D Lean Principles and page D-1

Accounting
Appendix Preview

LEAN BUSINESS MODEL

C1 Lean principles
Lean example
Lean overhead
Lean supply chain
Lean for services

NTK D-1

PRODUCTION
PERFORMANCE
A1 Cycle time
Cycle efficiency
A2 Days in work in process
inventory
 NTK D-2

LEAN ACCOUNTING
P1 Key accounts
Conversion costs
Accounting entries
P2 Costs of quality
A3 Days in payables

NTK D-3

Learning Objectives

CONCEPTUAL
C1 Describe lean principles.

ANALYTICAL
A1 Compute cycle time and cycle efficiency, and explain their
importance to production management.
A2 Compute days’ sales in work in process inventory.
A3 Compute days’ payable outstanding.

PROCEDURAL
P1 Record product costs using lean accounting.
P2 Classify quality costs and prepare a cost of quality report.
page D-2
LEAN BUSINESS MODEL
Describe lean principles.
Competition forces businesses to improve. One path to improvement
is the lean business model, whose goals are to use fewer resources
to deliver higher-quality products to satisfy customers. Exhibit D.1
shows key aspects of the lean business model. Lean business
principles differ from those in traditional manufacturing. Lean business
practices like continuous improvement, just-in-time inventory systems,
and supply chain management aim to cut waste and increase
productivity. Lean goals focus on the consumer and overall societal
benefits.
page D-5

EXHIBIT D.1
Lean Business Model

Lean Principles
Three key principles of the lean business model involve value
streams, pull production, and zero waste and zero defects.

Value Streams Lean businesses aim to provide customers what

they want, and when they want it. Customers increasingly want
customized products, so manufacturers must produce quickly and
without waste. Rather than build standard products in a long assembly
line, lean manufacturers use smaller value streams. Value streams
consist of all the activities needed to create customer value. For
example, a food processor might have separate value streams for its
trail mix, energy bars, and energy drinks. All of the processes for each
product type occur in one value stream. A trail mix value stream is
shown in Exhibit D.2.
EXHIBIT D.2
Trail Mix Value Stream

Pull Production Lean manufacturing differs from traditional

manufacturing. Lean manufacturers use pull production, where
production begins with a customer order. Goods are “pulled” through
the manufacturing process “just-in-time” and delivered directly to the
customer after completion.
Push Production Traditional manufacturing uses push production,
where goods are produced before a customer order and production is
based on sales forecasts. Goods are “pushed” into inventory and wait
for a customer order. Exhibit D.3 compares push production with pull
production.
Push production has several challenges.
• Inaccurate sales forecasts can cause overproduction. This
increases storage costs and risk of obsolescence (decrease in
value).
• Inaccurate sales forecasts can cause underproduction. This creates
stock-outs and lost sales.
• Batch sizes (lot sizes), which are the number of units produced
after a machine setup, are high. This makes it hard to produce
customized products. Large batch sizes can also produce more- ­
defects before the issue is identified and production is stopped.
EXHIBIT D.3
Lean Business Model
Pull Production To address these issues, many turn to pull page D-3
production. Pull production follows a lean strategy which includes a
focus on reducing (1) cycle time, (2) setup time, and (3) inventory
levels.
Cycle Time Cycle time (CT) is the total time a production process
takes, starting from putting raw materials into production to completing
a finished good. This can be in minutes, such as with fast-food
restaurants, or weeks, such as with jet engines. Lean businesses
reduce cycle time by producing in smaller batch sizes and making
goods to customer order. Smaller batch sizes reduce cycle time
because goods spend less time waiting for other goods to finish in the
production cycle. Customers get the goods they want more quickly.
Lean businesses focus on improving the following to reduce cycle
time.
Of the four parts of cycle time, only process time is a value-added
time activity that adds value to the customer. Inspection, move, and
wait time are non-value-added time activities because they do not
add value to customers.
Setup Time Setup time is the amount of time to prepare a process
for production; for example, preparing the roasting process to make
trail mix. Setup time includes time spent starting and calibrating
machines. Lean businesses want quick setups so they can reduce
cycle time when producing goods to customer order in smaller batch
sizes.
Inventory Levels Lean businesses believe holding inventory is
wasteful and instead use just-in-time inventory. The following table
compares how traditional and lean manufacturers manage inventory.

