Cost management accounting and control 6e by hansen mowen guan chapter 16

COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan

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.

1


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.

2


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.
3


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.

4


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.
5


Lean Manufacturing
Value Stream (con’t)
• 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.

6


Lean Manufacturing
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
7

Lean Manufacturing

8


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

9


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

10

Lean Manufacturing

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

11


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

12


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.
13


Lean Manufacturing
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.
14


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
15


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

16


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
17


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
18


Lean Accounting

The only
allocation used
regularly is
facility costs.
19


Lean Accounting
Multiple Products

20


Lean Accounting
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
Total value stream
cost of period
Value stream =
product cost
Units shipped
of period
21


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.
22

Lean Accounting

ROS = Return on Sales = Profit ÷Sales

a

• 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.

23


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
24


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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