Discussion
1
Access the website of the Institute of Management Accountants.
Read about the IMA and what management accounting is about (see menu on left at
home page). Also read about the process and advantages of the Certified
Management Accountant professional designation. Write a summary of this
information and discuss the value of such certification, and the difference
between CPA certification and CMA certification.
Week Two ExercisesComplete the following exercises from Chapters 12 & 13 and submit them to the instructor by the end of Day 3. This assignment will be graded as a completion only. The instructor will post the answers to these exercises by the end of Day 5 for you to check your accuracy and comprehension of the subject matter. Exercises: 12-2, 12-4, 12-8, 13-1, 13-4, 13-8.
Exercise 12-2 Direct versus indirect costs
Jeelani
Construction Company is composed of two divisions: (1) Home Construction and
(2) Com- mercial Construction. The Home Construction Division is in the process
of building 12 houses and the Commercial Construction Division is working on 3
projects. Cost items of the company follow.
Company
president’s salary Depreciation on crane used in commercial construction
Depreciation on home office building Salary of corporate office manager Wages
of workers assigned to a specific construction project Supplies used by the
Commercial Construction Division Labor on a particular house Salary of the
supervisor of commercial construction projects Supplies, such as glue and
nails, used by the Home Construction Division Cost of building permits
Materials used in commercial construction projects Depreciation on home
building equipment (small tools such as hammers or saws)
Required
a. Identify each cost as being a direct or
indirect cost assuming the cost objects are the indi- vidual products (houses
or projects).
b. Identify each cost as being a direct or
indirect cost, assuming the cost objects are the two divisions.
c.
Identify each cost as being a direct or indirect cost assuming the cost object
is Jeelani Construction Company as a whole.
Exercise 12-4 Allocating overhead costs among products
Nevin Company makes three products in its factory: plastic cups, plastic
tablecloths, and plastic bottles. The expected overhead costs for the next
fiscal year include the following.
Factory
manager’s salary $260,000
Factory
utility cost 121,000
Factory
supplies 56,000
Total
overhead costs $437,000
Nevin uses machine hours as the cost
driver to allocate overhead costs. Budgeted machine hours for the products are
as follows.
Cups 420hours
Tablecloths 740
Bottles 1,140
Total
machine hours 2,300
Required
a. Allocate the budgeted overhead costs to
the products.
b. Provide a possible explanation as to
why Nevin chose machine hours, instead of labor hours, as the allocation base.
Exercise
12-8 Allocating a fixed cost
Stevens
Air is a large airline company that pays a customer relations representative
$4,000 per month. The representative, who processed 1,000 customer complaints
in January and 1,300 com- plaints in February, is expected to process 12,000
customer complaints during 2012.
Required
a. Determine the total cost of processing
customer complaints in January and in February.
b. Explain why allocating the cost of the
customer relations representative would or would not be relevant to decision
making.
Exercise 13-1 Distinction between relevance and cost behavior
Leah
Friend is trying to decide which of two different kinds of candy to sell in her
retail candy store. One type is a name-brand candy that will practically sell
itself. The other candy is cheaper to purchase but does not carry an
identifiable brand name. Ms. Friend believes that she will have to incur
significant advertising costs to sell this candy. Several cost items for the
two types of candy are as follows.
Brandless
Candy
Name-Brand Candy
Cost per box Sales
$6.00 Cost per box Sales 7.00
commissions per box
1.00
commissions per box
1.00
Rent of display space 1,500.00 Rent of display space 1,500.00
Advertising 3,000.00 Advertising 2,000.00
Required
Identify
each cost as being relevant or irrelevant to Ms. Friend’s decision and indicate
whether it is fixed or variable relative to the number of boxes sold.
Exercise 13-4 Special order decision
Norman
Concrete Company pours concrete slabs for single-family dwellings. Wayne
Construc- tion Company, which operates outside Norman’s normal sales territory,
asks Norman to pour 40 slabs for Wayne’s new development of homes. Norman has
the capacity to build 300 slabs and is presently working on 250 of them. Wayne
is willing to pay only $2,500 per slab. Norman esti- mates the cost of a
typical job to include unit-level materials, $1,000; unit-level labor, $600;
and an allocated portion of facility-level overhead, $700.
Required
Should
Norman accept or reject the special order to pour 40 slabs for $2,500 each?
Support your answer with appropriate computations.
