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Baggaley, B. and B. Maskell. 2003. Value stream management for lean companies, Part II. Journal of Cost Management (May/June): 24-30.

Summary by Jodi Corcoran
Master of Accountancy Program
University of South Florida, Fall 2004

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This is the second article in a two part sequence1. In this article, Baggaley and Maskell promote value stream costing as a more appropriate costing method for lean companies than standard costing. The paper includes a brief discussion of the shortcomings of standard costing from the lean enterprise perspective, a description of value stream costing, an explanation of how value streams are managed with reference to two types of reports created with value stream costing information, and a discussion of the environment needed for value stream costing to work effectively.

Shortcomings of Standard Costing

Standard costing allocates all overhead to products and relates the overhead to direct labor hours.

Standard costing encourages non lean behavior by focusing on utilization of resources, people’s individual efficiencies, and overhead allocations.

Standard costing calls for elaborate and wasteful data collection systems; the opposite of lean thinking.

Standard costing does not provide the data needed to support and encourage lean manufacturing.

Value Stream Costing

Value stream cost are typically calculated weekly.

No distinction is made between direct or indirect costs. All costs of the value stream are considered direct costs.

Costs included in the value stream are production labor, production materials, production support, machines and equipment, operation support, facilities and maintenance, and all other value stream costs. (See the adaptation of Exhibit 1 below).

Value stream costing includes a simpler cost collection method and reduces the number of cost centers.

Value stream costing provides a “real” Income Statement due to the elimination of unnecessary costs outside the control of value stream managers.

Costs outside of the value stream are referred to as “sustaining costs” of the business and are not allocated to the value stream.

Emphasis is placed on maximizing the flow of product through the value stream, not on production.

Costs Included in Value Stream Costing

P & Ls and Scorecards

Two types of reports generated using value stream costing information for value stream managers are P & Ls and performance measuring scorecards. Value stream managers are responsible for increasing the value created by the value streams, removing waste from the value streams, and increasing profits of the value streams. Inventory changes are not taken into account in the P & L report when calculating profits of the value stream to ensure the value stream teams keep the right focus, i.e., the flow of product through the value stream.

The scorecard includes but is not limited to performance measurements of the value stream (e.g., units per person, on-time shipment %, dock-to-dock days, first time through %, average product cost, AR days, productive %, non-productive %, available capacity), the current capacity usage, a simplified value stream P & L, the scorecard history, and the goals of the value stream team.

Product Costing

Standard costing is typically used in considering pricing, profit margins, performance measurement, process improvement, make/buy, product and customer rationalization, and inventory valuation. However, in most cases, standard costing yields misleading information and leads managers to make wrong decisions. Value stream costing provides better data and these decisions can be made based on the overall profitability of the value stream rather than the individual product cost. For example, outsourcing decisions are based on the profitability of the value stream as a whole, not the profitability of individual products. Pricing is not based on specific product cost, but instead on customer value which has no relation to product cost.

Environment Needed

Baggaley and Maskell describe when value stream costing actually becomes the best way to collect costs and report the value stream profitability. The authors note that the following must be in place:

Reporting is not done by departments, but instead by value streams.

With little or no overlap, employees are assigned to those value streams.

There are few shared service departments and few monuments.

Production processes are controlled with low variability.

“Out-of-control” situations and exceptions (i.e., scrap or rework) must be thoroughly tracked.

Inventory is controlled, consistent, and relatively low.


1 Baggaley, B. and B. Maskell. 2003. Value stream management for lean companies, Part I. Journal of Cost Management (March/April): 23-27. (Summary).

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