A financial thermometer for lean operations

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© 2010 Wiley Periodicals, Inc.Published online in Wiley InterScience (www.interscience.wiley.com).DOI:10.1002/jcaf.20566

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Tom Pryor

What do you think had the greatest posi-

tive impact on the prac-tice of medicine during the past 200 years?

Peter Drucker’s surprising answer to this question in an October 2001 Business 2.0 magazine inter-view1 was “the fever thermometer.”

Drucker said the fever thermometer enabled parents to determine whether their children were sick or not. Thermometers have been around since the seventeenth century, but when it was downsized and placed in the hands of an aver-age person with a minimum of instruction, it simultaneously empowered the masses and improved decision making.

Placing a simple “financial thermometer” that measures lean principles in the hands of nonfinancial workers holds the potential to improve decision making and financial results. The formal name for the “ther-mometer” is lean activity-based costing (ABC) founded on

the simple principle “Time is money.”

TIME IS MONEY

“Time is money” is a univer-sally accepted truth.

When truth is put into prac-tice, decision making improves. “Time is money” can be put into practice by combining the prin-ciples of lean with the practices of time-driven activity-based costing (TDABC). This com-bination makes the financial implications and benefits of lean more apparent and understand-able to both financial and non-financial employees of any size organization.

Lean is simply defined as keeping the customer order flowing, not keeping machines or people busy.2

Time-driven activity-based cost-ing is simply defined as activities consume resources and products consume activities.3 The resources consumed by activities include time and money.

Lean and TDABC comple-ment each other and share much in common:

1. Both focus on activities: a. Lean: measures activity time b. TDABC: measures activity

cost2. Both focus on continuous

improvement as a common objective:

a. Lean: improves cycle time b. TDABC: improves costs3. Both focus on reduction

of non-value-added (NVA) costs, including excess capacity:

a. Lean: measures NVA time b. TDABC: measures NVA

costs

Synergy is a frequently used word that’s not so easy to define. It’s more than two or more people or ideas getting along; it’s when some particular combination equals more than the sum of the parts—for example, when 1 � 1 � 3 (or even more). This article describes how the principles of lean manufacturing on the one hand and time-driven activity-based costing on the other can combine to create synergy in organizations. © 2010 Wiley Periodicals, Inc.

A Financial Thermometer for

Lean Operations

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82 The Journal of Corporate Accounting & Finance / January/February 2010

DOI 10.1002/jcaf © 2010 Wiley Periodicals, Inc.

LEAN ABC

Lean ABC quantifies the value- and non-value-added costs within a value stream map. Rother and Shook defined a value stream as “all the actions (both value added and non-value added) cur-rently required to bring a product through the main flows essential to every product.”4 A value stream

map documents product flow with time and volume metrics. An example of a value stream map is shown in Exhibit 1.5

The actions to manufacture a product or product family, commonly called activities in activity-based costing systems, are shown as boxes at the bottom of the value stream map. Value stream maps measure volumes,

times, inventory quantities, headcount, and capacity. Lean ABC will augment those mea-sures with costs.

Lean ABC measures the value- and non-value-added cost of both current-state (Exhibit 1) and future-state value stream maps (not shown).

The core formula for lean ABC is a simple equation:

Exhibit 1

Value Stream Map

Annual Value Stream source Costs

Annual Value

Re

SStream source MinutesValue Stream Cost per

Re= Minute


The Journal of Corporate Accounting & Finance / January/February 2010 83

© 2010 Wiley Periodicals, Inc. DOI 10.1002/jcaf

The numerator repre-sents the total annual cost of resources committed to a value stream. Examples of resources include people, machines, and space.

The denominator represents the total annual resource minutes made available by the people and/or machines performing the value stream activities. The calculation of resource minutes uses the principles of practical capacity (e.g., reflects company policies regarding workdays, weekends, shifts, breaks, lunch, sickness, and preventative main-tenance).

Lean ABC divides resource costs by resource minutes to determine the average cost per minute spent in the value stream. Lean ABC cost is calculated in three steps.

