1. Lean Accounting and Value Stream Costing
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 reporting provides 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 Lean Behaviors
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