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PowerPoint Presentation by Gail B. WrightProfessor Emeritus of AccountingBryant University Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license.

MANAGEMENT ACCOUNTING8th EDITIONBYHANSEN & MOWEN1 INTRODUCTION16 LEAN ACCOUNTING, TARGET COSTING, & BALANCED SCORECARD

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LEARNING GOALSAfter studying this chapter, you should be able to:LEARNING OBJECTIVES

*Describe the basic features of lean manufacturing. Describe lean accounting.Explain the basics of life-cycle cost management & target costing.Discuss the basic features of the Balanced Scorecard & its role in lean manufacturing.LEARNING OBJECTIVES

Click the button to skip Questions to Think About

*QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc.

How does lean manufacturing change cost accounting & management?

*QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc.

What are the similarities between JIT & lean manufacturing?

*QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc.

How are products assigned costs in a lean manufacturing environment?

*QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc.

Why are processes so important to performance management?

*QUESTIONS TO THINK ABOUT: Allen Autoparts, Inc.

Are lean manufacturing and the Balanced Scorecard compatible approaches?

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1Describe the basic features of lean manufacturing.LEARNING OBJECTIVE

*ALLEN AUTOPARTS: BackgroundAllen Autoparts is concerned about competition in an environment that changes rapidly. They need to exercise better control, reduce costs, become more efficient, and gain operating efficiencies. Can lean manufacturing help? LO 1

*LEAN MANUFACTURING: Definition

Is an approach designed to eliminate waste & maximize customer value.LO 1

*DIMENSIONS OF LEAN MANUFACTURINGDelivering the right product Right quantity Right quality (zero defect)At time neededAt lowest possible costA cost reduction strategy that redefines activities performed

LO 1

*5 PRINCIPLES OF LEAN THINKINGPrecisely specify value by each particular productIdentify the value stream for eachMake value flow without interruptionLet customer pull value from producerPursue perfectionLO 1

*VALUE BY PRODUCT: Definition

Is when only value-added features should be produced; non-value-added activities should be eliminated.LO 1

*VALUE STREAM: Definition

Is all activities, both value-added & non-value-added, required to bring product group or service from starting point to finished product in hands of customer.LO 1

*VALUE STREAMTypes of value streamsOrder fulfillmentNew productValue stream activitiesNon-value-addedActivities avoidable in the short runUnavoidable activities due to current technology or production methodValue added

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*ORDER FULFILLMENT VALUE STREAMLO 1EXHIBIT 16-1Order fulfillment provides current products to current customers.

*VALUE FLOWChanges the traditional manufacturing setup for batches to a cellular approach in order to:Reduce setup timeReduce changeover time

LO 1

*MANUFACTURING CELL: Definition

Contains all operations in close proximity that are needed to produce a family of products.LO 1

*TRADITIONAL BATCH SYSTEMLO 1EXHIBIT 16-3ANote time lost in moving & waiting.

*CELLULAR SYSTEMLO 1EXHIBIT 16-3BTime saved over traditional manufacturing is 90 minutes (150 60).

*PULL VALUELean manufacturing uses a demand pull system to reduce waste.JIT inventory Reduces inventory levelsRequires close relations with suppliersSuppliers benefit from Long term relationsBetter competitive position

LO 1

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2Describe lean accounting.LEARNING OBJECTIVE

*LEAN ACCOUNTING: A ComparisonLO 2Traditional cost management systems may not be compatible with Lean Accounting. Lean Accounting makes product costs more simple & direct. More labor and overhead costs are assigned to products through direct tracing rather than allocation.

*FOCUSED VALUE STREAMS: Definition

Allow overhead costs to be assigned through driver tracing of costs in a lean accounting system.LO 2

*FOCUSED VALUE STREAMSAre more simple & accurate in product costingHave limitationsInitially, labor costs may be difficult to assign if people are employed in several value streamsLabor costs should assigned proportionatelyAre organized around a family of products

LO 2

*FORMULA: Multiple ProductsCosts are assigned proportionately when multiple products are produced.LO 2Value stream product cost:= Total value stream cost of period Units shipped of period= $600,000 / 5,000 = $120 per unit

*VALUE STREAM REPORTINGLO 2EXHIBIT 16-6Costs are collected, reported by value stream; outside costs reported separately.