Step 1: Define the Total Cost Consumed by the Value Stream’s Activities

The father of modern man-agement, Peter Drucker, said, “Always ask about the things you are seeing. What did this cost, and will the benefits justify the expense?”

The list of resources con-sumed by a value stream can be identified by taking the map, walking the flow, listing the resources being consumed by the value stream’s activities, and estimating the annual dollar value of each resource. The most obvious resources will be people, machines, and space. Don’t over-look less obvious resources such as maintenance, indirect support staff, supplies, and utilities. The annual cost of each resource is estimated and listed.

Because current-state maps commonly have large amounts of raw material, work-in-process, scrap, and finished goods, it

is wise to include the cost of capital for the existing invest-ment in inventory. In Exhibit 2, total value stream inventory is estimated to be $200,000. Using a 10 percent cost of capi-tal rate,6 the cost of capital is $20,000. As inventory levels decrease using lean techniques, the cost of capital will decrease as well.

Because the majority of costs are fixed in the short term and variable in the long term, it is rational and viable to com-bine costs in the numerator that are traditionally classified as

variable (i.e., supplies) and fixed (i.e., depreciation).

Step 2: Define the Total Resource Minutes Available in the Value Stream

Step 2 is used to determine the denominator for the value stream cost per minute. Because Step 1 uses annual costs, Step 2 uses the annual number of minutes available in the value stream. For this example, each of the five value stream activities in Exhibit 1 is people-paced, not machine-paced. Therefore, the

Total Value Stream

Labora (5 FTE’s X 2 shifts X $50,000 per FTE) $500,000

Depreciation 50,000

Maintenance and Supplies 30,000

Utilities 10,000

Space 10,000

Indirect Labor: Material Handler 40,000

Cost of Capital 20,000

Total Value Stream $660,000

* Labor includes annual wages and fringes.* Depreciation is the annual cost of the capital assets (e.g., machines). Most commonly, this cost will be the annual straight-line depreciation of the machines used in the value stream. If any of the machines are fully depreciated, be aware that you have overcosted products in previous years and are likely undercosting the value stream in the current time period.* Maintenance and Supplies includes charges for internal and external maintenance plus cleaning and manufacturing supplies.* Utilities includes the annual estimated costs of electricity, water, and gas.* Space includes the estimated number of value stream square footage multiplied by the annual cost per square foot of the space. Costs include building depreciation or rent and property taxes.* Indirect Labor includes the annual cost of material handlers and other nondirect labor people used in the value stream. Indirect headcount is not included in Step 2 because they do not perform value-added activity in the value stream map cycle-time calculation.* Cost of Capital is determined by multiplying the total value of raw material, work-in-process and finished goods times the company cost of capital (i.e., 10 percent to 20 percent). If the value stream is machine-paced and/or if depreciation exceeds 50 percent of total value stream resources, add to the cost of capital an appropriate amount (e.g., machine purchase price of $500,000 @ 10 percent = $50,000).

a The one full-time equivalent (FTE) manning the stamping work cell has significant idle time. For this example, it is assumed that this person on each shift spends most of his/her time waiting or helping others in the value stream.

Exhibit 2




identify and eliminate non-value-added waste by flowing the prod-uct at the pull of the customer in pursuit of perfection.

Tactics are how to achieve a strategy. Tactics are concise, short-term actions to implement the strategy. In military terms, lean ABC tactics are concerned with the conduct of daily lean battles, while strategy is con-cerned with how different tactics are linked to win the war against waste.

Every change effort in an organization benefits from quick wins. Therefore, using lean ABC to support tactical activities is wise. Tactical activities using the 65¢ cost per minute will ignite ingenu-ity and skills to gain a quick advantage.

While it supports both tactical and strategic uses, using lean ABC initially for immediate support of tactical decision making will produce quick results that create momentum for the more time-consuming

implementation of its strategic uses.

