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Kristensen, T. B. and P. Israelsen 2012. Management accounting system problems in context of lean: Development of a proposed solution. In Mitchell, F., H. Norrreklit and M. Jakobsen, eds. 2012. The Routledge Companion to Cost Management. Routledge Companions in Business.

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

JIT and Lean Enterprise Main Page | Lean Accounting Main Page

The purpose of this paper is to present a lean financial model developed to measure whether lean enterprise tools (e.g., just-in-time, jidoka, value stream mapping, 5-whys, etc.) actually reduce the costs of various types of waste as predicted by lean enterprise advocates. The paper includes five sections: 1) introduction, 2) research method, 3) interaction problems between lean and management accounting systems, 4) the new model, and 5) summary.

Introduction

In this section the authors cover some of the previous research on the lean vs. management accounting systems issue to establish the need for a new model. Kristensen and Israelsen disagree with authors who argue that non-financial measurements are all that is needed in a lean environment and that cost accounting is a problem and should be abandoned. The new model grew out of a study of three companies that experienced conflicts between the implementation of lean concepts and their management accounting control systems. The authors' research questions were designed to study the problems created by traditional standard cost systems in a lean environment, and how these systems could be changed to enhance rather than detract from lean initiatives.

Research Method

This research project and resulting model are based on a three year study of three companies. The research was guided by coherence theory and Merchant's six criteria for evaluating a management accounting system. Merchant's criteria include: congruence with organizational objectives, controllable by the manager who is influenced, and whether the information is timely, accurate, understandable, and cost effective. This section also includes a brief discussion of the three companies involved in the study.

Interaction Problems Between Lean and MAS

The authors listed ten problems that were identified in the three companies that implemented lean enterprise tools. Briefly they are as follows:

1. Difficulty in measuring profit improvements.
2. Difficulty in measuring lean progress in financial terms.
3. The cost of quality model used excluded some waste categories included in the lean approach.
4. Cost of capital does not include imputed cost.
5. Some capacity costs are allocated to the unit level confusing the identification of cost drivers.
6. Data on takt time is not used in the management accounting system.
7. Data collected in the value stream maps is not used in the management accounting system.
8. Learning curve effects are mixed with lean improvements.
9. Information from variance reports is not useful to line operators.
10. Traditional standard cost models do not support continuous improvement and mix expected and unexpected cost of waste.

The New Lean Financial Model

The model is presented using a modified example from one of the case companies studied. The example includes a graphic illustration of the flow layout and activity path for two value streams (See Figure 1), a table showing the steps in the production process for Value Stream 1 including various operators and support workers referred to as water spiders (Table 1), and a table showing a weeks production including all of the problems experienced during the period. In addition the example includes three types of reporting: 1) a traditional cost of waste financial report, 2) a regular lean report showing lead time, and 3) the new lean financial model report showing a wider variety of waste categories.

The example includes a considerable amount of detail that is beyond the scope of my summary, but adaptations of Figure 1 and Table 1 show how the example is set up into two value streams and three manufacturing cells.