page D-4
Zero Waste and Zero Defects Lean businesses aim for
zero waste and zero defects. Employees of lean businesses can stop
production if they see something wrong. Defective goods are not
passed on to the next process. Instead, the source of the problem is
identified and corrected before production resumes. Fewer defects
lead to lower scrap and ­rework costs, fewer warranty claims, and
increased customer satisfaction.

Lean Production Example

Nike implemented a lean approach to its clothes manufacturing in
several countries. Clothes manufacturing requires sewing, ironing,
and packing processes. Exhibit D.4 compares Nike’s traditional
approach to its new lean approach. Several benefits and cost savings
are identified.
EXHIBIT D.4
Lean Production at Nike

Source: Distelhorst, Greg; Hainmueller, Jens; and Locke, Richard M. Does Lean Improve
Labor Standards? Management and Social Performance in the Nike Supply Chain, August
29, 2015, Management Science, Vol. 63, Issue 3.

Lean Overhead Costs

Traditional manufacturers use methods like activity-based costing to
allocate overhead costs to products. Lean manufacturers like Illinois
Tool Works aim to eliminate overhead costs, not allocate them.
Focusing on the 20% of its products that generate 80% of its profits,
the company produces in separate value streams. Employees are
responsible for all activities in their value streams. The company made
major operational changes to implement a lean approach and
increase profits. The table below shows how those changes reduced
overhead costs.

After eliminating overhead costs, tracing direct costs to value

streams, and treating any remaining indirect costs as period costs, the
company no longer allocates costs. It doesn’t track cost drivers like
number of setups and number of purchase orders that are used in
activity-based costing. Profits and employee and customer satisfaction
all improved. Source: Tatikonda, L., O’Brien, D., and Tatikonda, R. Succeeding with
80/20, Management Accounting, Vol. 80, No.8.

Supply Chain Management

Supply chain management or logistics is the control of materials,
information, and finances as they move between suppliers,
manufacturers, and customers. Lean businesses use supply chain
management to ensure raw materials arrive just-in-time for production
and customers receive their orders on schedule.

Mihajlo Maricic/Alamy Stock Photo

All types of businesses must manage their supply chains. Nike

outsources all of its production, and it uses review programs to make
sure its suppliers follow ethical practices. Taco Bell’s just-in-time
preprocessed food deliveries require close coordination and
information sharing with its suppliers.
One measure of success in supply chain management is in the
demand for its services. A materials handling industry report forecasts
over 1.4 million openings for logistics jobs in supply chain
management. These include jobs for data analysts, marketers, human
resource managers, and fulfillment center employees. Average annual
salaries of around $100,000 are common for supply chain managers.
The Council of Supply Chain Professionals ([Link]) has more
information.

Lean Processes for Service Businesses

Lean principles also apply to retailers and service businesses.
Amazon applied lean principles when it changed its fulfillment
process to use machines for repetitive, low-value-added steps and
human employees for high-value, complex work. As a result, the
number of defects (incorrect order fulfillments) was reduced. Amazon
also applies lean principles to customer service. Employees make
quick decisions to satisfy customers. If customers call about a
defective product, employees can “stop the line” by removing the
product from Amazon’s website until the source of the defect is
resolved. This lean approach reduces the number of defective
products sold and increases customer satisfaction.
Taco Bell applies lean principles to food service. By focusing on
customer value, management determined “We are in the business of
feeding people, not making food.” As a result, the company changed
from food processing to food assembly. Ingredients are preprocessed
in off-site facilities and shipped just-in-time to restaurants. Employees
then assemble ingredients to suit customer orders. The lean approach
decreases inventory levels and costs, and it increases quality and
customer satisfaction.

