Post on 30-Dec-2015
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© BMA Inc. 2009. All rights reserved.
Value stream costing
Traditional cost accounting is harmful to lean enterprises.• Motivates non-lean behavior and is complex
& wasteful.
Value stream costing supports lean enterprises.• Motivates lean thinking, is understandable,
and simple.
© BMA Inc. 2009. All rights reserved.
Plant-wide income statement
We need to change the -3.8% to -4.0%
Motors Systems Spare Parts
New Product Design
Support Costs
TOTAL DIVISION
Sales £326,240 £748,894 £453,215 £1,528,349Additional Revenue £0 £0 £12,422 £12,422
Material Costs £111,431 £232,774 £149,561 £87,909 £12,764 £594,439Conversion Costs £57,628 £70,406 £81,579 £203,769 £37,645 £451,027
Outside Process Costs £32,433 £22,991 £22,661 £7,531 £85,616Other Costs £16,040 £57,816 £29,459 £72,721 £176,036
Tooling Costs £4,843 £12,544 £6,588 £23,975
Value Stream Profit £103,865 £352,363 £175,789 (£364,399) (£57,940) £209,678ROS 31.8% 47.1% 38.8% -23.7% -4.0% 13.7%
£925,314£918,807(£6,507)
£51,147
£152,024
9.9%Division ROS
Corporate Overhead
Division Profit
VALUE STREAMS
Opening InventoryClosing InventoryInventory Change
© BMA Inc. 2009. All rights reserved.
VALUE STREAM
Value StreamLabor
Value StreamMaterials
Value StreamMachines
Outside Processing Facilities &Maintenance
All OtherVS Costs
Actual cost of labor, machine, materials, support services, and facilities charged directly to the value stream. Little or no allocation.
Value stream costing
© BMA Inc. 2009. All rights reserved.
Calculated, as far as possible, on a “cash” basis:• Revenue of Value Stream – actual value of production delivered to customers in period.
• Material cost – actual cost of material purchased in period.
• Direct production costs in period.• Other costs. Only assign costs that can be managed in Value Stream – e.g. energy, space, depreciation. Can we assign support personnel to Value Stream ?
• Indirect costs. We do not apportion indirect overheads to the Value Stream !
Value Stream Costing
© BMA Inc. 2009. All rights reserved.
Sources of actual value stream costs
Cost Category Basis for Charging Source of Data
MaterialsVoucher on receipt
of MaterialsPurchase journal
Direct Labor When paid Payroll system
Support Labor When paid Payroll system
Outside Processing Supplier PO/invoice Purchases journal
MachinesDepreciation
expenseGeneral Journal
Facilities Square feet occupiedStandard Journal
Entry
Other Costs Voucher on receipt Credit card payment
© BMA Inc. 2009. All rights reserved.
Monument costs• Support Function Monuments
– Make the costs direct with very little allocation
– Assign full people – names & faces – not “equivalent heads”.
– If in the short term you must allocate people, include them in the value stream cost only if you plan to include a real name & face in the future.
• Process Monuments– If the value stream shares a monument
with another value stream – allocate it.– Use simple allocation. Do a study; don’t
track it on-going.
© BMA Inc. 2009. All rights reserved.
Step 2 – Collect actual costs based on value stream map resources
Value Stream Process Steps Material CostsOutside
Process CostsEmployee
CostsMachine Costs
Facilities Costs
Tooling CostsOther Costs Total Cost
Sales & Marketing £10,150 £0 £1,012 £11,162
Customer Service £1,848 £0 £1,848
Purchasing £616 £0 £616
Materials handling £1,576 £0 £1,576
Parts Fabrication £63,544 £3,322 £1,529 £2,011 £70,405
Machining £4,728 £0 £2,466 £7,194
Anodizing £32,433 £0 £0 £32,433
Assembly £47,887 £15,297 £6,584 £366 £70,134
Shipping £630 £0 £101 £731
Maintenance £1,576 £0 £1,576
Product Engineering £2,448 £0 £2,448
Quality Assurance £2,448 £0 £2,448
Cost Accounting £816 £0 £816
Managers & Supervisors £4,060 £0 £12,750 £2,177 £18,987
TOTAL £111,431 £32,433 £49,515 £8,113 £12,750 £4,843 £3,290 £222,375
© BMA Inc. 2009. All rights reserved.
Step 3: Calculate average costs for the value stream
Cost of the Value Stream TotalsMaterial Costs 111,431£ Outside Process Costs 32,433£ Employee Costs 49,515£ Machine Costs 8,113£ Facilities Costs 12,750£ Tooling Costs 4,843£ Other Costs 3,290£
Total Cost 222,375£ Conversion Cost 110,944£
Quantity Shipped to Customers 1,876
Average Material Cost 59.40£ Average Conversion Cost 59.14£ Average Cost per Unit 118.54£
Profit Per Hour 346.22£ Contribution Per Hour 716.03£ Conversion Cost Per Hour 369.81£ Cost Per Hour 741.25£
© BMA Inc. 2009. All rights reserved.
