Nick has over 20 years of experience with lean accounting systems. He has been with BMA since 2002, and has worked with a wide range of public and private companies putting lean accounting systems in place. Prior to working with BMA Inc. Nick was a CFO for several manufacturing companies that implemented lean. As a CFO, Nick led the companies implementing lean accounting practices such as performance measurements, value stream costing, lean decision making and eliminating traditional standard cost systems,as well as applying lean in all accounting & finance processes. Nick is a Certified Public Accountant and has a BS in Accounting and MBA in Finance, both from the University of Kentucky. He currently resides in Lexington, Kentucky. Thank you for your patience. This webinar will begin momentarily BMA Inc. www.maskell.com information@maskell.com 1 Training & Exercise 2
Monday Tuesday Wednesday Thursday Friday The Need for Lean Accounting Lean Performance Measurements Lean Cost Management Capacity & Lean Decision Making Transaction Elimination Implementing Today s Objective: For you to create a sample value stream income statement for your pilot value stream. 3 What is the Issue? Creating a Value Stream Income Statement Using a Value Stream Income Statement Summary Value Stream Costing Exercises 4
60 50 40 30 20 Revenue Costs Profit 10 0 1 2 3 4 5 6 7 5 6
Period 1 Period 2 REVENUE OEM $998,977 $1,039,440 Systems $1,002,466 $1,009,246 $2,001,443 $2,048,686 Cost of Goods Sold $1,621,169 81% $1,687,800 82% GROSS PROFIT $380,274 19% $360,886 18% ADJUSTMENTS Purchase Price Variance ($60,466) ($59,467) Materials Usage Variance $94,533 $96,733 Labor Variance ($19,718) ($93,895) Overhead Absorption Variance $38,341 $182,577 SG&A $129,889 6% $135,215 7% NET PROFIT $197,695 10% $99,723 5% 7 Overhead Costs Assume a direct relationship to labor costs Profits Maximum profits come from maximum utilization of resources Costs Costs controlled by tracking actual costs Costs optimized by optimizing each process step 8
9 Creating a Value Stream Income Statement 10
Direct Costs No Allocations Actual Spending Timely No Product Costs 11 12
Actual Cost of materials purchased 13 Actual Cost of People assigned to value stream 14
Depreciation, repairs & maintenance 15 Based on Square Footage of Value stream 16
Outside Processing 17 Production Process Costs Simple allocation to value streams Support Costs Direct assignment of people to value stream Don t assign by allocation 18
Manufacturing Support Resources shared among the value streams Appear as support costs New Product Development Lean companies recognize new product development as its own non-revenue generating value stream SG&A Costs not assigned to value streams appear as support costs 19 1. Actual costs for revenue generating Value Streams VALUE STREAMS New Product Design Support Costs TOTAL DIVISION 3. Non revenue Motors Systems Spare Parts generating NPD Value Stream Sales $326,240 $748,894 $453,215 $1,528,349 Additional Revenue $0 $0 $12,422 $12,422 Material Costs $111,431 $232,774 $149,561 $87,909 $12,764 $594,439 4. All costs Conversion Costs $57,628 $70,406 $81,579 $203,769 $37,645 not controlled $451,027 by Outside Process Costs $32,433 $22,991 $22,661 $7,531 Value Stream $85,616 teams Other 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) $209,678 ROS 31.8% 47.1% 38.8% -23.7% -3.8% 13.7% 2. Operating profit of the value streams Opening Inventory Closing Inventory Inventory Change $925,314 $918,807 ($6,507) 5. Financial adjustments for financial reporting Corporate Overhead Division Profit Division ROS $51,147 $152,024 9.9% 20
Using a Value Stream Income Statement 21 Material Costs Traditional Lean Measure of Financial Success Favorable Purchase Price Variance Actual Purchases Behavior Excess Inventory Reduced Flow Just-in-Time Purchasing 22
