2 LEARNING OBJECTIVES LEARNING GOALS After studying this chapter, you should be able to:
3 Click 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
4 QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. How does lean manufacturing change cost accounting & management?
5 QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. What are the similarities between JIT & lean manufacturing?
6 QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. How are products assigned costs in a lean manufacturing environment?
7 QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. Why are processes so important to performance management?
8 QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc. Are lean manufacturing and the Balanced Scorecard compatible approaches?
9 LEARNING OBJECTIVE1Describe the basic features of lean manufacturing.
10 ALLEN 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?
11 LEAN MANUFACTURING: Definition LO 1LEAN MANUFACTURING: DefinitionIs an approach designed to eliminate waste & maximize customer value.
12 DIMENSIONS 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
13 5 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
14 VALUE BY PRODUCT: Definition LO 1VALUE BY PRODUCT: DefinitionIs when only value-added features should be produced; non-value-added activities should be eliminated.
15 VALUE 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.
16 VALUE 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
17 ORDER FULFILLMENT VALUE STREAM LO 1ORDER FULFILLMENT VALUE STREAMOrder fulfillment provides current products to current customers.EXHIBIT 16-1
18 LO 1VALUE FLOWChanges the traditional manufacturing setup for batches to a cellular approach in order to:Reduce setup timeReduce changeover time
19 MANUFACTURING CELL: Definition LO 1MANUFACTURING CELL: DefinitionContains all operations in close proximity that are needed to produce a family of products.
20 TRADITIONAL BATCH SYSTEM LO 1TRADITIONAL BATCH SYSTEMNote time lost in moving & waiting.EXHIBIT 16-3A
21 CELLULAR SYSTEM EXHIBIT 16-3B LO 1CELLULAR SYSTEMTime saved over traditional manufacturing is 90 minutes (150 – 60).EXHIBIT 16-3B
22 LO 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
24 LEAN 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.
25 FOCUSED VALUE STREAMS: Definition LO 2FOCUSED VALUE STREAMS: DefinitionAllow overhead costs to be assigned through driver tracing of costs in a lean accounting system.
26 FOCUSED 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
27 FORMULA: 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
28 VALUE STREAM REPORTING LO 2VALUE STREAM REPORTINGCosts are collected, reported by value stream; outside costs reported separately.EXHIBIT 16-6
29 VALUE STREAM DECISIONS LO 2VALUE STREAM DECISIONSMay lead toShort term decisionsMay not reflect long term consequences
30 PERFORMANCE 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.
31 BOX SCORECARD EXHIBIT 16-7 LO 2BOX SCORECARDComparison measures point to future desired goals.EXHIBIT 16-7
32 LEARNING OBJECTIVE3Explain the basics of life-cycle cost management & target costing.
33 What 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.
34 VALUE CHAIN: Definition LO 3VALUE CHAIN: DefinitionIs the set of activities required to design, develop, produce, market, and service a product.
35 When are most costs incurred? LO 3When are most costs incurred?During the development stage. This is also the time costs should best be managed.
37 TARGET COST: Definition LO 3TARGET COST: DefinitionIs the difference between sales price needed to capture a predetermined market share & desired per-unit profit.
38 TARGET 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
39 TARGET COSTING MODEL EXHIBIT 16-9 LO 3TARGET COSTING MODELWhen desired profit not met, target product costing to redesign product, process.EXHIBIT 16-9
40 OTHER ISSUES Short life cycles LO 3OTHER ISSUESShort life cyclesLife cycle cost management even more important when life cycle is short
41 LIFE 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.
42 PERFORMANCE REPORT: Life Cycle Costing LO 3PERFORMANCE REPORT: Life Cycle CostingVariances are computed between actual & budgeted costs.EXHIBIT 16-11
43 LEARNING OBJECTIVE4Discuss the basic features of the Balanced Scorecard & its role in lean manufacturing.
44 BALANCED SCORECARD: Definition LO 4BALANCED SCORECARD: DefinitionTranslates an organization’s mission & strategy into operational objectives & performance measures.
45 BALANCED 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
46 STRATEGY + 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.
47 STRATEGY TRANSLATION PROCESS LO 4STRATEGY TRANSLATION PROCESSVision & strategy works through 4 perspectives to reach targets & initiatives.EXHIBIT 16-12
48 PERFORMANCE 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
49 LINKING 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
51 FINANCIAL PERSPECTIVE LO 4FINANCIAL PERSPECTIVEFlows from other 4 perspectivesRevenue growthCost reductionAsset utilization
52 LO 4CUSTOMER PERSPECTIVESource of revenue component within the financial perspectiveCore objectives & measuresCustomer valueDifference between what customers receive and what they have given upDelivery reliability
53 PROCESS 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
54 LEARNING & GROWTH PERSPECTIVE LO 4LEARNING & GROWTH PERSPECTIVESource of capabilities that enable the accomplishment of other 3 perspectivesEmployee capabilitiesMotivation, empowerment, alignmentInformation systems capabilities