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Lean: costing
the value stream
Patxi Ruiz-de-Arbulo-Lopez
Department of Business Management,
University of the Basque Country (UPV/EHU), Bilbao, Spain, and
647
Received 8 October 2012
Revised 8 December 2012
9 February 2013
Accepted 10 February 2013
Abstract
Purpose The purpose of this paper is to identify the shortcomings of traditional cost accounting
techniques in lean companies and then it seeks to analyse the validity and convenience of value stream
costing (VSC) as a tool in a company that has adopted some concepts of lean manufacturing.
Design/methodology/approach The paper reviews the relevant literature in order to discuss the
deficiencies of costing methods in lean manufacturing. It evaluates the requirements of VSC and
provides a concrete illustration of VSC in the continuous improvement process of a point of sales
terminal assembly line.
Findings The paper evidences the possible mistakes of cost accounting. The necessity and validity
of VSC in lean manufacturing are presented, followed by a case example. In order to make continuous
improvement decisions, VSM, VSC and box score offer complete information on the performance of the
value stream.
Research limitations/implications Although accompanied by an application on a real case
study, this is not an empirical investigation on the adoption of VSC.
Practical implications VSC requirements agree with the fundamentals of lean management.
Therefore, VSC is a valid tool for lean companies, although the applicability depends on the maturity
of the lean implementation.
Originality/value This paper contributes to the lean accounting literature because the
management accounting literature still lags behind the lean transformation. This is one of the first
papers on VSC in relevant journals and the first one to combine VSC and box scores with value stream
mapping. The paper will be useful to academics involved in new accounting systems but also to
practitioners who are implementing lean manufacturing.
Keywords Lean accounting, Value stream map, Value stream costing, Activity-based costing, Box score,
Lean production, Costs
Paper type Research paper
1. Introduction
Global competition has prompted many companies to adopt new manufacturing
approaches such as lean manufacturing in order to be more competitive (Shah and
Ward, 2003).
Lean manufacturing (Womack et al., 1990) can be defined as an extension of
just-in-time (JIT) or the Toyota production system (TPS), first described in English by
Sugimori et al. (1977). One feature of such system is its focus on the elimination of
waste or muda (in Japanese) anything that does not add value to a product by
means of continuous improvement activities.
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Lean manufacturing places emphasis on the flow of materials from when a product
begins to be manufactured until it is completed. According to Womack and Jones
(1996), processes are seen as value streams and wasteful activities keep products from
flowing down the value stream. A tool used to monitor flow and spot ways to remove
waste, is value stream mapping (VSM) (Rother and Shook, 1998). Maps show the flow
of materials and information through all manufacturing operations and they give
information on cycle time, downtime, inventories, and so on.
After four decades of research, the operational benefits of implementing lean
manufacturing practices are clear (Cua et al., 2001). Operational excellence and the
elimination of waste should lead to an improvement in efficiency, a reduction in cost
and eventually an increase in net profit. But this is not the case and many firms find
that their accounting methods clash with their lean manufacturing initiatives and this
may discourage the adoption of lean manufacturing (Ahlstrom and Karlsson, 1996;
Meade et al., 2006).
Some alternative costing techniques have been developed. One of them, called value
stream costing (VSC), recommended for mature lean companies (Maskell and Baggaley,
2004), will be studied in this paper.
2. Research approach
The issue of the lack of adaptation of costing systems to lean manufacturing, despite
its practical relevance, has been scarcely discussed in the academic literature. Womack
and Jones (1996) wonder what kind of management accounting system would be right
for lean companies. VSC might be the answer, but more research is necessary to base
decisions on solid ground.
The aim of our paper is to assess research on the VSC model and to test its
application. Our operative method follows these steps:
(1) to define and clarify what is VSC, its purpose and usage;
(2) to compile and summarize previous literature in order to facilitate the task of
researchers interested in lean accounting;
(3) to define the current state of the research on VSC;
(4) to make a critical assessment of VSC (including possible contradictions and
inconsistences in literature); and finally
(5) to put forward possible future directions for research.
The first research method used to achieve our aim is a complete review of the literature.
It is the same used by other authors who make a classification or develop a framework
or a research agenda on different topics related to accounting such as Neely et al. (1995) or
Stolowy and Breton (2004). Research papers have been retrieved from different
databases by using search words like value stream VSC or lean accounting. The main
idea was first to pinpoint the problems that stem from using traditional absorption costing
systems and activity-based costing (ABC) and then to introduce VSC and analyse it.
After that, since there are no evidences in literature of how VSC is calculated in detail,
we want to document how to apply VSC in a real process. VSC is a new method and
probably few companies have implemented it. Therefore, a survey is not appropriated.
