Management accounting system problems in context of Lean

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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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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

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

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

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

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

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.