MANAGEMENT ACCOUNTING FOR LEAN BUSINESSES

Transcription

1 MANAGEMENT ACCOUNTING FOR LEAN BUSINESSES Orest J. Fiume Retired Vice President - Finance The Wiremold Company 1

2 Wiremold Before and After Lean (1) Assessed Value $30 Million $770 Million West Hartford: Sales per Employee $90K $240K Gross Profit 38% 51% Throughput Time 4-6 Weeks 2 Hours 2 Days Product Dev l Time 2-3 Years 3-6 Months # Suppliers Inventory Turns Working Cap % Sales 21.8% 6.7% (1) Company Sold July 31, 2000 * W/C = A/R + Inv Trade Payables 2

3 LEAN A Business Strategy Not A Manufacturing Tactic Not A Cost Reduction Program 3

4 A Simple Example Two Companies in Same Industry Using Same Equipment Company A Set Up Takes 1 Hour Company B Set Up Takes 1 Minute Who Has Lowest Cost? Who Can Provide Best Customer Service? A Small Process Improvement Provides Enormous Strategic Advantage 4

5 Corporate management accounting systems are inadequate for today s environment Relevance Lost The Rise and Fall of Management Accounting H. Thomas Johnson Robert S. Kaplan

6 LEAN ACCOUNTING? All of the essentials of modern management accounting were established by 1930 without any significant changes since then Brian Maskell 6

7 TYPICAL COST ELEMENTS "Yesterday" "Today" Material 30% O/H 10% O/H 30% Touch Labor 60% Material 60% Touch Labor 10% 7

8 STANDARD COST ABSORPTION ACCOUNTING Most people do not understand a standard cost P&L statement Causes us to produce labor hours, not product No linkage between labor hours and the customer Allocation costs based on labor hours distorts product costs as a result 8

9 Most companies do not know their product costs buy they think they do out to four decimal places Causes - Inaccurate reporting - Inappropriate overhead allocations AND as a result 9

10 Inaccurate Product Cost Leads to Poor Decisions 10

11 CHANGE THE FOCUS From profitability of individual products To profitability of product groups From standard costs & variance analysis To actual costs & segregation of assignable and allocated costs 11

12 In other words do not maintain a system that collects individual product cost data on an on-going basis focus on product families. On those few occasions that you need to know the cost of an individual products calculate actual cost at that time. 12

13 STANDARD COST EXAMPLE This Year Last Year Net Sales 100,000 90,000 Cost of Sales: Standard Costs 48,000 45,000 Purch Price Var (3,000) 10,000 Matl Usage Var (2,000) 5,000 Labor Eff Var 7,000 (8,000) Labor Rate Var (2,000) 9,000 OH Volume Var 2,000 2,000 OH Spend Var (2,000) 8,000 OH Eff Var 16,000 (17,000) Total Cost of Sales 64,000 54,000 Gross Profit 36,000 36,000 Gross Profit % 36.0% 40.0% USELESS MANAGEMENT INFORMATION 13

14 CHANGING THE ACCOUNTING SYSTEM AND FINANCIAL STATEMENTS STANDARD COSTS??? 14

15 Plain English P&L This Year Last Year +(-)% Net Sales 100,000 90, Costs of Sales: Purchases 28,100 34,900 Inventory (Inc) Dec: Mat l Content 3,600 (6,000) Total Materials 31,700 28, Processing Costs: Factory Wages 11,400 11,500 (0.9) Factory Salaries 2,100 2, Factory Benefits 7,000 5, Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1, Scrap 2,600 4,000 (35.0) Total Processing Costs 27,500 26, Occupancy Costs: Building Depr Building Services 2,200 2, Total Occupancy Costs: 2,400 2, Total Mfg Costs 61,600 58, Manufacturing Gross Profit 38,400 32, Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 GAAP Gross Profit 36,000 36, % 40.0%

