MODULE 8 – LEAN ACCOUNTING

Lean Manufacturing (1 of 2)

 Approach designed to eliminate waste and maximize customer value

 Characterized by delivering the right product, in the right quantity, with the right quality, at the exact
time the customer needs it, and at the lowest possible cost.
 Benefits
- Reduced lead times and costs
- Improved quality and on-time deliveries
- Less inventory and human effort
- Increased profitability
Lean Manufacturing (2 of 2)

 Principles of lean thinking

- Precisely specify value by each particular product
- Identify the “value stream” for each product
- Make value flow without interruption
- Let the customer pull value from the producer
- Pursue perfection

VALUE BY PRODUCT

 Value relates to a specific product and to specific features of the product

- Adding features and functions that are not wanted by the customers is a waste of time and
resources.
 Assessing value is externally oriented
- Non-value added activities should be eliminated
VALUE STREAM (1 OF 2)

 Made up of all activities required to bring a product group or service from its starting point to finished
product.
 Order fulfillment value stream
- Focuses on providing current products to current customers
 New product value stream
- Focuses on developing new products for new customers
VALUE STREAM (2 OF 2)

 Activities are either value-added or non-value added

 Non-value added activities are the sources of waste
- TYPES:
 Activities avoidable in the short run
 Activities unavoidable in the short run due to current technology or production methods
Once value streams are identified, people and resources should be assigned.
VALUE FLOW- FEATURES

 Reduced setup/changeover times

- Reduce wait and move times dramatically
- Allow the production of small batches of differing products
 Traditional plant layout is replaced with a pattern of manufacturing cells
- MANUFACTURING CELLS: contain all the operations in close proximity that are needed to
produce a family of products.
DEMAND PULL-SYSTEM

 Each operations produces only what is necessary to satisfy the demand of the succeeding operation
 Involves JIT Purchasing
 - JIT PURCHASING: Requires suppliers to deliver parts and materials just in time to be used in
production.
- Encourages long-term contracts with few chosen suppliers that stipulate prices and acceptable
quality levels.

PURSUING PERFECTION (1 OF 3)
  Involves identifying and eliminating waste
- SOURCES:
o Defective products
o Overproduction of goods
o Inventories of goods awaiting further processing or consumption
o Unnecessary processing, movement of people, and transport of goods
o Waiting
o Design of goods and services that do not meet the needs of the customer

PURSUING PERFECTION (2 OF 3)

 Increasing the degree of employee participation increases productivity and overall cost efficiency
- flatter structures speed up and increase the quality of information exchange
 Lean manufacturing cannot be implemented without a commitment to total quality (TQC)
PURCHASING PERFECTION (3 OF 3)

 Inventories – lowered by cellular manufacturing, low setup times, JIT purchasing, and a demand-pull
system
 Process value analysis - searches for the root causes of wasteful activities and eliminates these
activities over time
LEAN ACCOUNTING – FOCUSED VALUE STREAMS AND TRACEABILITY OF OVERHEAD COSTS

 Overhead costs assigned to products using either driver tracing or allocation are directly traceable to
products
 Implementing the value-stream structure does not require an increase in the number of people needed
- Workers are assigned to the value stream
 Trained to set up the equipment in the cells within the stream, maintain them, and
operate them
 Labor cost is directly assigned to each value stream

LEAN ACCOUNTING – VALUE STREAM COSTING

  Single product (focused) value stream
- Support costs are exclusive to a focused value stream
Assigned to a product using direct tracing
- Product cost is calculated by taking the costs of the period and dividing by the output
 Multiple-product value stream
- Product costs for value steams are calculated using an actual average cost
Value-stream product cost = Total value stream cost of period/units shipped in period

 Costs are collected and reported by value stream

- Costs outside the value stream are reported in a separate column
- To avoid distorting the current week`s performance, inventory reductions are reported
separately from the value stream contributions
- Adding the inventory changes allows the income to the stated correctly for external reporting

LEAN ACCOUNTING – DECISION MAKING

 Fully specified and accurate product cost is not a requirement for many decisions
- Detailed variances by product to signal sources of waste and potential for improvement are not
needed
- Effect of the decision on the profitability of value stream may be required for certain decisions
LEAN ACCOUNTING – PERFORMANCE MEASUREMENT

 Lean control approach uses a mixture of financial and nonfinancial measures for the value stream
- Box Scorecard compares operational, capacity, and financial metrics with prior week
performance and with a future desired state.
- Trends over time and the expectation of achieving some desired state aids constant
performance improvement.