© BMA Inc. 2009. All rights reserved. Value Stream Cost & Capacity Exercises Lean Accounting for...

© BMA Inc. 2009. All rights reserved.

Value Stream Cost & Capacity Exercises

Lean Accounting for the Lean Enterprise

© 2009 BMA Inc. All rights reserved. 20090224rev

BHM revisions


Value Stream Capacity Exercise


Step 1. Calculate the Total Available Employee Time(#employees x #days x Labor Hrs per shift) x 3,600 seconds

Step 2. Calculate the Employee Productive Time(Qty per Month – (Qty x (scrap + rework rate))) x Cycle Time x Crew Size)

Step 3. Calculate the Employee Productive Capacity Percentage.(Employee Productive Time / Total Available Time)

Step 4. Calculate the change-over time, scrap & rework time, downtime, inspection time. C/O = (quantity/batch size) x Change-over timeScrap/rework = Qty x (scrap + rework rate) x Cycle Time x Crew sizeD/T = Downtime% x Total Available TimeInspection= (Inspect% x Quantity) x Inspection time

Step 5. Calculate the Total Non-Productive TimeStep 4 plus 5S & meetings

Step 6. Calculate the Employee Non-Productive Capacity PercentageTotal Non-Prod Time / Total Available Time

Step 7. Calculate the Employee Available Capacity Percentage. 100% - (Prod. Capacity + Non-Prod Capacity)

Calculate the Employee Capacity for this small value stream.

12

3

4

5

67

Current State

Employee Productive Capacity 44%

Employee Non-Productive Capacity 46%

Employee Available Capacity 9%

Quantity per Month 10000

Employee Cycle Time 60

I nternal Change Over Time Sec 10800

External Change-Over Sec 0

Labor Hours per shift 7.50

# Shifts per day 1

Average Batch Size 500

Scrap Rate 20%

Rework Rate 20%

Downtime % 10%

I nspection % 10%

I nspection Time Sec 120

Crew Size 2

# cells 2

Number of Employees 5

Days per month 20

Total Available Employee Time 2,700,000

Productive Time 1,200,000

Change Over Time Sec 216,000

Scrap & Rework Time 518,400

Downtime 270,000

I nspection Time 168,000

5S & Clean up 60,000

Meetings & reporting 12,000

I mprovement projects 0

Total Non-Productive Time 1,244,400

Current State

10000

60

10800

0

7.50

1

500

20%

20%

10%

10%

120

2

2

5

20

60,000

12,000

0


The employee capacity has changed as a result of the kaizen improvements.

