Presentation on theme: "Lean Accounting and Value Stream Costing"— Presentation transcript:
1 Lean Accounting and Value Stream Costing ACTG 6310Lean Accounting and Value Stream Costing
2 What is Lean? Lean is an overarching philosophy or system focusing on Delivering value to the customerImproving the end-to-end value stream process flowElimination of wasteRespect for peopleLean is NOT downsizing!
3 Lean ManufacturingA management strategy that requires everyone in the value stream to have one common vision for the company of reducing waste, resulting in improvements in quality and production/service time as well as reduction in costs.Philosophy of manufacturing one item at a time as opposed to traditional batch and queue methods.Apply flow and pull inventoryContinuous improvement is emphasizedEmployees are empoweredCustomers are the main focusPioneered by Toyota in the 1950s
5 Lean Accounting“Traditional accounting systems are actively harmful to lean organizations.” –Brian MaskellLean accounting provides better measurements for the changes in lean systemsLean accounting cannot exist independently from the systems it supports
6 Premises of Lean Accounting Do not reward managers for overproducingDo not reward managers for favorable labor efficiency variances due toManufacturing large batches for which there is not demandBuilding high inventoriesHiding wasteUse nonfinancial measures as well as financial measures in performance evaluationProvide timely, understandable financial and nonfinancial information to those on the shop floor
7 Lean Accounting Key tool in Lean Accounting – Value Stream Costing Direct costing by value streamsData typically reported weeklyLittle or no allocation of “overheads”.Provides financial information that can be clearly understood by everybody in the value stream which in turnLeads to good decisionsMotivates employees to improve across the entire value streamAssigns clear accountability for cost and profitability
8 Value Stream CostingWeekly reporting provides excellent control and management of costs because they can be reviewed by the value stream manager while the information is still current.Modify chart-of-accounts structure to value stream groupings rather than by traditional departments.
9 What is a Value Stream?A value stream is all the activities, both value-added and non-value added required to bring a product or service from concept to launch and from order to delivery.It includes all the steps involved in providing a product or service from initial concept until the customer pays for the product or service.The value stream is made up of all functions and stakeholders who need to work in harmony to provide the product/service.
10 Types of Value StreamsOrder fulfillment – Current customers and productsNew product (service) development - New productsCustomer acquisition - New customersCustomer development - Broadening sales to current customers
12 Value StreamsValue streams cut across functional departments making it possible for one stream to include design, sales and marketing, procurement, production, cash collection costs, and others.Easy process of gathering revenue and expenses for the value streamCosts not controlled in the value stream are shown “below the line” on internal value stream reports or are only included on reports for the entire business-unit.
13 Value Stream Costing Segment the business-unit into “value streams” Report sales and costs as “direct” to the value stream but not to the productIdeally:Employees are assigned to a single value streamWasting of resources is discouragedFacility costs charged on the basis of space consumedRecord costs when incurred (more cash basis)Reconcilable to GAAP, but not GAAP.
14 Cost Information and Value Streams Value stream is primary focusMore of a cash basisReal people – little or no allocationsMaterials charged as usedCosts charged directly to value streamsCosts are understoodInventory reductions reduce costsWasting of resources is discouraged
16 Comparing Behavior Traditional Behavior Lean Behaviors Make more product – build inventoryUtilize resources to the maxOptimize departmental efficienciesTrack direct labor in detailAllocate other costsLean BehaviorsEliminate barriers to flowFocus on value streams rather than departmentsContinuous improvement and teamworkEliminate waste, inventory, and overproduction
17 Result of DifferencesThe differences between traditional accounting and Lean processes create an active pushback against the ability to measure Lean results.Improvement Results:Fewer number of movesLower average costsLess obsolete inventoryFewer quality failuresLower WIP inventoriesShorter lead timesLower scrapFewer line stopsReduced purchasing costsReduced setupsReduced scheduling
18 Performance Measurement Wall Improvements due to Lean cannot be sustained without replacing the traditional performance measures used for measuring value.Lean implementations run into a wall when performance measures are not updated and made more relevant.“Accounting control systems have been the number one enemy of sound operations management in American business for at least 50 years.” – H. Thomas Johnson
19 Example: Watlow Electric Identified value streams:Demand creationNew product and business developmentOrder fulfillmentChanged chart of accounts into value stream groupsAccounted for COGS separately from SG&A expenses
20 Watlow ElectricReplaced month-end variance reports with daily operator generated reportingHas been very satisfied with lean accountingAttributes 15% increase in sales and sales margins to lean accounting
21 Problems with Lean Accounting Resistance to changeMust retrain employees and change their way of thinking to “Lean culture”.May distort the pricing process if indirect costs (SG&A) are not includedCost to implementNew concept that is just gaining acceptance
22 The Problem ….How can we link operational gains in the lean transition to financial results?Especially in the early stages of a lean transition, operational gains are obvious but many financial results (particularly as traditionally measured) are stagnant or declining.Value Stream Box Score Developed by Brian Maskell.Provides operational, financial, and resource usage perspectives in a single report.
23 Example of Box Score Source: Brian Maskell / Wikipedia