Management Accounting 2 Lecture 6


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Management Accounting 2 Lecture 6

  1. 1. Management Accounting 2 Lecture 6 ‘ Lean’ Accounting
  2. 2. Lecture Outline <ul><li>The ‘Lean ‘concept’ </li></ul><ul><li>Lean Techniques </li></ul><ul><li>Lean accounting </li></ul>
  3. 3. The Lean Concept <ul><li>Lean concept is a combination of various Japanese techniques and approaches </li></ul><ul><li>Developed widely in US and UK from its Japanese origins </li></ul><ul><li>The term ‘Lean’ came into use in early 1990s, particularly in relation to supply chain – then more widely </li></ul>
  4. 4. The Lean Concept per Womack and Jones – see Maskell, 1999 <ul><li>Four Key Elements: </li></ul><ul><li>Value and the value stream </li></ul><ul><li>Flow </li></ul><ul><li>Pull </li></ul><ul><li>Perfection </li></ul>
  5. 5. Value <ul><li>Value concerns what is provided to/for the customer </li></ul><ul><li>“Lean thinking must start with a conscious attempt to precisely define value in terms of specific products and specific capabilities offered at specific prices through a dialogue with specific customers”, Womack and Jones </li></ul><ul><li>Note the VA v NVA used in ABM </li></ul><ul><li>“Value is a feature a customer is prepared to pay for” </li></ul><ul><li>Value not defined here in terms of assets, products, engineering or sales skills, although all these may be important and may contribute to value creation </li></ul>
  6. 6. Value stream <ul><li>“ The value stream is the set of all the specific actions required to bring a specific product (good or service or both) through the three critical management tasks of any business: </li></ul><ul><ul><li>The problem solving task – concept design – launch </li></ul></ul><ul><ul><li>The information management task </li></ul></ul><ul><ul><li>The physical transformation task </li></ul></ul><ul><li>The entire value stream for a single product may be surprisingly long </li></ul><ul><li>Typically the value stream contains large amounts of ‘waste’ (muda = Japanese for waste) </li></ul>
  7. 7. Value stream for Coke production
  8. 8. Waste in the Cola value stream (production of cola and purchase through Tesco)
  9. 9. Flow <ul><li>This concept is that any item of production should flow through the various processes with little or no interruption – it should be made in ‘one go’ </li></ul><ul><li>Often implemented as ‘flow lines’ or manufacturing cells </li></ul><ul><li>This contrasts with traditional ‘batch and queue’ systems </li></ul><ul><li>Originates with Toyota Production System </li></ul><ul><li>Anything that interrupts the flow of production is waste </li></ul><ul><li>Simplest form is within factory </li></ul><ul><li>Most radical form is through the whole value stream – see Cola example </li></ul>
  10. 10. Old Bicycle Production Plant
  11. 11. Traditional Bicycle Production Plant <ul><li>Arranged by functional operations </li></ul><ul><li>Batches of work determined by ‘efficiency’ considerations </li></ul><ul><li>This led to long lead times and often months of items in stock </li></ul><ul><li>Various storage areas </li></ul><ul><li>Large number of part movements </li></ul>
  12. 12. Flow Production Bicycle Plant
  13. 13. PULL <ul><li>“Pull in simplest terms means that no-one upstream should produce a good or service until the customer downstream asks for it” </li></ul><ul><li>JIT is the most common pull system </li></ul><ul><li>The opposite is ‘push’ where a planning system determines what is produced in line with expected demand and then alterations are made when expectations are not met. MRP and MRPII are the most common push systems </li></ul><ul><li>Pull systems still have long run capacity planning, but actual production does not commence until a demand trigger occurs </li></ul>
  14. 14. Example of spare parts for Toyota <ul><li>In previous system dealers held common items of stock, non-common items were ordered with weekly deliveries </li></ul><ul><li>Result, large amount of stock, many customers had to wait as the part needed was not held in stock. </li></ul><ul><li>Aim: Toyota would supply any part next day (overnight) </li></ul><ul><li>New system of regional distribution centres, advanced ‘picking and packing’ system for small volumes </li></ul><ul><li>Service level improved and costs fell – see table </li></ul>
