Vl Value Stream Costing

Transcription

1 Vl Value Stream Costing Presented by Nick Katko BMA Inc. What s Wrong with Full Absorption Standard Costing? Distorts profitability by inappropriate overhead application. Motivates non lean behavior; large batches, overproduction & make for inventory. Requires significant detailed reporting of so called actual information. Considers labor as a variable cost when for practical purposes labor islargelyfixed fixed. Standard Costs lie to you. They give misleading information leading to bad decisions; make/buy, pricing, product introductions, etc.

2 Some simple examples This happened at a production plant not a million miles away from here.. Current State Manufacturing Operation Drill on CNC Machine 1 minute Batch 2500 Inspect & Pack 4 minutes 6 minutes Grind Machine on Lathe 4 minutes Total labor time: 15 minutes Labor cost: $5.00 Overhead cost: $15.00 Material Cost $1.50 TOTAL COST: $21.50 Lead Time: 6 weeks Inventory 25 days Batch size 2500 (10 days) On-Time delivery = 82%

3 Lean Manufacturing Improvements Created a cell. Replaced CNC machines with a drilling machine with quick change over. Reduced the batch size. Reduced the lead time. Reduced inventory. Almost perfect delivery. Created additional capacity on the CNC machine. Future State Lean Cell Machine on Lathe 4 minutes Drill on Drilling Machine 4 minutes Lean Cell Grind 6 minutes Inspect & Pack 4 minutes Total labor time: 18 minutes Labor cost: $6.00 Overhead cost: $18.00 Material Cost $1.50 TOTAL COST: $25.50 Lead Time: 2 days Inventory 5 days Batch size 250 (1 day) On-Time delivery = 98%

4 Problem Operations has made great improvement, which benefits the customer. BUT. the standard product cost has gone up and finance recommended the project be cancelled. In fact, the changes were highly beneficial both operationally and financially. i It is standard costing that is leading us in the wrong direction. Performance Measures Focus on Value Stream Performance Toward Lean Goals... Fabrication Heat Treat Assembly Shipping Product Shipped 18 Units Value Stream Measures Used for Performance Improvement First Time Through % 73% Dock-to-Dock Time 6.7 days On Time Delivery % 33% Average cost per unit $2,154

5 But Traditional Monthly Statements of Cost Motivate Overproduction by Department and Distort Overhead Applied... Absorption Budget Actual Variance Labor $3,200 $1,669 $(1,531) Overhead 21,667 12,495 (9,172) Total $24,867 $14,164 $(10,703) Result: a Conflicting Message to the Lean Team How to We Change This? Replace standard Use Plain English Use Value Stream costing with value financial Costing in business stream costing statements decision making Here is a summary of those changes

6 Value Stream Costing Replacing Standard Costing with a Simpler, More Accurate, and Lean Focused Method Identifying actual value stream costs Labor Production Materials Machines & Equipment ACTUAL VALUE STREAM COSTS Facilities & Maintenance All Other VS Costs All labor, machine, materials, support services, and facilities directly within the value stream. Little or no allocation.

7 Materials Actual Cost of materials purchased Labor Actual Cost of People assigned to value stream

8 Machines & Equipment Depreciation, repairs & maintenance 2008 BMA Inc. All rights reserved. Facility Costs & Utilities Based on Square Footage of Value stream 2008 BMA Inc. All rights reserved.

