Spring 2007 issue of Horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

It is very difficult for management to bridge the gap between implementing lean manufacturing principles and reporting disappointing accounting results. LEAN ACCOUNTING Lean accounting takes a simpler look at what goes on between the inputs and outputs of production process, expensing material as soon as it is pulled into production. This process is accomplished by organizing the costs of producing products into value streams. A value stream is defined as the flow of activities required to transform raw materials into a product for customer use. All products having similar features and characteristics are manufactured in one value stream. For example, a lawn and garden products manufacturer might have two different value streams. One value stream might consist of granular fertilizers and lawn and garden products distributed primarily through big box retail outlets. A second value stream might consist of the production of concentrated liquid pest control products sold primarily to professional exterminators. Lean accountingmakes no distinction between direct and indirect costs assigned to each value stream. Instead, all costs within the value stream are considered direct. There are very few allocations of costs included in the value stream, if any. The result is a simple profit and loss statement, produced weekly, that shows the input and output for each value stream in the company. In reviewing this statement, it becomes apparent that the cost of materials in the current year increased significantly as compared to the overall increase in revenue. Although factory wages did show an increase, as a percentage of revenue, it was less than the percentage increase in sales. It appears that there is a problem in Factory Benefits as it increased 140 percent over the prior year. In this format, it is much easier to spot unusual amounts or changes from the prior year. The users of the financial information are able to understand the reasons for changes in profitability and react to them in a much more timely manner. To the right is the same income statement is presented in a “Plain English” format.

“Plain English” Income Statement

Current Year Prior Year % Change

Net Sales

$150,000

$100,000

50.0%

Cost of Sales: Purchases

63,000

34,900

Increase/Decrease in Inventory Material Content

3,600

(6,000) 28,900

TOTAL MATERIALS

66,600

130.4%

Factory Wages Factory Benefits

15,000 12,000

11,500

30.4% 140.0% <4.0%>

5,000 2,500 1,900

Services & Supplies Equipment Depreciation

2,400 2,000 2,600

5.3%

Scrap

4,000 <35.0%>

TOTAL PROCESSING COSTS

34,000

24,900

36.5%

Building Depreciation

200

200

---

Building Services

2,200 2,400

2,000 2,200

10.0%

TOTAL OCCUPANCY COSTS

9.1%

TOTAL MANUFACTURING COST 103,000

56,000

83.9%

MANUFACTURING GROSS PROFIT Increase/Decrease in Inventory Labor & Overhead Content

47,000

44,000

6.8%

(5,000) $42,000

4,100

GAAP Gross Margin

$48,100 <12.7%>

Standard cost systems do not provide the daily informa- tion needed by production managers, supervisors and operators to make adjustments to production to support continuous improvement in the manufacturing process called for by lean initiatives. In order to maximize the effectiveness of your lean initiative, it is important that accounting information be used to make decision-mak- ing and analysis more straightforward, rather than in a battle over what the variances in standard cost account- ing mean weeks or months after the costs have been incurred.

Questions? Contact:

Mike Lewis, CPA Partner-in-Charge Manufacturing & Distribution Services Group 314-290-3391 mike.lewis@rubinbrown.com

24 u summer 2007 issue