Accounting & Control: Cost Management
Accounting & Control: Cost Management
Accounting & Control: Cost Management
Chapter 16
Lean Accounting
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.
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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
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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.
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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
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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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COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan
End Chapter 16