1. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN ACCOUNTING AND PRODUCTIVITY MEASUREMENT CHAPTER 15

2. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. CHAPTER 15 OBJECTIVES 1.Describe the basic features of lean manufacturing 2.Describe lean accounting 3.Discuss and define productive efficiency and partial productivity measurement 4.Explain what total productivity measurement is, and describe its advantages

3. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING An 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 and at the lowest possible cost Lean manufacturing systems allow managers to eliminate waste, reduce costs and become more efficient LO-1

4. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Promised benefits included such outcomes as reduced lead times, improved quality, improved on-time deliveries, less inventory, less space, less human effort, lower costs, and increased profitability LO-1

5. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Distinguished by the following five principles of lean thinking Precisely specify value by each particular product Identify the ‘value stream’ for each Make value flow without interruption Let the customer pull value from the producer Pursue perfection LO-1

6. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Value by Product Value is determined by the customer—at the very least, 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 LO-1

7. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Value Stream 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 Order fulfillment value stream focuses on providing current products to current customers New product value stream, which focuses on developing new products for new customers LO-1

8. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Value Stream Activities within the value stream are value-added or non-value-added 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 LO-1

9. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.1—ORDER FULFILLMENT VALUE STREAM LO-1

10. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.2—MATRIX APPROACH TO IDENTIFYING VALUE STREAMS LO-1

11. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Value Flow Reduced setup/changeover times: lean manufacturing reduces wait and move times dramatically and allows the production of small batches of differing products Cellular manufacturing: manufacturing cells contain all the operations in close proximity that are needed to produce a family of products LO-1

12. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.3—GARN’S CURRENT DEPARTMENTAL LAYOUT: MODEL A ALUMINUM WHEEL PRODUCTION LO-1

13. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.4—GARN’S PROPOSED MANUFACTURING CELL (MODEL A) LO-1

14. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Pull Value Lean Manufacturing uses a demand pull system The objective of lean manufacturing is to eliminate waste by producing a product only when it is needed and only in the quantities demanded by customers Demand pulls products through the manufacturing process LO-1

15. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Pursue Perfection Waste: consumes resources without adding value Major 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 The design of goods and services that do not meet the needs of the customer LO-1

16. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Pursue Perfection Employee empowerment: vital for identifying and eliminating all forms of waste In a lean environment, increasing the degree of participation increases productivity and overall cost efficiency LO-1

17. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Pursue Perfection Total quality control: lean manufacturing cannot be implemented without a commitment to total quality control (TQC) TQC is essentially a never-ending quest for perfect quality: the striving for a defect-free product design and manufacturing process LO-1

18. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN MANUFACTURING Pursue Perfection Inventories: lowered by cellular manufacturing, low setup times, JIT purchasing, and a demand-pull system Activity-based management: process value analysis searches for the root causes of the wasteful activities and then, over time, eliminates these activities LO-1

19. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN ACCOUNTING Focused Value Streams and Traceability of Overhead Costs Costing systems use three methods to assign costs to individual products Direct tracing Driver tracing Allocation LO-2

20. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.5—VALUE-STREAM COSTS LO-2

21. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN ACCOUNTING Value-Stream Costing Product Costing: Single-Product (Focused) Value Stream Because of multitask assignments, cross-training, and redeployment of other support personnel, most support costs are exclusive to a focused value stream and are thus assigned to a product using direct tracing Provide simple and accurate product costing LO-2

22. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN ACCOUNTING Value-Stream Costing Product Costing: Multiple-Product Value Stream Value streams are formed around products with common processes With multiple products, product costs for value streams are calculated using an actual average cost. Value-stream product cost = Total value-stream cost of period/Units shipped in period LO-2

23. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.6—STEEL WHEEL VALUE- STREAM COSTS: MODELS C AND D LO-2

24. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN ACCOUNTING Value-Stream Reporting Costs are collected and reported by value stream To avoid distorting the current week’s performance, inventory reductions are reported separately form the value-stream contributions LO-2

25. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.7—GARN AUTOPARTS PROFIT AND LOSS STATEMENT LO-2

26. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. LEAN ACCOUNTING Performance Measurement Lean control system uses a Box Scorecard that compares operational, capacity, and financial metrics with prior week performances and with a future desired state Lean control approach uses a mixture of financial and nonfinancial measures for the value stream LO-2

27. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.8—ABS VALUE-STREAM BOX SCORECARD LO-2

28. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. PRODUCTIVE EFFICIENCY Productivity is concerned with producing output efficiently, and it specifically addresses the relationship of output and the inputs used to produce the output LO-3

29. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. PRODUCTIVE EFFICIENCY Total productive efficiency is the point at which two conditions are satisfied Technical efficiency: 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 Allocative Efficiency: given the mixes that satisfy the first condition, the least costly mix is chosen—driven by relative input price relationships LO-3

30. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.9—IMPROVING TECHNICAL EFFICIENCY LO-3

31. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. EXHIBIT 15.10—IMPROVING ALLOCATIVE EFFICIENCY LO-3

32. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. PRODUCTIVE EFFICIENCY Partial Productivity Measurement Defined Productive measurement is a quantitative assessment of productivity changes Can be actual or prospective Actual productivity measurement allows managers to assess, monitor, and control changes Prospective measurement allows managers to compare relative benefits of different input combinations, choosing the inputs and input mix that provide the greatest benefit LO-3

33. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. PRODUCTIVE EFFICIENCY Measuring productivity for one input at a time is called partial productivity measurement Productivity ratio = Output/Input Operational productivity measure: both input and output are expressed in physical terms Financial productivity measure: both input and output are expressed in dollars LO-3

34. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. PRODUCTIVE EFFICIENCY Partial Measures and Measuring Changes in Productive Efficiency Statement about increasing or decreasing productivity efficiency by measuring changes in productivity. Can be made. To do so, the actual current productivity measure is compared with the productivity measure of a prior period This prior period is referred to as the base period and serves to set the benchmark or standard for measuring changes in productive efficiency LO-3

35. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. PRODUCTIVE EFFICIENCY Advantages of Partial Measures Allow managers to focus on the use of a particular input Easily interpreted by everyone within the organization Easy to use for assessing productivity performance of operating personnel LO-3

36. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. PRODUCTIVE EFFICIENCY Disadvantages of Partial Measures Can be misleading A decline in the productivity of one input may be necessary to increase the productivity of another Such a trade-off is desirable if overall costs decline, but the effect would be missed by using either partial measure LO-3

37. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. TOTAL PRODUCTIVITY MEASUREMENT Measuring productivity for all inputs at once Profile productivity measurement: provides a series or vector of separate and distinct partial operational measures Profit-linked productivity measurement: measures the amount of profit change attributable to productivity change LO-4

38. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. TOTAL PRODUCTIVITY MEASUREMENT 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 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 LO-4

39. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. TOTAL PRODUCTIVITY MEASUREMENT Profit-Linkage Rule Profit-linked productivity change = RPQ i P i – RAQ i P i where PQ i = The amount of input i that would have been used for the current period in the absence of a productivity change P i = Current-period price of input i AQ i = Actual amount of input i used in the current period PQi = Current-period output/Base-period productivity ratio for input i LO-4

40. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. TOTAL PRODUCTIVITY MEASUREMENT The difference between the total profit change and the profit-linked productivity change is called the price-recovery component Price recovery = Total profit change – Profit-linked productivity change LO-4

41. © 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password- protected website for classroom use. END OF CHAPTER 15