In fact we have not found a single company that has implemented VSC in our country yet,
so we apply VSC to a process previously described in literature of a lean company
undertaking continuous improvement activities. This will help us determine whether VSC
can model the processes of a company and support the development of lean manufacturing.
Different approaches to management accounting (Ahrens and Chapman, 2007) may be
appropriate depending on the circumstances of the research work (Hancock and Algozzine,
2011). Case based papers that address the emergence of accounting practices are common
in literature because the qualitative approach is useful when little is known about an issue.
Lean: costing
the value stream
649
3. The limitations of traditional costing systems
Traditionally, costing systems are used as means to control manufacturing performance:
deviations between the actual cost of the products and a standard value show how well
each cost centre is doing. To determine the cost of a product, besides direct materials
and direct labour, indirect manufacturing costs (overhead) are allocated to the product.
Overhead allocation rates are usually based on volume-related cost drivers such as labour.
Equation (1) shows how absorption costing methods compute the unit cost C of each
product i in period t, where j are different materials and parts and k are different cost
centres:
C i;t
The cost of materials used in the process (equation (1)) and the equivalent number of
units of production (equation (3)) are calculated taking into account the inventory of
raw materials and of work in process (WIP):
Cost of materialsj;i;t Purchasesj;i;t 2 Inventoryj;i;t1 2 Inventoryj;i;t
Equations (4) and (5) show how overhead in cost centre k is allocated to product i. We
accumulate all indirect costs and we divide them by the desired surrogate of
production activity (direct labour hours, production volume, etc.) to get an overhead
rate. Then, overhead is allocated to product i according to the amount of the cost driver
consumed by the product:
Overhead ratek;t
By the 1980s, some companies started claiming that their costing systems (especially
as they are applied in the USA) yielded distorted costs.
Johnson and Kaplan (1987) describe how original management accounting was
replaced by costing procedures developed in order to value inventories for financial
reports. Consequently, cost accounting emphasizes financial management, not operating
management.
Miller and Vollmann (1985) point out that the primary cost drivers for overhead are
transactions, not volume of production. Since indirect costs are increasingly important,
incorrect allocations lead to big errors. Cooper and Kaplan (1988) conclude that costing
methods originally created for plants that make large runs of a single product are not
acceptable for plants that manufacture families of different products.
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The previous list outlines the elements that lean managers would expect from
accounting:
.
While a reduction in inventories is considered to be a great achievement in lean
manufacturing, accounting considers it a financial loss (Plenert, 1999).
.
Since overhead is important, incorrect allocations lead to big errors. A better
allocation system is necessary. But not forgetting that lean manufacturing
places emphasis on the reduction of costs, not in its allocation (Holzer and Norreklit,
1991).
.
Late reports intended for inventory valuation and for external reporting are
usually too aggregate. The costing system has to track costs at cell level and
support continuous improvement.
.
A fixed standard and a top-down approach do not encourage either continuous
improvement or worker participation.
.
In a continuous improvement environment, a standard is meaningless.
.
Since purchases and inventories are simplified, related accounting tasks should
be simplified.
.
Since lean manufacturing relies on worker involvement, information has to be
understood by employees.
.
Avoid reports on labour efficiency and machine utilization because they lead to
keeping operators and machines accumulating inventory (Plenert, 1999), which
is the antithesis of lean manufacturing.
6. Background literature on lean accounting and VSC
Due to the problems of full costing and the complexity of ABC, other alternatives have
been developed. The term lean accounting appears for the first time in a presentation
by Maskell (2000). Without a formal definition, Maskell states that lean accounting
aims to provide information useful to people who are implementing and sustaining
lean manufacturing. He mentions value-stream cost management as an aspect of lean
accounting and a simplified form of activity cost analysis. We could trace the concept
of VSC back to Womack and Jones (1996), who, rather than categorizing costs by
departments, propose an organization by value streams. While the idea of functional
departments is related to traditional manufacturing, the concept of value stream is
related to lean manufacturing.
Baggaley and Maskell (2003a, b) present a maturity path towards lean
manufacturing. They suggest an organization based on value streams and, to avoid
the shortcomings of standard costing, they present VSC in the same way that they do
in their book Practical Lean Accounting (Maskell and Baggaley, 2004). The book
describes lean accounting and as a new method of managing a business that is built
upon lean principles and lean methods and devotes a full chapter to VSC.
Maskell and Baggaley (2004) suggest that VSC can only be implemented after a
company has achieved the maturity stage of lean manufacturing: a company organized
by value streams where people are assigned to value streams with no overlap and
with few or no shared services. Purchases and manufacturing are adjusted to demand,
with low and stable inventories. The production process is under control, with low
variability, few incidences, low lead times and control over the rate of output. Under the
Lean: costing
the value stream
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previous conditions, VSC focuses a companys attention on the resources that are being
used throughout a complete value stream rather than on individual products.
