Lean Accounting

LEAN ACCOUNTING AND
PRODUCTIVITY MEASUREMENT
CHAPTER 15
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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
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
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
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
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
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
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
EXHIBIT 15.1—ORDER FULFILLMENT VALUE
STREAM
LO-1
EXHIBIT 15.2—MATRIX APPROACH TO
IDENTIFYING VALUE STREAMS
LO-1
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
EXHIBIT 15.3—GARN’S CURRENT DEPARTMENTAL
LAYOUT: MODEL A ALUMINUM WHEEL
PRODUCTION
LO-1
EXHIBIT 15.4—GARN’S PROPOSED
MANUFACTURING CELL (MODEL A)
LO-1
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
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
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
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
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
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
EXHIBIT 15.5—VALUE-STREAM COSTS
LO-2
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
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
EXHIBIT 15.6—STEEL WHEEL VALUE-
STREAM COSTS: MODELS C AND D
LO-2
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
EXHIBIT 15.7—GARN AUTOPARTS PROFIT
AND LOSS STATEMENT
LO-2
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
EXHIBIT 15.8—ABS VALUE-STREAM BOX
SCORECARD
LO-2
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
• 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
EXHIBIT 15.9—IMPROVING TECHNICAL
EFFICIENCY
LO-3
EXHIBIT 15.10—IMPROVING ALLOCATIVE
EFFICIENCY
LO-3
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
• 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
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
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
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
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
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
• 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
THROUGHPUT ACCOUNTING
• The following data pertain to Spikey Company’s production

and sales activities for the month of November:
• Production 9,000 units
• Sales 7,000 units
• Standard manufacturing variable cost P20 per unit
• Standard fixed manufacturing costs P25 per unit
• Selling and administrative costs exp. (all fixed) P80,000
• Normal capacity is 10,000 units per month. There was no

inventory at the beginning of November. The product sells
for P75 per unit. All costs were incurred as expected. Of the
standard variable manufacturing cost of P20, 12 is for
materials.
END OF CHAPTER 15

Lean Accounting

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LEAN ACCOUNTING AND

1. Describe the basic features of lean

• An approach designed to eliminate waste and

• Promised benefits included such outcomes as

• Distinguished by the following five principles

Focused Value Streams and

• Productivity is concerned with producing output

• Total productive efficiency is the point at which

Partial Productivity Measurement

• Measuring productivity for one input at a

Partial Measures and Measuring

Advantages of Partial Measures

Disadvantages of Partial Measures

• Measuring productivity for all inputs at

• The difference between the total profit change

Price recovery = Total profit change – Profit-linked

• The following data pertain to Spikey Company’s production

• Normal capacity is 10,000 units per month. There was no

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