Calculate the employee capacity after the kaizen

Current State

Kaizen I mprovement

Future State 1

Employee Productive Capacity 44% 44%

Employee Non-Productive Capacity 46% 9%

Employee Available Capacity 9% 46%

Quantity per Month 10000 10000

Employee Cycle Time 60 60

I nternal Change Over Time Sec 10800 75% improvement 2700

External Change-Over Sec 0 0

Labor Hours per shift 7.50 7.50

# Shifts per day 1 1

Average Batch Size 500 Reduce to 300 300

Scrap Rate 20% 20% improvement 16%

Rework Rate 20% 50% improvement 10%

Downtime % 10% Eliminated 0%

I nspection % 10% Eliminated 0%

I nspection Time Sec 120 120

Crew Size 2 2

# cells 2 2

Number of Employees 5 5

Days per month 20 20

Total Available Employee Time 2,700,000 2,700,000

Productive Time 1,200,000 1,200,000

Change Over Time Sec 216,000 90,000

Scrap & Rework Time 518,400 84,240

Downtime 270,000 0

I nspection Time 168,000 0

5S & Clean up 60,000 60,000

Meetings & reporting 12,000 12,000

I mprovement projects 0 0

Total Non-Productive Time 1,244,400 246,240

Future State 1

10000

60

2700

0

7.50

1

300

16%

10%

0%

0%

120

2

2

5

20

0

0

60,000

12,000

0


Current State

Kaizen I mprovement

Future State 1 Business Decisions

Future State 2

Employee Productive Capacity 44% 44% 67%

Employee Non-Productive Capacity 46% 9% 12%

Employee Available Capacity 9% 46% 22%

Quantity per Month 10000 10000 I ncrease Sales 20% 12000

Employee Cycle Time 60 60 60

I nternal Change Over Time Sec 10800 75% improvement 2700 2700

External Change-Over Sec 0 0 0

Labor Hours per shift 7.50 7.50 7.50

# Shifts per day 1 1 1

Average Batch Size 500 Reduce to 300 300 300

Scrap Rate 20% 20% improvement 16% 16%

Rework Rate 20% 50% improvement 10% 10%

Downtime % 10% Eliminated 0% 0%

I nspection % 10% Eliminated 0% 0%

I nspection Time Sec 120 120 120

Crew Size 2 2 2

# cells 2 2 2

Number of Employees 5 5 Redeploy 1 person 4

Days per month 20 20 20

Total Available Employee Time 2,700,000 2,700,000 2,160,000

Productive Time 1,200,000 1,200,000 1,440,000

Change Over Time Sec 216,000 90,000 108,000

Scrap & Rework Time 518,400 84,240 84,240

Downtime 270,000 0 0

I nspection Time 168,000 0 0

5S & Clean up 60,000 60,000 48,000

Meetings & reporting 12,000 12,000 12,000

I mprovement projects 0 0 0

Total Non-Productive Time 1,244,400 246,240 252,240

Future State 2

12000

60

2700

0

7.50

1

300

16%

10%

0%

0%

120

2

2

4

20

0

0

48,000

12,000

0


Current State

Kaizen I mprovement



Future State 3

Employee Productive Capacity 44% 44% 67% 87%

Employee Non-Productive Capacity 46% 9% 12% 11%

Employee Available Capacity 9% 46% 22% 3%

Quantity per Month 10000 10000 I ncrease Sales 20% 12000 I ncrease 30% 15600

Employee Cycle Time 60 60 60 60

I nternal Change Over Time Sec 10800 75% improvement 2700 2700 2700

External Change-Over Sec 0 0 0 0

Labor Hours per shift 7.50 7.50 7.50 7.50

# Shifts per day 1 1 1 1

Average Batch Size 500 Reduce to 300 300 300 300

Scrap Rate 20% 20% improvement 16% 16% Improved Std.Work 5%

Rework Rate 20% 50% improvement 10% 10% 5%

Downtime % 10% Eliminated 0% 0% 0%

I nspection % 10% Eliminated 0% 0% 0%

I nspection Time Sec 120 120 120 120

Crew Size 2 2 2 2

# cells 2 2 2 2

Number of Employees 5 5 Redeploy 1 person 4 4

Days per month 20 20 20 20

Total Available Employee Time 2,700,000 2,700,000 2,160,000 2,160,000

Productive Time 1,200,000 1,200,000 1,440,000 1,872,000

Change Over Time Sec 216,000 90,000 108,000 140,400

Scrap & Rework Time 518,400 84,240 84,240 32,400

Downtime 270,000 0 0 0

I nspection Time 168,000 0 0 0

5S & Clean up 60,000 60,000 48,000 48,000

Meetings & reporting 12,000 12,000 12,000 12,000

I mprovement projects 0 0 0 0

Total Non-Productive Time 1,244,400 246,240 252,240 232,800

Future State 3

15600

60

2700

0

7.50

1

300

5%

5%

0%

0%

120

2

2

4

20

48,000

12,000

0


Inventory Valuation Exercise


TOTAL

$2,048,686

$849,526$312,984$342,421$116,550$53,731$41,200$9,664

$1,726,076

$322,610 16%

$1,186,035 $963,148

($222,887)

