© BMA Inc. 2009. All rights reserved. Value stream costing Lean reporting & control

© BMA Inc. 2009. All rights reserved.

Value stream costingLean reporting & control


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.


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


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.



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


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


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.


Step 1 – Identify & map value streams


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


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£


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


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



New Product Design

Support Costs

TOTAL DIVISION




Tooling Costs £4,843 £12,544 £6,588 £23,975


£925,314£918,807(£6,507)

£51,147

£152,024

9.9%Division ROS

Corporate Overhead

Division Profit

VALUE STREAMS


Step 5 - Plant-wide income statement


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%


New Product Design

Support Costs

TOTAL DIVISION




Tooling Costs £4,843 £12,544 £6,588 £23,975


£925,314£918,807(£6,507)

£51,147

£152,024

9.9%Division ROS

Corporate Overhead

Division Profit

VALUE STREAMS



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


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


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


Value stream P&L maturity path

Traditional Manufacturin

g

Traditional Accounting

Traditional Financial Reporting

Starting Lean Manufacturin

g

Traditional Accounting


Lean Supplemental

Statement

Lean Manufacturin

g

Lean Accounting

Lean Financial Reporting


Lean Manufacturin

g

Lean Accounting

Lean Financial Reporting

TRADITIONAL STARTING LEAN LEAN PROGRESS LEAN COMPANY


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.



• 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.


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 !!


Karol Warnock, Value Stream Manager, Marquip Ward United Corporation Visual Inventory Management Transaction Elimination Value Stream Costing

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© BMA Inc. 2009. All rights reserved. Value stream costing Lean reporting & control