Value Stream Costing In Process Industries “Accounting To See”
Value Stream Costing inProcess Industries“Accounting to See”Prof. dr. ir. Dirk Van GoubergenPresidentVan Goubergen P&M Productivity Improvement gcvEikenlaan 51B-2275 Lille (BELGIUM)Email: dirk@vangoubergen.comDepartment of Industrial ManagementGhent UniversityTechnologiepark 903B-9052 Zwijnaarde (BELGIUM) 2010 - 2011 Van Goubergen P&M gcv - Lille Belgium1V1.1IIE Process Division Webinar Feb 8 2012Introduction - Observations We are implementing lean, improving the flow of valueadded activities in our value streams, but we are notseeing the impact in our financial statements Actually, our P&L looks worse . When looking at investments, the business casecalculations are not showing the (positive) impact of flowimprovements/lead time reduction/inventory reduction.How to make sound decisions ? Therefore, Engineering calculated it was better to buy one big, fastproduction line (which now is a Shared Resource) instead of twosmaller, slower ones (but which are Dedicated to our value stream) 2010 Van Goubergen P&M gcv - Lille Belgium2v1.1
IIE Process Division Webinar Feb 8 2012Agenda Traditional Accounting vs. Lean What is Lean?Full Absorption Costing?Financial results in the early stages of Lean Throughput Accounting What is Throughput Accounting?Key measures of Throughput Accounting Value Stream Costing Understand what a value stream costing model isHow a value stream costing model supports value streambased decisions 2010 Van Goubergen P&M gcv - Lille Belgium3v1.14v1.1IIE Process Division Webinar Feb 8 2012Part OneTRADITIONALACCOUNTING vs. LEAN 2010 Van Goubergen P&M gcv - Lille Belgium
IIE Process Division Webinar Feb 8 2012What is “Lean” ? A business strategy for organizing andimproving the operational activities ofcompanies Improved competitiveness Flow Adapted from Toyota Production System 5 steps Correctly specify value for the customerIdentify the value stream and remove the wasteSo we can improve flowTo work better @ the pull of the customerWhile striving towards perfection(Lean Thinking - Womack, Jones)) 2010 Van Goubergen P&M gcv - Lille Belgium5v1.1IIE Process Division Webinar Feb 8 2012The Problem Which accounting system are we using totake internal decision? Financial Accounting vs. Management Accounting Our traditional Financial Accountingsystem (Full Absorption Costing)promotes overproduction The search for the perfect ‘unit cost’ In the P&L costs must always match the sales 2010 Van Goubergen P&M gcv - Lille Belgium6v1.1
IIE Process Division Webinar Feb 8 2012Full Absorption Costing Full absorption costing is a traditionalmethod where all manufacturing costs arecapitalized in the inventory Costs are charged to inventory and become assets These costs will only be expensed when theinventory is sold Developed in an era of mass productionbased on a ‘scarcity model’ Is required for external reporting. GAAP (Generally Accepted Accounting Principles (US)) IFRS (International Financial Reporting Standards (EU)) 2010 Van Goubergen P&M gcv - Lille Belgium7v1.18v1.1IIE Process Division Webinar Feb 8 2012Full Absorption Costing The full absorption method is alsofrequently used for internal reporting What kind of influence does this have onour: P&L? Unit costs? Behavior? 2010 Van Goubergen P&M gcv - Lille Belgium
IIE Process Division Webinar Feb 8 2012The early stages of Lean withFull Absorption CostingWHY? 2010 Van Goubergen P&M gcv - Lille Belgium9v1.1IIE Process Division Webinar Feb 8 2012Full Absorption CostingIn this method, only selling and administrative costs are chargedas expense. All the rest is charged to inventory. 2010 Van Goubergen P&M gcv - Lille Belgium10v1.1
IIE Process Division Webinar Feb 8 2012Full Absorption CostingAfter selling Profit & LossRevenue 990.000Gross Profit 772.200217.800Purchase pricevariance 87.200COGSIMaterial usagevarianceLabor UsageVariance 12.700 26.700Overheadabsorption varianceSG&ATotal CostsNet Profit 20.80019.800167.20050.600 2010 Van Goubergen P&M gcv - Lille Belgium11v1.1IIE Process Division Webinar Feb 8 2012A Simple Example6 000 pcs sold @ 1.5 /pcOutput this month: 10 000 pcs produced4 000 pcs in the warehouseTotal costs: 10 000 Unit cost 1 /pcProduction P&LRevenueCOGS (1 x 6 000pcs)Profit (EBIT)9 000 6 000 3 000 2010 Van Goubergen P&M gcv - Lille Belgium12v1.1