$99,723 5%

Calculate the Inventory Value Using the “Days of Inventory Method”

REVENUE

MaterialsDirect LaborSupport LaborMachinesOutside processFacilitiesOther Costs

TOTAL COST

VALUE STREAM PROFITReturn on Sales

Opening InventoryClosing Inventory

Inventory Adjustment

NET PROFIT

1. Calculate the material cost per day.2. Calculate the conversion cost per day3. Calculate Raw Material value (#days * material cost per day)4. Calculate the Finished Goods value (#days *( material +

conversion cost per day))5. Calculate WIP value (#days * material cost per day +

#days/2 * conversion cost per day)6. Calculate total inventory value by adding the three together

TOTAL

$2,048,686

$849,526$312,984$342,421$116,550$53,731$41,200$9,664

$1,726,076

$322,610 16%

$1,186,035 Closing Inventory


Days in the month Total Material CostMaterial Cost per

DayTotal Conversion

CostConversion cost

per day

20 $849,526 $42,476 $876,550 $43,828

Days Material Value Conversion Value Total Value

Raw Material 10 $424,763 $0 $424,763

Work in Process 3 $127,429 $65,741 $193,170

Finished Goods 4 $169,905 $175,310 $345,215

TOTAL INV VALUE 17 $722,097 $241,051 $963,148

Days in the month Total Material CostMaterial Cost per

DayTotal Conversion

CostConversion cost

per day

20 $849,526 $876,550

Days Material Value Conversion Value Total Value

Raw Material 10

Work in Process 3

Finished Goods 4

TOTAL INV VALUE 17


Total Units Manufactured

Total Material CostAverage Material

Cost per UnitTotal Conversion

Cost

Average Conversion cost

per Unit

22,861 $849,526 $37.16 $876,550 $38.34

Quantity Material Value Conversion Value Total Value

Raw Material 11,430 $424,744 $0 $424,744

Work in Process 3,430 $127,460 $65,758 $193,218

Finished Goods 4,573 $169,898 $175,341 $345,276

TOTAL INV 19,433 $963,238 $722,140 $241,098

TOTAL

$2,048,686

$849,526$312,984$342,421$116,550$53,731$41,200$9,664

$1,726,076

$322,610 16%

$1,186,035 $963,163

($222,872)

$99,737 5%

Calculate the Inventory Value Using the “Number of Units Inventory Method”

REVENUE


TOTAL COST




NET PROFIT

1. Calculate average material cost and average conversion cost

2. Calculate Raw Material value (#units * material cost per unit)3. Calculate the Finished Goods value ((#units * material +

conversion cost per unit))4. Calculate WIP value (#units * material cost per unit +

#units/2 * conversion cost per unit)5. Calculate total inventory value by adding the three together

TOTAL

$2,048,686

$849,526$312,984$342,421$116,550$53,731$41,200$9,664

$1,726,076

$322,610 16%



Total Units Manufactured

Total Material CostAverage Material

Cost per UnitTotal Conversion

Cost

Average Conversion cost

per Unit

22,861 $849,526 $876,550

Quantity Material Value Conversion Value Total Value

Raw Material 11,430

Work in Process 3,430

Finished Goods 4,573

TOTAL INV 19,433


Calculate the Inventory Value Using the “Days of Conversion Cost Method”

Inventory Value Materials Only

Number of Days in the Month

Number of Days of Inventory

$474,036 20 11.16

Inventory Value Materials Only

Number of Days in the Month

Number of Days of Inventory

$474,036 20

This method is used when the company tracks inventory but maintains inventory value for the ,material content only. The conversion cost is then applied based upon the number of days of material.