Step 4- Value stream P&L
Profit & Loss Report
5-May-05 Per UnitPercentage of
Sales
Sales £326,240 £173.90 1,876 Units
Additional Revenue £0
Material Costs £111,431 £59.40 34.16%
Employee Costs £49,515 £26.39 15.18%
Machine Costs £8,113 £4.32
Outside Process Costs £32,433 £17.29 9.94%
Other Costs £16,040 £8.55 4.92%
Tooling £4,843 £2.58 1.48%
Value Stream Profit £103,865 £55 31.84%
ROS 31.84% 31.84%
Hurdle Rate 42.00%
Cash FlowInventory £221,163 8.9 days
Accounts Receivable £2,348,928 36.0 days
Accounts Payable (£624,014) -28.0 days
© BMA Inc. 2009. All rights reserved.
Real example of a “plain
English” P&L format.
Gross Sales £32,332,000
Less Adjustments (£162,000)
Net Sales £32,170,000
External Sales Force (7.5% of ns) £2,428,000 7.5%
Material Purchases £7,853,000 24%
Margin After Comm & Matrls £21,889,000 68%
Wages-Mfg £5,778,000
Fringes-Mfg (41.4% of wages) £2,393,000
Supplies & Tooling £991,000
Depreciation-Mfg £380,000
Utilities-Mfg £247,000
Outside Services £1,072,000
Scrap & Warranty £468,000
Other Coversion Costs £426,000
Total Mfg Conversion Costs £11,755,000 37%
Total Matrls & Conversion Costs £19,608,000 61%
Margin Before Support Costs £10,134,000 32%
Wages £2,142,000
Fringes (28.9% of wages) £618,000
Supplies £131,000
Travel & Entertainment £158,000
Professional Services £69,000
Outside Services £82,000
Depreciation £85,000
Rentals £118,000
Advertising & Exhibits £27,000
Employee Recruiting £28,000
Other Support Costs £402,000
Total Support Costs £3,860,000 12%
£6,274,000 20%
SUPPORT COSTS
OPERATING PROFITS
REVENUES
VARIABLE COSTS
MANUFACTURING CONVERSION COSTS
© BMA Inc. 2009. All rights reserved.
Motors Systems Spare Parts
New Product Design
Support Costs
TOTAL DIVISION
Sales £326,240 £748,894 £453,215 £1,528,349Additional Revenue £0 £0 £12,422 £12,422
Material Costs £111,431 £232,774 £149,561 £87,909 £12,764 £594,439Conversion Costs £57,628 £70,406 £81,579 £203,769 £37,645 £451,027
Outside Process Costs £32,433 £22,991 £22,661 £7,531 £85,616Other Costs £16,040 £57,816 £29,459 £72,721 £176,036
Tooling Costs £4,843 £12,544 £6,588 £23,975
Value Stream Profit £103,865 £352,363 £175,789 (£364,399) (£57,940) £209,678ROS 31.8% 47.1% 38.8% -23.7% -4.0% 13.7%
£925,314£918,807(£6,507)
£51,147
£152,024
9.9%Division ROS
Corporate Overhead
Division Profit
VALUE STREAMS
Opening InventoryClosing InventoryInventory Change
Step 5 - Plant-wide income statement
© BMA Inc. 2009. All rights reserved.
Step 6 - Calculating the hurdle rate
Required ROS 15.0%Corporate Overhead 3.3%
Support Costs 4.0%New Product Design 23.7%
Value Stream Hurdle Rate 46.0%
HURDLE RATE CALCULATIONTHE VALUE STREAMS MUST MAKE A MINIMUM OF 46%
Motors Systems Spare Parts
New Product Design
Support Costs
TOTAL DIVISION
Sales £326,240 £748,894 £453,215 £1,528,349Additional Revenue £0 £0 £12,422 £12,422
Material Costs £111,431 £232,774 £149,561 £87,909 £12,764 £594,439Conversion Costs £57,628 £70,406 £81,579 £203,769 £37,645 £451,027
Outside Process Costs £32,433 £22,991 £22,661 £7,531 £85,616Other Costs £16,040 £57,816 £29,459 £72,721 £176,036
Tooling Costs £4,843 £12,544 £6,588 £23,975
Value Stream Profit £103,865 £352,363 £175,789 (£364,399) (£57,940) £209,678ROS 31.8% 47.1% 38.8% -23.7% -4.0% 13.7%
£925,314£918,807(£6,507)
£51,147
£152,024
9.9%Division ROS
Corporate Overhead
Division Profit
VALUE STREAMS
Opening InventoryClosing InventoryInventory Change
© BMA Inc. 2009. All rights reserved.