*VALUE STREAM DECISIONSMay lead toShort term decisionsMay not reflect long term consequences

LO 2

*PERFORMANCE MEASUREMENT: A ComparisonLO 2Lean accounting replaces standard cost system measurements with a Box Scorecard that compares a) operational, b) capacity, & c) financial metrics with prior week performances. A mixture of financial & nonfinancial measures are used.

*BOX SCORECARDLO 2EXHIBIT 16-7Comparison measures point to future desired goals.

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3Explain the basics of life-cycle cost management & target costing.LEARNING OBJECTIVE

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What are product life cycle & life cycle costs?Product life cycle is the time a product exists from conception to abandonment. Life cycle costs are all costs associated with a product for its life cycle. LO 3

*VALUE CHAIN: Definition

Is the set of activities required to design, develop, produce, market, and service a product.LO 3

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When are most costs incurred?During the development stage. This is also the time costs should best be managed. LO 3

*WHOLE-LIFE PRODUCT COSTProduct cost isNonrecurring costs Planning, Designing, TestingManufacturing costsLogistic costsCustomers postpurchase costs

LO 3

*TARGET COST: Definition

Is the difference between sales price needed to capture a predetermined market share & desired per-unit profit.LO 3

*TARGET COSTINGUses 1 of 3 methodsReverse engineeringTearing down a competitors product to discover design features that create cost reductionsValue analysisAttempting to assess the value placed on product functions by customersProcess improvement

LO 3

*TARGET COSTING MODELLO 3EXHIBIT 16-9When desired profit not met, target product costing to redesign product, process.

*OTHER ISSUESShort life cyclesLife cycle cost management even more important when life cycle is short

LO 3

*LIFE CYCLE COSTING: A ComparisonLO 3Life cycle costing includes development costs unlike conventional cost systems. Inclusion of more cost information can be useful for assessing effects on costs and benefit future design.

*PERFORMANCE REPORT: Life Cycle CostingLO 3EXHIBIT 16-11Variances are computed between actual & budgeted costs.

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4Discuss the basic features of the Balanced Scorecard & its role in lean manufacturing.LEARNING OBJECTIVE

*BALANCED SCORECARD: Definition

Translates an organizations mission & strategy into operational objectives & performance measures.LO 4

*BALANCED SCORECARD PERSPECTIVESFinancial perspectiveEconomic consequences of actions taken in other 3 perspectivesCustomer perspectiveDefines customer & market segments where the business unit will competeInternal business process perspectiveDescribes internal processes needed to provide value for customers, ownersLearning & growth (infrastructure) perspectiveDefines capabilities that an organization must have to create long term growth & improvement

LO 4

*STRATEGY + TRANSLATIONIs the ways in which a company implements it strategy for profit & growth within the balanced scorecard framework. It includes choices of type of customer, product, market, internal & business processes, etc. Strategy translation means specifying objectives, measures, targets & initiatives.LO 4

*STRATEGY TRANSLATION PROCESSLO 4EXHIBIT 16-12Vision & strategy works through 4 perspectives to reach targets & initiatives.

*PERFORMANCE MEASURESMust be balanced between:Lead measures (performance drivers)Lag (outcome) measures Objective (quantifiable & verifiable) measuresSubjective (more judgmental) measuresFinancial & nonfinancial measuresExternal & internal measures

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*LINKING PERFORMANCE MEASURES & STRATEGYTestable strategyUsing cause & effectLink objectives to overall goalDouble loop feedbackManagers receive information on effectiveness of strategy & its underlying assumptionsSingle loop feedbackEmphasizes only effectiveness of strategy

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*TESTABLE STRATEGYLO 4EXHIBIT 16-13Strategy map illustrates quality improvement strategy.

*FINANCIAL PERSPECTIVEFlows from other 4 perspectivesRevenue growthCost reductionAsset utilization

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*CUSTOMER PERSPECTIVESource of revenue component within the financial perspectiveCore objectives & measuresCustomer valueDifference between what customers receive and what they have given upDelivery reliability

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*PROCESS PERSPECTIVEProcess value chain made up of 3 processesInnovation processOperations processCycle time & velocityManufacturing cycle efficiencyDay-by-hour reportPost sales service process

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*LEARNING & GROWTH PERSPECTIVESource of capabilities that enable the accomplishment of other 3 perspectivesEmployee capabilitiesMotivation, empowerment, alignmentInformation systems capabilities

LO 4

*THE ENDCHAPTER 16