COST MANAGEMENT

Accounting & Control

HansenMowenGuan

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.

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

Lean Manufacturing
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.
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Lean Manufacturing
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.

Lean Manufacturing
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.
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Lean Manufacturing
Value Stream (cont)
The value stream is made up of all
activities, both value-added and nonvalue-added, required to bring a product
group or service from its starting point to a
finished product in the hands of the
customer.

Lean Manufacturing
Value Stream (cont)
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
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Lean Manufacturing

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

Lean Manufacturing
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

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Lean Manufacturing

Blue:Value-added
process time
Red: Non-value-added
move and preprocess wait time

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Lean Manufacturing
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

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Lean Manufacturing
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.
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Lean Manufacturing
Pull Value (cont)
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.
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Lean Manufacturing
Pull Value (cont)
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
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Lean Manufacturing
Pursue Perfection
Identify and eliminate sources of waste
Employee empowerment
Total quality control
Inventory management
Activity-based management

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Lean Accounting
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
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Lean Accounting
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

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Lean Accounting

The only
allocation used
regularly is
facility costs.
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Lean Accounting
Multiple Products

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Lean Accounting
Multiple Products (cont)
Product costs for value streams are
calculated using an actual average cost
Average costs are usually calculated
weekly and are based on actual costs
Total value stream
cost of period
Value stream =
product cost
Units shipped
of period
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Lean Accounting
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.
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Lean Accounting

ROS = Return on Sales = Profit Sales

Costs outside the value streams (sustaining costs) are reported in a separate
column.
To avoid distorting the current weeks performance, inventory reductions are
reported separately from the value stream contributions.

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Lean Accounting
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
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Lean Accounting
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
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Lean Accounting

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Lean Accounting
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

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Lean Accounting
Implementation (cont)
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
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Appendix: Multiple Products

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

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Appendix: Multiple Products

Two features
determine the rate
of flow: wheel size
and materials used

Average
Material + Conversion Conversion = Unit
Cost
Ratio
Cost
Cost

Model C: $82
Model D: $82

$32.5

1.00

$114.5

$32.5

1.20

$121.0

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COST MANAGEMENT
Accounting & Control
HansenMowenGuan

End Chapter 16

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.

Cengage Learning and South-Western are trademarks used herein under license.

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