NEED-TO-KNOW D-1
Lean Production
C1
Part A For each item, identify whether it best applies to lean
businesses (L) or traditional businesses (T).
1. Production begins with a sales forecast.
2. Only finished goods are inspected for quality.
3. Uses pull production.
4. Processes are located together.
5. Uses push production.
6. Produces in small batch sizes.
Solution
1. T 2. T 3. L 4. L 5. T 6. L
Part B Identify which of the statements below are true (T) or false
(F). Lean businesses aim to:
 1. Reduce inventory levels.
2. Increase profits.
3. Produce in large batch sizes.
4. Increase long setup times.
5. Reduce wait time.
6. Reduce inspection time.
Solution
1. T 2. T 3. F 4. F 5. T 6. T

Do More: QS D-1, QS D-2, E D-1

PRODUCTION PERFORMANCE

Compute cycle time and cycle efficiency, and explain their importance
to production management.
page D-6

Cycle Time and Cycle Efficiency

Lean businesses use many nonfinancial measures to evaluate the
performance of their production processes. It is important to reduce
the time it takes to produce products and to improve efficiency. Cycle
time (CT) is the time it takes to produce a good or provide a service. It
is computed using the equation in Exhibit D.5.

EXHIBIT D.5
Cycle Time

Process time is the only activity that adds value to the customer
(value-added activity). Inspection, move, and wait times do not add
value to customers (non-value-added activities). Lean businesses try
to reduce non-value-added time to improve cycle efficiency (CE).
Cycle e­ fficiency, defined in Exhibit D.6, measures the amount of cycle
time spent on value-added activities. A CE of 1 (100%) means a value
stream’s time is spent entirely on value-added activities. If the CE is
low, too much time is being spent on non-value-added activities and
the production process should be reviewed with an aim to eliminate
waste.

EXHIBIT D.6
Cycle Efficiency

To illustrate, assume that Rocky Mountain Bikes receives and

produces an order for 500 mountain bikes. It took the following times
to produce this order.

Cycle time is 6.0 days (1.8 + 0.5 + 0.7 + 3.0 days). Cycle efficiency is
computed as

Rocky Mountain Bikes’s value-added time (its process time, or time

spent working on the product) is 30%. The other 70% of time is spent
on non-value-added activities. The 30% CE for Rocky Mountain Bikes
is low. Employees and managers should try to reduce time spent on
non-value-added activities. If the company can reduce its wait time by
2 days, its cycle time will be 4 days (computed as 6 days − 2 days). Its
cycle efficiency will then be 0.45 (45%), computed as 1.8 days/4.0
days.

Compute days’ sales in work in process inventory.

Days’ Sales in Work in Process Inventory

Lean businesses aim to reduce inventory. They typically do not have a
separate Raw Materials Inventory account and hold few finished
goods. This means the Work in Process Inventory account can be
used to measure production efficiency. Work in process inventory
reflects delay in getting products to customers, which lean businesses
consider wasteful. Getting products to customers sooner by reducing
work in process inventory can increase customer satisfaction. To
measure production efficiency, we can use days’ sales in work in
process inventory, defined in Exhibit D.7. It’s often rounded to the
nearest whole day.

EXHIBIT D.7
Days' Sales in Work in Process Inventory

Axis Co., a computer maker, reports work in process inventory of $503

and cost of goods sold of $45,829. Axis computes its days’ sales in
work in process inventory as follows.
page D-7

Lower days’ sales in work in process inventory means the company is

completing its production cycle more quickly. Adopting a lean model
should result in a lower number of days’ sales in work in process
inventory. As an example, if Axis Co. adopts a lean model and
reduces its work in process inventory by 20%, its days’ sales in work
in process inventory is 3 days, computed as follows.

NEED-TO-KNOW D-2
Cycle Time and Cycle Efficiency
A1
Part 1
The following information is for an order produced by Tyler Co.
Compute cycle time and cycle efficiency.

Solution

Do More: QS D-9, QS D-10, E D-

6, E D-7, E D-8, E D-9
Days' Sales in Work in Process Inventory
A2
Part 2
Use the following information to compute days’ sales in work in
process inventory.