1. Calculate the number of days of inventory. (Days in the month * Inventory value / Monthly Material Cost)

2. Calculate the Conversion Cost Applied. (Number of days of inventory * total conversion cost / Number of Days in the Month)

3. Calculate total inventory cost. (Add materials value plus conversion cost applied)



NET PROFIT

TOTAL

$2,048,686

$849,526$312,984$342,421$116,550$53,731$41,200$9,664

$1,726,076

$322,610 16%

$1,186,035 $963,152

($222,883)

$99,726 5%

TOTAL

$2,048,686

$849,526$312,984$342,421$116,550$53,731$41,200$9,664

$1,726,076

$322,610 16%



REVENUE


TOTAL COST


Total Conversion Cost

Conversion Cost Applied

Total Inventory Cost

$876,550 $489,115 $963,151

Total Conversion Cost

Conversion Cost Applied

Total Inventory Cost

$876,550


Calculate the Inventory Value Using the “Monthly Average Cost Method”

1. Calculate Days of This Month. (Lower of “# Days” and “Days in the Month” 2. Calculate Days for Last Month (“# Days” minus “Days of This Month”3. Calculate Current Month Average Value (“Days of This Month” * “Average Cost this

Month” * Average Daily Demand for this Month”4. Calculate Last Month Average Value (“Days of Last Month” * ”Average Cost Last

Month” * “Average Daily Demand This Month”5. Calculate the Inventory Value (“Current Month Average Value + Last Month Average

Value”)

Average CostQuantity in

StockAverage Daily

Demand# Days

Days in the Month

Inventory Value

January $10.23 12,460 356 35 21 $130,015

February $11.43 14,912 466 32 20 $163,734

March $9.22 10,295 355 29 22 $100,412

April $9.14 9,950 398 19 21 $69,117

Days of This Month

Days of Last Month

Current Month Average Value

Last Month Average Value

February 20 12 $106,528 $57,206

March 22 7 $72,008 $28,404

April 19 0 $69,117 $0

Month Month Average Value Average Value

February

March

April

Average CostQuantity in

StockAverage Daily

Demand# Days

Days in the Month

Inventory Value

January $10.23 12,460 356 35 21 $130,015

February $11.43 14,912 466 32 20

March $9.22 10,295 355 29 22

April $9.14 7,562 398 19 21

Days of This Days of Last Current Month Last Month


Defining Value StreamsExercises


Exercise: Defining Value StreamsCompany & Product Description

Universal Valve

Company manufactures

industrial valves

Sizes

Mini

Small

Medium

Large

Types Medium Pressure

Low Pressure

High Pressure

Plastic

Brass

Alloy

Refrigeration

Construction

DIY

Hydraulics

Coffee Makers

Commercial

MANIFOLDSBrass/AlloySmall, Med,

Large


Exercise: Defining Value Streams Company & Product Description• The Universal Valve Company (UVC)

manufactures valves in four industry standard sizes – “Mini”, “Small”, “Medium” and “Large”.

• UVC makes valves for applications classed as “Low Pressure” (LP), “Medium Pressure” (MP) and “High Pressure” (HP).

• The valves are machined and assembled from

– plastic (LP)

– brass (LP and MP)

– alloy (HP) components.

• The plastic valves all have low pressure applications and are made exclusively for the plumbing/ water industry – domestic and commercial – and are sold to DIY chains, trade wholesalers and direct to construction companies. Only “Small” and “Medium” sized LP valves are made.

• Brass valves are made for low pressure and medium pressure applications. LP brass valves all have plumbing/ water uses and are made in “Small” and “Medium” sizes. MP brass valves are made in all four sizes and serve mainly refrigeration, and coffee machine OEMs. Large MP brass valves are made to order in two cells for fluid applications by specialist OEMs.

• Alloy valves are for specialized high pressure uses including hydraulics, commercial refrigeration and other technical applications by specialist OEMs. The alloy valves manufactured by UVC are all “Mini”, “Small” or “Medium” sizes.

• The company also combines brass or alloy valves with other components into Manifolds – with two assembly cells dedicated to this. “Small” and “Medium” valves (brass or alloy) are assembled into Manifolds on one cell; with “Large” valves (brass) assembled on the other cell.