IIE Process Division Webinar Feb 8 2012A Simple Example10% increase in output !!11 000 pcsOutput this month: 10 000 pcs produced6 000 pcs sold @ 1.5 /pcTotal costs: 10 000 Unit cost 1 /pc0.9 /pc4 000 pcs in the warehouse5 000 pcsProduction P&LRevenueCOGS (1 x 6 000pcs)Profit (EBIT)Production P&L9 000 6 000 3 000 RevenueCOGS (0,9 x 6 000pcs)Profit (EBIT)9 000 5 400 3 600 2010 Van Goubergen P&M gcv - Lille Belgium13v1.1IIE Process Division Webinar Feb 8 2012Conclusion ‘The Evil of HistoryNowadays Full Absorption Costing is promoting largebatches and overproduction Overproduction is put on the Balance Sheet, thus ‘evaporates’ for theProduction P&L By allocating overhead costs to individual products, our cost perpiece is lower if we increase batch sizes What about ABC costing ? As we can only put costs of goods SOLD in the P&L: (calculated)profit goes up While our bank account is going down . 2010 Van Goubergen P&M gcv - Lille Belgium14v1.1
IIE Process Division Webinar Feb 8 2012This Phenomenon leads to 2010 Van Goubergen P&M gcv - Lille Belgium15v1.1IIE Process Division Webinar Feb 8 2012Typical Financial Results in theearly Stages of Lean Revenue stays the same Although there may be some reduced backlog that bringsrevenue quicker Costs stay about the same Although overtime and scrap costs may reduce a little Operating profits may go down Because of the impact of reduced inventory on cost-of-sales Cash flow from operation increases As a result of the inventory reduction Average cost per unit sold has increased due to “increased costs”(Maskell and Baggaley, Practical Lean Accounting. Productivity Press 2004) 2010 Van Goubergen P&M gcv - Lille Belgium16v1.1
IIE Process Division Webinar Feb 8 2012Part TwoTHROUGHPUTACCOUNTING 2010 Van Goubergen P&M gcv - Lille Belgium17v1.1IIE Process Division Webinar Feb 8 2012Throughput Accounting (TA) Throughput accounting (costing), isdeducted from Goldratt’s Theory ofConstraints(TOC) It is largely in line with the JIT philosophy TA assumes that a manager has thefollowing resources: Buildings Capital Labor Using these resources, purchased materialsand parts must be processed to generatesales revenue18 2010 Van Goubergen P&M gcv - Lille Belgiumv1.1
IIE Process Division Webinar Feb 8 2012Throughput Accounting 2010 Van Goubergen P&M gcv - Lille Belgium19v1.1IIE Process Division Webinar Feb 8 2012Throughput Accounting The purpose is not to determine the perfect‘unit cost’. Besides direct material cost(valued at purchasing cost), no other costsare allocated to the products. The focus is more on ‘period costs’, whichis more in line with actual cash flow. The shorter the lead times and the betterwe produce to (real) demand, the more TAresults are similar to Full AbsorptionCosting 2010 Van Goubergen P&M gcv - Lille Belgium20v1.1
IIE Process Division Webinar Feb 8 2012Throughput Accounting TOC uses three key measures: Investments (I) Operational expenses (OE) Throughput (T) To make a decision according TOC, oneneeds to quantify the decision’s impact onthose three measurements, and translate itback to Net Profit (NP) and Return OnInvestment (ROI) 2010 Van Goubergen P&M gcv - Lille Belgium21v1.1IIE Process Division Webinar Feb 8 2012Throughput Accounting-Throughput (T) SalesInvestment (I) InventoryVariable costs MachinesBuildingsOperating Expense (OE) Conversion costs 2010 Van Goubergen P&M gcv - Lille Belgium22v1.1
IIE Process Division Webinar Feb 8 2012Decision Making ParametersNet Profit (NP) Throughput (T) - Operating Expense (OE)Return On Investment (ROI) Net Profit (NP) / Investment (I)Productivity Throughput (T) / Operating Expense (OE)Investment turns Throughput (T) / Investment (I) 2010 Van Goubergen P&M gcv - Lille Belgium23v1.124v1.1IIE Process Division Webinar Feb 8 2012Part ThreeVALUE STREAM COSTING 2010 Van Goubergen P&M gcv - Lille Belgium
IIE Process Division Webinar Feb 8 2012Value Stream nsupportMachines &equipmentValue StreamOperationsupportFacilities &maintenanceAll otherVS costs All labor, machine, materials, support services andfacilities directly within the Value Stream ‘Real’ costs over a period Little or no allocation 2010 Van Goubergen P&M gcv - Lille Belgium25v1.1IIE Process Division Webinar Feb 8 2012With Value Stream Costingwe are going to focus on Financial performance of the value stream Financial impact of going from the currentto the future state Translating lead-time reduction into financialfigures The financial impact of investments on thevalue stream 2010 Van Goubergen P&M gcv - Lille Belgium26v1.1