Tactical Uses of Lean ABC

There are several tactical uses of lean ABC, including the following examples:

1. Lean ABC provides man-agement and employees a simple, useful frame of reference. Posting a large sign in the value stream area that says “65¢ per minute,” helps make cost discussions and improved decision mak-ing an everyday event. Cost studies no longer require finance staff assistance. For example, “How much does a 10-minute changeover cost?” Answer: $6.50.

time-driven ABC to calculate a single value stream cost per minute is reasonable. Activity-based costing expert and author Gary Cokins says, “When the condition exists that a sub-stantial amount of resource expenses are in a highly repeat-able process . . . the ABC model may replace the activity driver quantities with an average (i.e., standard) time required for each activity event. This method is referred to as time-driven activity-based costing.”7

Note that lean focuses organizations on creating an efficient value stream that makes customer-ordered quan-tities, not practical capacity quantities. Sixty-five cents rep-resents the cost per minute to make 18,400 pieces per month

(see Exhibit 1), or 220,800 per year. To calculate lean ABC at practical capacity, both the numerator and denominator would change.

Cost per minute is a sim-ple, familiar point of refer-ence. For example, the rule of thumb to produce a training video is typically $1,500 per minute. Knowing this number makes decision making easier. Making value stream work-ers aware of value stream cost per minute can have a positive impact.

STRATEGIC AND TACTICAL USES OF VALUE STREAM COST

Lean ABC is designed to support the strategy of lean—create a systematic approach to

total amount of time available is calculated as follows:

250 workdays (365 � 104 weekend days � 11 holidays)

� 8 hours per day � 60 minutes per hour � 5 people per shift (1 FTE

for each of the 5 activities) � 2 shifts � 85 percent factor for

breaks, sickness, and other downtime

� 1,020,000 minutes of an-nual work time available

The 85 percent factor will vary by company. Some organi-zations use 90 to 95 percent if the value stream does not stop for breaks and total productive maintenance has resulted in less machine downtime.

If direct labor deter-mines the pace of the activities, use the calcula-tion above to calculate the lean ABC equation denominator. If machines define the pace in a value stream, change the cal-culation to reflect machines as the resource minutes. No mat-ter whether the value stream is people-paced or machine-paced, the numerator remains the same.

Step 3: Calculate the Value Stream’s Average Cost per Minute

Using the data from Steps 1 and 2, the average cost per minute in the value stream is 65¢.

An important attribute of any value stream is that it either produces a single product or a family of homogeneous products. As a result, use of

Making value stream workers aware of value stream cost per minute can have a positive impact.

$660,000 65¢1,020,000 = per minutes minute




Communication is value-added but it’s not free.

Strategic Uses of Lean ABC

To use a baseball analogy, tactical uses of lean ABC are sin-gles with an occasional double. Enough singles in a row leads to scoring runs on the profit-and-loss (P&L) statement and bal-ance sheet. Strategic applications of lean ABC will result in home runs. Winning organizations need both. There are three strate-gic examples of lean ABC:

1. Lean ABC quantifies the annual non-value-added dollars of waste in a value stream. See Exhibit 3 for an example. The $212,339 NVA calculation is accomplished by combining data found in the value stream map (Exhibit 1) with data from the three-step lean ABC calculation.

The value stream NVA cost chart should be cre-ated monthly and updated

‘moving parts costs money’ and being able to measure that cost set off a chain of actions that resulted in sig-nificantly lower inventory levels, shorter lead times, reduced operating costs and improved profits.”9

6. Lean ABC enables both shop floor and administra-tive employees to bench-mark or compare value stream cost per minute. For example, if two manu-facturing sites of the same company make the same product, lean ABC can be used for value stream comparison. For example, if one plant’s lean ABC is 65¢ while another’s is 55¢, employees should dialogue and determine why a 10-cent difference exists. The find-ings can be used to define and calculate paybacks on improvement projects.

7. Lean ABC has the potential to reduce endless meetings. A 30-minute value stream meeting costs $19.50.

2. Lean ABC supports kaizen, the Japanese philosophy of continuous improvement. Having the 65¢ prominently posted opens the door of opportunity for all functions of a business, from the CEO to the assembly-line workers, to easily quantify the dollar impact of kaizen events or improvement ideas.

