Value Stream Costing Mahmoud Al-Odeh, PhD Bemidji State University

Objectives Value Stream Costing (VSC) Drawbacks in standard costing Case study on implementing VSC.

Value Stream Process GATHER DATA DEVELOP CURRENT STATE PERFECTION DEVELOP FUTURE STATE DEVELOP ACTION PLAN

Value Stream Costing Developed in 2003 by Maskell and Baggaley as an instrument to facilitates the calculation of production cost. VSCA shows how resources are used within value stream. VSC main advantage the simplicity in use, which helps reducing waste.

Value Stream Costing VSC deals with tracking revenue and the associated variable costs required to generate revenue. Not to spend funds unless they are associated with generating revenue. VSC provides better information for decision-making it has a positive impact for effective cost control.

Value Stream Costing VSC is typically calculated weekly (bi-weekly or monthly) and it takes account of all the costs in the value stream. No distinction between direct costs and indirect costs; all the costs within the value stream are considered direct. Costs outside of the value stream should be eliminated. The total value stream cost includes all labor costs; both traditionally direct costs and traditionally indirect costs.

Value Stream Costing The production material costs are generally calculated from how much material has been purchased for the value stream during a particular week. For this material cost to be valid there needs to be low raw materials and work-in-process inventories; and these inventories must be under good control. If inventories are low, then the materials brought during that week will be used quickly and will accurately reflect the material cost of the product manufactured that week.

Value Stream Costing Machine cost is calculated based on the time life of the machine to find the cost per minute. Support costs like spare parts and soft tooling are purchased for the value stream and the costs of consumables, supplies, and other day-to-day expenses are assigned to the value stream.

Value Stream Costing Value Stream Material Cost Machine Cost Employee Cost Support Costs Value Stream

Traditional Costing Traditional costing is designed to support mass production. Standard costing allocates all overhead to products and relates the overhead to direct labor hours. Standard costing encourages non lean behavior by focusing on utilization of resources, people’s individual efficiencies, and overhead allocations. Standard costing calls for elaborate and wasteful data collection systems. Standard costing does not provide the data needed to support and encourage lean manufacturing.

Traditional Costing VSC Reduce the cost by making more product Make as needed products Build just-in-case inventory Focus on Value Stream Costs rather than departments costs Reduce the cost by utilizing resources to the maximum Improve the available Capacity Reduce the cost by optimizing department efficiencies Reduce non- productive time Track direct, indirect, overhead costs No distinction between direct or indirect costs Relates the overhead to direct labor All costs of the value stream are considered direct costs

Case Study XYZ industries

Bearings UC 208 UC 208 Customer Oder 5000 monthly Working Hours Two shifts – 12 hours each / day Break One hour/shift Raw Material Monthly Working day/ week 7 days

Factors used in VSC Total Available Time Productive Time Non-Productive Time Value-Added cost Available capacity Non-value added cost

Bearings VSC Process Designing Purchasing Preparation Material Costs Employee Costs Machine Costs Other Costs Total Cost Designing   $1.70 $5.20 $6.90 Purchasing $2.10 Preparation $460.00 $8.50 $2.80 $471.30 Processing (includes Assembling, Finishing, Packaging) $92.00 $6816.67 $428.54 $7337.21 Maintenance $1.10 Marketing & Customer Service $1.40 Shipping $25.00 $8.08 $33.08 Accounting $2.40 Total $577.00 $6841.95 $431.34 $7855.49

Current State

Bearings Processing – Before Value-Added Time Material Costs Employee Costs Machine Costs Other Costs Total Cost Bar cutting 13.89 $166.67 $2.91   $169.58 Upsetting 9.72 $116.67 $2.78 $119.45 Piercing 16. 67 $19.00 $200.00 $2.86 $221.86 Annealing 180.56 $2,166.67 $306.58 $2473.24 CNC machine 145.83 $22.00 $1,750.00 $97.38 $1869.38 Drilling 90.28 $25.00 $1,083.33 $8.61 $1116.94 Threading 48.611 $24.00 $583.33 $7.42 $614.75 Inspection & Packing 62.5 $2.00 $750.00 $752.00 Total 568.06 hours $92.00 $6,816.67 $428.54 $7337.21

Future State

Bearings Processing – After Value-Added Time Material Costs Employee Costs Machine Costs Other Costs Total Cost Bar cutting 13.89   $166.67 $2.91 $169.58 Upsetting 9.72 $0.00 $116.67 $2.78 $119.45 Piercing 16.67 $19.00 $200.00 $2.86 $221.86 Annealing 90.28 $1083.33 $306.58 $1389.91 CNC machine 145.83 $22.00 $1750.00 $97.38 $1869.38 Drilling $25.00 $8.61 $1116.94 Threading 48.61 $24.00 $583.33 $7.42 $614.75 Inspection & Packing 62.50 $2.00 $750.00 $752.00 Total 477.78 hours $92.00 $5733.33 $428.54 $6253.88

Achievements Factor Before After WIP 82.72 69.57 Value- added time 568.1 hours 477.8 hours Non-Value- added time 47.37 hours 39.83 hours Not used 56.57 hours 154.4 hours Total time available/ Month 672 hours Total Cost  $7337.21  $6253.88 Productive time 85% 71% Non- productive time 7% 6% Available capacity 8% 23% Value-Added cost $6816.67 $5733.33 Non-value added cost $568.44 $478.00 Customer not ready to pay $1083.33

Questions ?