Download Lean manufacturing

CHAPTER
12
Lean Principles, Lean
Accounting, and Activity
Analysis
Warren
Reeve
Duchac
human/iStock/360/Getty Images
Managerial
Accounting
13e
Lean Principles
•
The lean enterprise is a business that produces
products or services with high quality, low cost, fast
response, and immediate availability.
o
o
Lean manufacturing, sometimes called just-in-time
processing (JIT), accomplishes these objectives in a
manufacturing setting.
Both manufacturing and nonmanufacturing businesses use
lean principles to accomplish theses service and cost
objectives.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Lean versus Traditional Manufacturing Principles
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reducing Inventory
•
•
•
Lean manufacturing views inventory as wasteful and
unnecessary, and thus emphasizes reducing or
eliminating inventory.
Under traditional manufacturing, inventory often hides
underlying production problems or problems caused
by a shortage of trained employees, unreliable
suppliers, or poor product quality.
In contrast, lean manufacturing solves and removes
production problems.
o
In this way, raw materials, work in process, and finished
goods inventories are reduced or eliminated.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reducing Lead Time
(slide 1 of 2)
•
Lead time, sometimes called throughput time,
measures the time interval between a product
entering production (is started) and when it is
completed (finished).
o
That is, lead time measures how long it takes to manufacture
a product.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reducing Lead Time
(slide 2 of 2)
•
The lead time can be classified as one of the
following:
o
o
•
Value-added lead time, which is the time spent in
converting raw materials into a finished unit of product
Non-value-added lead time, which is the time spent while
the unit of product is waiting to enter the next production
process or is moved from one process to another
The value-added ratio is computed as follows:
Value-Added Lead Time
Value-Added Ratio =
Total Lead Time
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reducing Setup Time
•
•
A setup is the effort spent preparing an operation or process
for production.
A batch size is the amount of production in units of product that
is produced after a setup.
The total within-batch time is computed as follows:
•
The value-added ratio is computed as follows:
•
Lean manufacturing emphasizes decreasing setup times in
order to reduce the batch size, whereas traditional
manufacturing does not treat setup improvement as an
important priority.
•
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Emphasizing Product-Oriented Layout
•
•
•
Manufacturing processes can be organized around a
product, it is called a product-oriented layout (or
product cells).
Alternatively, manufacturing processes can be
organized around a process, which is called a
process-oriented layout.
Lean manufacturing normally organizes manufacturing
around products rather than processes.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Emphasizing Employee Involvement
•
•
Employee involvement is a management approach
that grants employees the responsibility and authority
to make decisions about operations.
Employee involvement is often applied in lean
manufacturing by organizing employees into product
cells.
o
Within each product cell, employees are organized as
teams where the employees are cross-trained to perform
any operation within the product cell.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Emphasizing Pull Manufacturing
•
•
In pull manufacturing (or make to order), products
are manufactured only as they are needed by the
customer. Products can be thought of being pulled
through the manufacturing process.
In contrast, the traditional approach to manufacturing
is based on estimated customer demand. This principle
is called push manufacturing (or make to stock).
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Emphasizing Zero Defects
•
•
Lean manufacturing attempts to eliminate poor
quality.
Six Sigma was developed by Motorola Corporation
to improve product quality and manufacturing
processes and consists of five steps:
1.
2.
3.
4.
5.
Define
Measure
Analyze
Improve
Control
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Emphasizing Supply Chain Management
(slide 1 of 2)
•
•
Supply chain management coordinates and controls
the flow of materials, services, information, and
finances with suppliers, manufacturers, and customers.
Supply chain management partners with suppliers
using long-term agreements.
o
These agreements ensure that products are delivered with
the right quality, at the right cost, at the right time.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Emphasizing Supply Chain Management
(slide 2 of 2)
•
To enhance the interchange of information between
suppliers and customers, supply chain management
often uses:
o
o
o
Electronic data interchange (EDI), which uses computers to
communicate orders, relay information, and make or receive
payments from one organization to another
Radio frequency identification devices (RFID), which are
electronic tags (chips) placed on or embedded within
products that can be read by radio waves that allow instant
monitoring of product location
Enterprise resource planning (ERP) systems, which are used
to plan and control internal and supply chain operations
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Lean Principles for
Nonmanufacturing Processes
•
Lean manufacturing practices can also be adapted to
service businesses (hospitals, banks, insurance
companies, and hotels) or administrative processes
(processing of insurance applications, product designs,
and sales orders).
o
o
In the case of a service business, the “product” is normally
the customer or patient.