3. Kaizen is a daily lean activ-ity. In support of kaizen, lean ABC enables nonfi-nancial people to perform experiments on their work using the scientific method8 and how to spot and elimi-nate waste in business processes.

4. Lean ABC provides new insights and alternatives to reduce non-value-added costs per part. Employees working in the value stream can develop methods to minimize or eliminate non-value-added activities in the map, such as changeovers. Or they could use a 5S kaizen event to reduce space by 50 percent, thereby reduc-ing the numerator (value stream costs) by $5,000. Cost per minute would decline from 65¢ to 64¢.

5. Lean ABC will result in value stream improvements. In his thought-provoking book I May Be Wrong, But I Doubt It, Doug Hicks points out, “Although cost information is not always a prerequisite for identify-ing and executing operat-ing improvements, it often serves that purpose. At one client, we identified in-proc-ess movement as a signifi-cant activity and measured the cost of ‘picking up a basket of parts and putting it down somewhere else’ at $3.50. The discovery that

Value Stream NVA Cost Chart

1. Value-added minutes per bracket 3.13 minutes

(188 seconds ÷ 60 seconds per minute)

2. Cost per minute 65¢

3. Value-added cost per bracket $2.03

4. Annual customer demand 220,800 brackets

5. Annual value-added cost $447,661

6. Total value stream cost $660,000

7. Annual non-value-added cost $212,339

* Enter data for lines 1 and 4 from the value stream map.* Enter data for lines 2 and 6 from the lean ABC calculation.* Multiply lines 1 and 2 to define value-added cost per part.* Multiply lines 3 and 4 to define line 5, annual value-added cost.* Subtract line 5 from line 6 to define line 7, annual non-value-added cost in the value stream.

Exhibit 3




focuses on the clock. Tra-ditional P&Ls measure time periods (e.g., month, quarter, year, budget), while lean measures activity and value stream cycle time in seconds or minutes.

There are five steps to create a lean ABC P&L:

Step 1: Add columns for value and non-value-added.

Step 2: Change cost of goods sold from three line items (material, labor, and over-head) to two (material and value stream cost).

Step 3: Use the data from Exhibit 3 for the value stream cost.

Step 4: Use time-driven ABC to calculate VA and NVA costs for each oper-ating expense department if they are not part of a value stream. Exhibit 5 shows the VA and NVA calculation for a QA Department that has one $40,000 employee work-ing one shift plus $10,000 of QA supplies and other expenses.

Step 5: Break material cost into value and non-value. For this example, the com-pany experienced a 5 percent scrap rate.

The lean ABC P&L state-ment (Exhibit 6) shows the company could be making $421,539 pretax profit if there was no waste. NVA waste of $437,539 results in a total pretax loss of $16,000. Another way of stating it is: “Budget is not the best this organization can be.” Realistically, NVA will never be zero. But the lean ABC P&L confirms that the ongoing

statement in Exhibit 4, I limit the shortcoming to three key issues:

Traditional accounting • does not measure waste, yet lean focuses on waste elimination. Traditional P&Ls imply that budget is the best the organization can perform in the short term, yet lean commonly exposes 50-percent-plus non-value-added wasted time in a value stream.Traditional accounting • measures vertically, yet organizations operate horizontally. Traditional P&Ls focus on (a) cost centers (i.e., manufac-turing, sales & market-ing, etc.); (b) resources

(i.e., labor, depreciation, supplies, etc.); and (c) categories (i.e., cost of goods sold, overhead, operating expenses, etc.). Lean focuses on measur-ing the time consumed by customer orders flowing through value streams. Traditional accounting measures cost centers. Lean mea-sures the amount of time products spent in a cost center.Traditional accounting • focuses on the calendar (month-end), yet lean

(a) after each significant improvement is implemented in the value stream; (b) after each significant change in the cost per minute; and (c) after increases or decreases in customer demand.