Exercise: Defining Value StreamsProduct Data for Valves; MINI family

MINI Plastic Brass Alloy

Size of Valve: Mini

None

Medium Pressure High Pressure

% of Total Revenue 9% 10%

Main CustomersOEM Refrigeration & Coffee Machines

OEM Hydraulics & other specialist

uses

No. of Manufacturing Cells

3 cells

(1 Refrigeration

2 Coffee)

1 cell


Exercise: Defining Value StreamsProduct Data for Valves; SMALL family

SMALL Plastic Brass Alloy

Size of Valve: Small

Low Pressure Low PressureMedium Pressure

High Pressure

% of Total Revenue

7% 3% 13% 9%

Main Customers

DIY Stores, Trade

Wholesalers, Construction

firms

DIY Stores, Trade


firms

Refrigeration OEM, Coffee

Machine OEM

Commercial refrigeration.

Hydraulic OEMs. Specialist OEMs

No. of Manufacturing

Cells2 1 cell

4 cells

(2 Refrigeration; 2 Coffee)

1


Exercise: Defining Value Streams Product Data for Valves; MEDIUM family

MEDIUM Plastic Brass Alloy

Size of Valve: Medium

Low Pressure Low PressureMedium Pressure

High Pressure

% of Total Revenue

8% 5% 12% 6%

Main Customers

DIY Stores, Trade


firms

Construction firms & misc.

Refrigeration OEM

Commercial refrigeration.

Hydraulic OEMs.

Specialist OEMs

No. of Manufacturing

Cells2 1 2 1


Exercise: Defining Value Streams Product Data for Valves; LARGE family

LARGE Plastic Brass Alloy

Size of Valve: Large

None

Medium Pressure

None

% of Total Revenue 8%

Main CustomersMade to order for specialist OEM

firms


2


Exercise: Defining Value Streams Product Data for Valves; MANIFOLDS

MANIFOLD Brass Brass Alloy

Size of Valve: LargeSmall or Medium

Size Small or Medium

Size

% of Total Revenue 3% 7%

Main CustomersMade to order for specialist OEM

firmsMade to order for specialist OEM firms


1 1


Exercise: Defining Value Streams

• Manifold Assembly Cells– 1 cell assembles “Small” or “Medium” brass or

alloy (never mixed) valves into Manifolds. This accounts for 7% of total UVC revenue with specialist OEMs as the customers.

– 1 cell assembles “Large” brass valves into Manifolds. This accounts for 3% of total UVC revenue with specialist OEMs as the customers.


Exercise: Defining Value Streams Summary of Production Cells

SIZE Plastic Low Pressure

Brass Low Pressure

Brass Medium Pressure

Alloy High Pressure

Mini 0 03


1(specialist)

Small 2(plumbing/ water)

1(plumbing/ water)

4


1

(specialist)

Medium 2(plumbing/ water)

1(plumbing/ water)

2

(2 Refrigeration)

1

(specialist)

Large 0 02

(specialist)0

Manifolds2

(specialist)

1(Specialist)Shared with

Brass


Exercise: Defining Value Streams Factory Layout – before Value Streams

Plastic Deflash

4 people

Engineering5 people

Receiving & Shipping

2 People

Plastic Machining & Assembly.

4 cells

Brass screw, deburr &

assembly.

13 cells

Finished Goods

Injection Moulding

2 people

12 people 65 people

Alloy Screw, deburr &

assembly.

3 cells

16 people

Manifold Assembly. 2 cells

4 people

6 people

Production Control3 people

Purchasing3 people

Customer Service2 people


Exercise:Defining Value Streams

In your group discuss the possible ways in which you might define the Value Streams for the Universal Valve Company.

What are the advantages and disadvantages of each ?

State your preferred selection with reasons.

Remember: Order Fulfillment Value Streams are primarily defined by materials flow.


