COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 16
Lean Accounting

COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. 1

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.

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

8
 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
9
 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.

10
 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.
11
 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
12
suppliers
 Lean Manufacturing
Pursue Perfection
• Identify and eliminate sources of waste
• Employee empowerment
• Total quality control
• Inventory management
• Activity-based management

13
 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

14
 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

15
 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.

16
 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

17
 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
18
 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

19
 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

20
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan

End Chapter 16

COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. 21

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