The costs associated to a value stream k (equation (7)), in a period t include all the
activities in the value stream (purchasing, manufacturing, quality assurance, engineering,
design, maintenance, accounting, shipping, customer service, etc.), with no distinction
between direct costs and indirect costs. All labour costs are included. Ideally, each resource
is assigned to a single value stream, rather than being split among several. Otherwise,
allocation (Akt) will be necessary (Ward et al., 2003):
2
3
Materials
Labour and supervison
6
7
6
Engineering procurement 7
Cost of a value streamk;t 6 Outside processing
7
4
5
Depreciation; supplies Utilities facility costs
k;t
Hoshin Kanri or VSC. The later, based on the principle accounting techniques support
the lean transformation is intended for cost management and defined as a simple
summary direct costing of the value streams. They point out that the full cost of
specific products need not be known. They contend that all sales, unless a product is
being sold at a price below its direct material costs, contribute to the profitability of the
company (like Goldratt and Cox (1986) in The Goal) and that decisions on a product are
taken according to criteria related to the value chain as a whole.
If individual product costs are needed, total value stream expenses other than direct
materials (total conversion costs) are divided by the number of units (of all kinds)
(equation (8)). Otherwise, some features and characteristics of the product or the flow
speed of a product can become cost drivers:
Average units cost i;k;t Direct Material i;k;t
Maskell and Kennedy (2007) after explaining how traditional accounting systems
hinder the lean transformation, state (quoting Maskell and Baggaley, 2006) that lean
accounting, more that a new method, is the adaptation of familiar financial and
management accounting methods to the needs of lean organizations, with the aims of:
(1) providing information to motivate lean transformation;
(2) eliminating waste from the accounting processes while maintaining financial
control;
(3) complying with reporting regulations requirements; and
(4) supporting continuous improvement.
Then, they recommend VSC similar to that used by some process manufacturers,
where the process yields many individual products, but the costing system is designed
around the process as a whole to control costs, drive cost reduction and be the basis
for decision making.
Van der Merwe and Thomson (2007) give a definition of lean accounting: Lean
accounting refers to attempts to derive monetary management information based on
Lean principles. They question that accounting is a real problem; that lean accounting
supports external reporting and that all conversion costs are fixed.
Brosnahan (2008) describes how one company implemented lean accounting, on the
basis of value stream management. VSC implementation is not described.
Kennedy and Widener (2008), by means of a the experience of a company that adopted
lean accounting, develop a theoretical framework that assists in understanding the
accounting practices associated with lean manufacturing. Fullerton et al. (2013) build
on Kennedy and Widener (2008) by examining a structural equation model that
provides evidence on the extent to which a lean manufacturing implementation is related
to several accounting practices. Using survey data from American companies, they find
a direct positive relation between the extent of a lean manufacturing implementation
and VSC.
Gordon (2010) describes VSC which has the advantage (over ABC) of simplicity
as well as the ability to properly capture cause and affect relationships between costs
and activities. The paper provides an illustration of VSC in a factory, but not how
it is derived from its processes.
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the value stream
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DeBusk (2012), contends that Value stream costing is used to provide a value
stream profit and loss statement. He describes the costs that should be included in
VSC like Maskell and Baggaley (2004).
Kristensen and Israelsen (2012), after describing the interaction problems between
lean manufacturing and management accounting, present a new lean accounting model
developed to measure whether lean enterprise tools actually reduce waste. The model
combines physical and monetary concepts.
Chiarini (2012), on the basis of a case study carried at a small company that is
implementing lean manufacturing, discusses whether ABC and value stream accounting
are suitable for lean production by means of examples but the example where value stream
accounting is analysed is very small, since this method was not applied by the company.
Li et al. (2012), from an academic perspective, examine the impact of three
different management accounting systems (traditional accounting, ABC and VSC) on
lean manufacturing implementation through simulation modelling and statistically
designed experimental methods. The results demonstrate that VSC bridges the gap
between the operational and the financial side of lean manufacturing.
After the revision of the literature, we conclude that most papers (mainly authored
by delegates at the 2005 Summit) are devoted to presenting and promoting a novelty
and are intended for an audience of practitioners more interested in lean manufacturing
than in accounting. We find many declarative statements without empirical evidence.
The papers include the advantages of VSC but not its drawbacks. They clearly link
VSC to elements of lean manufacturing but they do no document the practice. There is
no research on the implementation of lean accounting and VSC. It still lacks a definition
of lean accounting (and the explanation of its scope) and a definition of VSC.
Although Carnes and Hedin (2005) state that the management accounting literature
and curricula lag behind the adoption of lean accounting practices, the number, quality and
approach of papers published in 2012 reveal the increasing interest of researchers and
practitioners on the VSC topic. Besides, VSC begins to be present in textbooks (Hansen et al.,
2009) and in papers oriented towards education (Haskin, 2010).