16 Balance Sheet Current Assets: TY LY Current Liabilities TY LY Cash xx yy Accts Payable xx yy Acct Rec xx yy Accruals xx yy Inventory Other xx Other xx yy Total xx Total xx yy Long Term Debt xx Fixed Assets xx yy Capital xx Total Assets xx yy Total Liab + Cap. xx yy yy yy yy yy 16

17 Balance Sheet Current Assets: TY LY Current TY LY Liabilities Cash xx yy Accts Payable xx yy Acct Rec Inv-Material Inv-Def. L+O/H xx yy Accruals Other Total xx xx xx yy yy yy Total Inv Other xx yy Long Term Debt xx Total xx yy Capital xx Fixed Assets xx yy Total Liab + xx Cap. Total Assets xx yy yy yy yy 17

18 Plain English P&L This Year Last Year +(-)% Net Sales 100,000 90, Costs of Sales: Purchases 28,100 34,900 Inventory (Inc) Dec: Mat l Content 3,600 (6,000) Total Materials 31,700 28, Processing Costs: Factory Wages 11,400 11,500 (0.9) Factory Salaries 2,100 2, Factory Benefits 7,000 5, Services & Sup 2,400 2,500 (8.0) Equipment Depr 2,000 1, Scrap 2,600 4,000 (35.0) Total Processing Costs 27,500 26, Occupancy Costs: Building Depr Building Services 2,200 2, Total Occupancy Costs: 2,400 2, Total Mfg Costs 61,600 58, Manufacturing Gross Profit 38,400 32, Inv Incr (Dec): Labor,O/H Content (2,400) 4,000 GAAP Gross Profit 36,000 36, % 40.0%

19 Cash Flow From Manufacturing This Year Last Year Gross Profit 36,000 36,000 Equipment 2,000 1,900 Depreciation Building Depreciation Chg. In Inv. 2,400 (4,000) Labor & O/H Cash Flow From Mfg. 40, % 34,100 19

20 Lean Accounting Summit September 22-23, Attendees September 21-22, Attendees 20

21 Excerpts from E&Y 2005 Presentation Lean Accounting is a Young Practice Field Stage 1: Conceptual Framing and Isolated Practice Examples Stage 2: Networking of Innovators and Proliferation of Practices Stage 3: Maturation of Practices and Convergence around common methods and tools Stage 4: Standardization and Incorporation into Formal Training 21

22 Excerpts from E&Y 2005 Presentation, con t Some Implications of Lean Manufacturing for Finance/Accounting Feature Lean Manufacturing Finance and Accounting Implications Production Mix Labor Costs Production Practices -Low volume production of many variants. (High variety/low volume) -Short Lead Times and Cycle Times -Direct Labor is a small percentage of total labor costs -Difficult to distinguish between direct and indirect labor -Production on Demand (Just in Time) -Production is driven by pull signal -One-piece flow; inventory levels radically reduced -Production organized around value streams -Cell production; each worker performs multiple operations -Frequent production changes; short set up times -Individual Product Costing becomes increasing complex and burdensome -Overhead allocation is difficult -More attention needs to be paid to up-front development and launch costs -Labor is an inappropriate basis for allocating overhead -Detailed labor tracking by product is not useful -The value of inventory may not be material (significant) from an accounting point of view -No longer necessary to do labor reporting 22

23 Excerpts from E&Y 2005 Presentation, con t Some Implications of Lean Manufacturing for Finance/Accounting Feature Lean Manufacturing Finance and Accounting Implications Continuous Improvement -Management of quality through prevention -Continuous changes to improve productivity -Standard Costs are rapidly obsolete -Continuous updating is required to make sure quoted costs are based on actual costs Supplier Relationships Management Structure -Reduced number of suppliers -Supplier responsibilities for maintaining inventory levels -Long term supplier relationships -Fewer layers of management -Strong team-based structure -High levels of team autonomy -Disciplined team-based measurement systems -Visual Control systems -Supplier transactions become more simplified -Incoming inspection and matching eliminated -Communication with suppliers can be managed electronically -Process control can be delegated to the appropriate level of the organization -Process stability and capability is ensured be local measures -Financial checking systems can be eliminated -Finance and Accounting can focus on providing value-added information to support improvements 23