A strategic use of lean ABC is establishing mini-mum pricing. Combining material cost per unit with value-added lean ABC per unit defines the best case for product cost. The material cost per bracket in the exam-ple is $5.00 per unit. The value-added cost per bracket is $2.03 (see Exhibit 3). Therefore, the best-case, minimum cost per bracket is $7.03. Any sales price below $7.03 will result in a gross margin loss.

Most companies will have more than one value stream. Therefore, a value stream map and lean ABC will need to be created for each value stream as lean is rolled out across the company. After lean is implemented company-wide—whether that is one or more value streams—management can proceed to strategic use #2.

2. A value stream P&L sup-ports lean and offsets the shortcoming of traditional profit-and-loss statements. Much has been written about traditional accounting’s lack of support of lean principles. Authors such as Brian Maskell and Bruce Baggaley10 and Jean Cunningham and Orest Fiume11 and others have documented the deficiencies well. Therefore, instead of writing a lengthy treatise, using the traditional P&L

A strategic use of lean ABC is esta-blishing minimum pricing. Combining material cost per unit with value-added lean ABC per unit defines the best case for product cost.




portion of the $20,000 cost of capital; waiting, a portion of the • idle time included in

defects, shown as the • $55,200 material scrap;overproduction, shown • as the work-in-process

pursuit of lean will be finan-cially rewarding.

The NVA of $437,539 quan-tifies lean’s eight forms of waste:

Traditional P&L Statement

Sales Volume Price Actual Budget Variance

Left-hand 144,000 $10 $1,440,000 $1,440,000 -

Right-hand 76,800 $10 $768,000 $768,000 -

220,800 $2,208,000 $2,208,000 -

Cost of Goods Sold

Material $5 $1,104,000 $1,104,000 -

Labor $500,000 $500,000 -

Overhead

Depreciation $50,000 $50,000 -

Maintenance $30,000 $29,000 $1,000

Utilities $10,000 $11,000 ($1,000)

Property Tax $10,000 $10,000 -

Indirect Labor $40,000 $45,000 ($5,000)

Supplies $20,000 $10,000 $10,000

Total COGS $1,764,000 $1,759,000 $5,000

Gross Profit $444,000 $449,000 ($5,000)

20.1% 20.3% �0.2%

Operating Expense

Sales and Marketing $130,000 $100,000 $30,000

Finance $80,000 $80,000 -

QA $50,000 $50,000 -

R&D $50,000 $40,000 $10,000

Admin $150,000 $160,000 ($10,000)

$460,000 $430,000 $30,000

20.8% 19.5% 1.4%

Pretax Profit ($16,000) $19,000 ($35,000)

–0.7% 0.9% –1.6%

Exhibit 4




the $212,339 NVA of Exhibit 3;non-value-added activi-• ties, such as Inspect Parts in QA’s Exhibit 5; transportation, the mate-• rial movement time cap-tured in the $212,339 NVA of Exhibit 3; inventory, captured as • cost of capital in the 65¢ per minute; motion, NVA activities • that do not transform raw material in Exhibit 1; and underutilized employees, • a portion of both the $212,339 value stream NVA as well as the $150,000 NVA operating expenses.

NOTE: Companies with multiple value streams would have all value stream costs

listed in the cost of goods sold section of the lean ABC P&L statement.

3. Lean ABC can be used to cal-culate the potential sales and profit if practical capacity is sold. A third and advanced strategic use of lean ABC is calculating a capacity sold lean ABC P&L (Exhibit 7).

According to Mark Ses-sumes, leader of the Texas Manufacturing Assistance Center’s (TMAC’s)12 Lean Center of Excellence, there are three ways to make money with lean: (1) decrease the expenses used to convert inventory into throughput; (2) decrease investment in inventory; and (3) increase throughput. Exhibit 7 is an example of how lean ABC captures the potential dollar impact of increased throughput.

