lean accounting , abc accounting , cvp analysis

52
LEAN ACCOUNTING

Transcript of lean accounting , abc accounting , cvp analysis

Page 1: lean accounting , abc accounting , cvp analysis

LEAN ACCOUNTIN

G

Page 2: lean accounting , abc accounting , cvp analysis

LEAN ACCOUNTINGLean Accounting is a business management tool that focuses on

reducing waste from production processes and maximizing customer value.

It is characterized by delivering,

The right product In the right quantity

With the right quality (zero-defect) At the exact time the customer needs it

At the lowest possible cost

Page 3: lean accounting , abc accounting , cvp analysis

THE SEVEN FORMS OF WASTE

1. •Overproduction

2. •Waiting

3. •Transportation

4. •Extra Processing

5. •Inventory

6. •Motion

7. •Defects

Page 4: lean accounting , abc accounting , cvp analysis

THE VISION FOR LEAN ACCOUNTING

Provide accurate, timely, and

understandable information to

motivate the lean transformation throughout the

organization.

Use lean tools to eliminate waste from

the accounting processes while

maintaining thorough financial control.

Fully comply with generally accepted

accounting principles (GAAP), external

reporting regulations, and internal reporting

requirements.

Support the lean culture by motivating investment in people,

and empowering continuous

improvement at every level of the

organization.

Page 5: lean accounting , abc accounting , cvp analysis

FEATURES

• Two principles exist in the lean accounting business function:

MEASURE MOTIVATE

Page 6: lean accounting , abc accounting , cvp analysis

PRINCIPLES OF LEAN THINKING

Page 7: lean accounting , abc accounting , cvp analysis

• Value is determined by the customer.• The value of a product to customer is the

difference between realization and sacrifice.– Realization is what a customer receives.– Sacrifice is what the customer gives up for the

basic and special product features (quality, brand name, and reputation).

Page 8: lean accounting , abc accounting , cvp analysis

• The value stream is made up of all activities, both value-added and non-value-added, required to bring a product group or service from its starting point to a finished product in the hands of the customer.

• Non-value-added activities are the source of waste– Activities avoidable in the short run– Activities unavoidable in the short run due to current

technology or production methods.

VALUE STREAM

Page 9: lean accounting , abc accounting , cvp analysis
Page 10: lean accounting , abc accounting , cvp analysis

Blue: Value-added process timeRed: Non-value-added move

and pre-process wait time

CREATING A FLOW

Page 11: lean accounting , abc accounting , cvp analysis

• The cell can produce 12 units per hour

• The production rate is controlled by the slowest activity in the cell

• The cycle time of operation as the number of minutes it takes an operation to process one unit of a product

Page 12: lean accounting , abc accounting , cvp analysis

• Lean accounting uses a demand-pull system, where the production is triggered by the customer order

• Eliminates waste by producing a product only when it is needed and only in the quantities demanded by customers– No production takes place until a signal from a

succeeding process indicates a need to produce

PULL VALUE

Page 13: lean accounting , abc accounting , cvp analysis

As value is specified, value streams are identified, wasted steps are removed, and flow and pull are introduced, begin the process again and continue it until a state of perfection is reached in which perfect value is created with no waste.

SEEK PERFECTION

Page 14: lean accounting , abc accounting , cvp analysis

PRINCIPLES AND PRACTICES

Page 15: lean accounting , abc accounting , cvp analysis
Page 16: lean accounting , abc accounting , cvp analysis

• Improve quality: In order to stay competitive in today’s marketplace, a company must understand its customers' wants and needs and design processes to meet their expectations and requirements.

• Eliminate waste: Waste is any activity that consumes time, resources, or space but does not add any value to the product or services.

Four Goals of leanGOALS OF LEAN ACCOUNTING

Page 17: lean accounting , abc accounting , cvp analysis

• Reduce time: Reducing the time it takes to finish an activity from start to finish is one of the most effective ways to eliminate waste and lower costs.

• Reduce total costs: To minimize cost, a company must produce only to customer demand. Overproduction increases a company’s inventory costs due to storage needs.

Page 18: lean accounting , abc accounting , cvp analysis

Poka – Yoke

5s visual workplace

Just in time

Continuous improvement

Material management

Work in process

LIST OF LEAN TOOLSLIST OF LEAN TOOLS

Page 19: lean accounting , abc accounting , cvp analysis

The following steps should be implemented in order to create the ideal lean manufacturing system:

Design a simple manufacturing system

Recognize that there is always room for improvement

Continuously improve the lean manufacturing system design

STEPS TO ACHEVIE LEAN ACCOUNTING

Page 20: lean accounting , abc accounting , cvp analysis

1. Design a simple manufacturing system A fundamental principle of lean manufacturing is

demand-based flow manufacturing. In this type of production setting, inventory is only pulled through each production centre when it is needed to meet a customer’s order.