Flow Layout and Activity path in a Lean Environment


Adapted from Table 1 - Value Stream 1
Resource Activity Path for Value Stream 1
Per unit - If not otherwise stated
Standard
Stock 1 Stock 1 storage 5 days
Water spider Transport of materials per batch 180 sec
Factory 1 Storage 1 hour
Water spider Scheduling and planning per batch 2,500 sec
Water spider Expected extra scheduling (rework) 2,000 sec
Materials Bill of materials per unit 1 pcs
Cell 1 activities (per unit) - bottleneck (special tools)
Operator 1 1. Shaping components 310 sec
Operator 2 2. Getting special power tools 10 sec
Operator 2 3. Surface treatment 250 sec
Operator 2 4. Transport materials to WIP 10 sec
Operator 2 5. Time expected for problems 10 sec
Operator 2 Cell 1 imbalance (1)-(2+3+4+5) 30 sec
Cell 1 total standard time 620 sec
Factory 2 Work in process storage 2 hours
Water spider Moving WIP into Cell 2 15 sec
Cell 2 activities
Operator 1 1. Drilling holes 280 sec
Operator 1 2. Moving between two power tools 7 sec
Operator 2 3. Montage 200 sec
Operator 2 4. Moving around the product unit to get in right position 15 sec
Operator 3 5. Welding 300 sec
Water spider 6. Inspection 25 sec
Water spider 7. Transport materials to WIP 20 sec
Operator 2 8. Time expected for problems power tools 20 sec
Operator 1+2 Cell 2 imbalance (5)-(1+2)+(5)-(3+4+8) 78 sec
Cell 2 total standard time 945 sec
Operator 1+2+3 Cell 1 and 2 imbalance (bottleneck process time 310 sec) 30 sec
Factory 1 WIP storage (average time) 1 hour
Machine 1 (23 painting slots in machine per batch)
Water spider Moving WIP into machine 1 - per batch 300 sec
Operator Loading machine with paint per batch 200 sec
Operator Setup of machine per batch 200 sec
Machine 1 Machine 1 - painting the batch 4,500 sec
Operator Managing and steering the machine per batch 4,500 sec
Operator/Machine 1 Machine breakage downtime expected per batch (waiting time) 200 sec
Water spider Inspection of finished goods per batch 100 sec
Machine 1 total standard time per batch 5,500 sec
Machine 1 (imbalance with cells) available time on machine 1 per batch 2,030 sec
Materials Paint used per batch in machine 1 10,000 ml
Materials Paint wasted inside machine - not usable 2% per batch 20 ml
Operator Adjusting - reworking some of the units per unit 13 sec
Water spider Transport of finished goods to Stock 2 per batch 300 sec
Stock 2 Storage (average time) 10 days
Materials Scrap of finished goods by inspection per batch 1 pcs
Traditional Reporting
Direct hours Total operator/water spider direct (hours) standard time per unit 1,795.43 sec
Lean Reporting
Unit hours Total operator/water spider standard time per unit without waste 1,340 sec
Batch hours Total operator/water spider standard time per batch without waste 7,200 sec

Visual boards are used on the shop floor to show what is happening during the production process. This information is recorded by the water spiders (support workers) and used by operators and foreman to monitor the production process and to identify and solve production problems. The data from the visual boards are provided in Table 2 for the week's production in Value Stream 1.

Adapted from Table 2 - Visual Board of Week's Actual Results for Value Stream 1
Actual finished units ( including scrap) 322
Actual finished batches 14
Scrap per batch 2
Total operator hours actual (6 operators 8 hours a day, 5 days) 240
Total water spider hours actual (2 water spiders 8 hours a day, 5 days) 80
Actual paint consumed less standard ml 100
Reported visual board deviations
Problems with tools in cell 1 ( incorrect processing) - working slower - 1 batch missed 2 hours
Cell 2 had trouble keeping up the pace and was 400 sec slower on one batch (no lost batch-not bottleneck) 400 sec

Traditional Profit Reporting

This section includes two tables that show how the results of the week are reported in the traditional format. Table 3 provides the actual results in column 1, the flexible budget in column 2, and the budget or scheduled production in column 3.

Adapted from Table 3 - Traditional Financial Reporting for Value Stream 1
Actual:
Actual
Production x Actual Price
Flexible Budget:
Actual
Production x Standard Price
Budget:
Scheduled
x Standard Price
Revenue $29,400 $29,400 $33,000
Direct labor (operator - water spider in cells) 3,718 3,666 4,115
Materials (bom + paint) 2,515 2,515 2,755
Contribution margin 1 23,166 23,219 26,131
Indirect variable costs (operators-water spiders) 3,932 4,160 3,599
Contribution margin 2 19,234 19,059 22,532
Materials loss (paint) 29 28 30
Scrap (materials) 234 117 125
Scrap (labor) 349 175 287
Contribution margin 3 18,622 18,740 22,090
Capacity costs 1,000 1,000 1,000
Depreciation 1,000 1,000 1,000
Profit before interest 16,622 16,740 20,000