Exercise
13-8 Outsourcing decision
Roaming
Bicycle Manufacturing Company currently produces the handlebars used in
manufacturing its bicycles, which are high-quality racing bikes with limited
sales. Roaming pro- duces and sells only 6,000 bikes each year. Due to the low
volume of activity, Roaming is unable to obtain the economies of scale that
larger producers achieve. For example, Roaming could buy the handlebars for $35
each; they cost $38 each to make. The following is a detailed breakdown of
current production costs.
Item Unit
Cost Total
Unit-level
costs
$18
$108,000
Materials 12
72,000
Labor
3
18,000
Overhead
Allocated facility-level costs
5
30,000
Total
$38
$228,000
After
seeing these figures, Roaming’s president remarked that it would be foolish for
the company to continue to produce the handlebars at $38 each when it can buy
them for $35 each.
Required
Do you
agree with the president’s conclusion? Support your answer with appropriate
computations.
Week 2 -
Assignment 2
Week Two Problems
Complete
the following problems from Chapters 12 & 13 and submit to the instructor
by the end of Day 7. These problems will be graded for accuracy.
Problems: 12-16, 12-17, 13-23.
Problems: 12-16, 12-17, 13-23.
Problem 12-16 Cost allocation in a service industry
Kirby
Airlines is a small airline that occasionally carries overload shipments for
the overnight delivery company Never-Fail Inc. Never-Fail is a
multimillion-dollar company started by Jack Never immediately after he failed
to finish his first accounting course. The company’s motto is “We Never-Fail to
Deliver Your Package on Time.” When Never-Fail has more freight than it can
deliver, it pays Kirby to carry the excess. Kirby contracts with independent
pilots to fly its planes on a per trip basis. Kirby recently purchased an
airplane that cost the company $5,500,000. The plane has an estimated useful
life of 25,000,000 miles and a zero salvage value. During the first week in
January, Kirby flew two trips. The first trip was a round trip flight from
Chicago to San Francisco, for which Kirby paid $350 for the pilot and $300 for
fuel. The second flight was a round trip from Chicago to New York. For this
trip, it paid $300 for the pilot and $150 for fuel. The round trip between
Chicago and San Francisco is approximately 4,400 miles and the round trip
between Chicago and New York is 1,600 miles.
Required
a. Identify the direct and indirect costs
that Kirby incurs for each trip.
b. Determine the total cost of each trip.
c. In addition to depreciation, identify
three other indirect costs that may need to be allocated to determine the cost
of each trip.
Problem
12-17 Cost allocation in a manufacturing
company
Hunt
Manufacturing Company makes tents that it sells directly to camping enthusiasts
through a mail-order marketing program. The company pays a quality control
expert $72,000 per year to inspect completed tents before they are shipped to
customers. Assume that the company com- pleted 1,600 tents in January and 1,200
tents in February. For the entire year, the company expects to produce 15,000
tents.
Required
a. Explain how changes in the cost driver
(number of tents inspected) affect the total amount of fixed inspection cost.
b.
Explain how changes in the cost driver (number of tents inspected) affect the
amount of fixed inspection cost per unit.
c. If the cost objective is to determine
the cost per tent, is the expert’s salary a direct or an indi- rect cost?
d. How
much of the expert’s salary should be allocated to tents produced in January
and February?
Problem 13-23 Effect of order
quantity on special order decision
Ellis
Quilting Company makes blankets that it markets through a variety of department
stores. It makes the blankets in batches of 1,000 units. Ellis made 20,000
blankets during the prior accounting period. The cost of producing the blankets
is summarized here.
Materials
cost ($25 per unit 3 20,000) Labor cost ($22 per unit 3 20,000) Manufacturing
supplies ($2 3 20,000) Batch-level costs (20 batches at $4,000 per batch)
Product-level costs
Facility-level
costs Total costs Cost per unit 5 $1,510,000 4 20,000 5 $75.50
$
500,000
440,000 40,000 80,000 160,000 290,000
$1,510,000
Week 2 -
Assignment 3
Article Summary
Access
and read the ProQuest article: Van der Merwe, A., & Thomson, J. (2007,
February). The
Lowdown on Lean Accounting. Strategic Finance, 88(8),
26-33. Write a 1 to 2 page summary of the article and submit to the instructor
by the end of Day 7.
