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Lean Accounting Summit 2012
Solving the Standard Costing Problemg g
Presented by Brian Maskell
BMA IBMA [email protected] . www.maskell.com
© 2012 BMA Inc. All rights reserved.This material may not be copied or reproduced in any form without the express permission of BMA Inc.BMA Inc., 100 Springdale Road # 110, Cherry Hill NJ 08003 USA+ 609 239 1080Contact: [email protected] Web: www.maskell.com
Notes/ Answer Sheet
Solving the Standard Cost Problem
Lean Accounting Summit 2012Orlando, FL ‐ September 12‐14
Brian H Maskell
Standard Cost Problem
Brian H MaskellPresident, BMA Inc.
What is the Standard Cost Problem?
Agenda
What is the Standard Cost Problem?
The Solution: Value Stream Costing
Making Business Decisions using Value Stream Costing
Business Decision Making Example
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us ess ec s o a g a p e
Wrap Up
Lean Accounting Summit 2012 Solving the Standard Costing Problem
Copyright 2012 BMA Inc. All rights reserved. Page 1
The Standard Costing Problem
Traditional Measurement Systems
Lean Principles
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Principles
… and lead to anti‐lean business decisions
Standard Costing……
Distorts profitability because of overhead allocation
Motivates non‐lean behavior
Distorts costs because it assumes labor is variable
© 2012 BMA Inc. All rights reserved. Contact: [email protected]
labor is variable
Requires significant detailed reporting
Lean Accounting Summit 2012 Solving the Standard Costing Problem
Copyright 2012 BMA Inc. All rights reserved. Page 2
Current State: Standard Costing P&L’s distort profitability
Period 1 Period 2REVENUE
OEM $998,977 $1,039,440Systems $1,002,466 $1,009,246
$2,001,443 $2,048,686
Cost of Goods Sold $1,621,169 81% $1,687,800 82%
GROSS PROFIT $380,274 19% $360,886 18%
ADJUSTMENTSPurchase Price Variance ($60,466) ($59,467)
Materials Usage Variance $94,533 $96,733
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g $ , $ ,Labor Variance ($19,718) ($93,895)
Overhead Absorption Variance $38,341 $182,577
SG&A $129,889 6% $135,215 7%
NET PROFIT $197,695 10% $99,723 5%
Future State: Value Stream Income Statement
Period 1 Period 2REVENUE
OEM $998,977 $1,039,440Systems $1,002,466 $1,009,246y , , , ,
$2,001,443 $2,048,686
Materials $829,936 41% $849,526 41%Direct Labor $305,767 15% $312,984 15%
Support Labor $340,245 17% $342,421 17%Machines $113,862 6% $116,550 6%
Outside process $60,043 3% $53,731 3%Facilities $40,250 2% $41,200 2%
Other Costs $12,009 0.6% $9,664 0.5%TOTAL COST $1,702,112 $1,726,076
GROSS PROFIT $299,331 15% $322,610 16%
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Inventory Adjustment ($41,593) ($161,426)Corporate Allocations $60,043 $61,461
NET PROFIT $197,695 10% $99,723 5%
Lean Accounting Summit 2012 Solving the Standard Costing Problem
Copyright 2012 BMA Inc. All rights reserved. Page 3
Work Against Continuous Improvement
Drill on CNC Machine
Inspect & Pack
Machine on Lathe
Batch 2500
Grind
1 minute
4 minutes6 minutes
4 minutes
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Total labor time: 15 minutesLabor cost: 5.00Overhead cost: 15.00Material Cost: 1.50TOTAL COST: 21.50
Lead Time: 6 weeksInventory 25 daysBatch size 2500 (10 days)On-Time delivery = 82%
Future State: Lean CellSmaller Drilling
Machine replaces
CNC Machine
Improve flow: reduce batch size,
lead time and inventory
Machine on Lathe
Drill on Drilling
Lathe
4 minutes
Grind
6 minutes
Inspect & Pack
4 minutes
Machine4 minutes Lean Cell
Same Resources in Value Stream = Same Cost
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Total labor time: 18 minutesLabor cost: 6.00Overhead cost: 18.00Material Cost 1.50TOTAL COST: 25.50
Lead Time: 2 daysInventory 5 daysBatch size 250 (1 day)On‐Time delivery = 98%
Lean Accounting Summit 2012 Solving the Standard Costing Problem
Copyright 2012 BMA Inc. All rights reserved. Page 4
Distort Costs….