24 Excerpts from E&Y 2005 Presentation, con t Element Traditional Finance/Accounting Lean Finance/Accounting Role of Finance Finance seeks to drive and control operations Finance serves/supports operations Costing Basis Costing based on individual products Costing based on real costs of value streams Costing Systems Use of Standard Costing Systems Use of target costing and kaizen costing Transactions Multiple and complex finance and accounting transactions Elimination of most transactions Inventory Valuation Complex systems for inventory valuation Inventory valuation based on simple visual management Overhead Levels High levels of indirect costs Make as many costs as possible direct Overhead Allocation Indirect costs allocated based on direct labor costs Do not allocate any overhead Production Scale Focus on economies of scale Seek the same product costs regardless of volume Data for Monitoring and Control Summary of the Lean Finance/Accounting Shift Financial accounting and cost accounting used to measure and monitor operations Separate financial accounting and costing from operations; use simple and direct financial 24 data

25 The Vision for Lean Accounting Provide accurate, timely, & understandable information to motivate lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow. Use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control. Develop lean accounting methods that fully comply with GAAP, external reporting regulations, and internal reporting requirements. Support the lean culture by providing information that is relevant and actionable, and empowers continuous improvement at every level of the organization. 25

26 Principles, Practices, & Tools of Lean Accounting PRINCIPLES PRACTICES TOOLS OF LEAN ACCOUNTING A. Lean & simple business accounting. 1. Continuously eliminate waste from the transactions processes, reports, and other accounting methods. a. Value stream mapping; current & future state. b. Kaizen (lean continuous improvement. B. Accounting processes that support lean transformation. 1. Management control & continuous improvement. a. Performance Measurement Linkage Chart; linking metrics for cell/process, value streams, plant & corporate reporting to the business strategy, target costs, and lean improvement. b. Value stream performance boards containing break-through and continuous improvement projects. c. Box scores showing value stream performance. 2. Cost management. a. Value stream costing b. Value stream income statements 3. Customer & supplier value and cost management. a. Target costing C. Clear & timely communication of information 1. Financial reporting. a. Plain English financial statements b. Simple, largely cost-based accounting 2. Visual reporting of financial & non-financial performance measurements. a. Primary reporting using visual performance boards; division, plant, value stream, cell/process in production, product design, sales/marketing, administration, etc. 3. Decision-making a. Incremental cost & profitability analysis using value stream costing and box scores. 26

27 D. Planning from a lean perspective. 1. Planning & budgeting a. Hoshin policy deployment b. Sales, operations, & financial planning (SOFP) 2. Impact of lean improvement a. Value stream cost and capacity analysis b. Current state & future state value stream maps. c. Box scores showing operational, financial, and capacity changes from lean improvement. Plan for financial benefit from the lean changes. E. Strengthen Internal Accounting Controls 3. Capital planning 4. Invest in People 1. Internal controls based on lean operating controls 2. Inventory valuation a. Incremental impact of capital expenditure on value stream box-score. Often used with 3P approaches. a. Performance measurements tracking CI participation, employee satisfaction, and crosstraining. b. Profit Sharing a. Transaction elimination matrix b. Process maps showing controls and SOX risks a. Simple methods to value inventory without the requirement for perpetual inventory records and product costs can be used when the inventory is low and under visual control. 27

28 THANK YOU 28

29 Real Numbers: Management Accounting in a Lean Organization By Orest J. Fiume and Jean Cunningham Winner of 2004 Shingo Prize in Research (go to TBM store) (go to Store, then Lean Applications) 29