Labor & Machine Costs Traditional Lean Measure of Financial Success Favorable Variances & Absorption Actual Labor & Machine Costs Behavior FG Inventory Reduced Flow & Productivity % time spent of value-added activities 23 Quality & Rework Week 36 Week 37 Week 38 Week 39 Week 40 Week 41 Downtime % 1.10% 1.67% 0.00% are affecting 0.00% 0.00% 0.00% Rework (number) 191 286 205 297 delivery performance 414 218 Rework (secs) 16,703 43,615 17,048 30,114 48,197 17,030 On-Time Delivery % 96.8% 78.9% 83.0% 86.5% 90.1% 93.0% Supplier Materials Days 15 15 15 15 15 15 Finished Goods Inventory Days 5 5 5 7 7 10 Total Units produced 4,709 2,851 4,178 3,789 3,276 2,325 Hours Worked 129.30 131.60 106.60 126.60 110.25 58.30 Units 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 33.95 Non-Productive Capacity 2.65 5.71 1.58 4.46 2.79 1.58 Available 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 tsupport tlabour Cost t 4900 4,900 4900 4,900 Revenue 4,900 varies 4900 4,900 4,900 4900 4,900 Energy Cost 1,060 1,067 considerably 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 The 7,794 Value Stream -11,171 4,679 8.22% -41.09% -42.25% is 15.10% not yet stable -34.14% 19.98% Value Stream Return on Sales % Average Value Stream Cost per 8.17 17.38 9.38 11.56 13.40 8.06 unit 24
Actual Value Stream Costs Capacity & Operational Performance Measures 25 Cost of the Value Stream Totals Material 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 26
Average cost per Unit Objective: Reduce over time Reduce Costs Increase Units Eliminate waste Just-in-time Materials Improve Flow 27 VALUE STREAMS Motors Systems Spare Parts New Product Design Support Costs TOTAL DIVISION Sales $326,240 $748,894 $453,215 $1,528,349 Additional Revenue $0 $0 $12,422 $12,422 Material Costs $111,431 $232,774 $149,561 $87,909 $12,764 $594,439 Conversion Costs $57,628 $70,406 $81,579 $203,769 $37,645 $451,027 Outside Process Costs $32,433 $22,991 $22,661 $7,531 $85,616 Other 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) $209,678 ROS 31.8% 47.1% 38.8% -23.7% -4.0% 13.7% The value streams must make a minimum of 46% HURDLE RATE CALCULATION Opening Inventory $925,314 Closing Inventory $918,807 Required ROS 15.0% Inventory Change ($6,507) Corporate Overhead 3.3% Support Costs 4.0% Corporate Overhead $51,147 New Product Design 23.7% Division Profit $152,024 Value Stream Hurdle Rate 46.0% Division ROS 9.9% 28
Value Stream Profitability Did not achieve Hurdle Rate Reduce Costs Increase Revenue Eliminate waste Reduce capacity to lower demand level Sales & Marketing Action Plan 29 Summary 30
Customer Vl Value Value Streams Flow & Pull Profits driven by demandd True profit centers of business Increase flow to increase profits Costs driven by capacity & performance Actual spending, no allocations Increase flow to reduce costs 31 Continuous Improvement Eliminate waste = reduced costs Improve performance and manage costs Empowered Employees Accurate, easy to understand financial information Direct relationship between operating performance & profits 32
How much did the Value Stream ship? How much did the Vl Value Stream actually spend? 33 Lean Strategy Root Cause Analysis 34
Materials Actual purchases @ actual cost From cash disbursements or purchase journal Labor Actual payroll of full-time people assigned to value stream From Payroll Machines Depreciation, repairs & maintenance, tooling From general ledger 35 Facilities Facility costs from general ledger Estimate square footage Other Costs Any other direct cost of the value stream that is under the control of the value stream From general ledger Revenue Actual revenue for the period from the general ledger 36
2. Prepare a Value Stream Income Statement in Excel Compare it to your current income statement format 3. How would you explain the benefits of value stream costing to management? 37 Visit BMA USA website Contact Nick Katko or Susan Lilly To receive free Lean Accounting resources by download To read articles and case studies about Lean Accounting www.maskell.com Blogs, articles, books etc. nkatko@maskell.com sjlilly@maskell.com Visit www.maskell.com and click the Download Free Resources button Visit www.maskell.com and choose the Lean Accounting Tab Join the Lean Accounting Visit www.leanaccounting.ning.com Blogs, SuperGroup p (free) forums, videos, and more. Over 1200 members Join the BMA Lean Accounting Group on LinkedIn (free) Visit www.linkedin.com and either join or sign in. Go to the Groups tab, search on BMA Lean Accounting and join in. Forums, networking, and more. Over 325 members 38
Monday Tuesday Wednesday Thursday Friday The Need for Lean Accounting Lean Performance Measurements Lean Cost Management Capacity & Lean Decision Making Transaction Elimination Implementing 39