Slide 1
[READ SLIDE]
In this section, we examine the nature of the accounting changes under way.
The discussion reviews the problems associated with standard cost accounting
and outlines two alternative approaches: (1) activity-based costing and (2) value
stream accounting
Slide 2
[READ SLIDE]
The techniques and conventions used in traditional manufacturing do not
support the objectives of lean manufacturing firms.
The illustration shows the changes in cost structure between different
Manufacturing environments.
Slide 3
[READ SLIDE]
1) An assumption of standard costing is that all overheads need to be allocated to
the product and that these overheads directly relate to the amount of labor
required to make the product. A consequence of automation is the restructuring
of manufacturing cost patterns.
Figure 7-19 shows the changing relationship between direct labor, direct
materials, and overhead cost under different levels of automation. In the
traditional manufacturing environment, direct labor is a much larger component
of total manufacturing costs than in the CIM environment.
Overhead, on the other hand, is a far more significant element of cost under
automated manufacturing. Applying standard costing leads to product cost
distortions in a lean environment, causing some products to appear to cost more
and others to appear to cost less than they actually do. Poor decisions regarding
pricing, valuation, and profitability may result.
[READ SLIDE]
2) The primary performance measurements used in standard costing are personal
efficiency of production workers, the effective utilization of manufacturing
facilities, and the degree of overhead absorbed by production. In addition,
standard costing conceals waste within the overhead allocations and is difficult
to detect. To improve their personal performance measures, management and
operations employees are inclined to produce large batches of products and
build inventory.
[READ SLIDE]
3) Standard cost data for management reporting are historic in nature. Data lag
behind the actual manufacturing activities on the assumption that control can be
applied after the fact to correct errors. In a lean setting, however, shop floor
managers need immediate information about abnormal deviations. They must
know in real time about a machine breakdown or a robot out of control. After-the
fact information is too late to be useful.
[READ SLIDE]
4) Decisions pertaining to the functionality of a product or process, improving
product quality, and shortening delivery time, however, are not necessarily well
served by financial information produced through standard cost techniques.
Indeed, attempts to force such data into a common financial measure may distort
the problem and promote bad decisions.
Slide 4
[READ SLIDE] Activities - Preparing a purchase order, readying a product for
shipping, or operating a lathe are examples of activities.
[READ SLIDE] Cost objects - These include products, services, vendors, and
customers. For example, the task of preparing a sales order (the activity) is
performed because a customer (the cost object) wishes to place an order.
Slide 5
activity driver - This factor measures the activity consumption by the cost object.
For example, if drilling holes in a steel plate is the activity, the number of holes is
the activity driver.
Traditional accounting systems often use only one activity driver. For instance,
overhead costs, collected into a single cost pool, are allocated to products on the
basis of direct labor hours. A company using ABC may have dozens of activity
cost pools, each with a unique activity driver.
Slide 6
The picture illustrates the allocation of overhead costs to products under ABC.
Slide 7
ABC allows managers to assign costs to activities and products more accurately
than standard costing permits. Some advantages that this offers are:
Slide 8
ABC has been criticized for being too time-consuming and complicated for
practical applications over a sustained period. The task of identifying activity
costs and cost drivers can be a significant undertaking that is not completed
once and then forgotten. As products and processes change, so do the
associated activity costs and drivers. Unless significant resources are committed
to maintaining the accuracy of activity costs and the appropriateness of drivers,
cost assignments become inaccurate. Critics charge that rather than promoting
continuous improvement, ABC creates complex bureaucracies within
organizations that are in conflict with the lean manufacturing philosophies of
process simplification and waste elimination.
Slide 9
Slide 10
Notice that value streams cut across functional and departmental lines to include
costs related to marketing, selling expenses, product design, engineering,
materials purchasing, distribution, and more. An essential aspect in
implementing value stream accounting is defining the product family.
Slide 11
Slide 12
So this is the illustration on how multiple products may be grouped into product
families.
Value stream accounting includes all the costs associated with the product family, but
makes no distinction between direct costs and indirect costs. Raw material costs are
calculated based on how much material has been purchased for the value stream,
rather than tracking the input of the raw material to specific products.
Thus, the total value stream material cost is the sum of everything purchased for
the period. This simplified (lean) accounting approach works because RM and
WIP inventories on hand are low, representing perhaps only one or two days of
stock.
Slide 13
In this section we discuss the information systems commonly associated with
lean manufacturing and world-class companies. It begins with a review of
materials requirements planning (MRP). As the name implies, MRP systems are
limited in focus and geared toward determining how much raw materials are
required to fulfill production orders. We then review manufacturing resources
planning (MRP II). These systems evolved from MRP to integrate additional
functionality into the manufacturing process, including sales, marketing, and
accounting. Finally, we examine some key features of enterprise resource
planning (ERP) systems. ERP takes MRP II a step further by integrating all
business functions into a core set of applications that use a common database.
Slide 14
MRP is an automated production planning and control system used to support
inventory management. Its operational objectives are to:
[READ SLIDE]
Slide 15
It illustrates the key features of an MRP system. Depending on the manufacturing
process in place, inputs to the MRP system will include sales, sales forecasts, FG
inventory on hand, RM inventory on hand, and the bill of materials. MRP is a
calculation method geared toward determining how much of which raw materials
are required and when they should be ordered to fill a production order. By
comparing FG inventory on hand with the needed levels (based on the sales
forecast), MRP calculates the total production requirements and the individual
batch lot sizes needed. From this, the BOM is exploded to produce a list of raw
materials needed for production, which is compared to the raw materials on hand.
The difference is the amount that will be ordered from vendors. The primary
outputs from the MRP system are RM purchase requisitions that are sent to the
purchases system. In addition, the system output may include production
schedules, management reports, and day-to-day production documents such as
work orders and move tickets
Bill of Materials (BOM) specifies the types and quantities of the raw material (RM) and
subassemblies used in producing a single unit of finished product.
Slide 16
[READ 1] that has evolved beyond the confines of inventory management. It is
both a system and a philosophy for coordinating a wide range of manufacturing
activities.
Slide 17
The MRP II system will produce a BOM for the product, fit the production of the
product into the master production schedule, produce a rough-cut capacity plan
based on machine and labor availability, design a final capacity plan for the
factory, and manage the RM and FG inventories. In addition, MRP II will produce a
materials requirements plan that will schedule the delivery of the raw materials on
a JIT basis. The ordering of raw material must be coordinated with the
manufacturing process to avoid waste (early arrival) while ensuring that stock-out
situations do not disrupt the production processes. Manufacturing firms can
realize considerable benefits from a highly integrated MRP II system.
Slide 18
Slide 19
In recent years MRP II has evolved into large suites of software called ERP
systems.
ERP integrates departments and functions across a company into one system of
integrated applications that is connected to a single common database. This
enables various departments to share information and communicate with each
other.
An ERP system is composed of function-specific modules that reflect industry
best practices. Designed to interact with the other modules (for example,
accounts receivable, accounts payable, purchasing, and so on), these
commercial packages support the information needs of the entire organization,
not just the manufacturing functions.
EDI
It will allow the firm to electronically receive sales orders and cash receipts from
customers, send invoices to customers, send purchase orders to vendors,
receive invoices from vendors and pay them, as well as send and receive
shipping documents. EDI is a central element of many electronic commerce
systems.