Solution
 Days’ sales in work in process inventory = ($2,053/$46,828) × 365
=

Do More: QS D-11, E D-10, E D-

11

LEAN ACCOUNTING

Record product costs using lean accounting.

Key Accounts
Lean businesses usually have fewer transactions to record and use
fewer accounts. The key accounts in lean accounting follow.
• Work in Process Inventory Lean businesses put raw materials
immediately into production, so a separate Raw Materials Inventory
account is not used. Raw materials purchases are recorded in
Work in Process Inventory.
• Conversion Costs Direct labor, indirect labor, and other overhead
costs are recorded in this ­account. In lean businesses, employees
work within individual value streams and they do both direct and
indirect labor tasks. For example, employees in a trail mix value
stream might do roasting, blending, packaging, and cleaning duties.
Therefore, all of these costs are accumulated in the Conversion
Costs account.

Conversion Costs
In lean accounting, budgeted conversion costs are applied to work in
process. For example, if a business budgets for $100,000 of
conversion costs and 4,000 production hours in a value stream, the
conversion cost rate is computed as follows.
This rate can be expressed in terms of units of product. For example,
if each unit requires 2 production hours, the conversion cost rate is
$50 per unit ($25 × 2).

Accounting Entries
Point: Variations of lean accounting exist. Some use “backflush”
accounting, where entries are delayed until goods are finished or sold.
Solshine manufactures solar panels. Each solar panel requires $40 of
raw materials and $160 of conversion costs. The company produced
and sold 200 solar panels for $480 each this period. Actual conversion
costs equaled applied conversion costs. The relevant journal entries
follow.
page D-8

records raw materials purchased ($40 per panel × 200 panels

produced = $8,000) as Work in Process Inventory. Separate raw
materials inventory accounts are not used.
applies conversion costs ($160 per panel × 200 panels produced =
$32,000) to Work in Process Inventory. This applied conversion
cost is based on a budgeted amount of conversion costs.
records actual conversion costs to produce 200 solar panels. This
amount includes the actual costs of direct labor, indirect labor, and
other overhead costs. The various credit accounts in this journal
entry would include Salaries Payable, Wages Payable, Utilities
Payable, Accumulated Depreciation—Manufacturing Equipment,
and others.
 records the sale of goods on account (200 panels sold × $480
sales price per panel = $96,000).
records the related cost of 200 panels sold (200 × $200 = $40,000).
The cost per unit is the sum of $40 of raw materials and $160 of
conversion costs. Because lean businesses make goods to order,
finished product costs are immediately recorded in Cost of Goods
Sold.
When Finished Goods Inventory Remains Lean businesses
sometimes end an accounting period with finished but unsold goods. If
instead of selling 200 panels, assume Solshine sold 185 panels and
had 15 panels left in inventory. It records journal entries ①, ②, and ③
as above; but it records entries ④ and ⑤ as follows. Finished Goods
Inventory is increased for the cost of goods not sold (15 units × $200).
Cost of goods sold is computed as 185 units sold × $200 = $37,000.

NEED-TO-KNOW D-3
Lean Accounting Entries
P1
A lean manufacturer incurs $45 per unit in raw materials page D-9
costs and applies $75 per unit in conversion costs to produce office
chairs. Each chair is sold for $170. In the current period, the
business produced 500 units and sold 470 units. Prepare the
necessary journal entries following lean accounting. Assume actual
conversion costs equal applied conversion costs.
Solution
 Do More: QS D-3, QS D-4, QS
D-5, QS D-6, E D-2, E D-3, E D-4

Costs of Quality

Classify quality costs and prepare a cost of quality report.

Lean businesses assess the costs of quality to reduce non-value-
added activities. Costs of quality are the costs incurred to produce
the quality of products that satisfies customers. Exhibit D.8 shows
examples of the four different types of quality costs.