Product AStandard Cost $90 06
Product BStandard Cost $109 85Standard Cost = $90.06
Material $42
Labor 17 mins @ $24.23/hr = $6.87
Overhead 600% = $41.19
Actual Cost = $100Material $42P d ti $580/10 $58
Standard Cost = $109.85Material = $42
Labor 24m @ $25/hr = $9.69
Overhead 600% = $58.18
Actual Cost = $100Material $42
$ $
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Production $580/10 = $58
Standard Cost too low
Production $580/10 = $58
Standard Cost too high
…which leads to poor decision making: Outsourcing product B
Traditional Approach Actual Impact
Standard Cost = $109.85
Outsourced Cost = $85.00
“Savings” of $24.85 per unit
New Material Cost = $ 85Old Material Cost = $ 42
Increase in Actual Material Cost = $43
Actual production cost per hour = $580 because no resources were eliminated
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Actual costs increase due to outsourcing
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Shop Floor
Distribution
Close out W.O.to put product
in F. G.
Cost Accounting(product costing)
Detailed Reporting
Work Order
InventoryValuation
WIP Val. &
Attempted Inv.Control
Pain in
PlanningLaunches
Production(MRP)
(SOFP)
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Customer Service
Not Used
Labor Tracking
Value added by oper. codeInfo. Technology
the Neck
Solving the Standard Cost Problem
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The Solution: Value Stream Costing
Lean Accounting Summit 2012 Solving the Standard Costing Problem
Copyright 2012 BMA Inc. All rights reserved. Page 6
The Future State: Value Stream Costing
Understood by everyone• Separates value stream profit from financialSeparates value stream profit from financial
accounting adjustments
Accurate Cost Information• Real spending• Checkbook of the value stream
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Relationship to Continuous Improvement• Eliminate waste – reduce actual costs
Root Causes of Costs Identified
Actual Value Stream Costs
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Capacity & Operational Performance Measures
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Value Stream Costing
Direct Costs
No Allocations
Actual Spending Timely
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No Product Costs
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Value Stream sets the boundaries for costs
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Actual, Direct Costs
M i l • Actual purchases @ actual costMaterials
• Actual payroll of full‐time people assigned to value streamLabor
• Depreciation repairs & maintenancehi
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• Depreciation, repairs & maintenance, toolingMachines
Actual, Direct Costs
• Utilities, rent, maintenance & repairF iliti Utilities, rent, maintenance & repair• Charged based on square footage of value streamFacilities
• Actual cost for the periodOutside
processing
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• Any other direct cost of the value stream that is under the control of the value streamOther Costs
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Monument Costs
Production Support CostsProcess Costs
• Simple allocation to value streams
Support Costs
• Direct assignment of people to value stream D ’t i b
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• Don’t assign by allocation
Costs Not Assigned to the Value Stream
Manufacturing Support
New Product Development SG&App
• Resources shared among the value streams
• Appear as support costs
p
• Lean companies recognize new product development as its own non‐
• Costs not assigned to value streams appear as support costs
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pprevenue generating value stream
Lean Accounting Summit 2012 Solving the Standard Costing Problem
Copyright 2012 BMA Inc. All rights reserved. Page 11
Value Stream Profit and Loss Statement
M t S t S P t
New Product D i
Support C t
TOTAL DIVISION
VALUE STREAMS
Motors Systems Spare Parts Design Costs DIVISION
Sales $326,240 $748,894 $453,215 $1,528,349Additional Revenue $0 $0 $12,422 $12,422
Material Costs $111,431 $232,774 $149,561 $87,909 $12,764 $594,439Conversion Costs $57,628 $70,406 $81,579 $203,769 $37,645 $451,027
Outside Process Costs $32,433 $22,991 $22,661 $7,531 $85,616Other Costs $16 040 $57 816 $29 459 $72 721 $176 036Other Costs $16,040 $57,816 $29,459 $72,721 $176,036
Tooling Costs $4,843 $12,544 $6,588 $23,975
Value Stream Profit $103,865 $352,363 $175,789 ($364,399) ($57,940) $209,678ROS 31.8% 47.1% 38.8% -23.7% -3.8% 13.7%
$925,314$918,807($6,507)
Opening InventoryClosing InventoryInventory Change
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($6,507)
$51,147
$152,0249.9%Division ROS
Corporate Overhead
Division Profit
Inventory Change
Lean Accounting Summit 2012 Solving the Standard Costing Problem
Copyright 2012 BMA Inc. All rights reserved. Page 12
Making Business Decisions
Solving the Standard Cost Problem
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Making Business Decisions with Value Stream Costing
Lean Financial Analysis: Actual Change in Revenue, Costs & Profit
Project the actual change in value stream revenue
Ch i it f d d Ch i i
Project the actual change in value stream costs
Changes to capacity & measurements Material cost impact
Change in units of demand Changes in prices
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Calculate the future state value stream profitabilityDoes the future state return on sales exceed
the current state?Yes – the decision makes financial sense
No – decision is a poor financial decision
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Relationship between: Operational Performance & Costs
I t f d i iImpact of decision on value stream performance measurements
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Probable corresponding impact on value stream costs
Relationship between Capacity & Costs ‐ 1
Business I l i
Capacity
Business Decision
Is total capacity changed?
