management 16 Lean Accounting • Accounting practice should closely follow changes in the operation of a business • Traditional cost management. .. size and materials used Average Material + Conversion × Conversion = Unit Cost Ratio Cost Cost Model C: $82 Model D: $82 + $32.5 × 1.00 = $114.5 + $32.5 × 1.20 = $121.0 30 COST MANAGEMENT Accounting. .. COST MANAGEMENT Accounting & Control Hansen Mowen Guan End Chapter 16 COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning Cengage Learning and South-Western are trademarks