EXHIBIT D.8
Types of Quality Costs

Costs of Good Quality Prevention and appraisal costs are incurred

before a good or service is provided to a customer. The purpose of
these costs is to reduce the chance the customer is provided a
defective good or service. These are the costs of trying to ensure that
only good-quality items are produced.
• Prevention activities focus on quality training and improvement
programs to ensure quality is built into the product or service.
Working with good suppliers and performing equipment
maintenance are other prevention activities.
• Appraisal activities include the costs of inspections to ensure that
materials and supplies meet specifications and inspections of
finished goods.
Costs of Poor Quality Internal and external failure costs are the
costs of making poor-quality items.
• Internal failure costs are incurred after a company has
manufactured a defective product but before that product has been
delivered to a customer. Internal failure costs include the costs of
reworking products, reinspecting reworked products, and scrap.
• External failure costs are incurred after a customer has been
provided a defective product or service. Examples of this type of
cost include costs of warranty repairs and costs of recalling
products. This category also includes lost profits due to dissatisfied
customers buying from other companies.
Point: International Organization for Standardization (ISO) page D-10
develops standards on best practices involving: Quality management,
Environmental management, Health and safety, Energy management,
Food Safety, and IT security. Its ISO 9000 standards for quality
management are the best known.

Exhibit D.9 shows a cost of quality report, which lists the costs of
quality activities by category. In addition to dollar amounts, this report
shows the percentage of the total costs of quality in each category.
This company spends only 55% (25% + 30%) of its total cost of
quality on the activities of good quality. Spending more on prevention
and appraisal could reduce the costs of bad quality and reduce the
costs of lost profits from dissatisfied customers.
EXHIBIT D.9
Cost of Quality Report

CORPORATE SOCIAL RESPONSIBILITY

Peter Varga/Shutterstock
Nike implemented lean processes and achieved increased
productivity, lower inventory levels, lower defect rates, and faster
production. These improvements benefited the “profit” aspect of the
triple bottom line, but lean processes can have other triple bottom line
benefits. Nike saw major improvements in compliance with labor rules.
Nike increased both profits and working conditions for employees
(“people”) in its supply chain.
Lean businesses also try to reduce waste. Apple’s Environmental
Responsibility Report shows a focus on the “planet” aspect of the
triple bottom line. Apple strives for a closed-loop supply chain,
where products are built using only renewable resources or recycled
material, as shown in Exhibit D.10.
To achieve its goal, Apple works with its suppliers to use 100%
recycled tin in the main part of its iPhone. It also has programs to
encourage customers to recycle old devices. Robots disassemble
millions of iPhones per year to reclaim materials.

EXHIBIT D.10
Closed-Loop Supply Chain

Compute days' payable outstanding.

Companies that buy on credit monitor how long they take to pay
creditors. This is particularly important for lean businesses because
they usually have long-term contracts with important suppliers. Taking
too long to pay could harm important partnerships. Paying too soon,
however, means the company has less cash a ­ vailable for other needs.
Days’ payable outstanding, defined in Exhibit D.11, is a measure of
how long, on average, a company takes to pay its creditors (it is
usually rounded to the nearest whole day).

EXHIBIT D.11
Days' Payable Outstanding
 Nike’s days’ payable outstanding is shown in Exhibit D.12. Its days’
payable outstanding is 44 days [($2,612/$21,643) × 365] in the current
year. This increased from the two prior years. A company’s days’
payable outstanding can be compared to its typical credit terms and to
its industry ­competitors. Under Armour’s days’ payable outstanding
was 81 at the end of the current year. A company with 30 days to pay
and a days’ payable outstanding of 12 days should consider paying its
creditors later. On the other hand, a company with 30 days to pay and
a days’ payable outstanding of 55 days risks hurting its ­partnerships
with key suppliers.
page D-11

EXHIBIT D.12
Days' Payable Outstanding for Two Competitors

Days’ payable outstanding varies across industries. Yum Brands’s

(a restaurant operator) days’ payable outstanding has been over 200
days in recent years. Twitter has about 52 days’ payable outstanding.

Summary: Cheat Sheet

LEAN BUSINESS MODEL

Value streams: Activities that create customer value.

Pull production: Production starts with customer order.
Push production: Production starts with sales forecast.