Exercise: Define Value Streams

• Order fulfillment value streams are primarily set up based upon the flow of materials through the process.

• We need to create a value stream team that includes both production people and the people that support production.

• The value stream must be a reasonable size. – No less than 10% of revenues– Between 20-150 people.


Ship/Rec

Sales

Cust Serv

Acct

IT

Manager

16 cell

1 FG (share)

1 PC (Share)

1 Eng

55 cell

2 FG

2 PC

2 Eng

1 Purchase

16 cell

1 FG

1 PC (share)

1 Eng

1 Purchase

18 cell

1 FG

1 PC

1 Eng

1 Purchase

People

18%42%25%15%Revenue

%

41134Number of

Cells

Make to Order

Refrigerator

Coffee

DIY

Construction

Hydraulic

Refrigerator

Commercial

DIY

ConstructionMarket

SHAREDNEW

PRODUCT DESIGN

BRASS

Large & Manifolds

BRASS

Mini, Small, Med

ALLOYPLASTICSVALUE

STREAM

Ship/Rec

Sales

Cust Serv

Acct

IT

Manager

16 cell

1 FG (share)

1 PC (Share)

1 Eng

55 cell

2 FG

2 PC

2 Eng

1 Purchase

16 cell

1 FG

1 PC (share)

1 Eng

1 Purchase

18 cell

1 FG

1 PC

1 Eng

1 Purchase

People

18%42%25%15%Revenue

%

41134Number of

Cells

Make to Order

Refrigerator

Coffee

DIY

Construction

Hydraulic

Refrigerator

Commercial

DIY

ConstructionMarket

SHAREDNEW

PRODUCT DESIGN

BRASS

Large & Manifolds

BRASS

Mini, Small, Med

ALLOYPLASTICSVALUE

STREAM

Exercise: Work SheetVALUE

STREAM

Market

Number of Cells

Revenue

%

People


Value Streams by MarketSample Answer #1

Value Streams

by Materials

PLASTICS

BRASS large & Manifolds

ALLOY

BRASS Mini, Small, Medium

Plastic SmallLP 7% 2cells

Brass SmallLP 3% 1 cell

Plastic MedLP 8% 2 cells

18 people

Brass MiniMP 9% 3 cell

Brass SmallMP 13% 4 cell

Brass MediumMP 12% 2 cell

Alloy MiniHP 10% 1 cell

Alloy SmallHP 9% 1 cell

Brass MediumLP 5% 1cell

Alloy MediumHP 6% 1 cell

ManifoldsHP 10% 2 cell

Brass LargeMP 8% 2 cell

10 people

6 people 5 people

11 people

55 people


Exercise: Sample Answer #1VALUE

STREAMPLASTICS ALLOY

BRASS

Mini, Small, Med

BRASS

Large & Manifolds

NEW PRODUCT DESIGN

SHARED

MarketDIY

Construction

Hydraulic

Refrigerator

Commercial

Refrigerator

Coffee

DIY

Construction

Make to Order

Number of Cells

4 3 11 4

Revenue

%15% 25% 42% 18% Ship/Rec

Sales

Cust Serv

Acct

IT

ManagerPeople

18 cell

1 FG

1 PC

1 Eng

1 Purchase

16 cell

1 FG

1 PC (share)

1 Eng

1 Purchase

55 cell

2 FG

2 PC

2 Eng

1 Purchase

16 cell

1 FG (share)

1 PC (Share)

1 Eng



Value Streams

by Market

DIY, Trade &Construction

OEM & Specialist

Hydraulics

Refrigeration& CoffeePlastic Small

LP 7% 2cells



10 people

18 people










10 people

6 people 5 people

11 people

45 people



STREAMDIY, Trade &

Construction

Refrigeration & Coffee Valves

HydraulicsOEM &

Specialist

NEW PRODUCT DESIGN

SHARED

ProductsPlastics

Brass Low Pressure


Alloy Mini & Small

Manifolds

Brass Large

Alloy Medium

Number of Cells

6 9 cells 2 5

Revenue

%23% 34% 19% 24% Ship/Rec

Sales

Cust Serv

Acct

IT

ManagerPeople

28 Cell1 FG1 PC1 Eng

1 Purch

45 cell2 FG1 PC1 Eng

1 Purch

11 cell1 FG (Share)1 PC (Share)