The
Lean Revolution is off and running! But before we get too far in transforming
businesses, especially the management accounting support for Lean (aka Lean
Accounting or LA), it's important to slow down just a bit and address some
critical questions in the spirit of advancing the thinking for the benefit of
practitioners. In this regard we want to answer two questions: (1) Is Lean
Accounting a viable replacement for, complement to, and/or supplement for
current and evolving management accounting approaches? (2) Does Lean Accounting
have the capability to advance two of the more forward-looking roles undertaken
by the management accountant: decision support and enterprise optimization?
Lean thinking, the foundation for Lean Accounting, has a history
of demonstrable benefit and is likely to have a significant impact on the U.S.
business landscape. Lean refers to the management system of applying Lean
principles to operations, and Lean Accounting refers to attempts to derive
monetary management information based on Lean principles. This unique bond
between an operations flow design approach (Lean) and a management accounting
approach means the process of coming to terms with LA has a number of
distinctive traits. The management accountant is required to gain an
understanding of Lean thinking, principles, and practices, and a manufacturing
shop floor emphasis requires that those from service industries dig a little
deeper before they will be comfortable. A careful scrutiny of LA literature
(books, articles, the Lean Accounting Summit in September 2006, etc.) reveals a
number of assertions (and/or strong implications) related to management
accounting that require technical analysis and broader, more open debate for
the benefit of practitioners. The process of evaluating LA requires addressing
four aspects of the case for it as presented: ( 1 ) LA's assertions as stated
in the literature, (2) understanding the implications of these assertions, (3)
questioning the operations-centric view of LA, and (4) evaluating LA's decision
support capabilities.
It's
important to point out up front that the primary purpose of this article is to
provide a fair assessment of Lean Accounting as viable today or its potential
to provide benefit in the transformation of the profession. In the "Lean
land rush," many assertions have been made that can easily be construed as
declarative statements of fact: Accounting is the problem, other approaches
have no place in the world of Lean, and more. These statements have been made
in numerous Lean articles and books, at the Lean Accounting Summit, and in
other forums. When they previewed this article, thought leaders in the Lean
Accounting community questioned whether the three assertions included for
elaboration would result in a distorted view of or misinformation with regard
to Lean Accounting. We subsequently provided references that point to the
pervasiveness of these assertions in the LA discourse. As we already said, we
believe that "Lean thinking" has real transformational potential but
that broader perspectives, fewer declarative statements lacking empirical
evidence, and open debate including technical analysis are required if
management accounting practitioners are to benefit in the end. (You can view
and download presentations from the Lean Accounting Summit at
www.leanaccountingsummit.com/ 2006presentations. These materials provide
background, cases, and more and, in some cases, the "assertions" that
we keep referencing.)
Our
concern isn't with Lean "extremism" in terms of its potential to help
transform the profession-it's with those who suggest that Lean Accounting is
THE ONLY answer. We strongly believe that exploration, understanding
potentially complementary management accounting approaches, and fact-based
discussion will help achieve the ultimate objective: providing transformation
approaches to help practitioners in an increasingly complex and competitive
business environment. The profession doesn't need a repeat of the "ABC
cult," the "EVA cult," or "pick your 'save the world'"
cult in the Lean environment, so this article is intended to also serve as an
intervention and a wake-up call for management accountants to get engaged from
a leadership and technical perspective.
COMING
TO TERMS WITH LA ASSERTIONS
There
are at least three assertions in Lean Accounting that justify closer scrutiny:
(1) Accounting is the problem, (2) all conversion costs (in Lean Accounting,
conversion costs are defined as all value stream costs except materials and
purchased outside services) are fixed, and (3) claims for support of external
reporting.
Accounting
Is the Problem
First,
in the reasoning by some in the Lean movement that accounting is the problem,
LA uses a weak straw person as its target and basis for the call to action-full
absorption standard costing, which is infamous for its deficiencies in decision
support. In the LA discourse, examples abound that highlight the perils of
arbitrary indirect cost allocations in full absorption standard costing. In
particular, the dangers of allocating overhead costs are highlighted. No one
objects to the examples sighted because the credibility of full absorption
standard costing was already demolished by activity-based costing (ABC) in the
1980s and early 1990s.
