2LEARNING OBJECTIVES LEARNING GOALS After studying this chapter, you should be able to:
3Click the button to skip Questions to Think About LEARNING OBJECTIVESDescribe the basic features of lean manufacturing.Describe lean accounting.Explain the basics of life-cycle cost management & target costing.Discuss the basic features of the Balanced Scorecard & its role in lean manufacturing.Click the button to skip Questions to Think About
4QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. How does lean manufacturing change cost accounting & management?
5QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. What are the similarities between JIT & lean manufacturing?
6QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. How are products assigned costs in a lean manufacturing environment?
7QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. Why are processes so important to performance management?
8QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. Are lean manufacturing and the Balanced Scorecard compatible approaches?
9LEARNING OBJECTIVE1Describe the basic features of lean manufacturing.
10ALLEN AUTOPARTS: Background LO 1ALLEN AUTOPARTS: BackgroundAllen Autoparts is concerned about competition in an environment that changes rapidly. They need to exercise better control, reduce costs, become more efficient, and gain operating efficiencies. Can lean manufacturing help?
11LEAN MANUFACTURING: Definition LO 1LEAN MANUFACTURING: DefinitionIs an approach designed to eliminate waste & maximize customer value.
12DIMENSIONS OF LEAN MANUFACTURING LO 1DIMENSIONS OF LEAN MANUFACTURINGDelivering the right productRight quantityRight quality (zero defect)At time neededAt lowest possible costA cost reduction strategy that redefines activities performed
135 PRINCIPLES OF LEAN THINKING LO 15 PRINCIPLES OF LEAN THINKINGPrecisely specify value by each particular productIdentify the “value stream” for eachMake value flow without interruptionLet customer pull value from producerPursue perfection
14VALUE BY PRODUCT: Definition LO 1VALUE BY PRODUCT: DefinitionIs when only value-added features should be produced; non-value-added activities should be eliminated.
15VALUE STREAM: Definition LO 1VALUE STREAM: DefinitionIs all activities, both value-added & non-value-added, required to bring product group or service from starting point to finished product in hands of customer.
16VALUE STREAM Types of value streams Value stream activities LO 1VALUE STREAMTypes of value streamsOrder fulfillmentNew productValue stream activitiesNon-value-addedActivities avoidable in the short runUnavoidable activities due to current technology or production methodValue added
17ORDER FULFILLMENT VALUE STREAM LO 1ORDER FULFILLMENT VALUE STREAMOrder fulfillment provides current products to current customers.EXHIBIT 16-1
18LO 1VALUE FLOWChanges the traditional manufacturing setup for batches to a cellular approach in order to:Reduce setup timeReduce changeover time
19MANUFACTURING CELL: Definition LO 1MANUFACTURING CELL: DefinitionContains all operations in close proximity that are needed to produce a family of products.
20TRADITIONAL BATCH SYSTEM LO 1TRADITIONAL BATCH SYSTEMNote time lost in moving & waiting.EXHIBIT 16-3A
21CELLULAR SYSTEM EXHIBIT 16-3B LO 1CELLULAR SYSTEMTime saved over traditional manufacturing is 90 minutes (150 – 60).EXHIBIT 16-3B
22LO 1PULL VALUELean manufacturing uses a demand pull system to reduce waste.JIT inventoryReduces inventory levelsRequires close relations with suppliersSuppliers benefit fromLong term relationsBetter competitive position
24LEAN ACCOUNTING: A Comparison LO 2LEAN ACCOUNTING: A ComparisonTraditional cost management systems may not be compatible with Lean Accounting. Lean Accounting makes product costs more simple & direct. More labor and overhead costs are assigned to products through direct tracing rather than allocation.
25FOCUSED VALUE STREAMS: Definition LO 2FOCUSED VALUE STREAMS: DefinitionAllow overhead costs to be assigned through driver tracing of costs in a lean accounting system.
26FOCUSED VALUE STREAMS Are more simple & accurate in product costing LO 2FOCUSED VALUE STREAMSAre more simple & accurate in product costingHave limitationsInitially, labor costs may be difficult to assign if people are employed in several value streamsLabor costs should assigned proportionatelyAre organized around a family of products
27FORMULA: Multiple Products LO 2FORMULA: Multiple ProductsCosts are assigned proportionately when multiple products are produced.Value stream product cost:= Total value stream cost of period÷ Units shipped of period= $600,000 / 5,000 = $120 per unit
28VALUE STREAM REPORTING LO 2VALUE STREAM REPORTINGCosts are collected, reported by value stream; outside costs reported separately.EXHIBIT 16-6
29VALUE STREAM DECISIONS LO 2VALUE STREAM DECISIONSMay lead toShort term decisionsMay not reflect long term consequences
30PERFORMANCE MEASUREMENT: A Comparison LO 2PERFORMANCE MEASUREMENT: A ComparisonLean accounting replaces standard cost system measurements with a Box Scorecard that compares a) operational, b) capacity, & c) financial metrics with prior week performances. A mixture of financial & nonfinancial measures are used.