7. Applying VSC to an assembly process
In order to demonstrate the method of designing a VSC system in a company
environment, in this section, we apply VSC to an assembly process described by
Cuatrecasas (2003). The process is devoted to the assembly of point-of-sales (POS)
terminals (electronic cash registers). In the past, the plant had a process-oriented layout
where products moved on a batch-and-queue basis, and the plant adopted the principles
of lean manufacturing in order to raise production from 19 to 70 units per day.
The methodology that we follow to get to compute the cost of the product has eight
steps:
(1) Acquisition of numerical data on the process (including methods study and
work measurement).
(2) Charting the process (process chart, spaghetti chart) is a traditional way of
recording work methods.
(3) Drawing a VSM. Following Rother and Shook (1998), we use VSM,
a fundamental tool of lean manufacturing, to represent the process and the
flow of materials through the value stream.
(4) Computing physical values on the VSM (using common process management
formulas).
(5) Computing capacity usage (using common process management formulas).
(6) Costing the value stream. Since lean manufacturing places emphasis on
operational measures, in this paper, we integrate VSM with VSC in order to
measure both operational and financial improvements.
(7) Lean accounting uses a box score to monitor the performance of a value stream
(Womack and Jones, 1996). It is divided into three sections: operational
performance, capacity information, and financial performance (Maskell and
Baggaley, 2004). At each step of the improvement process, data are collected
from the VSM, the VSC and the capacity analysis.
(8) Manufacturing system redesign by means of work design techniques
(methods engineering) and the theory of constraints (Goldratt and Cox, 1986)
to adjust operations to the pace of the process. After that, the method goes
back to the first step like the Plan-Do-check-Act wheel of continuous
improvement.
Lean: costing
the value stream
655
Being VSM a well-known technique, we follow (except for steps 5-7) the methodology
described in Serrano et al. (2008), and we refer the reader to that paper for a detailed
discussion.
10
20
72
70
52
71
50
11 *21
31
LPC
34 35 36
51
62
60
61
PA
37 38 39
CCM
TM
EM
ALP
Cleaning of
screens
ALC
Cleaning of
glass
EM
Assembly
TM
Testing
CCM
Quality Control
PA
Packaging
Figure 1.
Layout of manufacturing
processes at the outset,
after the implementation
of one-piece flow
Figure 2.
Production processes
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ALC
Total
EM
Total
TM
Total
CCM
Total
PA
Table I.
Description of tasks and
times for the assembly
process at the outset,
after the implementation
of one-piece flow
Total
Total
processing
time
Type
U/ P/ Time per
L N unit (s)
L
U
L
L
U
L
N
P
N
N
P
N
U
U
U
U
U
U
U
U
U
P
P
P
P
P
P
P
P
P
5
116
0
10
40
10
181
375
570
220
180
180
840
12
0
2,382
360
30
360
12
0
U P
U P
U P
U P
L N
U P
U P
U P
L N
U P
U P
L N
762
30
60
60
12
0
162
120
30
50
People in
workstation
Cycle
time (s)
181
375
1
1
570
580
857
762
162
200
200
3,687
ecast
ly for
Month
ers
ly ord
Week
Lean: costing
the value stream
Shift : 8 hours
Mo
nth
ly
for
We
eca
ekl
st
yo
rde
rs
Production
control
Suplier
Customers
657
33 units
per day
daily
ALP-ALC
EM1
EM2
EM3
EM4
TM
CCM
PA
0
17
1 operator
12
1 op.
1 op.
1 op.
C/T = 181 s
C/T = 375 s
C/T = 570s
zero defects
Zero
defects
Zero
defects
Zero
defects
200 hours
200 h
200 h
200 h
day
0.36 days
181 s
0.06 days
375 s
C/T = 580s
0.03 days
570 s
1 op.
C/T = 857 s
1 op.
1 op.
C/T = 762 s
C/T = 162 s
Zero
defects
Zero
defetcs
Zero
defects
200 h
200 h
0.03 days
580 s
762 s
1 op.
C/T = 200s
Defective = 0
200 h
0.03 days
857 s
200 hours
0
162 s
Processing time
3,687 s
Average wait
time 1.01 days
Order
lead time
32,825 s
(9.11 hours)
200 s
With a cycle time (Ci) of 857 seconds (the longest operation), daily capacity is 33 POS
terminals in an eight-hour shift (equation (9)). In a month (25 days or 200 working
hours), the value stream produces 825 units:
Daily capacity
Since times per each operation are shown in Table I and Figure 3 (VSM), it is possible
to compute (Table II) how much of the value streams resources are used productively
(equation (10)), how much time is devoted to non-value added activities (equation (11)),
and how much available capacity is within the value stream (equation (12)).