Nevertheless,
the discussion often proceeds as if full absorption standard costing and all
other traditional approaches are equally flawed. But the fact is that a
traditional approach like direct costing doesn't absorb any overhead or even
fixed costs; an approach like Resource Consumption Accounting (RCA) makes no
arbitrary assignments at all-i.e., the principle of causality governs every
assignment (the word "allocate" refers to arbitrary cost mapping and
the word "assign" to cost mapping based on cause-and-effect
relationships-i.e., applying the principle of causality); and ABC has made
advances in better understanding capacity costs and simplified data collection.
In addition, many management accountants (including one of the authors, who was
an SBU CFO at a large telecom) have used ABC for "process
costing"-integrated cross-functional processes tied together to produce an
output (similar to LAs value stream). Making comparisons to a weak sister (full
absorption costing) and putting all advances of the past 20 years into the same
trash bin aren't in the spirit of fact-based debate on behalf of the
practitioner. We have long stated that the management accounting profession
needs to accelerate its transformation to increase its relevance, but
comparisons to methods everyone knows are weak and to the
"accountant" from 20 years ago (numbers cruncher in the back office
vs. strategic business partner on the front lines of decision making) create an
artificially wide gap between the current and aspirational states of the
profession.
All
Conversion Costs Are Fixed
Second,
the assertion-or very strong implication-in the LA literature that all conversion
costs are fixed isn't unique to Lean Accounting. The Theory of Constraints
(TOC) can probably be credited with this view of cost behavior. This view is a
hallmark of so-called simple solutions to management accounting and typically
considers material cost as the only cost relevant to a whole host of decisions.
As we will show, what's implied is that these "fixed costs" are
actually unavoidable costs. This practice (the "blended cost concept
error") confuses operational cost concepts (fixed and variable) with
decision cost concepts (unavoidable and avoidable).
This
error is least detrimental for decisions dealing with small changes within the
relevant range when the two sets of cost concepts more closely align (e.g., a
variable cost isn't that different from an incremental cost). But wider-ranging
decisions that affect step-fixed cost relationships pose a serious challenge
because the avoidable cost in these instances comprises both fixed and variable
costs. The blended cost concept error results in understating the benefits of
wider-ranging decisions and eliminating these decision options or simply
ignoring them (refer to the make-buy example below). The error also raises
another question for Lean Accounting: unavoidable under which specific decision
scenario? The principle of "different costs for different purposes"
has been well understood in management accounting for a very long time.
LA Can
Transform External Reporting, Too
Third,
when it comes to support for external reporting, Lean Accounting strongly
implies that it has the ability to transform traditional financial accounting
(external reporting of financial and notes disclosures based on GAAP/FASB) just
as it aspires to transform management accounting (decision support, planning,
and control). Yet our review of the existing Lean literature and presentations
at the Lean Accounting Summit reveal that the only meaningful support in the
area of financial accounting is inventory valuation. Other integration points
with financial accounting are rarely mentioned. Does supporting them run foul
of Lean's aversion to transaction recording (too complex; why does the shop
floor need transactionlevel detail to run the business?) and LA's notion of a
single cost object-its value stream? The need to isolate and capitalize certain
costs (e.g., asset under construction), collecting and invoicing costs incurred
for work done internally and paid for by an insurer or, similarly, work paid
for by the original equipment manufacturer (OEM) under warranty or for recalls
doesn't seem to be considered by LA as "required" complexities under
the law (add Sarbanes-Oxley to the mix).
The
problem gets worse in service industries. For example, consider a repair
facility that receives the customer's item (e.g., a jet engine) or healthcare-both
are required to provide the customer a detailed invoice that's different for
every item repaired or customer served.
Statement
of Financial Accounting Standards (SFAS) No. 15!, "Inventory Costs-an
amendment of ARB No. 43, Chapter 4," requires that excess/idle capacity
cost be reported as a period expense and not absorbed to the product. This also
poses a challenge for Lean Accounting. Excess/idle capacity costs exclude any
variable cost. For example, preventative machine maintenance is a fixed cost
and must be included in excess/idle capacity costs, while repairs are
considered a variable cost and would be excluded. We don't believe that Lean
Accounting can make this distinction because of its blended cost concept error,
which seems to consider all machine-related costs as fixed.
IMPLICATIONS
OF THESE INSIGHTS
As we
said, there seems to be a land rush to grab the gold mine potential some see in
the Lean movement that's similar to the ABC land rush of the 1980s and 1990s,
which-at least initially-created clutter and confusion, not costing advances
for practitioners. For example, one presentation at the Lean Accounting Summit
described rolling outlooks and other means to improve (if not replace) today's
planning and budgeting processes as "Lean planning." An approach to
simplify Sarbanes-Oxley compliance was referred to as "Lean SOX."
