Copyright © 2013 Nelson Education Ltd. PowerPoint Presentations for Cornerstones of Cost Accounting First Canadian Edition Adapted by George Gekas Ryerson University

Lean Accounting and Productivity Measurement Copyright © 2013 Nelson Education Ltd.

17-3 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd. Lean manufacturing is concerned with eliminating waste in manufacturing processes Designed to maximize customer value Characterized by: Delivering the right product In the right quantity With the right quality (zero defects) At the exact time the customer needs it At the lowest possible cost

17-4 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd. Five principles of lean thinking: 1. Precisely specify value by each particular product 2. Identify the “value stream” for each 3. Make value flow without interruption 4. Let the customer pull value from the producer 5. Pursue perfection

17-5 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd. Value is determined by the customer: It is an item or feature for which the customer is willing to pay Customer value is the difference between realization and sacrifice Realization — what a customer receives Sacrifice — what a customer gives up Value by Product

17-6 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd. Made up of all activities (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 Activities can be: Value added Non-value added Activities avoidable in the short run Activities unavoidable in the short run due to current technology or production methods Value Stream

17-7 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd.

17-8 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd.

17-9 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd. Made up all move and wait time necessary to move resources and product batches before and after the production process, to product completion Requires significant move and wait time Cellular Manufacturing Lean manufacturing uses a series of cells to produce families of similar products See Cornerstone 17-1 Value Flow

17-10 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd.

17-11 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd.

17-12 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd. Lean manufacturing uses a demand-pull system Objective: Eliminate waste by producing a product only when it is needed and only in the quantities demanded by customers — thus, demand pulls products through the manufacturing process Pull System

17-13 Lean Manufacturing 1 Copyright © 2013 Nelson Education Ltd. Waste is anything customers do not value Sources of waste: Defective products Overproduction of goods not needed Inventories of goods awaiting further processing or consumption Unnecessary processing Unnecessary movement of people Unnecessary transport of goods Waiting Design of goods and services that do not meet customer needs Pursue Perfection

17-14 Lean Accounting 2 Copyright © 2013 Nelson Education Ltd.

17-15 Lean Accounting 2 Copyright © 2013 Nelson Education Ltd. See Cornerstone 17-2

17-16 Lean Accounting 2 Copyright © 2013 Nelson Education Ltd.

17-17 Lean Accounting 2 Copyright © 2013 Nelson Education Ltd.

17-18 Productivity 3 Copyright © 2013 Nelson Education Ltd. Productivity is concerned with producing output efficiently, and it specifically addresses the relationship of output and the inputs used to produce the output.

17-19 Productivity 3 Copyright © 2013 Nelson Education Ltd. Total Productive Efficiency The point at which two conditions are satisfied: 1. For any mix of inputs that will produce a given output, no more of any one input is used than necessary to produce the output  driven by technical relationships: referred to as technical efficiency 2. Given the mixes that satisfy the first condition, the least costly mix is chosen  driven by relative input price relationships: referred to as allocative efficiency

17-20 Productivity 3 Copyright © 2013 Nelson Education Ltd.

17-21 Productivity 3 Copyright © 2013 Nelson Education Ltd.

17-22 Productivity 3 Copyright © 2013 Nelson Education Ltd. Productive Measurement Quantitative assessment of productivity changes Can be actual or prospective Is forward looking Serves as input for strategic decision making Allows managers to compare relative benefits of different input combinations

17-23 Productivity 3 Copyright © 2013 Nelson Education Ltd. Partial Productivity Measure Measuring productivity for one input at a time Productivity ratio = Output/Input Operational Productivity Measure: Partial measure where both input and output are expressed in physical terms Financial Productivity Measure: Partial measure where both input and output are expressed in dollars See Cornerstone 17-3

17-24 Total Productivity Measurement 4 Copyright © 2013 Nelson Education Ltd. Productivity of organizational success is measured by selective few relevant indicators. Profile measurement involves a series of critical input measures over time compared to a base period. Profit-linked productivity measurement measures the amount of profit changes attributed to productivity changes. Price recovery component is the difference between total profit change and profit linked productivity changes.

17-25 Total Productivity Measurement 4 Copyright © 2013 Nelson Education Ltd. See Cornerstone 17-4 Profit-Linkage Rule: For the current period, calculate the cost of the inputs that would have been used in the absence of any productivity change, and compare this cost with the cost of the inputs actually used. The difference in costs is the amount by which profits changed because of productivity changes.

17-26 End of Chapter 17