Non-productive time also includes waiting between cycles (equation (13)). In these
equations, j represents workstations, while i, k and z are operations:
Productive timej Si Capacity Value added task timei;j
10
11
12
13
VSC uses the information from the VSM to calculate the cost of the whole value stream
(Table III). The average cost of the value stream per POS terminal is e58.68.
In order to calculate the cost of the value stream, we have considered the costs of
materials, labour costs and machine depreciation as well as other costs such as soft
Figure 3.
Current state VSM at
the outset, after
the implementation
of one-piece flow
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Table II.
Study of the capacity
of each workstation at
the outset, after the
implementation of
one-piece flow
Labour
capacity
(per
month)
Workstations
(units)
LPC
Productive (hours)
827.75 35.75
(%)
52
18
Non(hours)
348.79
5.74
productive (%)
22
3
Available (hours)
423.46 158.52
(%)
26
79
Total
(hours) 1,600.00 200.00
(%)
100
100
Productive (s/cycle)
156
tasks
Non-prod. (s/cycle)
25
tasks
Wait first (s)
0
unit
Wait next (s/cycle)
0
piece
Table III.
VSC for the assembly
process at the outset,
after the implementation
of one-piece flow
Total
Customer service
Purchasing
LPC (ALP ALC)
EM (operations 30-33)
EM (operation 34)
EM (op. 35-37)
EM (op. 38-41)
TM
CCM
PA
Other departments
Material
cost (e)
EM
(1)
EM
(2)
EM
(3)
EM
(4)
TM
CCM
PA
85.94
43
0.00
0
114.06
57
200.00
100
375
130.63
65
0.00
0
69.38
35
200.00
100
570
132.92
66
0.00
0
67.08
34
200.00
100
580
196.40
98
0.00
0
3.60
2
200.00
100
857
174.63
87
21.77
11
3.60
2
200.00
100
762
37.13
19
159.27
80
3.60
2
200.00
100
162
34.38
17
162.02
81
3.60
2
200.00
100
150
50
181
556
1,126
1,706
2,563
3,325
3,487
95
695
657
Outside
cost (e)
1,650.00
4,537.50
4,000.00
4,000.00
4,000.00
4,000.00
4,000.00
4,000.00
4,000.00
4,000.00
2,475.00
8,662.50
Employee
cost (e)
0.00
32,000.00
Machine
cost (e)
Other
cost (e)
Total
cost (e)
2,000.00
357.50
429.70
653.15
1,329.20
982.00
6,007.50
8,967.20
6,653.15
7,804.20
4,982.00
6,000.00
4,000.00
4,000.00
3,751.55
48,414.05
2,000.00
4,000.00
tooling and consumables which are directly related to the productive tasks at each
workstation, in one month. Unlike full absorption costing, other departments (shared
among several value streams) have not been considered in order to avoid allocations.
Material costs (for each step i ) are calculated according to equation (14) (Production
is 825 units). The amounts of raw materials and parts in each step of the process
(unit material cost) have been previously estimated (0, 2, 4 or 5.5 euros per unit).
Material costs are calculated from how much material has been purchased for the value
stream over the period. For this approach to be valid, there needs to be low raw materials
and work-in-process inventories, which must be under good control. If inventories are
low, then the materials will be used quickly and will accurately reflect the material cost
of the product manufactured during that time. The costs of consumables, supplies, and
other day-to-day expenses are similarly assigned to the value stream:
Material cost t Si Unit material cost i Productioni;t < Purchasest
14
Labour costs are computed according to equation (15) (in the example, Working time is
one month). The monthly cost of each employee j is e2,000. In a lean company, labour
costs would be taken from the payroll:
Labour cost t Sj Monthly salaryj Working timej;t < Payroll t
15
16
The costs of other resources associated with each step of the process are computed
according to equation (17). The productive time for each workstation i is taken from
Table II. Only productive time is considered. When a workstation is idle, auxiliary
materials are not consumed. Unit costs are 0, 5 or 10 euros per hour, depending on the
workstation:
Other cost t Si Unit cost i Productive timei;t
Lean: costing
the value stream
17
Costs are collected for the total value stream and are summarized over the selected
period.
Next, several improvement activities will be undertaken on the shop floor in order to
make the process more efficient. VSM and VSC will be used at each stage. We will
study whether the operational improvements are mirrored in the costs.
7.2 Stage 1
In order to improve flow, we focus on the bottleneck (the workstation that carries out
tasks 38-40). Task 38 will now be done in a way that requires 720 seconds.
Furthermore, as the four workstations in EM have longer processing times than the
others, it seems necessary to implement a parallel assembly line with four more people.
Next, the constraint workstation is the one carrying out operations 50-53. The
improvement consists in making operations 50 and 51 in a single workstation (with
a 390 seconds cycle) and making operations 52 and 53 in a different workstation
(a 372 seconds cycle). Figure 4 shows the new plant layout after the aforementioned
improvement actions.