IIE Process Division Webinar Feb 8 2012Elements of theValue Stream Cost Model Value stream Inventory Module Cost Module Capacity/EPEI Module Profit Module 2010 Van Goubergen P&M gcv - Lille Belgium27v1.1IIE Process Division Webinar Feb 8 2012FurnaceBasic OxygenProcessRefiningCastingTHE PROCESSPicklingAnnealingHot mill 2010 Van Goubergen P&M gcv - Lille Belgium28v1.1
IIE Process Division Webinar Feb 8 2012Current State Value Stream 2010 Van Goubergen P&M gcv - Lille Belgium29v1.130v1.1IIE Process Division Webinar Feb 8 2012Inventory Module Throughput accounting Valuation Inventory Only material costs! Calculate only the value ofthe inventory of this valuestream 1.200,- x 7.000 ton 8.400.000,- 2010 Van Goubergen P&M gcv - Lille Belgium
IIE Process Division Webinar Feb 8 2012Cost Module All costs aredirectly linked tothe value stream Allows you notonly “to see” thecosts, but also toeasily associatethem withprocesses You can easilyshape your chartof accounts 2010 Van Goubergen P&M gcv - Lille Belgium31v1.132v1.1IIE Process Division Webinar Feb 8 2012Capacity/EPEI Module 2010 Van Goubergen P&M gcv - Lille Belgium
IIE Process Division Webinar Feb 8 2012Profit Module 2010 Van Goubergen P&M gcv - Lille Belgium33v1.1IIE Process Division Webinar Feb 8 2012Profit Module It is possible that a product family contains products with differentkinds of materials. In this case you need to quantify the materialcost and the quantity sold for each product separately This is also called conversion costs per product. In a productfamily the conversion costs are the same for every product. 2010 Van Goubergen P&M gcv - Lille Belgium34v1.1
IIE Process Division Webinar Feb 8 2012Current State Value Stream Cost Model 2010 Van Goubergen P&M gcv - Lille Belgium35v1.1IIE Process Division Webinar Feb 8 2012Current State Value Stream Cost Model 2010 Van Goubergen P&M gcv - Lille Belgium36v1.1
IIE Process Division Webinar Feb 8 2012And now the Future State.Lead-time reduction: from 98 days to 27 daysAND WHAT WILL BE THE RESULTS INFINANCIAL TERMS? 2010 Van Goubergen P&M gcv - Lille Belgium37v1.1IIE Process Division Webinar Feb 8 2012Future State Value Stream Cost Model 2010 Van Goubergen P&M gcv - Lille Belgium38v1.1
IIE Process Division Webinar Feb 8 2012Scorecard 2010 Van Goubergen P&M gcv - Lille Belgium39v1.140v1.1IIE Process Division Webinar Feb 8 2012VSCM: Decision making 2010 Van Goubergen P&M gcv - Lille Belgium
IIE Process Division Webinar Feb 8 2012Dedicated Casting Machine ? 2010 Van Goubergen P&M gcv - Lille Belgium41v1.142v1.1IIE Process Division Webinar Feb 8 2012 2010 Van Goubergen P&M gcv - Lille Belgium
IIE Process Division Webinar Feb 8 2012Conclusions Traditional accounting (full absorption costing), used forexternal reporting is not the best method for internal decisionmaking For management accounting purposes it is better to usethroughput accounting (with the same basic input data as thefinancial accounting) In order to quantify financial benefits while implementinglean we need a value stream cost model in order not to takedecisions based on suboptimization A Value Stream Cost Model provides readable, comprehensiveinsights into the cost structure 2010 Van Goubergen P&M gcv - Lille Belgium43v1.144v1.1IIE Process Division Webinar Feb 8 2012dirk@vangoubergen.com 2010 Van Goubergen P&M gcv - Lille Belgium
IIE Process Division Webinar Feb 8 2012Who am I?Prof. dr. ir. Dirk Van Goubergen – Email: dirk@vangoubergen.comEducation:* MS in Mechanical Engineering (1991) – Royal Military Academy, Brussels (B)* MS in Industrial Management (1997) – Ghent University/Vlerick Management School (B)* PhD in Industrial Engineering (2004) – Ghent University (B)Professional experience:1992-2004 Lecturer in Industrial Engineering at HORITO College Turnhout (B)2000-2004 Research Associate at Ghent University – Dept. of Industrial Management (B)* Grad. classes on Design of Production Systems and Operations Management2004- Professor at Ghent University – Dept. of Industrial Management (B)* Grad. classes on Design of Manufacturing and Service Operations, Operations Management, Method Engineering and Work Measurement.2000- Guest lecturer at the Grado Dept. of Industrial and Systems Engineering at Virginia Tech, Blacksburg VA (USA)2002Examiner for the US Senate Productivity and Quality Award for the State of Virginia (USA)2004-2010 Program Director ‘Fellow in Industrial