Business process improvement, transformational change, and elimination of
wasteful practices are not the sole domain of Lean, and expanding the net in
this manner impacts credibility. But the planning and compliance ideas are good
ones and should stand on their own as delivering transformational value to
practitioners.
The
assertion that accounting is the problem is too simplistic and impairs the
credibility of Lean Accounting as an evolving body of knowledge with
transformational potential. For example, the claim that accounting causes undue
inventory build-up is obviously a problem in performance measurement and not
accounting. The larger issue, in our view, isn't accounting per se but the
inconsistent application of the principle of causality in some traditional
management accounting approaches. As we indicated, some approaches don't commit
this error, and the broad guilt-by-association brush that LA applies to full
absorption accounting is invalid.
The
Lean Accounting claim for support of external reporting clearly requires more
study, including an evaluation of the complexity of fully meeting all
requirements. The point here isn't that LA violates GAAP. We didn't investigate
its ability to provide compliance information in a vanilla manufacturing
environment-given its manufacturing roots, we presume this isn't an issue. Our
concern is with a broader application of Lean principles and LA, e.g., in
service industries such as transportation.
At the
very least, open debate and market research (e.g., case studies of LA beyond
the manufacturing shop floor) into a number of simplistic assumptions
underlying LA will have to be undertaken. These include the practice of blending
cost concepts, claims of no need for transaction logging, and managing the
performance of the entire business (service and/or manufacturing) with Lean
Accounting's single cost object.
The
blended cost concept error has broader implications, and we will reference some
specific examples from the Lean Accounting literature. The effects of this
error gravitate toward inferior decision support because our sense is that LA
spurns operational modeling (the traditional use of the concepts fixed and
variable) in the name of simplicity and the notion that "the shop
floor" is the center of the universe where the "real" decisions
are made and actions taken. Operational modeling is essential to decision
support because understanding current cause-andeffect relationships provides
insight into the potential outcomes of decision options. We believe that even
in relatively small manufacturing environments, let alone in service
environments, operational modeling is necessary.
Consider a make-or-buy decision scenario presented at the Lean
Accounting Summit where it was reasoned that the only time the buy option would
be selected is when the external provider can supply the product at less than
the material cost of making it internally. This is because labor and machine
costs are considered fixed-i.e., you incur them regardless. This is a case of
dealing with unavoidable costs, not fixed costs. The blended cost concept error
has effectively eliminated the buy option. It's possible that Lean Accounting
reasoning in this application has its roots in Japanese lifetime employment
(the likely explanation) because one of the key Lean tenets is that as waste is
eliminated, people aren't terminated-they are reassigned to another value
stream that requires resources to support its growth. (The LA thought leaders
did point out that there are potential gains for new adopters in avoiding costs
associated with equipment and facilities in the process of right-sizing their
infrastructure. Our point, however, about the blended cost concept error and
the default LA view that resembles that of throughput thinking with regard to
consumption and cost behavior remains true.)
There
are several challenges for Lean Accounting in its reasoning in this regard.
First, adaptability through the ups and downs of economic cycles is a hallmark
of the U.S. economy. There's obviously a need in this country to support
capacity-adjustment decisions that doesn't appear to be possible with LA's
summary value stream information and the blended cost concept error. This is
another great topic for open, fact-based debate.
Second,
LA's preference seems to be to expand capacity through incremental investments
(usually the constrained resource) rather than to select the buy option. For
these investment decisions LA seems to prefer a periodic, point-in-time value
stream income statement and not the multiyear, long-run discounted cash flow
(DCF) approach. Implications include more emphasis on shorter-term return on
sales (ROS) as opposed to longer-term return on investment (ROI).
Table
1 shows a typical LA scenario. A company receives a request for quote to
provide an existing customer with 20,000 more units. The value stream income
statement in the table reflects the profitability impact and is used to justify
investing in additional people and machines to fulfill the order.