Figure 5 shows the VSM of the new situation. For this arrangement, the bottleneck
is the operation with a cycle time of 390 seconds. Using equation (9), daily capacity is
73 units. Improvements are also reflected in flexibility (time reduction), labour
efficiency and work-in-process reduction.
Labour costs have increased (Table IV) because of the new operators. The effect
of allocating external costs on the basis of labour might be devastating. However,
the cost of the value stream per POS terminal has fallen because of the higher
efficiency.
659
72
71
*
20
70
*
10
52
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Figure 4.
Plant layout after the first
improvements (stage 1)
34 35 36
11 *21
50
37 38 39
51
62
60
EM
PA
LPC
TM
31
34 35 36
61
CCM
37 38 39
ecast
Shift : 8 hours
ly for
Month
ly
Week
Mo
Production control
order
nth
We
ek
ly
Supplier
ly
for
eca
ord
st
ers
customers
73 units
per day
daily
ALP-ALC
EM1
EM2
EM3
EM4
TM
TM2
CCM
PA
37
Figure 5.
Current state VSM after
the first improvements
(stage 1)
0
1 operator
2 op.
2 op.
2 op.
2 op.
1 op.
1 op.
1 op.
1 op.
C/T = 181 s
C/T = 187.5 s
C/T = 285 s
C/T = 290 s
C/T = 358.5 s
C/T = 390 s
C/T = 372 s
C/T = 162 s
C/T = 200 s
Zero defects
Zero
defects
Zero
defects
Zero
defects
Zero
defects
Zero
defects
Zero
defects
Zero
defects
Zero
defects
200 hours
200 h
200 h
200 h
200 h
200 h
200 h
200 h
day
0.08 days
181 s
0.07 days
187.5 s
0.01 days
285 s
0.03 days
290 s
0.01 days
358.5 s
0.01 days
390 s
372 s
200 h
0 days
0 days
162 s
Processing time
3,567 s
Average wait
time 0.72 days
Order
lead time
16,827 s
(4.67 hours)
200 s
7.3 Stage 2
The second stage of efficiency boosting is devoted to line balancing. It was observed
that the time of the first workstation in the TM process (the constraint at stage 1) could
be reduced to 375 seconds by performing two operations simultaneously. The CCM and
PA workstations were merged. In the first EM workstation, only one person is
necessary. Figure 6 shows the layout at stage 2.
The VSM of this stage is shown in Figure 7. Table V shows the capacity for each
workstation. Due to a better balance, the output has increased with less resources and
capacity usage has increased. Now the daily production is 76 units.
Operational improvements in labour efficiency, cycle time and lead time should be
reflected in costs. Table VI shows the calculation of the cost of the value chain for a
monthly production of 1,900 units. The cost of the value stream per unit drops again.
Customer service
Purchasing
LPC (ALP ALC)
EM (operations 30-33)
EM (operation 34)
EM (op. 35-37)
EM (op. 38-41)
TM (op. 50-51)
TM (op. 52-54)
CCM
PA
Other departments
Outside
cost (e)
3,650.00
10,037.50
4,000.00
8,000.00
8,000.00
8,000.00
8,000.00
4,000.00
4,000.00
4,000.00
4,000.00
5,475.00
*
20
Other
cost (e)
Total
cost (e)
4,000.00
790.80
950.50
1,444.80
2,940.30
1,868.10
8,440.80
18,988.00
13,444.80
16,415.30
9,868.10
6,000.00
4,000.00
4,000.00
4,000.00
2,000.00
52,000.00
6,000.00
7,994.50
85,157.00
Lean: costing
the value stream
661
Table IV.
VSC for the assembly
process after the first
improvements (stage 1)
70
0.00
Machine
cost (e)
52
19,162.50
10
Employee
cost (e)
72
Material
cost (e)
71
34 35
36
37
11 * 21
LPC
38 39
50
51
62
60
61
EM
31
TM
34 35
36
37
PA
CCM
38 39
Finally, Table VII shows a box score that allows comparing the key parameters before
lean manufacturing, after implementing one-piece flow, after stage 1 and after stage 2.
It reveals that the plant has improved both its operational and financial results.
Finally, we calculate the cost of a product by using ABC techniques (Table VIII). Each
task of the process is considered as an activity. Cost drivers are man hour and machine
hour. Next, the cost per unit of cost driver is computed. Such costs include labour,
depreciation, auxiliary materials and all the resources necessary to perform the activity.