In the case of administrative processes, the “product” is
normally information.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Lean Accounting
• In lean manufacturing, the accounting system reflects the lean philosophy.
Such systems are called lean accounting, and have the following
characteristics:
o
o
Fewer transactions
Combined accounts
 All in-process work is combined with raw materials to form a new account, Raw and
In Process (RIP) Inventory.
 Direct labor is also combined with other costs to form a new account titled
Conversion Costs.
o
o
Nonfinancial performance measures
Direct tracing of overhead
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Fewer Transactions
•
•
•
The traditional process cost accounting system accumulates
product costs by department.
The recording of product costs by departments facilitates the
control of costs. However, this requires that many transactions
and costs be recorded and reported, which adds cost and
complexity to the cost accounting system.
In lean manufacturing, there is less need for cost control.
o
•
This is because lower inventory levels make problems more visible.
The lean accounting system uses backflush accounting.
o
Backflush accounting simplifies the accounting system by eliminating the
accumulation and transfer of product costs by departments, but instead,
pulls material and conversion costs directly to finished goods.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Combined Accounts
•
•
Lean accounting debits all materials and conversion costs to an
account titled Raw and In Process Inventory.
Lean manufacturing often does not use a separate direct labor
cost classification.
o
This is because the employees in product cells perform many tasks—
some which are classified as direct and some as indirect.
 Thus, labor cost (direct and indirect) is combined with other product cell
overhead costs and recorded in an account titled Conversion Costs.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Nonfinancial Performance Measures
•
•
•
Lean manufacturing normally uses nonfinancial measures to help
guide short-term operating performance.
A nonfinancial measure is operating information that has not
been stated in dollar terms.
Examples of nonfinancial measures of performance include:
o
o
o
o
o
o
o
Lead time
Value-added ratio
Setup time
Number of production line stops
Number of units scrapped
Deviations from scheduled production
Number of failed inspections
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Direct Tracing of Overhead
•
In lean manufacturing, many indirect tasks are assigned to a
product cell.
 Thus, the salary of maintenance personnel can be traced directly to the
product cell, and thus, to the product.
•
In traditional manufacturing, maintenance personnel are part of
the maintenance department.
o
The cost of the maintenance department is then allocated to products
based on predetermined factory overhead rates.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Activity Analysis
•
•
Activities can be used to support operational
improvement in the lean enterprise using activity
analysis.
Activity analysis determines the cost of activities for
the purpose of determining the cost of the following:
o
o
o
Quality
Value-added activities
Processes
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality
(slide 1 of 2)
•
•
Competition encourages businesses to emphasize high-quality
products, services, and processes. In doing so, businesses incur
costs of quality.
Costs of quality can be classified as follows:
o
o
o
o
Prevention costs are costs of preventing defects before or during the
manufacture of the product or delivery of services.
Appraisal costs are costs of activities that detect, measure, evaluate,
and inspect products and processes to ensure that they meet customer
needs.
Internal failure costs are costs associated with defects discovered
before the product is delivered to the consumer.
External failure costs are costs incurred after defective products have
been delivered to consumers.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Costs of Quality
(slide 2 of 2)
•
•
Prevention and appraisal costs can be thought of as
costs of controlling before any products are known to
be defective.
Internal and external failure costs can be thought of
as the cost of controlling quality after products have
become defective.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Quality Activity Analysis
•
An activity analysis of quality quantifies the costs of
quality in dollar terms.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Pareto Chart of Quality Costs
•
•
•
One method of reporting quality cost information is a
Pareto chart.
A Pareto chart is a bar chart that shows the totals of
an attribute for a number of categories.
The Pareto chart gives managers a quick visual tool
for identifying the most important quality control cost
categories.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Cost of Quality Report
•
•
The costs of quality also can be summarized in a cost
of quality report.
A cost of quality report normally reports the
following:
o
o
o
Total activity cost for each quality cost classification
Percent of total quality costs associated with each
classification
Percent of each quality cost classification to sales
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Value-Added Activity Analysis
•
In addition to prevention, appraisal, internal failure,
and external failure, activities may also be classified
as follows:
o
Value-added
 A value-added activity is one that is necessary to meet customer
requirements.
o
Non-value added
 A non-value-added activity is not required by the customer but
occurs because of mistakes, errors, omissions, and process failures.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Process Activity Analysis
•
Activity analysis can be used to evaluate business
processes.
o
•
A process is a series of activities that converts an input into
an output.
Management can use process activity analysis to
improve a process.
©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.