1. 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.

2. Study Objectives Describe the basic features of lean manufacturing.
Explain the basics of lean accounting.
Describe features and characteristics costing for multiple products.

3. Lean Manufacturing 1.
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.

4. Lean Manufacturing 1. 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.

5. Lean Manufacturing 1. 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.

6. Lean Manufacturing 1. Value Stream (con’t)
The value stream is made up of all activities, both 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.

7. Lean Manufacturing 1. 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

8. Lean Manufacturing 1.

9. Lean Manufacturing 1. Identifying value streams Two-dimensional matrix
Activities/processes on one dimension
Products on the second dimension

10. Lean Manufacturing 1. 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

11. Lean Manufacturing 1. Blue: Value-added process time
Red: Non-value-added move and pre-process wait time

12. Lean Manufacturing 1. The cell can produce 12 units per hour
The production rate is controlled by the slowest activity in the cell
The cycle time of operation as the number of minutes it takes an operation to process one unit of a product

13. Lean Manufacturing 1. Pull Value
Lean manufacturing uses a demand-pull system, where the production is triggered by the customer order
Eliminates waste by producing a product only when it is needed and only in the quantities demanded by customers
No production takes place until a signal from a succeeding process indicates a need to produce.

14. Lean Manufacturing 1. Pull Value (con’t)
Customer demand extends back through the value chain
Affects how a manufacturer deals with suppliers
JIT purchasing requires suppliers to deliver parts and materials just in time to be used in production
Supply of parts must be linked to production, which is linked to demand.

15. Lean Manufacturing Pull Value (con’t)
JIT purchasing exploits supplier linkages
Negotiate long-term contracts with a few chosen suppliers located as close to the production facility as possible
Establish more extensive supplier involvement
Vendor selection
Not on the basis of price alone
The quality of the component, the ability to deliver as needed, and the commitment to JIT purchasing are vital considerations
Establish a partners-in-profits relationship with suppliers

16. Lean Manufacturing 1. Pursue Perfection
Identify and eliminate sources of waste
Employee empowerment
Total quality control
Inventory management
Activity-based management

17. Lean Accounting 2.
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

18. Lean Accounting 2. 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

19. Lean Accounting 2. The only allocation used regularly is
facility costs.

20. Lean Accounting 2.
Multiple Products

21. Lean Accounting 2. 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

22. Lean Accounting 2. 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.

23. Lean Accounting 2.
aROS = Return on Sales = Profit ÷Sales
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.

24. Lean Accounting 2. 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

25. Lean Accounting 2. 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

26. Lean Accounting 2.

27. Lean Accounting 2. 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

28. Lean Accounting Implementation (con’t) Service Sector
The root cause of wastes in service companies resides in the functionally organized batch-and-queue processes
Using a pull approach to determining the level of output with customer demand is equally applicable to service businesses

29. Appendix: Multiple Products3.
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 = 6
Model D: 60/12 = 5
Costs:
Material: $82
Conversion: $195/hr
Unit Cost:
Model C: $82 + ($195/6) = $114.50
Model D: $82 + ($195/5) = $121.00

30. Appendix: Multiple Products3.
Two features determine the rate of flow: wheel size and materials used
Model C:
Model D:

31. End Chapter 16
COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license.