Therefore, a man hour may be e30 in one activity and e20 in another activity. Man hours
and machine hours consumed by each activity are taken from the VSM (Figure 7). There is
a difference between the values yielded by VSC and ABC because VSC allocates all actual
labour and depreciation costs to the products. In ABC, a fixed cost such as depreciation is
allocated according to a standard consumption of resources (drivers). Then if machines are
under-utilized, only a fraction of the plant depreciation is allocated to products. ABC does
not take into account the operator wait time (due to a poor line balance).
8. Concluding remarks and directions for future research
Traditional costing lost credibility in the 1980s.because the allocation of overhead to
products on the basis of volume-related drivers distorted costs. Traditional performance
Figure 6.
Plant layout at stage 2
IMDS
113,5
Shift: 8 hours
ecast
ly for
Month
ly
Week
Mo
Production control
order
nth
We
ek
ly
supplier
ly
for
eca
ord
ers
st
Customers
662
76 units
per day
daily
ALP-ALC
EM1
EM2
EM3
EM4
TM
TM2
CCM + PA
38
1 operator
Figure 7.
Current state VSM
for stage 2
1 op.
2 op.
2 op.
2 op.
1 op.
1 op.
C/T = 375 s
C/T = 285 s
C/T = 290 s
C/T = 368.5 s
C/T = 375 s
C/T = 372 s
C/T = 362 s
Zero defects
Zero
defects
Zero
defects
Zero
defects
Zero
defects
Zero
defects
Zero
defects
Zero
defects
200 hours
200 h
200 h
200 h
200 h
200 h
200 h
day
0.12 days
181 s
0 days
375 s
Productive
0.01 days
285 s
Total
0.01 days
290 s
LPC
0.01 days
368.5 s
EM
(1)
0.01 days
375 s
306.11
77
89.72
22
4.17
1
400.00
100
580
0
85
Order
lead time
16,302 s
(4.53 hours)
200 h
0 days
0 days
372 s
Workstations
EM
EM
EM
(2)
(3)
(4)
156
375
570
Non-prod. tasks (s/cycle)
25
0
0
Wait next piece (s/cycle)
0
0
90
Processing time
3,552 s
Average wait time
0.67 days
1 op.
C/T = 181 s
Labour capacity
(per month)
(units)
Table V.
Study of the capacity
of each workstation
at stage 2
388.97
97
6.86
2
4.17
1
400.00
100
737
0
6.5
362 s
TM
(1)
TM
(2)
CCM
PA
197.92
99
0.00
0
2.08
1
200.00
100
375
0
0
196.33
98
1.58
1
2.08
1
200.00
100
372
0
3
164.67
82
33.25
17
2.08
1
200.00
100
312
50
13
indicators drive behaviours against lean principles and lean does not show financial
benefits. Some companies moved to ABC. If well executed, it assigns costs by identifying
cause and effect relationships and identifies non-value added activities. It is very
accurate, but it consumes a lot of resources. In the 1980s and 1990s, some articles
claimed changes in accounting to fit the JIT/lean philosophy. As an answer to that call,
lean accounting has emerged. One of its techniques is VSC. It is a relevant approach
because it represents a novel approach to costing, linked with the lean concepts of flow
and VSM.
Material
cost (e)
Outside
cost (e)
3,800.00
10,450.00
4,000.00
4,000.00
8,000.00
8,000.00
8,000.00
4,000.00
4,000.00
4,000.00
5,700.00
19,950.00
Employee
cost (e)
0.00
44,000.00
Machine
cost (e)
Other
cost (e)
Total
cost (e)
4,000.00
823.30
989.60
1,504.15
3,061.10
1,944.85
8,623.30
15,439.60
13,504.15
16,761.10
9,944.85
6,000.00
4,000.00
4,000.00
2,000.00
6,000.00
8,323.00
Data
category
Box score
Measurements
Operational
Capacity
Financial
(VSC)
Batch
Period of time
Flow
Stage 1
78,273.00
Lean: costing
the value stream
663
Table VI.
VSC for the assembly
process at stage 2
Stage 2
This paper has analysed the literature on VSC and lean accounting. We have found
how these practices were initially elaborated, disseminated and documented though
publications and we have found that both the implementation of VSC and the research
on VSC are still at an early stage, but there is an increasing interest on the topic.
Besides, the many articles devoted to promoting these techniques, recent academic
papers focus on the comparison between ABC and VSC.
After reviewing the literature and having applied VSC, we define lean accounting as a
business management system, built on the principles of lean thinking, made up of several
tools relating to financial and operational measures intended to support continuous
improvement and control at cell, value stream and plant (or company) levels. It combines
the use of lean techniques to make accounting more efficient and an acounting process
that captures the benefits of lean manufacturing and drives lean behaviour. If a value
stream is the process in which a product/service is designed, produced and distributed,
VSC is a technique under the lean accounting umbrella, introduced around the year 2000,
Table VII.
Box score for the value
stream at stage 2
IMDS
113,5
664
Table VIII.