1 Eng1 Purch




Value Streams

by Detailed Market

Water

OEM & Specialist

Coffee

Refrigeration

Plastic SmallLP 7% 2cells



10 people

18 people










10 people

6 people

5 people

11 people

5 people

Manifolds


10 people


10 people

10 people



STREAMWater Refrigeration Coffee Manifold

Specialist OEM

SHARED

ProductsPlastic & Brass Low Pressure



Brass & Alloy

Small, Medium, & Large

Alloy High Pressure

Brass large Medium Pressure

Number of Cells

6 5 4 2 5

Revenue

%23% 21% 13% 10% 33% Ship/Rec

Sales

Cust Serv

Acct

IT

ManagerPeople


1 Purchase


1 Purch

10 cell1 FG Shared

0 PC1 Eng

0 Purchase

6 cell1 FG shared

0 PC1 Eng

0 Purchase


1 Purchase


Universal Value Company Value Stream Costing Exercise


Universal Valve CompanyCreating an Income Statement

August ($ Thousands)

Plastics 458.3

Alloy 675.0

Brass 1,408.3

Large Brass 525.0

Total 3,066.6


Universal Valve CompanyCell Staffing & Machines

In August there were no staffing changes.

Value Stream

Plastics Alloy BrassLarge &

ManifoldsSupport

Number of Cells

4 3 11 4 Materials Handling

(1)

Sales (7)

Cust.Servce (1)

Accounting (3)

IT (3)

Engineering Mgr (1)

Plant Manager

(1)

Operators 18 16 55 16

Materials Handlers

1 1 21 shared

with Brass

Production Control

1 1 21 shared with Alloy

Engineering

1 1 2 1

Purchasing

1 1 11 shared

with Brass

Number of Machines

13 11 40 12


Universal Valve CompanyBreakdown of Costs

• Payroll per Annum– Operators & Materials Handlers $50,450– Engineers

$82,143– Engineering Manager $100,000– Customer Service $40,000– Production Control, Purchasing, Accounting & IT

$55,000– Plant manager $120,000– Sales are paid on commission of 0.42% of sales

• Insurance, payroll taxes, & fringes 12.7%

• Machine depreciation/machine per annum $6,000


Universal Valve CompanyMore Costs for the month of August

Value Stream

Plastics Alloy BrassLarge &

ManifoldsSupport

Materials $205.8K $562.5K $765.0K $362.5K $44.5K

$5.2KEnergy Costs

$6.4K $25.0K $45.0K $20.5K

MRO & Supplies

$5.0K $6.5K $16.2K $7.1K $4.3K

Space Used

Sq. Feet18,800 17,400 57,900 15,900 40,000

Travel Costs

$1K $1.2K $2.2K $.8K $8.6K

Occupancy cost = $2.00 per square foot per annum


Universal Valve CompanyMore Information for Costs

• There are Corporate overhead costs of 1% of sales and Group overhead costs of ½% of sales. These are not allocated to the value streams.

• In August Universal Valve has gained $56.5K owing to exchange rate changes.


On your flip chart:

1. Be sure to include all four value streams and support.

2. Add the “below the line” adjustments to bring the statement into line with GAAP and other external

reporting requirements.3. You may use rounded figures.