31BOX SCORECARD EXHIBIT 16-7 LO 2BOX SCORECARDComparison measures point to future desired goals.EXHIBIT 16-7
32LEARNING OBJECTIVE3Explain the basics of life-cycle cost management & target costing.
33What are product life cycle & life cycle costs? LO 3What are product life cycle & life cycle costs?Product life cycle is the time a product exists from conception to abandonment. Life cycle costs are all costs associated with a product for its life cycle.
34VALUE CHAIN: Definition LO 3VALUE CHAIN: DefinitionIs the set of activities required to design, develop, produce, market, and service a product.
35When are most costs incurred? LO 3When are most costs incurred?During the development stage. This is also the time costs should best be managed.
37TARGET COST: Definition LO 3TARGET COST: DefinitionIs the difference between sales price needed to capture a predetermined market share & desired per-unit profit.
38TARGET COSTING Uses 1 of 3 methods Reverse engineering Value analysis LO 3TARGET COSTINGUses 1 of 3 methodsReverse engineeringTearing down a competitors product to discover design features that create cost reductionsValue analysisAttempting to assess the value placed on product functions by customersProcess improvement
39TARGET COSTING MODEL EXHIBIT 16-9 LO 3TARGET COSTING MODELWhen desired profit not met, target product costing to redesign product, process.EXHIBIT 16-9
40OTHER ISSUES Short life cycles LO 3OTHER ISSUESShort life cyclesLife cycle cost management even more important when life cycle is short
41LIFE CYCLE COSTING: A Comparison LO 3LIFE CYCLE COSTING: A ComparisonLife cycle costing includes development costs unlike conventional cost systems. Inclusion of more cost information can be useful for assessing effects on costs and benefit future design.
42PERFORMANCE REPORT: Life Cycle Costing LO 3PERFORMANCE REPORT: Life Cycle CostingVariances are computed between actual & budgeted costs.EXHIBIT 16-11
43LEARNING OBJECTIVE4Discuss the basic features of the Balanced Scorecard & its role in lean manufacturing.
44BALANCED SCORECARD: Definition LO 4BALANCED SCORECARD: DefinitionTranslates an organization’s mission & strategy into operational objectives & performance measures.
45BALANCED SCORECARD PERSPECTIVES LO 4BALANCED SCORECARD PERSPECTIVESFinancial perspectiveEconomic consequences of actions taken in other 3 perspectivesCustomer perspectiveDefines customer & market segments where the business unit will competeInternal business process perspectiveDescribes internal processes needed to provide value for customers, ownersLearning & growth (infrastructure) perspectiveDefines capabilities that an organization must have to create long term growth & improvement
46STRATEGY + TRANSLATION LO 4STRATEGY + TRANSLATIONIs the ways in which a company implements it strategy for profit & growth within the balanced scorecard framework. It includes choices of type of customer, product, market, internal & business processes, etc. Strategy translation means specifying objectives, measures, targets & initiatives.
47STRATEGY TRANSLATION PROCESS LO 4STRATEGY TRANSLATION PROCESSVision & strategy works through 4 perspectives to reach targets & initiatives.EXHIBIT 16-12
48PERFORMANCE MEASURES Must be balanced between: LO 4PERFORMANCE MEASURESMust be balanced between:Lead measures (performance drivers)Lag (outcome) measuresObjective (quantifiable & verifiable) measuresSubjective (more judgmental) measuresFinancial & nonfinancial measuresExternal & internal measures
49LINKING PERFORMANCE MEASURES & STRATEGY LO 4LINKING PERFORMANCE MEASURES & STRATEGYTestable strategyUsing cause & effectLink objectives to overall goalDouble loop feedbackManagers receive information on effectiveness of strategy & its underlying assumptionsSingle loop feedbackEmphasizes only effectiveness of strategy
51FINANCIAL PERSPECTIVE LO 4FINANCIAL PERSPECTIVEFlows from other 4 perspectivesRevenue growthCost reductionAsset utilization
52LO 4CUSTOMER PERSPECTIVESource of revenue component within the financial perspectiveCore objectives & measuresCustomer valueDifference between what customers receive and what they have given upDelivery reliability
53PROCESS PERSPECTIVE Process value chain made up of 3 processes LO 4PROCESS PERSPECTIVEProcess value chain made up of 3 processesInnovation processOperations processCycle time & velocityManufacturing cycle efficiencyDay-by-hour reportPost sales service process
54LEARNING & GROWTH PERSPECTIVE LO 4LEARNING & GROWTH PERSPECTIVESource of capabilities that enable the accomplishment of other 3 perspectivesEmployee capabilitiesMotivation, empowerment, alignmentInformation systems capabilities