Calculation of the unit
cost at stage 2 by means
of ABC
Cost driver
Tasks (code)
11 and 21
Man hour
31
Man hour
34
Machine hour
35-37
Man hour
38-41
Man hour
50-51
Machine hour
52-54
Man hour
60-64 and 70-71
Man hour
Total value added tasks
Tasks and processes (code)
10, 12, 20, 22
Man hour
CCM PA
Man hour
Total non-value added tasks (transport)
Total material cost
Total unit cost
Cost
(e/hour) Time (seconds)
Consumed
(hours of driver)
Cost (e)
30
25
35
30
25
30
20
20
156
375
570
580
737
375
372
312
0.043
0.104
0.158
0.161
0.205
0.104
0.103
0.087
1.300
2.604
5.542
4.833
5.118
3.125
2.067
1.733
26.32
20
20
25
50
0.007
0.014
0.139
0.278
0.42
10.50
37.24
based on the value stream concept, intended to avoid the pitfalls of traditional costing,
that aims at capturing the cost of materials, labour and every resource directly within
the value stream with little or no allocation, in value-stream-based lean manufacturing
systems, in order to allow in an easy, understable and timely way costing a product
family (at an intermediate level of detail), driving continuous improvement and decision
making, in combination with non-financial performance measures.
Then, this paper outlines a new pragmatic product costing approach (VSC) using a
case study. To the best of our knowledge, our paper is the first one that describes how
to apply VSC to a real-world lean company. We have used VSC to demonstrate the
value of lean improvements. Maybe they could not be justified using other costing
methods or, at least, deriving the results would be much harder, as we have seen in the
example. Since lean is an operations-focused culture, it is interested in simple measures
that timely support on-going improvement. The aim is not to know how much does
the product cost? but how can we improve the process to cut cost?
As insights from practice, we can identify the benefits and drawbacks of VSC. The
main benefits are:
.
VSC is able to model the processes on the shop floor while it simplifies the
accounting process (compared to traditional costing and ABC);
.
it gives cost information as relevant as ABC; and
.
while ABC fails to identify unused capacity usage, a key element in lean
manufacturing, VSM-VSC techniques encourage continuous improvement since
they reflect operational improvements.
The main drawbacks are that it requires a completely lean company (organized around
value streams) and that it only offers a rough estimation of the cost of the product.
While avoiding allocations, VSC is less accurate than other costing systems such as
ABC. Another drawback of VSC is that a methodology treating all items as equal
might work well for short-term performance measurement and short-term decisions,
but not when considering the long-term. We have seen how operational improvements
in flow (capacity and lead time) go hand in hand with the cost of the value stream and
the average cost per piece. There is a positive correlation between lean practices and
financial parameters. We have seen how VSC integrates with other tools of lean
manufacturing such as VSM because they share the principles of lean manufacturing.
As another practical insight, we have defined a VSC process that begins with a VSM
which generates the necessary information to compute some costs of the value stream.
The external validity and generalization of results in case-based research is
problematic because it is difficult to make the results applicable to all companies.
Nevertheless, the elements of accounting (labour, overhead, raw materials, etc.) in our
example are common to all companies and only the quantity of shared tasks between
value streams depends on the organization of each company.
Following the path of ABC, in the future, empirical research could focus on the
following issues: the diffusion of VSC across organizations; factors influencing the
adoption of VSC; factors influencing the success of VSC; problems of implementation;
impact of VSC on the organization; impact of VSC on the profits; factors influencing the
accuracy of VSC and finally, because the relation between the differnet elements of lean
accounting is unclear, it is necessary to get to know idf they are standalone tools or
they work better in an integrated framework.
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About the authors
Patxi Ruiz-de-Arbulo-Lopez is an Associate Professor of Business Management at the Technical
School of Engineering of the University of the Basque Country at Bilbao (Spain). He is an
economist and he received his PhD from the University of the Basque Country. He has authored
several books and journal articles on the new ways of accounting that suit lean manufacturing.
Jordi Fortuny-Santos is an Associate Professor of Operations Management at the Technical
School of Engineering at Manresa (Barcelona, Spain). He is an industrial engineer and he
Lean: costing
the value stream
667
IMDS
113,5
668
received his PhD from the University of Lleida (Spain). His research focuses on a variety of
problems that arise in manufacturing environments. His research papers can be found in
national and international journals. Jordi Fortuny-Santos is the corresponding author and can be
contacted at: jordi.fortuny@upc.edu
Llus Cuatrecasas-Arbos was a Professor of Operations Management until he retired in 2012.
He is an industrial engineer and he received his PhD from the Technical University of Catalonia
(Spain). He is the President of the Instituto Lean Management Espana (Spanish branch of the
Lean Enterprise Institute). He has authored many books and his research has appeared in
leading international journals.
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