The P&L in Exhibit 7 is based on the assumption that all NVA time in the value stream is successfully eliminated and redeployed to making good product sold in the marketplace at $10 per unit. This would result in a pretax profit of $677,660 instead of the actual of $4,000 or the $421,539 cal-culated in Exhibit 6.

NVA sales volume for the capacity sold P&L is calcu-lated by dividing the value stream NVA cost of $212,339 by the VA cost per part of $2.03 ($447,661/220,800). If all non-value-added cost is eliminated from the value stream using lean principles, an additional 104,732 units could be manufactured and sold.

This is calculated as fol-lows: $212,339/$2.03 � 104,732 additional capacity @ $10 each � $1,047,320. The capacity sold lean ABC P&L assumes the only vari-able cost is material. Value stream costs and operating expenses remain fixed.

The practical capacity lean ABC P&L is useful for stra-tegic planning, goal setting, and what-if analysis (i.e., What could pretax profit be if we added a new market or group of customers who are willing to purchase our exist-ing products?).

Traditional P&Ls report to management what profits are. The lean ABC P&L informs management what profits can be. Kaplan and Anderson note, “Time-driven activity based cost-ing enables companies to improve their cost manage-ment systems, not abandon them.”13

QA Department Time-Driven ABC

VA NVA

NVA Excess

Capacity Total

Total QA Costs $50,000.00

Activity Do Compliance Reports

Inspect Parts

Activity Output 102 5,000

Minutes per Output 200 10

Total Minutes* 20,400 50,000 31,600 102,000

Cost per Minute $0.49 $0.49 $0.49 $0.49

$10,000.00 $24,509.80 $15,490.20 $50,000.00

Total NVA $40,000.00

*1 � 250 � 8 � 60 � 85%

Exhibit 5




Lean ABC P&L Statement

Sales Volume Price Value NVA Actual Budget Variance

Left-hand 144,000 $10 $1,440,000 - $1,440,000 $1,440,000 -

Right-hand 76,800 $10 $768,000 - $768,000 $768,000 -

220,800 $2,208,000 - $2,208,000 $2,208,000 -

Cost of Goods Sold

Material $5 $1,048,800 $55,200 $1,104,000 $1,104,000 -

Value Stream Cost $447,661 $212,339 $660,000 $655,000 $5,000

Total COGS $1,496,461 $267,539 $1,764,000 $1,759,000 $5,000

Gross Profit $711,539 ($267,539) $444,000 $449,000 ($5,000)

32.2% –12.1% 20.1% 20.3% –0.2%

Operating Expense

Sales and Marketing $90,000 $40,000 $130,000 $100,000 $30,000

Finance $50,000 $30,000 $80,000 $80,000 -

QA $10,000 $40,000 $50,000 $50,000 -

R&D $40,000 $10,000 $50,000 $40,000 $10,000

Admin $100,000 $30,000 $130,000 $140,000 ($10,000)

$290,000 $150,000 $440,000 $410,000 $30,000

13.1% 6.8% 19.9% 18.6% 1.4%

Interest Expense - $20,000 $20,000 $20,000 -

Pretax Profit $421,539 ($437,539) ($16,000) $19,000 ($35,000)

19.1% –19.8% –0.7% 0.9% –1.6%

Exhibit 6

CONCLUSION: 1 � 1 � 3

Synergy is a familiar word yet not so easy to define. It’s more than two or more people or ideas getting along. It’s when a combination equals more than the sum of the parts—for exam-ple, when 1 + 1 = 3 (or even more).

A story illustrates the concept of synergy. In northern Canada,

an ox pull was held to determine the strongest ox. The winner pulled 9,000 pounds. The runner-up pulled just a few pounds less. People in the crowd started to debate as to how much the two strongest oxen could pull if teamed together.

The wagers went down. Most people in the crowd said the oxen should be able to pull double their singular effort—

18,000 pounds. When the two oxen were hitched together, they actually pulled 26,000 pounds!

That’s synergy—the whole being greater than the sum of the parts.

There is synergy in the principles of lean and time-driven ABC. “Hitching” them together using lean ABC holds the potential to provide tactical and strategic results far greater




than the sum of the parts for any organization.