The
dangers of using ROS are well understood. Once the order is fulfilled, the
value stream profit margin will slump below that of the current state. The
revenue and material costs in the Change column will go away (i.e., viewed as
nonrecurring) but not the employee and machine costs, resulting in a value
stream profit of $595,000 and a profit margin of 29.8% (i.e., $2,000,000
1,000,000 - 240,000 - 165,000 = $595,000 and $595,000/$2,000,000 = 29.75%). Was
the LA decision the right decision? Is the value stream income statement and
ROS the appropriate tool to use for these types of decisions? DCF has a very
explicit accommodation of the time dimension for investment decisions (i.e.,
the time value of money), but ROS doesn't. We have seen very little
constructive, fact-based debate in this area, so we can only speculate that the
reason for LA's lack of asset-level operational details, required for the
"I" part of the traditional performance metric, forces the use of the
value stream income statement and ROS.
Third,
the implied assumption in Lean Accounting that small capacity adjustments are a
regular and straightforward occurrence seems inconsistent with Lean's
"right" principles of right-design, right-size, and right-fit. If the
whole infrastructure is truly right-sized to the initial factory outlay, it
doesn't follow that expanding capacity is a small venture. Moreover, for many
industries, capacity increments don't always come in right-sized steps. For
example, a commercial airline flight simulator costs $100M, and there are no
right-sized flight simulators. How is this investment decision supported using
LA principles and information?
MORE
QUESTIONS
The
argument that management accounting is a model of the goods and services
consumed in operations that provides insight in related monetary values for
decision support will find no naysayer. Management accounting is about
modeling, and the closer you can get to the thing being modeled the better.
Throughout management accounting's history, causality has enjoyed an
unquestionable position as the overriding modeling principle. For example,
Alexander Church based his 1910 discussion of the appropriate treatment of
excess/idle capacity costs on cause-and-effect relationships. Traditional
thinking recognizes different sets of principles for operations flow design (as
good or as bad as those might be) and for deriving monetary management
information for decision support.
The
overriding nature of Lean's "one-piece flow" simplification principle
in LA is evident when you consider the resultant value stream income statement.
Causality apparently isn't the guiding principle because common fixed costs
(e.g., excess/idle capacity costs) are allocated to the value stream and used
in product-related decisions (e.g., taking on a new order, outsourcing,
make-buy). All of the costs associated with Lean's one-piece-flow principle are
considered relevant. Excess and idle capacity may have little if anything to do
with the outputs being produced by the value stream. In fact, they have more to
do with outputs that weren't produced.
Again,
in the relatively simple environment of a small manufacturing operation-the
"shop floor"-it may be possible to directly assign soft and hard
assets. But given more complex operations (including service industries) and
customer demands for bundled products and services (customer
micro-segmentation), dynamic shared resources are a business reality, and
causality is critical for decision-making purposes. This means that the
management accounting profession must think outside the box in creating
technically sound, efficient business solutions that support decision making in
this complex environment. One of the basic tenets is for management to understand
the impact of decisions (both strategic and tactical) on consumption and
efficient utilization of resources throughout the value chain.
DECISION
SUPPORT WITH LEAN ACCOUNTING
The
culmination of Lean Accounting's assertions and application of production-flow
design principles to decision support information is nowhere more aptly
illustrated than looking at a decision scenario presented at the Lean
Accounting Summit. Consider the following example used to demonstrate LA's
superior decision support capabilities. A company uses a 15% margin percentage
hurdle rate for accepting new orders. Table 2 shows profit margin percentages
for full absorption standard costing and the value stream for an order
received. (Margins are the anticipated margins if the order is accepted; all
alternatives use the same basic cost data but allocate costs differently to the
product and value stream, respectively. The standard costing gross margin was
used in this illustration. No reason was given during the presentation as to why
the standard costing contribution margin wasn't used.)
As was argued in the session, full absorption standard costing
would turn the order down, and LA shows the order should be accepted, primarily
because LA allocates less total cost to products than full absorption standard
costing does.
Consider
the same scenario with two changes: ( 1 ) The hurdle margin percentage required
is 30%, and (2) a causally derived gross margin is added as shown in Table 3.
(The causally derived gross margin is based on assigning costs only to product
for which cause-and-effect relationships can be identified.) Note that a
causally derived margin (using any of a number of existing approaches) would
easily be higher than the value stream profit margin because the common fixed
costs of excess/idle capacity would be excluded. With this hurdle rate, Lean
Accounting would reject the order, but an approach that focuses on
cause-andeffect behavior would accept the order. In the original LA
illustration, the price was set by the market, which means that using the
product's contribution margin would be more appropriate. But Lean Accounting
espouses that product costs and therefore product profitability aren't
necessary for business decision making. The point of this simple example is this:
Fact-based debate that includes operational managers in service environments
and qualified management accountants is a good thing for advancing the body of
knowledge. Declarative statements about the benefits of LA without supporting
case studies or empirical analysis will be seen by practitioners as selling a
solution vs. advancing a solution, especially those who have been subject to
the selling of ABC/EVA/ ERP/BPM/CPM/CRM/ERM...and the beat goes on.