Engineering’ program from the Flemish Engineers Chamber VIK (B)2005- Guest Professor at the Antwerp University (B)* Grad. Class on Cost and Performance Benchmarking2005-2010 Program Director of the “Master in Industrial Management” program at the Ghent University (B)2005- Founder and Coordinator of the ‘Black Belt in Lean’ training and certification program at the Ghent University (B)2009- Guest lecturer at the Vlerick Leuven-Gent Management School (B)2010- Member of the Advisory Board of the Institute of Industrial Engineers – Process Division (USA)1993-. Founder and president of VAN GOUBERGEN P&M Productivity Improvement (www.vangoubergen.com)* 15 years of international experience in the area of set-up reduction, lean management and productivity improvementin different manufacturing and service industries throughout Europe, North America and Asia (a.o. Volvo, Akzo, AtlasCopco, Masterfoods/Mars, Danone, Philips, Coca Cola, Imperial, Lays, Belgian Railways, )2006-. Founder and President of the CENTER FOR PRODUCTIVITY IMPROVEMENT ROMANIA (www.productivity.ro)Senior Member of the Institute of Industrial Engineers, Member of the International Society for Occupational Ergonomics and Safety 2010 Van Goubergen P&M gcv - Lille Belgium45v1.1IIE Process Division Webinar Feb 8 2012Van Goubergen P&M Productivity ImprovementTraining/Education (15%) - Implementation (85%)Some of our references 2010 Van Goubergen P&M gcv - Lille Belgium46v1.1
Full absorption costing is a traditional method where all manufacturing costs are capitalized in the inventory Costs are charged toinventory and become assets These costs will only be expensed when the inventory is sold Developed in an era of mass production based on a ‘scarcity model’ Is required for external reporting.
costing is a system in which actual costs incurred in the past are ascertained. b. Pre-determined costs / standard cost: Standard costing is not a method of costing like job order on process costing. It is a special technique control costs and can be used in conjunction with any other system like job costing, process costing or marginal costing .
costing system and is examined in detail in Chapter 6. A comparison of job-order costing and process costing is given in Exhibit 5-1. Production Costs in Job-Order Costing While the variety of product-costing definitions discussed in Chapter 2 applies to both job-order and process costing
Selection of value stream Start the process by selecting a relevant value stream to map. The following starting points can be used in the choice of value stream: It is a recurring value stream in the unit. The value stream is in need of change. The value stream is clear, that is, it is possible to define it with clear limitations.
2. Use a single plantwide factory overhead rate for product costing. 3. Use multiple production department factory overhead rates for product costing. 4. Use activity-based costing for product costing. 5. Use activity-based costing to allocate selling and administrative expenses to products. 6. Use activity-based costing in a service business .
Alignment to a Specific and Explicit Value Stream is Higher than Expected 9 Product-Centric Thinking Wins over Project-Centric Thinking 9 The Creation and Alignment of Roles around Value 11 11 Discovery through Value Stream Mapping 12 Value Stream Mapping is Not Value Stream Management 13 Use Value Stream Mapping as an Improvement Kata 13
1. Product costing flow for discrete manufacturing w/o PA 2. Product costing flow for discrete manufacturing with PA: 3. Product costing flow for make-to-order production with valuated stock and PA 4. Product costing flow for make-to-order production with PA 5. Product costing flow for assemble-to-order production with PA 6. Product costing .File Size: 355KB
1 Marginal cost and marginal costing 1.1 Introduction Marginal cost is the variable cost of one unit of product or service. Marginal costing is an alternative method of costing to absorption costing. In marginal costing, only variable costs are charged as a cost of sale and a contribution is calculated (sale
Topic 6 – The job costing system 207 Study unit 13: The job costing system 208 1 Introduction 208 2 Costing systems 208 3 Description of job costing 209 4 The flow of documents in a job costing system 209 5 Manufacturing cost flow through ledger accounts using the job costing system 209 6 Summary 213 Self-assessment Activity 213