The benefits of this goal include• decreased cycle time• less inventory• increased productivity• increased capital equipment utilization

Page 21: lean accounting , abc accounting , cvp analysis

2.There is always room for improvement The core of lean is founded on the concept of continuous

product and process improvement and the elimination of non-value added activities. “The Value adding activities are simply only those things the customer is willing to pay for, everything else is waste, and should be eliminated.

3.Continuous improvement A continuous improvement mindset is essential to reach a

company's goals. The term "continuous improvement" means incremental improvement of products, processes, or services over time, with the goal of reducing waste to improve workplace functionality, customer service, or product performance.

Page 22: lean accounting , abc accounting , cvp analysis

What can you expect to gain from successful and sustainable lean implementation?

A complete overhaul of your organisation’s culture.

Process that are free of waste and deliver products and services that are of high quality.

Products that have been engineered to work once produced

and are designed to be build with the least amount and effort and cost.

BENEFITS

Page 23: lean accounting , abc accounting , cvp analysis

Drastically improved margins.

Reduced lead times

Reduced inventories

Maintenance programs that extend the useful life of assets

Less costly rework

Satisfied customers

Growth

Page 24: lean accounting , abc accounting , cvp analysis

ACTIVITY BASED

COSTING

Page 25: lean accounting , abc accounting , cvp analysis

ACTIVITY BASED COSTING

A costing method that identifies the activities performed within the organization as it delivers its goods and services and assigns costs to products, based on the number of activities the organization used in producing them.

Page 26: lean accounting , abc accounting , cvp analysis

PRODUCTS REQUIRE

ACTIVITIES

ACTIVITIES CONSUME

RESOURCES

PEOPLE MANAGE

ACTIVITIES

Page 27: lean accounting , abc accounting , cvp analysis

APPLICATIONS OF ABC

• Product lines differ in volume and manufacturing complexity.

• Product Diversity or Multiple Products• High Overheads• The manufacturing process or number of

products has changed significantly

Page 28: lean accounting , abc accounting , cvp analysis

• Customer Diversity • Stiff Competition • Products do not consume costs directly • Money is spent on activities • Activities are consumed by product/services

Page 29: lean accounting , abc accounting , cvp analysis

Steps For Implementation of Activity Based Costing

Page 30: lean accounting , abc accounting , cvp analysis

1. Identify and classify the activities related to the company’s products or services.

Hierarchy of activitiesUnit – LevelBatch – LevelProduct – LevelCustomer-LevelFacility -Level

Page 31: lean accounting , abc accounting , cvp analysis

2. Estimate Cost of each activity.3. Calculate a cost-rate driver for each activity.

4. Assign activity costs to products using cost-driver rate.

Page 32: lean accounting , abc accounting , cvp analysis

Activity Based Costing - Advantages

1. Product cost determination under activity-based costing is more accurate and reliable because it focuses on the cause and effect linkage of costs and activities in the context of producing goods.2. Fixation of selling price for multi-products under activity-based costing is fair and correct because overheads are allocated on the basis of relevant cost drivers.

Page 33: lean accounting , abc accounting , cvp analysis

3. Control of overheads consisting of fixed and variable becomes possible by controlling and monitoring activities. Linkage between cost and activities are clearly identified in activity-based costing and thus provides opportunities to control overhead costs.

4. Sufficient information can be obtained to make decisions about the profitability of different product lines.

5. Fair allocation of overheads occupy a considerable portion in the total cost components.

Page 34: lean accounting , abc accounting , cvp analysis

Disadvantages Or Limitations Of Activity-Based Costing

1. Difficult to identify the overall activities that influence costs.

2. Not easy to select the most suitable cost drive.

3. Difficult to evaluate cost on the basis of activities.

4. Not suitable for small manufacturing concerns.

Page 35: lean accounting , abc accounting , cvp analysis

Conclusion• An efficient means of developing a comprehensive picture of a

business’ costs and expenditures, as they relate to products and services. ABC is simple to implement and can provide a host of benefits including the following:

1. Activity-based costing is applicable to a wide range of business needs. It may be used to look at a small portion of production or at the full scope of business operations.

2. With ABC, businesses can respond to inefficiencies. By identifying areas that are absorbing too many resources, managers can reallocate funds to more profitable areas.

3. Activity-based costing provides a more direct means of controlling company funds. With ABC, businesses can manage exactly where funds are going and how resources are being used.

Page 36: lean accounting , abc accounting , cvp analysis

CVP ANALYSIS

Page 37: lean accounting , abc accounting , cvp analysis

Break Even Point Break-even is the point of zero loss or profit. At break-even point, the revenues of the business are equal its total costs and its contribution margin equals its total fixed costs. Break-even point can be calculated by equation method, contribution method or graphical method.

