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

Lean Manufacturing• Principles of Lean Thinking: – Precisely specify value by each particular product.. Lean ManufacturingValue by Product • Value is determined by the customer • The va

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 16 Lean Accounting

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.

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.

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.

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

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

pre-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

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.

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.

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

Lean Accounting

changes in the operation of a business

may not work well in the lean

environment Changes in structural and

procedural activities for lean

manufacturing change

– Product-costing

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

Lean Accounting

The only allocation used regularly is

Lean Accounting

Multiple Products

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

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.

Lean Accounting

• Costs outside the value streams (sustaining costs) are reported in a separate

a ROS = Return on Sales = Profit ÷Sales

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

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

Lean Accounting

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

Lean Accounting

Implementation (con’t)

• Service Sector

– The root cause of wastes in service companies

resides in the functionally organized queue processes

batch-and-– Using a pull approach to determining the level of

output with customer demand is equally

applicable to service businesses

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.

Unit Cost:

Appendix: Multiple Products

Two features determine the rate

of flow: wheel size and materials used

Average

COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

End Chapter 16