Develop a “plain English” income statement for the Month of August

Universal Valve CompanyValue Stream Income Statement


Exercise Answer

$000 Plastic Alloy Brass

Large Brass & Manifold Support TOTAL

Income 458.3 675.0 1408.3 525.0 0.0 3066.6

Materials 205.8 562.5 765.0 362.5 44.5 1940.3MRO and Supplies 5.0 6.5 16.2 7.1 4.3 39.1Energy 6.4 25.0 45.0 20.5 5.2 102.1Space Costs 3.1 2.9 10.0 2.7 6.7 25.4Travel etc 1.0 1.2 2.2 0.8 8.6 13.8Machines 6.5 5.5 20.0 6.0 38.0

Sub Total 227.8 603.6 858.4 399.6 69.3 2158.7

Operators & Materials Handlers 79.9 71.5 241.7 69.4 4.2 466.7Production Controllers 4.6 6.9 9.2 2.3 0.0 23.0Engineers 6.8 6.8 13.7 6.8 0.0 34.1Purchasing 4.6 4.6 6.9 2.3 0.0 18.4Customer Service 3.3 3.3Finance & I.T. 27.5 27.5Engineering Manager 8.3 8.3Plant Manager 10.0 10.0Sales Commissions 12.8 12.8

Total Wages and Salaries 95.9 89.8 271.5 80.8 66.1 604.1Benefits 12.2 11.4 34.5 10.3 8.4 76.8

TOTAL COST 335.9 704.8 1164.4 490.7 143.8 2839.6

VALUE STREAM PROFIT 122.4 (29.8) 243.9 34.3 (143.8) 227.0

VALUE STREAM PROFIT % 26.71% -4.41% 17.32% 6.53% 0.00% 7.40%

Corporate Overheads 30.7 -30.7 Group Overheads 15.3 -15.3

Exchange Rate Gain 56.5 56.5

NET PROFIT 237.5NET PROFIT % 7.75%

Universal Valve Company August 2008 Income Statement by Value Stream


Universal Value Company Decision-Making Exercise


Example 1: Special Order with Available Capacity

• We received a special order of 1000 units per month of a Alloy Medium value– Price = $14.00 per unit– Standard Cost = $15– Margin = ($1)– Material unit cost - $9.50

• We have capacity available to produce these additional products

• Should we take the order?


Example 1: Special Order with Available Capacity


Example 2: Special Order without Available Capacity

• We have received a special order of 1000 units per month – Price = $14.00 per unit– Standard Cost = $15– Margin = ($1)

• Material unit cost - $9.50• Must add an extra person ($4,204 per month) to the

value stream

• Should we take the order?


Example 2: Special Order without Available Capacity


Example 3: Special Order with Outsourced Supplier

• We have received a special order of 1000 units per month – Price = $14.00 per unit– Standard Cost = $15– Margin ($1)

• We have no available capacity, but have found a local supplier– Outsourced purchase cost - $12.75

• Should we outsource this and take the order?


Example 3: Special Order with outsourced supplier


Example 4: Bring Outsourced Processes in House

• In the Brass Valves value stream continuous improvement has created enough capacity to possibly bring outsourced work in house.

– Monthly outsourced cost - $ 62,400– Material cost (if we make it in-house)= $36,000

• To produce in house we must: – buy a 2 machines ($3060 per month)– hire an extra supervisor ($4500/mo)– and 2 more operators ($8,400 per month)

• Should we bring this work in-house?


Example 4: Bring Outsourced Processes In House


Example 5: Capital Purchase Frees Up People

• We are thinking of buying a new machine to automate a manual production task in the Brass Valves value stream.– Machine cost = $4,000 per month– Machine purchase frees up 2 assembly operators ($8400 per

month)

• We have received orders for 2500 more units per month and the new machine provides the additional capacity.– The price is $18.00 and the material cost is $14.00

• Should we buy the machine?


Example 5: Capital Purchase which Frees Up People

© BMA Inc. 2009. All rights reserved. Value Stream Cost & Capacity Exercises Lean Accounting for...

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Transcript of © BMA Inc. 2009. All rights reserved. Value Stream Cost & Capacity Exercises Lean Accounting for...