Less Capacity is required
More Capacity is required
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CostsIf available capacity is removed from
value stream, costs decrease
If available capacity remains in value stream, no change
in costs
Continued on next slide
Lean Accounting Summit 2012 Solving the Standard Costing Problem
Copyright 2012 BMA Inc. All rights reserved. Page 14
Relationship between Capacity & Costs ‐ 2
Business Decision Do we have il bl
Capacity
Requires Increase in Capacity
available capacity for the
decision?
No Yes
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Costs Cost to Acquire Capacity
Additional improvements to create capacity
No Impact
How profitable is an order?
Demand Standard Cost
• 1000 units per month
• $14.00 unit price
• $ 15.00 per unit
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Std margin per unit = ($1.00)
Loss of $1000 per month Reject order
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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1. How profitable is the order, with available capacity?
Demand Materials Capacity
• 1000 units per month
• $14.00
• $9.50 per unit actual cost
• Currently available to meet 1000 units
th
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unit price per month
Financial Analysis using Value Stream Costing
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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2. How profitable is the order, without available capacity?
Demand
• 1000 units per month
Materials
• $9.50 per unit actual cost
Capacity
• Must add one person at
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• $14.00 unit price
a cost of $4204
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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2: Value Stream Costing without available capacity
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Solving the Standard Cost Problem
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Business Decision Making Example
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Example
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Given this annual cost information, calculate the Labor Rate and Overhead Rate (as a percentage of Labor Rate) required for Standard Costing.
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Example: standard cost
Calculate the Standard Cost for product Pro‐Valve 602 given the following informationPro Valve 602 given the following information.
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Exercise: standard marginThe company receives a request‐for‐quote from a customer for 3000 Pro‐Valve 602’s per month. The customer’s target price is $45 per unit. Your company requires a minimum of 15% margin.p y q gWork out the profitability using Standard Costing.
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Example: low cost outsourcingThe company has found an Asian supplier quoting a landed cost of $33.00 for the Pro‐Valve 602. The customer’s target price is $45 per unit. Your company requires a minimum of 15% margin. Work out the profitability from outsourcing this product.
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Example: value stream costingWork out the profitability using Value Stream Costing.You need to get 2 new machines and 2 operators to support this volume increase of 3000 units/month
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Lean Financial Analysis: Actual Change in Revenue, Costs & Profit
Ch i M t i l C t
Ch i L b C t
Change in Material Cost
$17.50 per unit X 3000 units = $52,500
Change in Machine Cost
Change in Labor Cost
Monthly cost $293,762 / 62 people = $ 4738 per person x 2 new hires = $9476
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Change in Machine Cost
Monthly cost $116,533 / 76 machines = $1533 per machine X 2 machines = $3067
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Example: summary & decision
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Example: box scores show the full impact
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Wrap Up
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Value Stream Costing: Simple & Easy
Actual Value stream St d d C tinumbers focus
No allocations
No product costing
Standard Costing
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Real results
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Value Stream Costing: Relevant & Accurate
H h did thHow much did the Value Stream ship?
How much did the l ll
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Value Stream actually spend?
Value Stream Costing: reduces costs
Lean Strategy Root Cause Analysis
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Lean Accounting Summit 2012 Solving the Standard Costing Problem
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In Lean, it’s all about flow
• Determined by the rate of flow of orders through a value streamProfitability
• Measuring and managing flowCost Control
• Achieved by eliminating waste, which improves flow & increases capacityCost Reduction
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• Increase demand on value stream and use capacity
Profitable Growth
Lean Accounting Summit 2012 Solving the Standard Costing Problem
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Question TimeVisit BMA USA website www.maskell.com
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p p ( ) ,
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