COST MANAGEMENT Accounting Control HansenMowenGuan Chapter 16 Lean

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan • Chapter 16 • Lean Accounting 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 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. 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 15 suppliers

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 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 a. ROS = 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. 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 25

Lean Accounting 26

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 27

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 28

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 29

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

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan • End Chapter 16 31