  15. 15. Toyota (US) Spare Parts Service <ul><li>USA – 1994 USA – 1996 </li></ul><ul><li>parts days parts days </li></ul><ul><li>Parts Dist n Centre 50,000 120 65,000 30 </li></ul><ul><li>Dealer 4,000 90 6,000 21 </li></ul><ul><li>Stock level index 100 33 </li></ul><ul><li>Service rate 98% in 7 days 98% in 1 day </li></ul><ul><li>One dealer was able to cut the value of stock held in half while holding 25% more stock items; turn half the store area into money-earning service bays and give –same-day’ service to a substantailly larger pnumber of customers </li></ul>
  16. 16. Perfection <ul><li>This is the pursuit and attainment of excellence </li></ul><ul><li>Perfection through a series of endless steps </li></ul><ul><li>Perfection is often found the practice not design </li></ul><ul><li>Various well-known techniques are used to achieve this: </li></ul><ul><ul><li>Kaizen – continuous improvement </li></ul></ul><ul><ul><li>Breakthrough improvement </li></ul></ul><ul><ul><li>Best practice and benchmarking </li></ul></ul>
  17. 17. Lean Techniques <ul><li>Elimination of Waste </li></ul><ul><li>Continuous Improvement – Kaizen </li></ul><ul><li>JIT and zero-defects </li></ul><ul><li>Pull instead of Push </li></ul><ul><li>Multifunctional teams </li></ul><ul><li>Decentralised responsibilities with integrated functions </li></ul><ul><li>Horizontal and vertical information systems </li></ul><ul><li>Supportive supplier relations - partnerships </li></ul>
  18. 18. Lean Accounting Issues <ul><li>Critique of traditional management accounting </li></ul><ul><li>Leads to wrong production decisions, such as large batch sizes, and high utilisation (produce for stock) </li></ul><ul><li>Hides waste by lumping most costs in overheads – note the Stream Int experience of many small activities combining </li></ul><ul><li>Provides little useful information for improvement </li></ul><ul><li>Organised by Departments not value streams </li></ul><ul><li>Creates waste through too many transactions and too many unused accounting reports </li></ul>
  19. 19. Recommendations for Lean Accounting <ul><li>Per Maskell – note he is a consultant in this area </li></ul><ul><li>70% of accounting staff located in operations </li></ul><ul><li>50% of accounting staff time devoted to improvement </li></ul><ul><li>High level budgets only – no detailed budgets </li></ul><ul><li>Control processes through activity outputs </li></ul><ul><li>No need to record detailed labour hours </li></ul><ul><li>All information widely and easily available </li></ul><ul><li>Set targets using benchmarking and ‘lean perfection’ </li></ul><ul><li>Identify non-financial performance measures </li></ul>
  20. 20. ABT and Lean Accounting <ul><li>Initially there appears to be a conflict </li></ul><ul><li>ABC usually shows that large batches yield much cheaper unit costs – thus this may be a motivation away from lean ideas </li></ul><ul><li>Cooper in 1996 JCM paper argues this is not the case </li></ul><ul><li>He argues that the batch costs need to be taken into consideration in deciding how small batches should be </li></ul><ul><li>Also the correct managerial response to higher batch costs is not necessarily larger batch sizes, but action to reduce batch costs </li></ul>
  21. 21. Lean Accounting and Target Costing <ul><li>Japanese practice, developed from 1960s - considerable development through that period </li></ul><ul><li>Contingent factors include: increased automation, shorter product lives, intense domestic competition, objective of increased world market share </li></ul><ul><li>Belief that scope for cost reduction after production started is relatively small </li></ul>
  22. 22. What is the Target Cost (TC)? <ul><li>Target cost = Target price - Target Profit (including target volume) </li></ul><ul><li>Target cost = maximum manufactured cost of product </li></ul><ul><li>Target cost = cost planning tool; costs must be reduced to TC </li></ul><ul><li>Target cost = integrative mechanism (see TC processes later) </li></ul>