NOTES

1. Schonfeld, E. (2001). The guru’s guru. Business 2.0, 2(8), 66–72. For an una-bridged version of the interview, see http://www.rucmba.com/bbs/archiver/showtopic-4542.aspx.

2. “Lean is a systematic approach to identi-fying and eliminating waste (non-value-added activities) through the continuous improvement by flowing the product at the pull of the customer in pursuit of perfection.” Latson, E. (n.d.). Carter BloodCare deploys a key tool to tackle

cost challenges. Texas Manufacturing Assistance Center, http://www.texas-quality.org.

3. “Time-Driven ABC is based on two key elements: the time needed to perform an activity and the cost of consuming resources/capacity per time-unit by that activity. Contrary to traditional ABC, Time-Driven ABC (TDABC) makes unused capacity visible providing man-agement with essential data to manage capacity requirements in terms of head-count, equipment and space.” Kaplan, R., & Anderson, S. (2007). Time-driven activity-based costing. Cambridge, MA: Harvard Business School Press; p. 51–52.

4. Rother, M., & Shook, J. (1999, June). Learning to see: Value stream mapping

to create value and eliminate muda. Brookline, MA: The Lean Enterprise Institute; p. 32–33.

5. The author recognizes that most compa-nies have more than one value stream. A company with one value stream was used in this article to help readers better follow the proposed lean ABC step-by-step process.

6. The cost of capital rate varies by company. 7. Cokins, G. (2009). Performance man-

agement: Integrating strategy, execu-tion, methodologies, risk, and analytics. Hoboken, NJ: Wiley; p. 126.

8. Scientific methods consist of the col-lection of data through observation and experimentation, and the formulation and testing of hypotheses.

Capacity Sold Lean ABC P&L Statement

Sales Volume Price Value NVA Actual Budget

Left-hand 212,300 $10 $2.123,000 ($683,000) $1,440,000 $1,440,000

Right-hand 113.232 $10 $1,132,320 ($364,320) $768,000 $768,000

325,532 $3,255,320 ($1.047,320) $2,208,000 $2,208,000

Cost of Goods Sold

Material $5 $1,627,660 ($523,660) $1,104,000 $1,104,000

Value Stream Cost $660,000 — $660,000 $655,000

Total COGS $2,287,660 ($523,660) $1,764,000 $1,759,000

Gross Profit $967,660 ($523,660) $444,000 $449,000

43.8% –23.7% 20.1% 20.3%

Operating Expense

Sales and Marketing $90,000 $40,000 $130,000 $100,000

Finance $50,000 $30,000 $80,000 $80,000

QA $10,000 $40,000 $50,000 $50,000

R&D $40,000 $10,000 $50,000 $40,000

Admin $100,000 $30,000 $130,000 $140,000

$290,000 $150,000 $440,000 $410,000

13.1% 6.8% 19.9% 18.6%

Interest Expense - $20,000 $20,000 $20,000

Pretax Profit $677,660 ($693,660) ($16,000) $19,000

Exhibit 7




12. Texas Manufacturing Assistance Center, www.tmac.org.

13. Kaplan, R., & Anderson, S. (2007). Time-driven activity-based costing. Cambridge, MA: Harvard Business School Press; p. 255.

tem for measuring and managing the lean enterprise. New York: Productivity Press.

11. Cunningham, J., & Fiume, O. (2003). Real numbers: Management accounting in a lean organization. Durham, NC: Managing Times Press.

9. Hicks, D. (2008). I may be wrong, but I doubt it: How accounting information undermines profitability. Farmington Hills, MI: D. T. Hicks & Co; p. 40.

10. Maskell, B. H., & Baggaley, B. (2003). Practical lean accounting: A proven sys-

Tom Pryor is a growth coach, financial consultant, and lean costing trainer on staff at the Texas Manufac-turing Assistance Center at the Automation and Robotics Research Institute at the University of Texas at Arlington. He can be reached at [email protected].


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A financial thermometer for lean operations