9 Other Direct Value Stream Costs Outside Processing 2008 BMA Inc. All rights reserved. Weekly Reporting in the Box Score Caspian Company PA Motors GOAL Current 5-Feb 12-Feb 19-Feb 26-Feb 5-Mar 12-Mar 19-Mar 26-Mar 31-Mar Units per Person On-Time Shipment 96.2% 98.2% 98.5% 97.6% 97.2% 98.0% First Time Thru 42% 44% 43% 47% 54% 62% Dock-to-Dock Days Weekly 8.0 Average Cost $ $ $ $ $ $ AP days - AR days Reporting 8.0 Productive 22% 22% 22% 21% 21% allows for 22% Non-Productive 58% 58% 58% 41% 41% 37% root cause Available Capacity 20% 20% 20% 38% 38% 41% Revenue $366,487 $321,499 $331,546 $325,481 $326, analysis $325,000 Material Costs $112,196 $109,812 $113,243 $111,172 $111,431 $111,007 Conversion Costs $92,564 $95,743 $95,233 $99,463 $98,194 $94,039 Inventory $310,622 $295,712 $271,857 $231,848 $221,163 $198,798 Value Stream Profit $161,727 $115,944 $123,070 $114,846 $116,615 $119,953 Value Stream ROS 44.13% 36.06% 37.12% 35.29% 35.75% 36.91% 46.00% Hurdle Rate -1.87% -9.94% -8.88% % % OPERATIONAL CAPACITY FINANCIAL

10 Value Stream Costing Income Statement Value stream costs are cash disbursements for the period All costs not assigned to value stream become support costs Balance sheet change in inventory & other financial accounting adjustments The VS P&L separates value stream operating results from financial accounting adjustments and requires value stream managers to perform root cause analysis on costs Value Stream Costing Examples Comparing the analysis using value stream costing and standard dcosting

11 Value Stream Costing Example #1 Comparing a traditional standard cost based analysis of operations to a value stream costing based analysis Current Standard Costing Analysis in a Lean Plant PTDNA MANUFACTURING VARIANCES January, 2007 ($000) Ashe County Budget Actual Labor Material 1,529 1,496 VOH VMC absorption 2,654 2,617 Fixed Mfg absorption Total Standard COP 3,608 3,524 Labor variances 0 (62) Material variances 0 (45) VOH variances (40) (92) Purch.Price Variances 0 (92) Inventory adjustment 0 0 Sub-total VMC Variances (40) (292) % Vmc Standard -1.5% -11.1% Fixed Mfg Absorption Fixed Mfg Actual (1,003) (943) Fixed Spending Variances 0 60 Fixed Volume Variance (48) (96) Sub-total Fixed Mfg Var (48) (36) Total Plant Variances (89) (328) Mfg. Start Up (104) (92) Allocated Fixed Exp. Var. 0 4 Total Other Variances (104) (87) In January 2007, orders were lower than expected, thus production was less than the quantity used to create the budget The Corporate financial review consisted of plant management explaining their variances Corporate concluded that the plant performed poorly in January because actual variances were worse than budget Total Mfg. Variances (192) (415) % TPC Standard -5.3% -11.8%

12 Lean Plant Using Lean Accounting Analysis 3. January material costs were higher because the primary supplier was down for 2 weeks forcing plant to buy from secondary supplier which was more expensive Category Metric Dec-06 Jan-07 CAPACITY VS MEASU UREMENTS FINANCIAL On Time Performance Dock-To-Dock Slabs per Hours Worked S & D 1.10% 1.82% Slab Yield 99.56% 98.82% Average Actual VS Con. Cost Per Unit $76.08 $79.02 Productive 38.1% 38.5% Non-Productive 23.7% 23.8% Available Capacity 38.2% 37.7% Revenue $3,823 $3,437 Material Costs $1,364 $1,464 Conversion Costs $1,568 $1,467 Inventory $0 $0 Value Stream Profit $891 $527 Value Stream ROS 23% 15% 4. Conversion costs were under control in January because operational measures and capacity were consistent month to month 2. January orders were less than December 1. Plant financial performance in January was worse than December. Why? Value Stream Costing Example #2 What is the actual profitability of a new product tthat t is replacing an old product? Model 508 Light Source has replaced Model 500 Light Source What impact does this have on profits?

13 Standard Costing Analysis Material Cost is greater Current Model New Model Unit Annual Unit Annual Price , ,000 Material Labor & OH Standard cost 125 4, ,520 Margin 275 9, , % 68.8% 82.0% 82.0% Standard Costing Analysis Current Model New Model Unit Annual Unit Annual Price , ,000 Material Labor & OH Standard cost 125 4, ,520 Margin 275 9, , % 68.8% 82.0% 82.0% Conclusion: because the cycle time to produce the new model is less than the current model, standard costing will calculate the new model to have lower standard cost.