PRODUCTION PERFORMANCE

LEAN ACCOUNTING

Entries for Materials and Conversion Costs

No separate Raw Materials Inventory account.
Acquire raw materials on credit

Apply conversion costs to production

Record actual conversion costs

 Key Terms

Batch size (lot size) (D-2)

Closed-loop supply chain (D-10)
Conversion cost rate (D-8)
Costs of quality (D-9)
Cost of quality report (D-10)
Cycle efficiency (CE) (D-6)
Cycle time (CT) (D-3)
Days’ payable outstanding (D-11)
Days’ sales in work in process inventory (D-6)
Lean business model (D-2)
Non-valued-added time (D-3)
Pull production (D-2)
Push production (D-2)
Setup time (D-3)
Supply chain management (D-5)
Value-added time (D-3)
Value stream (D-2)

QUICK STUDY page D-12

QS D-1
Lean business model C1
Identify each of the following as applying more to lean (L) or to
traditional (T) businesses.
1. Production begins with sales forecasts.
2. Uses “pull” production.
3. Aims for zero defects.
4. Uses large batch sizes.
5. Quality is controlled at each process.
6. Uses just-in-time inventory systems.

QS D-2
Lean business model
C1
Identify each of the following as applying more to lean (L) or to
traditional (T) businesses.
1. Production begins with a customer order.
2. Reducing defects is not a priority.
3. Inventory levels are lower.
4. Wait times are long.
5. Uses small batch sizes.
6. Quality control is only at product completion.
7. Cycle times are shorter.
8. Move times are longer.

QS D-3
Lean accounting for materials P1
Use lean accounting to prepare the journal entry to record the
purchase of $28,000 of raw materials on credit.

QS D-4
Lean accounting for conversion costs P1
Use lean accounting to prepare journal entries for the following
transactions.
1. Applied $43,600 of conversion costs to production.
2. Incurred actual conversion costs of $43,600. Credit “Various
Accounts.”

QS D-5
Lean accounting for cost of goods sold P1
Use lean accounting to prepare journal entries for the following
transactions.
1. Sold $16,800 of goods on credit.
2. Recorded cost of goods sold of $11,760.

QS D-6
Lean accounting for COGS and inventory P1
Use lean accounting to prepare journal entries for the following
transactions.
1. Sold $33,250 of goods on credit.
2. Recorded cost of goods sold of $23,250, and finished goods
inventory of $1,860.

QS D-7
Conversion cost rate P1
A manufacturer budgets annual conversion costs of $1,207,500 and
production of 2,100 hours. Compute the conversion cost rate per
production hour.

QS D-8
Conversion cost rate
P1
A manufacturer budgets annual conversion costs of $1,000,000 and
production of 1,600 hours.
1. Compute the conversion cost rate per production hour.
2. Prepare the journal entry to apply conversion costs to an order
that used 65 production hours.

QS D-9
Cycle time and cycle efficiency
A1
Compute (a) cycle time and (b) cycle efficiency using the following
information.

QS D-10
Cycle time and cycle efficiency
A1
Compute (a) cycle time, (b) value-added time, (c) non-value-added
time, and (d) cycle efficiency using the following information.

QS D-11
Days’ sales in work in process inventory A2
A company reports work in process inventory of $770 and cost of
goods sold of $23,404. Compute days’ sales in work in process
inventory. Round the answer to the nearest whole day.

QS D-12
Cost of quality report
P2

A lean manufacturer reports the following quality costs. Prepare a cost

of quality report.

QS D-13
Cost of quality report for service business
P2
A restaurant reports the following quality costs. Prepare a cost of
quality report.
QS D-14
Days' payable outstanding
A3
A company reports accounts payable of $2,055 and cost of goods
sold of $18,300. Compute days' payable outstanding. Round the
answer to the nearest whole day.
page D-13

QS D-15
Days’ payable outstanding
A3
A company reports accounts payable of $9,569 and cost of goods
sold of $28,155. Compute days’ payable outstanding. Round the
answer to the nearest whole day.