Page 38: lean accounting , abc accounting , cvp analysis

Equation approach The equation method is based on the CVP formula:

Px = Vx + FC + Profit

BEP in Sales UnitsAt break-even point the profit is zero therefore the CVP formula is simplified to:Px = Vx + FCBreak-even Sales Units = x =

Page 39: lean accounting , abc accounting , cvp analysis

Example

Calculate break-even point in sales units and sales dollars from following information:

Price per Unit Rs.15

Variable Cost per Unit

Rs.7

Total Fixed Cost Rs.9,000

Page 40: lean accounting , abc accounting , cvp analysis

SolutionWe have,p = Rs.15v = Rs.7, andFC = Rs.9,000Substituting the known values into the formula for breakeven point in sales units, we get:Breakeven Point in Sales Units (x)= 9,000 ÷ (15 − 7)= 9,000 ÷ 8= 1,125 unitsBreak-even Point in Sales Dollars = Rs.15 × 1,125 = Rs.16,875

Page 41: lean accounting , abc accounting , cvp analysis

CONTRIBUTION MARGIN APPROACH

Contribution margin is the difference between sales and variable costs. When calculated for a single unit, it is called unit contribution margin. Contribution margin ratio is the ratio of contribution margin to sales.

Contribution Approach Formulas

BEP Sales in Units Since unit contribution margin (Unit CM) is equal to unit sale price (p) less unit variable cost (v), So,Unit CM = p − vTherefore,Break-even Sales Units = x = FC ÷ Unit CM

Page 42: lean accounting , abc accounting , cvp analysis

BEP in Sales Rupees

Break-even Sales Rupees = Price per Unit × Break-even Sales Units OrBreak-even Sales Rupees = FC ÷ CM Ratio

Page 43: lean accounting , abc accounting , cvp analysis

ExampleCalculate the break-even point in units and in sales dollars when sales price per unit is Rs.35, variable cost per unit is Rs.28 and total fixed cost is Rs.7,000.

Solution Contribution Margin per Unit = ( 35 − Rs.28 ) = Rs.7Break-even Point in Units = Rs.7,000 ÷ Rs.7 = 1,000Break-even Point in Sales Dollars = 1,000 × Rs.35 or Rs.7,000 ÷ 20% = Rs.35,000

Page 44: lean accounting , abc accounting , cvp analysis

COST-VOLUME-PROFIT (CVP) RELATIONSHIPS IN GRAPHIC FORM

A CVP graph highlights CVP relationships over wide ranges of activity. Viewing CVP relationships in a graph gives managers a perspective that can be obtained in no other way.

In CVP Graph (also called break-even chart) , unit volume is represented on the horizontal ( x ) axis and dollars on the vertical ( y ) axis. Preparing a CVP graph involves three steps as depicted in exhibit 6–1.

Page 45: lean accounting , abc accounting , cvp analysis
Page 46: lean accounting , abc accounting , cvp analysis

Total expense at that sales volume is:

The interpretation of the completed CVP graph is given in exhibit 6–2. The anticipated profit or loss at any given level of sales is measured by the vertical distance between the total revenue line (sales) and the total expense line (variable expense plus fixed expense).

Page 47: lean accounting , abc accounting , cvp analysis

The break-even point is where the total revenue and total expense lines cross. The break-even point of 350 speakers in exhibit 6–2 agrees with the break-even point computed earlier.

Page 48: lean accounting , abc accounting , cvp analysis

Click icon to add picture

    An even simpler form of the cvp graph, which we call a profit graph, is presented in exhibit 6–3. That graph is based on the following equation: Profit = unit cm × q - fixed expensesIn the case of acoustic concepts, the equation can be expressed as:Profit = Rs.100 × q - Rs.35,000

Page 49: lean accounting , abc accounting , cvp analysis

Contribution margin ratio

In this section, we show how the contribution margin ratio can be used in cost volume- profit calculations. As the first step, we have added a column to acoustic concepts’ contribution format income statement in which sales revenues, variable expenses, and contribution margin are expressed as a percentage of sales:

Page 50: lean accounting , abc accounting , cvp analysis

This ratio is computed as follows:

For acoustic concepts, the computations are:

In a company such as acoustic concepts that has only one product, the cm ratio can also be computed on a per unit basis as follows:

Page 51: lean accounting , abc accounting , cvp analysis

 The CM ratio shows how the contribution margin will be affected by a change in total sales. Acoustic concepts’ cm ratio of 40% means that for each dollar increase in sales, total contribution margin will increase by 40 cents (Rs.1 sales × cm ratio of 40%). Net operating income will also increase by 40 cents, assuming that fixed costs are not affected by the increase in sales.

    The cm ratio is particularly valuable in situations where the dollar sales of one product must be traded off against the dollar sales of another product. In this situation, products that yield the greatest amount of contribution margin per dollar of sales should be emphasized.

Page 52: lean accounting , abc accounting , cvp analysis

Cvp analysis

Key calculations when using CVP analysis are the contribution margin and the contribution margin ratio.

The contribution margin represents the amount of income or profit the company made before deducting its fixed costs. Said another way, it is the amount of sales dollars available to cover (or contribute to) fixed costs.

When calculated as a ratio, it is the percent of sales dollars available to cover fixed costs. Once fixed costs are covered, the next dollar of sales results in the company having income.