ACTG 6310

1. ACTG 6310 Lean Accounting and Value Stream Costing

2. What is Lean? • Lean is an overarching philosophy or system focusing on • Delivering value to the customer • Improving the end-to-end value stream process flow • Elimination of waste • Respect for people • Lean is NOT downsizing!

3. Lean Manufacturing • A management strategy that requires everyone in the value stream to have one common vision for the company of reducing waste, resulting in improvements in quality and production/service time as well as reduction in costs. • Philosophy of manufacturing one item at a time as opposed to traditional batch and queue methods. • Apply flow and pull inventory • Continuous improvement is emphasized • Employees are empowered • Customers are the main focus • Pioneered by Toyota in the 1950s

4. Lean Accounting

5. Lean Accounting • “Traditional accounting systems are actively harmful to lean organizations.” –Brian Maskell • Lean accounting provides better measurements for the changes in lean systems • Lean accounting cannot exist independently from the systems it supports

6. Premises of Lean Accounting • Do not reward managers for overproducing • Do not reward managers for favorable labor efficiency variances due to • Manufacturing large batches for which there is not demand • Building high inventories • Hiding waste • Use nonfinancial measures as well as financial measures in performance evaluation • Provide timely, understandable financial and nonfinancial information to those on the shop floor

7. Lean Accounting • Key tool in Lean Accounting – Value Stream Costing • Direct costing by value streams • Data typically reported weekly • Little or no allocation of “overheads”. • Provides financial information that can be clearly understood by everybody in the value stream which in turn • Leads to good decisions • Motivates employees to improve across the entire value stream • Assigns clear accountability for cost and profitability

8. Value Stream Costing • Weekly reportingprovides excellent control and management of costs because they can be reviewed by the value stream manager while the information is still current. • Modify chart-of-accounts structure to value stream groupings rather than by traditional departments.

9. What is a Value Stream? • A value stream is all the activities, both value-added and non-value added required to bring a product or service from concept to launch and from order to delivery. • It includes all the steps involved in providing a product or service from initial concept until the customer pays for the product or service. • The value stream is made up of all functions and stakeholders who need to work in harmony to provide the product/service.

10. Types of Value Streams • Order fulfillment –Current customers and products • New product (service) development - New products • Customer acquisition - New customers • Customer development - Broadening sales to current customers

11. Value Stream Management

12. Value Streams • Value streams cut across functional departments making it possible for one stream to include design, sales and marketing, procurement, production, cash collection costs, and others. • Easy process of gathering revenue and expenses for the value stream • Costs not controlled in the value stream are shown “below the line” on internal value stream reports or are only included on reports for the entire business-unit.

13. Value Stream Costing • Segment the business-unit into “value streams” • Report sales and costs as “direct” to the value stream but not to the product • Ideally: • Employees are assigned to a single value stream • Wasting of resources is discouraged • Facility costs charged on the basis of space consumed • Record costs when incurred (more cash basis) • Reconcilable to GAAP, but not GAAP.

14. Cost Information and Value Streams • Value stream is primary focus • More of a cash basis • Real people – little or no allocations • Materials charged as used • Costs charged directly to value streams • Costs are understood • Inventory reductions reduce costs • Wasting of resources is discouraged

15. Comparison of Financial Statements

16. Comparing Behavior • Traditional Behavior • Make more product – build inventory • Utilize resources to the max • Optimize departmental efficiencies • Track direct labor in detail • Allocate other costs • Lean Behaviors • Eliminate barriers to flow • Focus on value streams rather than departments • Continuous improvement and teamwork • Eliminate waste, inventory, and overproduction

17. Result of Differences • The differences between traditional accounting and Lean processes create an active pushback against the ability to measure Lean results. • Improvement Results: • Fewer number of moves • Lower average costs • Less obsolete inventory • Fewer quality failures • Lower WIP inventories • Shorter lead times • Lower scrap • Fewer line stops • Reduced purchasing costs • Reduced setups • Reduced scheduling

18. Performance Measurement Wall • Improvements due to Lean cannot be sustained without replacing the traditional performance measures used for measuring value. • Lean implementations run into a wall when performance measures are not updated and made more relevant. • “Accounting control systems have been the number one enemy of sound operations management in American business for at least 50 years.” – H. Thomas Johnson

19. Example: Watlow Electric • Identified value streams: • Demand creation • New product and business development • Order fulfillment • Changed chart of accounts into value stream groups • Accounted for COGS separately from SG&A expenses

20. Watlow Electric • Replaced month-end variance reports with daily operator generated reporting • Has been very satisfied with lean accounting • Attributes 15% increase in sales and sales margins to lean accounting

21. Problems with Lean Accounting • Resistance to change • Must retrain employees and change their way of thinking to “Lean culture”. • May distort the pricing process if indirect costs (SG&A) are not included • Cost to implement • New concept that is just gaining acceptance

22. The Problem …. • How can we link operational gains in the lean transition to financial results? • Especially in the early stages of a lean transition, operational gains are obvious but many financial results (particularly as traditionally measured) are stagnant or declining. • Value Stream Box Score Developed by Brian Maskell. • Provides operational, financial, and resource usage perspectives in a single report.

23. Example of Box Score • Source: Brian Maskell / Wikipedia Source: Brian Maskell / Wikipedia