EXERCISES
Exercise D-1
Lean business model
C1
Identify each of the following production processes as lean (L) or
traditional (T).
1. The process produces standard goods, with no customization.
Production begins with a sales forecast.
2. The process uses push production in large batch sizes.
3. Production occurs in value streams.
4. The production process begins when a customer makes an
order.
5. Raw materials are delivered just-in-time for production to begin.

Exercise D-2
Lean accounting
P1
Use lean accounting to prepare journal entries for the following
transactions.
1. Purchased $22,500 of raw materials on credit.
2. Applied conversion costs of $67,500.
3. Incurred actual conversion costs of $67,500. Credit “Various
Accounts.”
4. Sold $120,000 of goods on credit.
5. Recorded cost of goods sold of $90,000.

Exercise D-3
Lean accounting
P1
Robo-Pool is a lean manufacturer of robotic pool vacuums. Each unit
requires $225 of raw materials and $375 of conversion costs and is
sold for $700. During a recent month, the company produced and sold
120 units. Use lean accounting to prepare journal entries for the
following transactions.
1. Purchase of raw materials on credit. page D-14

2. Applied conversion costs to production.

3. Sold 120 units on credit.
4. Record cost of goods sold.
Exercise D-4
Lean accounting with inventory
P1
Robo-Pool is a lean manufacturer of robotic pool vacuums. Each unit
requires $225 of raw materials and $375 of conversion costs and is
sold for $700. During a recent month the company produced 120 units
and sold 100 units. Use lean accounting to prepare journal entries to
record each of the following.
1. Purchase of raw materials on credit.
2. Applied conversion costs to production.
3. Sold 100 units on credit.
4. Record ending inventory and cost of goods sold.

Exercise D-5
Conversion cost rate
P1
Dyzor is a lean manufacturer of wireless sound systems. Its wireless
speaker value stream budgets $48,000 of conversion costs and 600
production hours for the next quarter. Each unit requires 2 production
hours. Compute the conversion rate per production hour and per unit.

Exercise D-6
Cycle time and cycle efficiency
A1
Oakwood Company produces maple bookcases. The following
information is available for the production of a recent order of 500
bookcases.
1. Compute cycle time.
2. Compute cycle efficiency.
3. Management believes it can reduce move time by 1 day and wait
time by 2 days by adopting lean manufacturing techniques.
Compute cycle efficiency assuming the predictions are correct.

Exercise D-7
Cycle time and cycle efficiency
A1
Best Ink produces printers for personal computers. The following
information is available for production of a recent order of 500 printers.

1. Compute cycle time.

2. Compute cycle efficiency.
3. Management believes it can reduce inspection time by 2 hours
and wait time by 8 hours by adopting lean manufacturing
techniques. Compute cycle efficiency assuming the predictions are
correct.

Exercise D-8
Cycle time
A1
A manufacturer makes T-shirts in several processes. Information on
the components of cycle time follows. Compute (a) value-added time,
(b) inspection time, (c) move time, (d) wait time, and (e) cycle time.
Exercise D-9
Cycle efficiency
A1
Management of a T-shirt manufacturer believes if the company
applies lean principles, then cycle efficiency can be improved. The
following are estimated completion times for different activities in the
manufacturing process. Compute cycle efficiency for the (a) traditional
approach and (b) lean approach.

Exercise D-10
Days’ sales in work in process inventory
A2
Use the information below to answer the requirements.

1 Compute days’ sales in work in process inventory for the page D-15
current year.
2. Compute days’ sales in work in process inventory for the prior
year.
 Did days’ sales in work in process inventory increase or decrease
3. from the prior year?

Exercise D-11
Days’ sales in work in process inventory
A2

Use the information below to answer the requirements.

1. Compute days’ sales in work in process inventory for the current
year.
2. If the company’s work in process inventory were 20% lower, by
how many days would days’ sales in work in process inventory be
reduced? Round to the nearest day.

Exercise D-12
Costs of quality
P2
Orion Motors manufactures cars. Classify each of the following quality
costs as either prevention, appraisal, internal failure, or external
failure.
1. Inspecting raw materials $60,000
2. Training lean business practices 55,000
3. Product recalls 9,000
4. Warranty claims $25,000
5. Equipment maintenance 45,000
6. Scrap of defective materials 6,000
Exercise D-13
Cost of quality report
P2
Refer to the information in Exercise D-12. Prepare a cost of quality
report.