LET'S
CLOSE THE GAP
Lean
thinking has a history of success and the potential for providing significant
benefit to adopters. The principles of eliminating waste, replacing rather than
duplicating, empowering workers, customer pull vs. company push, etc. are
important tenets to help improve U.S. global competitiveness. In a world where
cross-functional teams with a strong and independent management accounting
advocate are becoming more prevalent to drive business performance, the value
stream concept to deliver customer value has the potential to improve business
performance dramatically.
Let's
summarize our answers to the two central questions we raised in the
introduction. First, is Lean Accounting ready to replace, complement, or
supplement existing or evolving management accounting approaches/ change initiatives?
At best, possibly beyond the shop floor in a relatively simple manufacturing
environment, the answer is that LA in full deployment is premature until there
is more technical depth and understanding as to how it supports operational
decision making, strategic planning, and external reporting.
The
second central question, "Does LA support decision making and enterprise
optimization?" is probably a clearer "no" if the center of the
universe extends beyond the shop floor. The goal should be to advance the
debate on these important issues, not dismiss the debate as being
characteristic of old-school accountants who want to go back to the days of
full absorption accounting.
Frankly,
we are all too smart for that approach, and practitioners have no tolerance for
creating more clutter and what seem to be characterized as one-size-fits-all
solutions.
Although
"Lean thinking" and the Lean enterprise have clear potential, the
"Lean Accounting movement" in the U.S. requires an intervention. We
must eliminate declarative statements that suggest that even exploring the
integration of existing or evolving management accounting change initiatives
isn't in the spirit of Lean because they are too complex. Many examples abound,
and we see the possibilities for integration on behalf of the practitioner, but
we certainly don't have all the answers. We do know that open debate/discussion
is required at a more technical level. Accounting or management accounting
isn't the root of the problem, but management accountants must step up and
ensure that technically sound solutions are in place to dramatically improve
business performance in an increasingly complex global market.
We and
many others have long maintained that the management accounting profession must
accelerate its transformation to increase its relevance to management. Scores
of research studies, including those conducted by the Institute of Management
Accountants (IMA®), IBM, PricewaterhouseCoopers, and CFO magazine, support our
contention that the CFO organization has come a long way in evolving from
simply a counter of wealth to also serving as a creator of wealth and from
strictly performance reporter to performance contributor. All these studies
also clearly indicate that there is still a large gap between the current state
of reality and aspirations of the profession. There are many transformational
"change initiatives" in the profession today (ABC/ABM, RCA/GPK, EVA,
ERM, balanced scorecard, business intelligence/data mining, the "rebirth"
of Six Sigma and quality assurance, interactive data, strategy-based planning,
budgeting, etc.). A process predicated on fact-based research and debate and
that addresses the complexities of modern business is much more likely to be
successful and "practitioner friendly."
Sidebar
Our
concern isn't with Lean "extremism" in terms of its potential to help
transform the professionit's with those who suggest that Lean Accounting is THE
ONLY answer.
Sidebar
The
Lean Accounting Value Stream
Lean
Accounting follows the Lean operational principle of one-touch flow design for
the management accounting information it provides. LA proposes a single cost
collector-the value stream. A value stream is defined as all the activities
required to bring a product or service from conception through to the customer,
including related information processing, logistics, and the collection of
money.
From a
management accounting perspective, the total cost of all the resources plus any
product material and outside service costs are included in the value stream
cost object. The value stream income statement serves as the primary tool in
providing monetary information for decision making and reflects revenues from
which direct material and all people, machine, and other conversion costs are
deducted to obtain value stream profit. A value stream profit margin (profit
divided by revenue) is calculated. Although an average product cost is
sometimes calculated, Lean Accounting insists that product unit cost isn't
necessary-in fact, not needed-for decision making as a Lean enterprise.
AuthorAffiliation
Anton
van der Merwe is a member of Aha Via Consulting, LLC, in South Lebanon, Ohio.
You can reach him at (513) 257-7451 or antonvdm@altavia.com.
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