Example: Italian ClientWeek 36 Week 37 Week 38 Week 39 Week 40 Week 41
Downtime % 1.10% 1.67% 0.00% 0.00% 0.00% 0.00%Rework (number) 191 286 205 297 414 218Rework (secs) 16,703 43,615 17,048 30,114 48,197 17,030On-Time Delivery % 96.8% 78.9% 83.0% 86.5% 90.1% 93.0%Supplier Materials Days 15 15 15 15 15 15Finished Goods Inventory Days 5 5 5 7 7 10Total Units produced 4,709 2,851 4,178 3,789 3,276 2,325Hours Worked 129.30 131.60 106.60 126.60 110.25 58.30Units per Hour 36.42 21.66 39.19 29.93 29.71 39.88
Productive Capacity 41.55 39.83 17.86 32.29 39.41 33.95Non-Productive Capacity 2.65 5.71 1.58 4.46 2.79 1.58Available Capacity 55.80 54.46 80.56 63.25 57.80 64.47
Revenue € 41,919 35,121 27,541 51,605 32,717 23,421 Material Cost € 27,937 38,961 29,171 33,338 33,798 9,867 Direct Operative Labour Cost € 2,586 2,632 2,132 2,532 2,205 1,166 Direct Support Labour Cost € 4,900 4,900 4,900 4,900 4,900 4,900 Energy Cost € 1,060 1,067 983 1,051 995 819 Facilities Cost € 240 240 240 240 240 240 Depreciation € 1,750 1,750 1,750 1,750 1,750 1,750 Other Direct Costs € 0 0 0 0 0 0 Total Cost € 38,473 49,550 39,176 43,811 43,888 18,742 Value Stream Profit € 3,446 -14,429 -11,635 7,794 -11,171 4,679
Value Stream Return on Sales %8.22% -41.09% -42.25% 15.10% -34.14% 19.98%
Average Value Stream Cost per unit €
8.17 17.38 9.38 11.56 13.40 8.06
© BMA Inc. 2009. All rights reserved.
Example: Italian Manufacturer - All Value Streams
Month ending 30/09/07: Weeks 36 to 39
Euro
Refrigeration Valves
Coffee Valves Water Valves General Purpose Valves
Manifold Trading Support/ Overhead
TOTAL
Revenue 156,186 555,755 365,296 175,198 182,696 1,220,000 0 2,655,1310
Direct Material Purchases 129,407 302,892 179,687 98,645 65,387 980,000 1,756,018Direct Operative Labour 9,882 14,967 9,095 10,188 4,976 30,000 79,108
Direct Support Labour 19,600 0 0 0 5,600 190,000 215,200Energy Usage 4,160 2,332 1,202 932 455 1,047 10,128
Facilities cost (m2) 960 960 960 960 1,567 40,000 7,000 52,407
Depreciation 7,000 3,500 3,500 3,500 10,500 10,000 38,000Other Direct Costs 0 0 0 0 0 0
TOTAL VALUE STREAM COST171,009 324,651 194,444 114,225 88,485 1,050,000 208,047 2,150,861
VALUE STREAM PROFIT -14,823 231,104 170,852 60,973 94,211 170,000 -208,047 504,270
Value Stream Return on Sales %-9.49 41.58 46.77 34.80 51.57 13.93 18.99
© BMA Inc. 2009. All rights reserved.
Lean Thinking: Make it simple by eliminating the causes of complexity
What must be in place for value stream costing to be effective?• Reporting should be by value stream - not by department
• Ideally everybody assigned to a single value stream with little or no overlap
• Few (or no) shared services departments. Try to eliminate monuments
• Production processes reasonably under control and low variability.
• Thorough tracking of “out-of-control” situations and of exceptions like scrap, rework, etc.
• Inventory must be under control, relatively low, and consistent
© BMA Inc. 2009. All rights reserved.
Value stream P&L maturity path
Traditional Manufacturin
g
Traditional Accounting
Traditional Financial Reporting
Starting Lean Manufacturin
g
Traditional Accounting
Traditional Financial Reporting
Lean Supplemental
Statement
Lean Manufacturin
g
Lean Accounting
Lean Financial Reporting
Traditional Financial Reporting
Lean Manufacturin
g
Lean Accounting
Lean Financial Reporting
TRADITIONAL STARTING LEAN LEAN PROGRESS LEAN COMPANY
© BMA Inc. 2009. All rights reserved.
Value stream costing All costs are considered direct and are posted to the
value stream profit center on the General Ledger.Very few cost/profit centers
All value stream costs are includedProductive, Non-productive, available capacityDirect, support, administrative
No overhead costs are allocated; direct costs only. If they are in the value stream they are direct; if not they are excluded.
Average Cost used as a primary value stream performance measurement.
© BMA Inc. 2009. All rights reserved.
Value stream costing
• Almost all costs are assigned directly to the value streams. The value stream manager has P&L responsibility for his/her value stream.
• Costs not associated with the value streams are small and assigned to a business support cost center. They are budgeted and controlled.
• Plant or division P&L consolidates the value streams and the business support costs.
© BMA Inc. 2009. All rights reserved.
What are the advantages of value stream costing?1. Simple and very little work2. Timely – weekly3. Relevant & actionable financial
information4. Very few transactions 5. Focus attention on value stream issues,
problems, & opportunities6. Teamwork, ownership, accountability7. Presents the “real” financial information8. Everybody understands it9. Does not require a CPA to do it !!