Table 4 includes the cost of waste for direct labor (unexpected), materials loss (expected and unexpected), materials scrap (expected and unexpected), labor scrap (expected and unexpected), indirect labor (unexpected), and total cost of waste. The unexpected costs of waste are the differences between columns 1 and 2 in Table 3 except for the last amount indicated for indirect labor resulting from a lost batch. The expected costs of waste are from column 2 (the flexible budget) of Table 3.

Adapted from Table 4 - Cost of Waste in Traditional Financial Reporting
1-2 Direct labor (unexpected) 53
2 Materials loss (expected) 28
1-2 Materials loss (expected) 1
2 Materials scrap (expected) 117
1-2 Materials scrap (unexpected) 117
2 Labor scrap (expected) 175
1-2 Labor scrap (unexpected) 175
1-3 Increase indirect labor (unexpected) 1 batch lost 334
Total expected cost of waste 319
Total unexpected cost of waste 679
Total cost of waste 998

Lean Financial Reporting

The authors begin this section by stating that a cost model is needed in a lean organization even though traditional cost models are not compatible with lean thinking. For example, the traditional standard cost model promotes non-lean behavior, provides confusing information by allocating non-unit cost to the unit level, and hides waste in the standards. Their new lean financial reporting model uses standards, but includes separate categories for ten types of waste that have been identified in the lean environment. These include: rework/scrap, movement, transport, waiting time, incorrect processing, overproduction, inventory, imbalance time, inspection, and setup. Standards are needed to understand how the cost of waste is affected by changes in product mix and volume, and to determine available capacity compared to process consumption and waste.

Their model is illustrated in Tables 6 and 7. Kristensen and Israelsen's Table 6 includes the three columns as indicated in my adaptation of their table below. The main purpose of their new lean financial model is to show all types of waste that are aggregated and hidden in a traditional cost model. An advantage of this new approach is that each type of waste can be addressed with different lean tools. The new model supports continuous improvement by reducing and monitoring expected as well as unexpected types of waste.

Adapted from Table 6 - Lean Financial Reporting for Value Stream 1
Actual:
Actual Production Volume x Actual Price
Flexible Budget:
Actual Production Volume x Standard Price (Expected)
Budget:
Scheduled Volume x Standard
Price
Revenue 29,400 29,400 33,000
Unit-level labor (operators - water spiders) 2,739 2,736 3,071
Unit-level materials (bom and paint) 2,515 2,515 2,755
Unit-level Contribution Margin 1 24,146 24,149 27,174
Unit level materials loss (paint) 29 28 30
Scrap (materials) 234 117 125
Unit-level inspection 56 56 60;
Unit-level movement 105 105 113
Unit-level transport 67 67 72
Unit-level scrap (labor) 261 130 140
Unit-level rework 29 29 31
Unit-level waiting time 350 0 0
Unit-level incorrect processing 117 67 72
Unit-level imbalance 309 309 331
Unit-Level Contribution Margin 2 22,590 23,241 26,202
Batch-level labor (operators - water spiders) 700 700 750
Batch Margin 1 21,890 22,541 25,452
Setup 19 19 21
Batch-level inspection 10 10 10
Batch-level movement 29 29 31
Batch-level transport 47 47 50
Batch-level rework and rescheduling 39 39 42
Batch-level waiting time 19 19 21
Batch-level incorrect processing 0 0 0
Batch-level imbalance with cells 197 197 211
Batch-level Margin 2 21,529 22,180 25,065
Value stream sustaining (avoidable operators) 1,425 1,425 1,425
Available labor operators - not bottleneck cell 56 345 58
Available labor operators on bottleneck cell 1 28 172 29
Value stream sustaining - (avoidable w spiders) 1,398 1,498 1,463
Depreciation for available machine time 240 290 240
Depreciation for wasted machine time 322 272 292
Depreciation for machine time consumed 438 438 469
Value stream Capacity costs (engineer) 1,000 1,000 1,000
Profit before imputed interest 16,622 16,740 20,090
Raw materials stock 4 4 4
WIP storage materials - cost of capital 1 0 1
Finished goods - cost of capital 8 7 8
Stock facilities - cost of capital 87 81 87
Machine assets - cost of capital 29 29 29
Factory occupancy - cost of capital 288 288 288
Profit after imputed interest 16,206 16,330 19,674

