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Management Accounting 2

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1 Management Accounting 2
Lecture 6 ‘Lean’ Accounting

2 Lecture Outline The ‘Lean ‘concept’ Lean Techniques Lean accounting

3 The Lean Concept Lean concept is a combination of various Japanese techniques and approaches Developed widely in US and UK from its Japanese origins The term ‘Lean’ came into use in early 1990s, particularly in relation to supply chain – then more widely

4 The Lean Concept per Womack and Jones – see Maskell, 1999
Four Key Elements: Value and the value stream Flow Pull Perfection

5 Value Value concerns what is provided to/for the customer
“Lean thinking must start with a conscious attempt to precisely define value in terms of specific products and specific capabilities offered at specific prices through a dialogue with specific customers”, Womack and Jones Note the VA v NVA used in ABM “Value is a feature a customer is prepared to pay for” Value not defined here in terms of assets, products, engineering or sales skills, although all these may be important and may contribute to value creation

6 Value stream “The value stream is the set of all the specific actions required to bring a specific product (good or service or both) through the three critical management tasks of any business: The problem solving task – concept design – launch The information management task The physical transformation task The entire value stream for a single product may be surprisingly long Typically the value stream contains large amounts of ‘waste’ (muda = Japanese for waste)

7 Value stream for Coke production

8 Waste in the Cola value stream (production of cola and purchase through Tesco)

9 Flow This concept is that any item of production should flow through the various processes with little or no interruption – it should be made in ‘one go’ Often implemented as ‘flow lines’ or manufacturing cells This contrasts with traditional ‘batch and queue’ systems Originates with Toyota Production System Anything that interrupts the flow of production is waste Simplest form is within factory Most radical form is through the whole value stream – see Cola example

10 Old Bicycle Production Plant

11 Traditional Bicycle Production Plant
Arranged by functional operations Batches of work determined by ‘efficiency’ considerations This led to long lead times and often months of items in stock Various storage areas Large number of part movements

12 Flow Production Bicycle Plant

13 PULL “Pull in simplest terms means that no-one upstream should produce a good or service until the customer downstream asks for it” JIT is the most common pull system The opposite is ‘push’ where a planning system determines what is produced in line with expected demand and then alterations are made when expectations are not met. MRP and MRPII are the most common push systems Pull systems still have long run capacity planning, but actual production does not commence until a demand trigger occurs

14 Example of spare parts for Toyota
In previous system dealers held common items of stock, non-common items were ordered with weekly deliveries Result, large amount of stock, many customers had to wait as the part needed was not held in stock. Aim: Toyota would supply any part next day (overnight) New system of regional distribution centres, advanced ‘picking and packing’ system for small volumes Service level improved and costs fell – see table

15 Toyota (US) Spare Parts Service
USA – USA – 1996 parts days parts days Parts Distn Centre , ,000 30 Dealer , ,000 21 Stock level index Service rate % in 7 days 98% in 1 day One dealer was able to cut the value of stock held in half while holding 25% more stock items; turn half the store area into money-earning service bays and give –same-day’ service to a substantailly larger pnumber of customers

16 Perfection This is the pursuit and attainment of excellence
Perfection through a series of endless steps Perfection is often found the practice not design Various well-known techniques are used to achieve this: Kaizen – continuous improvement Breakthrough improvement Best practice and benchmarking

17 Lean Techniques Elimination of Waste Continuous Improvement – Kaizen
JIT and zero-defects Pull instead of Push Multifunctional teams Decentralised responsibilities with integrated functions Horizontal and vertical information systems Supportive supplier relations - partnerships

18 Lean Accounting Issues
Critique of traditional management accounting Leads to wrong production decisions, such as large batch sizes, and high utilisation (produce for stock) Hides waste by lumping most costs in overheads – note the Stream Int experience of many small activities combining Provides little useful information for improvement Organised by Departments not value streams Creates waste through too many transactions and too many unused accounting reports

19 Recommendations for Lean Accounting
Per Maskell – note he is a consultant in this area 70% of accounting staff located in operations 50% of accounting staff time devoted to improvement High level budgets only – no detailed budgets Control processes through activity outputs No need to record detailed labour hours All information widely and easily available Set targets using benchmarking and ‘lean perfection’ Identify non-financial performance measures

20 ABT and Lean Accounting
Initially there appears to be a conflict ABC usually shows that large batches yield much cheaper unit costs – thus this may be a motivation away from lean ideas Cooper in 1996 JCM paper argues this is not the case He argues that the batch costs need to be taken into consideration in deciding how small batches should be Also the correct managerial response to higher batch costs is not necessarily larger batch sizes, but action to reduce batch costs

21 Lean Accounting and Target Costing
Japanese practice, developed from 1960s - considerable development through that period Contingent factors include: increased automation, shorter product lives, intense domestic competition, objective of increased world market share Belief that scope for cost reduction after production started is relatively small

22 What is the Target Cost (TC)?
Target cost = Target price - Target Profit (including target volume) Target cost = maximum manufactured cost of product Target cost = cost planning tool; costs must be reduced to TC Target cost = integrative mechanism (see TC processes later)

23 Target costing v Traditional costing

24 Implementing Target Costing
4 Key stages Product Planning Product Design Preproduction Production

25 Examples from Matsushita and Toyota

26 Stage 1 - Product planning - 1
Committee headed by chief engineer establish product specification and target price, using: market info, competitor info, present price etc. Functional analysis - degree to which functionality of feature meets customer requirements (cost of function not cost of item) Toyota: Target price = Current price + value of improvements Target profit based on 3 year medium term profit plans and seen over life of product Target Cost calculated as residual after volumes estimated

27 2 Estimated cost = Current production cost + cost of new features
Cost tables enable new features (new products) to be costed Estimated cost - target cost = required cost reduction

28 Product Planning Implementation Issues
Target cost, estimated costs etc. calculated for total and each component and each production process Requires target cost to be allocated across all components!! Cost reductions calculated for each component and process

29 Stage 2 - Product Design Most cost reduction obtained at this stage
Value Engineering is process of design and redesign that produces target cost Value engineering highlights design simplicity, common parts and processes, evaluation of alternatives, innovative solutions Extensive use of prototypes to test cost reduction Iterative process until target cost is reached Toyota has 2 year prototype phase involving many cross-functional teams Toyota 'Does value added by new feature justify its cost?'

30 Stage 3 - Preproduction Configuring production lines and trial runs
Target cost still being recalculated up until point of production Toyota runs 2 experimental production lines

31 Stage 4 - Production Stage
Cost maintenance is primary objective Standard costs based on target costs Some forms of TC require annual reduction in standard costs Kaizen Costing

32 Benefits of Target Costing
Pricing is market oriented Profit margins are maintained Close cross- functional co-operation Integral to other Japanese methods (JIT, continuous improvement) Congruent with overall objectives of growth in market share (1970s and 80s)

33 Problems and Difficulties of Target Costing
Benefits of TC decrease when accuracy of variable costs diminishes - uncertainty, volume estimates, totally new products Emphasises manufacturing costs when other areas may be more important - e.g. procurement, quality Knowledge of customer requirements Allocating TC to components and processes Longer development times (e.g. Matsushita shaver!) Employee burnout through stress of deadlines Organisational conflict - sales v manufacturing Market confusion - does the market know what it wants?

34 Concluding Comments The Lean concepts and techniques are widespread and moving into service industries Analysis of whole supply chain (value chain) is now common Many firms use some of the ideas and techniques without espousing the Lean ideology Lean is an umbrella for many ideas not a tightly defined approach Lean is extremely important in many industries, notably automotive and aerospace

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