  23. 23. Target costing v Traditional costing
  24. 24. Implementing Target Costing <ul><li>4 Key stages </li></ul><ul><li>Product Planning </li></ul><ul><li>Product Design </li></ul><ul><li>Preproduction </li></ul><ul><li>Production </li></ul>
  25. 25. Examples from Matsushita and Toyota
  26. 26. Stage 1 - Product planning - 1 <ul><li>Committee headed by chief engineer establish product specification and target price, using: market info, competitor info, present price etc. </li></ul><ul><li>Functional analysis - degree to which functionality of feature meets customer requirements (cost of function not cost of item) </li></ul><ul><li>Toyota: Target price = Current price + value of improvements </li></ul><ul><li>Target profit based on 3 year medium term profit plans and seen over life of product </li></ul><ul><li>Target Cost calculated as residual after volumes estimated </li></ul>
  27. 27. 2 <ul><li>Estimated cost = Current production cost + cost of new features </li></ul><ul><li>Cost tables enable new features (new products) to be costed </li></ul><ul><li>Estimated cost - target cost = required cost reduction </li></ul>
  28. 28. Product Planning Implementation Issues <ul><li>Target cost, estimated costs etc. calculated for total and each component and each production process </li></ul><ul><li>Requires target cost to be allocated across all components!! </li></ul><ul><li>Cost reductions calculated for each component and process </li></ul>
  29. 29. Stage 2 - Product Design <ul><li>Most cost reduction obtained at this stage </li></ul><ul><li>Value Engineering is process of design and redesign that produces target cost </li></ul><ul><li>Value engineering highlights design simplicity, common parts and processes, evaluation of alternatives, innovative solutions </li></ul><ul><li>Extensive use of prototypes to test cost reduction </li></ul><ul><li>Iterative process until target cost is reached </li></ul><ul><li>Toyota has 2 year prototype phase involving many cross-functional teams </li></ul><ul><li>Toyota 'Does value added by new feature justify its cost?' </li></ul>
  30. 30. Stage 3 - Preproduction <ul><li>Configuring production lines and trial runs </li></ul><ul><li>Target cost still being recalculated up until point of production </li></ul><ul><li>Toyota runs 2 experimental production lines </li></ul>
  31. 31. Stage 4 - Production Stage <ul><li>Cost maintenance is primary objective </li></ul><ul><li>Standard costs based on target costs </li></ul><ul><li>Some forms of TC require annual reduction in standard costs </li></ul><ul><li>Kaizen Costing </li></ul>
  32. 32. Benefits of Target Costing <ul><li>Pricing is market oriented </li></ul><ul><li>Profit margins are maintained </li></ul><ul><li>Close cross- functional co-operation </li></ul><ul><li>Integral to other Japanese methods (JIT, continuous improvement) </li></ul><ul><li>Congruent with overall objectives of growth in market share (1970s and 80s) </li></ul>
  33. 33. Problems and Difficulties of Target Costing <ul><li>Benefits of TC decrease when accuracy of variable costs diminishes - uncertainty, volume estimates, totally new products </li></ul><ul><li>Emphasises manufacturing costs when other areas may be more important - e.g. procurement, quality </li></ul><ul><li>Knowledge of customer requirements </li></ul><ul><li>Allocating TC to components and processes </li></ul><ul><li>Longer development times (e.g. Matsushita shaver!) </li></ul><ul><li>Employee burnout through stress of deadlines </li></ul><ul><li>Organisational conflict - sales v manufacturing </li></ul><ul><li>Market confusion - does the market know what it wants? </li></ul>
  34. 34. Concluding Comments <ul><li>The Lean concepts and techniques are widespread and moving into service industries </li></ul><ul><li>Analysis of whole supply chain (value chain) is now common </li></ul><ul><li>Many firms use some of the ideas and techniques without espousing the Lean ideology </li></ul><ul><li>Lean is an umbrella for many ideas not a tightly defined approach </li></ul><ul><li>Lean is extremely important in many industries, notably automotive and aerospace </li></ul>