Although some authors have advocated using a cost model based on actual costs, it is difficult to compare actual costs because of inflation and changes in product mix and available capacity. In addition, an actual cost model does not provide the information needed to identify the various types of waste.

In addition to measuring all types of waste, the new lean financial model also includes a relativity measure that shows the relative percentage of cost for: 1) process consumed or value-added costs, 2) cost of waste, 3) cost of available capacity, and 4) value stream sustaining costs. Table 7 shows the details of the relativity measures for Value Stream 1. These measures are summarized in Table 8 (not included) which shows the following: For materials costs, 90.5% were process consumed or value added, while 9.5% of the costs represented waste. For labor costs, 43% were process consumed or value added, 14.4% represented waste, 7.4% were available, and 35.3% were value stream sustaining. For machine time, 43.8% was value added, 32.1% represented waste, and 24.2% was available.

Adapted from Table 7
Lean Financial Model Cost of Waste and Relatively Measure
1. Process consumed (not available nor waste) Unexpected Expected Relativity
Measure
Materials 0 2,515 90.5 %
Labor (slower pace) 3 3,436 43.0%
Machine time 0 450 43.8%
2. Cost of waste Unexpected Expected Relativity
Measure
Materials loss (paint) 1 28
Scrap (material) 117 117
Cost of waste materials 9.5%
Inspection 0 66
Movement 0 134
Transport 0 114
Scrap (labor) 131 130
Rework 0 68
Waiting time 350 19
Incorrect processing 50 67
Setup 0 19
Cost of waste labor 14.4%
Wasted machine time 50 280 32.1%
Stock cost 7 92 100%
3. Available Unexpected Expected Relativity
Measure
Bottleneck cell available labor (operator) -144 172 0.3%
Imbalance labor 0 506 6.3%
Machine available -50 299 24.2%
Other labor operators available -289 345 0.7%
4. Value stream sustaining Unexpected Expected Relativity
Measure
Operators 0 1,425 17.8%
Water spiders -100 1,498 17.5%
Total cost of waste (Unexpected + Expected from 2.) 1,840

Table 7 indicates that the total cost of waste is 1,840 while the traditional reporting model in Table 4 shows only 998, a difference of 842. The lean model labels non-value adding activities as waste. For example, movement is a major type of waste in the lean model. For a cost model to be effective in a lean environment, it must be able to show whether the costs of waste have been reduced as a result of lean initiatives. The new lean model does this by measuring all types of waste, while the relativity measure is useful for analyzing the company's progress towards lean objectives in each waste category. The lean model also shows the different types of capacity including bottleneck capacity, other labor capacity, and imbalance capacity.

Summary

The lean financial model presented in this paper was developed after examining the operations and cost systems of three companies. The model integrates information from the visual boards, includes standards from the value stream maps, and separates cost variances into four categories including process consumed costs, cost of waste, cost of available capacity and value stream sustaining costs. The model provides a number of benefits that are listed in this section. For example, the new lean model provides information to support the shop floor by measuring all types of waste, by providing a way to calculate both expected and unexpected variances, by separating unit and batch costs, by separating lean improvements from normal learning curve effects, and by distinguishing between various types of capacity.

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Note: This article is published in Mitchell, F., H. Norrreklit and M. Jakobsen, eds. 2012. The Routledge Companion to Cost Management. Routledge Companions in Business. (Contents).

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