Accountancy for

Managers
Case study Presentation on “Cost
Accounting Approaches: The Lean
Success”
 Under guidance of
Dr Pratiksha Jha

Group - 11
 Priyanka Sahu 23GSOB2010800
 Ashutosh Kumar 23GSOB2010804
 Suryamani kumar 23GSOB2010668
 Farhan Khan 23GSOB2010664
 Faiz Ahmad Khan 23 GSOB2010652
Abstract

 Using the performance of Toyota during and after the

economic crisis versus that of the “Big Three” US auto
manufacturers, this case study presents the operational
aspects and accounting tools underlying how a company
adopts a cost accounting method. Toyota operates from a
lean production system that is compared with and contrasted
against the traditional production systems of US auto
manufacturers.
 The case provides an overview of approaches to cost accounting: traditional,
activity-based costing and lean, while introducing lean accounting tools to
demonstrate their impact on performance analysis and decision making. By
examining the analysis tools in traditional systems, such as the gross profit
percentage and variance analysis, the case raises concerns about how such
tools could be misleading. Lean accounting tools unveil significant hidden
costs, which have a strong impact on performance analysis and decision-
making.
Objectives
 identify constraints faced by traditional production systems during economic
downturn;
 identify advantages of lean operations during economic downturns;
 analyze traditional and lean Income statements;
 assess managerial performance based on both traditional and lean income
statements.
Discussion Question

 The Big Three auto manufacturers failed to sustain profitable operations

during the 2008 economic crisis. Identify at least TWO major constraints in
their traditional operational system that hindered adapting their production
to the economic conditions. Explain and provide examples from the case to
support your answer.
 Solution

 The major constraints are presented in the case under Auto Manufacturing
Industry: Economic crisis. The section discusses the structural and operational
limitations of the Big Three. Also labor costs (UAW issues) and transportation
costs since the majority of suppliers are scattered at long distances from the
factories. Since most of the wages would have to paid regardless of any
interruption to production, the Big Three were forced to keep their
production level despite the drop in demand. The resulting over-production
added to their costs (holding costs) and reduced their revenues, and
accounted for an additional constraint. Although labor and transportation
costs are usually classified as variable production costs, in this case their
behavior was fixed. Commitments with the UAW and 78% of GM suppliers
hindered the auto-industry flexibility in reducing production to match the
demand.
Discussion Question

 Toyota was able to sustain its profitable operations despite the economic
crisis. List at least FOUR advantages identified in its lean production system.
Provide examples from the case to support your answer.
Solution
 “A tale of two auto plants” illustrates the competitive advantage of Toyota’s
production system in San Antonio, Texas, where Toyota applied a system of
waste reduction, continuous improvement, and just-in-time inventory
(Hawkins & Shirouzu, 2006). Although both factories were located in the heart
of Texas—GM in Arlington and Toyota in San Antonio—each had a different
structural and operational system. GM’s factory had been in operation in
Arlington for over 50 years, employing 3,000 workers.
Solution
 Despite renovation efforts in 2000, unlike Toyota, GM was bound by its long-
term workers’ benefits, high wages, and layout constraints. It had to use long
conveyers to transport its production from one process to the other, which
consumed unnecessary throughput time. Older machinery meant more
breakdowns and idle labor hours. Its suppliers were dispersed causing high
transportation costs and potential for delivery delays.
Solution

Seven general wastes are identified in lean operations:

 “over-production and early production—producing over customer requirements,
producing unnecessary materials / products.
 waiting—time delays, idle time (time during which value is not added to the product).
 transportation—multiple handling, delay in materials handling, unnecessary handling.
 inventory—holding or purchasing unnecessary raw materials, work in process, and
finished goods.
 motion—actions of people or equipment that do not add value to the product.
 over-processing—unnecessary steps or work elements / procedures defective units—
production of a part that is scrapped or requires rework.
Recent Economy

 Since 2006, Ford has invested in the future to meet customers’ preferences.
The company improved the quality of its products, and invested in energy-
saving electric and hybrid manufacturing plants.
 But it is still far from Toyota’s lean. For example, to ensure quality and
reduce cost, Toyota “pull the cord,” i.e., stops the production line 2,000
times/week to fix quality problems, while Ford averages only 2 times/week
Discussion Question
 Financial statements analysis:
 a. Traditional Income Statement (Table 1): The gross profit and gross profit percent are
useful analysis tools for evaluating performance in a traditional cost accounting system.
 Use the traditional Income statement in Table 1 to determine the following.
 i. The difference in dollar amount of Gross Profit over the two years presented.
 ii. Determine the Gross Profit % for each year.
 iii. Based on Gross Profit % above, which year is more profitable?
 iv. Based on your knowledge of traditional cost accounting system and related analytical
tools discussed in class:
 1. Identify for each of the presented years, whether the variances used to adjust the
standard Cost of Sales are favorable or unfavorable.
 2. Provide a brief explanation of the noted change in variances above over the
presented years.
Solution
 The difference in dollar amount of Gross Profit over the two years presented:
There is no difference in the Gross Profit of both years. Also there was no
change in performance over the two years. Based on the comparative gross
profit percent, previous year’s performance was better than that of the
current year.
 The Gross Profit percent for each year: Based on the comparative gross profit
percent, previous year’s performance
Current Yearwas better than that of Year
Previous the current year

Gross Profit 36,000 36,000

Net Sales 100,000 90,000
Gross Profit% 36.00% 40.00%
Solution
 Based on the Gross Profit percent determined above, which year
demonstrates better performance: The Gross Profit percent decreased 10
percent: (36% − 40%)/40%. The previous year’s Income Statement shows a
higher gross profit.
Solution
Current Previous Explanation
Year amt Year amt

1 Overhead Volume 2,000 U 2,000 U Under-production;

Variance under-utilization of capacity.
2 Labor Rate 2,000 F 9,000 U There is a decrease in pay rates
Variance as compared to the standards.
Since labor efficiency variance
shows unfavorable results, it
suggests that unskilled laborers
might have been hired.
3 Material Usage 2,000 F 5,000 U Higher quality, skilled laborers,
Variance and better factory supervision.
4 Labor Efficiency 7,000 U 8,000 F Labor hours used were more than
Variance standard, possibly due to hiring
unskilled laborers, or due to lack
of adequate supervision
Consolidated Financial Results for
FY2023
Conclusion

 This case examines lean production systems and the related financial
statements’ presentation and performance analysis. By illustrating
how Toyota production grew as the “Big Three” US auto
manufacturers’ performance declined during and after the economic
crisis, the case compares and contrasts lean and traditional
production systems. It demonstrates the difficulty faced by
traditional production systems to adapt operations during tough
economic conditions.
Thank You