14 Lean Accounting Analysis #2 YTD VS P&L Optical New YTD November 30, 2007 Tooling Model New Model Revenue 2,099,787-2,099,787 Materials 215, ,459 Contribution Margin 1,883,818 (490) 1,883,328 Contribution Margin 90% 90% Expenses Labor 587, ,433 Machines 91,888-91,888 Supplies 13,633-13,633 Freight 30,273-30,273 Facilities - - Interest - Other 37,045-37,045 Total Expenses 760, ,272 Value stream Profit 1,123,546 (490) 1,123,056 $ (490.00) Return on Sales 54% 53% The only change in value stream costs is the increase in material costs. There is no decrease in conversion costs (labor & OH) because there has been no reduction in actual spending. The reduction in cycle time has created capacity, and the company will make money by using that capacity to meet new orders Value Stream Costing Example #3 Using Standard Costing to Set prices

15 Pricing with Standard Costing Current Model Per Unit Current Price $ New Model Unit Material $ $ Labor & OH $ $ Standard cost $ $ Standard Margin $ $ $ New Model Price = Std Cost + Std Margin $ $ Current pricing methodology is to maintain Standard margin $, which would mean lowering the price of the new model to $ But the reduction in price will reduce value stream profits by $4000 YTD VS P&L Optical New YTD November 30, 2007 Tooling Model New Model Revenue 2,099,787 (4,025) 2,095,762 Materials 215, ,459 Contribution Margin 1,883,818 (4,515) 1,879,303 Contribution Margin % 90% 90% Expenses Total Expenses 760, ,272 Value stream Profit 1,123,546 (4,515) 1,119,031 $ (4,515.00) Return on Sales 54% 53% Prices should never be set using standard costing

16 Conclusions Standard costs inaccurate because they are based on: Many estimates (e.g. spending & production rates) Complex cost allocations Incorrect business decisions in a lean company will happen using standard costing Moving from Standard Costing to Value Stream Costing. Step 1 Pilot Lean Production Cells Lean Manufacturing Widespread Lean Through- Out Company & Partners Successful lean cells Extensive training in lean principles Kanban pull & 5S SMED & quick change-over Standard work Quality at source & selfinspection Once the Lean Manufacturing process is stable & under control. Continue to use standard costing or average actual cost. Backflush the materials, labor, and overhead costs. Do not use variance reports for shopfloor reporting. Clearly define the value streams

17 Moving from Standard Costing to Value Stream Costing. Step 2 Pilot Lean Production Cells Lean Manufacturing Widespread Lean Through- Out Company & Partners Cellular manufacturing with std. work & single-piece-flow Extensive use of visual systems Improvement teams trained & established Initial supplier certification & kanban pull Manufacturing organized by value stream Process control through SPC Work in Process and Finished Goods Inventories relatively low Manage the business by value streams. Move to Value Stream Costing using summary & direct cost information. Use average cost as a primary performance measurement. If a product cost is needed, use features & characteristics cost. Moving from Standard Costing to Value Stream Costing. Step 3 Pilot Lean Production Cells Lean Manufacturing Widespread Lean Through- Out Company & Partners Company organized by value stream Extensive cooperation with customers, suppliers, & partners Continuous improvement is a way of life Lean product design using concurrent engineering Use Target Costing to focus on customer value. New value streams, new products, current products

18 What Must Be in Place for Value Stream Costing to Be Effective? Report by value stream not by department. Ideally the people should be assigned to a single value stream with little or no overlap. Few shared services departments. Few monuments. Little requirement for cost allocation. Production processes must be largely under control, so that variability is reasonably low Thorough tracking of out of control situations and of excepts like scrap, rework, etc. Inventory must be under control, relatively low, and consistent Implementing Lean Manufacturing & Lean Enterprise Thinking More About BMA Inc. Visit: for free downloadable resources, articles, and order books LeanAccounting SuperGroup nkatko@maskell.com Nick Katko, Senior Consultant information@maskell.com i Susan Lilly, Associate Director Phone:

19 Questions?