Lean Accounting and Productivity Measurement 15 CHAPTER

Lean Manufacturing OBJECTIVE 1 Lean Manufacturing is concerned with eliminating waste in manufacturing processes Designed to maximize customer value Characterized by Delivering the right product In the right quantity With the right quality (zero defects) At the exact time the customer needs it At the lowest possible cost

1 Lean Manufacturing Five principles of lean thinking OBJECTIVE 1 Five principles of lean thinking Precisely specify value by each particular product Identify the ‘value stream’ for each Make value flow without interruption Let the customer pull value from the producer Pursue perfection 15-3

1 Lean Manufacturing Value by Product OBJECTIVE 1 Value by Product Value is determined by the customer – at a minimum – an item or feature for which the customer is willing to pay Customer value is the difference between realization and sacrifice Realization – what a customer receives Sacrifice – what a customer gives up 15-4

1 Lean Manufacturing Value Stream OBJECTIVE 1 Value Stream Made up of all activities – value-added and non-value added- required to bring a product group or service from its starting point to a finished product in the hands of the customer Activities can be Value added Non-value added Activities avoidable in the short run Activities unavoidable in the short run due to current technology or production methods 15-5

1 Lean Manufacturing Waste is anything customers do not value. OBJECTIVE 1 Waste is anything customers do not value. Major sources of waste include: Defective products Overproduction of goods not needed Inventories of goods awaiting further processing or consumption Unnecessary processing Unnecessary movement of people Unnecessary transport of goods Waiting The design of goods and services that do not meet the needs of the customer 15-6

Productive Efficiency OBJECTIVE 3 Total productive efficiency is the point at which two conditions are satisfied: For any mix of inputs that will produce a given output, no more of any one input is used than necessary to produce the output driven by technical relationships: referred to as technical efficiency Given the mixes that satisfy the first condition, the least costly mix is chosen driven by relative input price relationships: referred to as allocative efficiency 15-7

Productive Efficiency OBJECTIVE 3 Productive measurement – Is a quantitative assessment of productivity changes Can be actual or prospective Is forward looking Serves as input for strategic decision making Allows managers to compare relative benefits of different input combinations 15-8

Productive Efficiency OBJECTIVE 3 Partial Productivity Measure: Measuring productivity for one input at a time Productivity ration = output/input Operational Productivity Measure: Partial measure where both input and output are expressed in physical terms Financial Productivity Measure: Partial measure where both input and output are expressed in dollars 15-9

Total Productivity Measurement OBJECTIVE 4 Profit-Linkage Rule: For the current period, calculate the cost of the inputs that would have been used in the absence of any productivity change, and compare this cost with the cost of the inputs actually used. The difference in costs is the amount by which profits changed because of productivity changes. To compute the inputs that would have been used (PQ), use the following formula: PQ = Current period output/ base period productivity ratio 15-10