Lean Accounting

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 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.

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1. 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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1. 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.

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1. Lean Manufacturing - Principles
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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1. Lean Manufacturing - Principles
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.

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1. Lean Manufacturing - Principles
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

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1. Lean Manufacturing - Principles

aMoving materials, quality management engineering, setting up equipment, maintenance,

etc.
bCutting, drilling and insertion, assembly, and finishing.
cCustomer complaints, field repairs, warranty services, etc.

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

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1. Lean Manufacturing - Principles
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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CELL MANUFACTURING
1. Lean Manufacturing - Principles
Manufacture of a
batch with 10 units

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

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1. Lean Manufacturing - Principles

• The cell can produce

12 units per hour (60
minutes/ 5 minutes)
• 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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1. Lean Manufacturing - Principles
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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1. Lean Manufacturing - Principles
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.
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Lean Manufacturing - Principles
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
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suppliers
1. Lean Manufacturing - Principles
Pursue Perfection
• Identify and eliminate sources of waste
– Ex. Defective products, overproduction not needed,
waiting, design that do not meet customers’ needs, etc.
• Employee empowerment
– Workers assume greater responsibility
• Total quality control
– striving for a defect-free product design and manufacturing process
• Inventory management
• Activity-based management
– Process value analysis is the methodology for identifying and
eliminating non-value-added activities.
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2. 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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2. 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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2. Lean Accounting

The only
allocation used
regularly is
facility costs.

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2. Lean Accounting
Multiple Products

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2. 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

Value stream = cost of period
product cost Units shipped
of period
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2. 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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2. Lean Accounting

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.
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2. 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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2. 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
2.

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2. 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 (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

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3. 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: Costs: Unit Cost:

Model C: 60/10 = 6 Material: $82 Model C: $82 + ($195/6) = $114.50
Model D: 60/12 = 5 Conversion: $195/hr Model D: $82 + ($195/5) = $121.00
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3. Appendix: Multiple Products

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

Average
Material + Conversion  Conversion = Unit
Cost Cost Ratio Cost
Model C: $82 + $32.5  1.00 = $114.5
Model D: $82 + $32.5  1.20 = $121.0

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