Exercise D-14
Days’ payable outstanding
A3
Use the information below to answer the requirements.

1. Compute days’ payable outstanding for the current year.

2. Compute days’ payable outstanding for the prior year.
3. Did the company take longer to pay its creditors in the current
year?

Exercise D-15
Days’ payable outstanding
A3
Use the information below to answer the requirements.

1. Compute days’ payable outstanding for the current year. Round

to the nearest day.
2. If the company’s accounts payable were 8% lower, by how many
days would days’ payable outstanding be reduced? Round to the
nearest day.
3. If the company’s accounts payable were 8% higher, by how
many days would days’ payable outstanding be increased? Round
to the nearest day.

PROBLEMS
Problem D-1
Lean accounting
P1
Robo-Lawn is a lean manufacturer of robotic lawn mowers. page D-16
The company budgets $800,000 of conversion costs and 10,000
production hours for this year. The manufacturing of each mower
requires 5 production hours and $250 of raw materials. During a
recent quarter, the company produced 600 mowers and sold 580
mowers. Each mower is sold for $1,000.
Required
1. Compute the conversion cost rate per mower.
2. Prepare journal entries to record (a) purchase of raw materials
on credit, (b) applied conversion costs to production, (c) sale of
580 mowers on credit, and (d) cost of goods sold and finished
goods inventory.

Problem D-2
Lean accounting
P1
Auto-Motion is a lean manufacturer of self-driving wheelchairs. The
company budgets $680,000 of conversion costs and 2,000 production
hours for this year. The manufacturing of each wheelchair requires 25
production hours and raw materials costs of $4,300. The company
started and completed 75 wheelchairs during the year and sold 68.
Each wheelchair is sold for $15,000. Actual conversion costs equal
applied conversion costs.
Required
1. Prepare journal entries to record (a) the purchase of raw
materials on credit to produce 75 units, (b) applied conversion
costs to the production of 75 units, (c) actual conversion costs of
$637,500 (credit “Various Accounts”), (d) sale of 68 units on credit,
and (e) ending inventory and cost of goods sold.
2. Compute the ending balances of Work in Process Inventory and
Finished Goods Inventory. Assume each of these inventory
accounts began the year with a balance of zero.

Problem D-3
Cycle time and cycle efficiency
A1
Ruiz Foods makes energy bars using a traditional manufacturing
process. Raw materials are stored in inventory and then moved into
production. Work in process inventory is moved across the company’s
three separate departments. The information below in the Traditional
column is available for a recent order. If the company adopts lean
manufacturing, management believes both move time and wait time
can be reduced, as shown in the Lean column.

Required
1. Compute the total amount of non-value-added time under the
traditional manufacturing process.
 Compute cycle efficiency under the traditional manufacturing
2.
process. Round to two decimals.
3. Compute the total amount of non-value-added time under the
proposed lean manufacturing process.
4. Compute cycle efficiency under the proposed lean
manufacturing process. Round to two decimals.
5. Would the proposed lean approach improve cycle efficiency?
page D-17

Discussion Questions

1. What are the three key principles of the lean business model?
2. How does push production differ from pull production?
3. What are three common problems with push production?
4. Define supply chain management.
5. Apple wants a closed-loop supply chain. Define a closed-loop
supply chain and discuss methods the company uses to
meet its goal.
6. Can management of a retail company like Amazon use lean
techniques? Explain.
7. Define setup time and provide some examples of tasks that
are included in setup time.
8. Why do lean accounting systems not use separate Raw
Materials Inventory accounts?
9. Do lean accounting systems use Finished Goods Inventory
accounts? Explain.
10. Define and describe cycle time and identify the components
of cycle time.
11. Explain the difference between value-added time and non-
value-added time.
12. Define and describe cycle efficiency.
13. Can management of a company like Samsung use cycle
time and cycle efficiency as useful measures of
performance? Explain.