lean accounting , abc accounting , cvp analysis
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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
THE SEVEN FORMS OF WASTE
THE VISION FOR LEAN ACCOUNTING
FEATURESTwo principles exist in the lean accounting business function:
PRINCIPLES OF LEAN THINKING
VALUE OF THE PRODUCT
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).
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 wasteActivities avoidable in the short runActivities unavoidable in the short run due to current technology or production methods.
Blue:Value-added process timeRed:Non-value-added move and pre-process wait time
CREATING A FLOW
The cell can produce 12 units per hourThe production rate is controlled by the slowest activity in the cellThe cycle time of operation as the number of minutes it takes an operation to process one unit of a product
Lean accounting uses a demand-pull system, where the production is triggered by the customer orderEliminates waste by producing a product only when it is needed and only in the quantities demanded by customersNo production takes place until a signal from a succeeding process indicates a need to produce
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.
PRINCIPLES AND PRACTICES
Improve quality: In order to stay competitive in todays 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
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 companys inventory costs due to storage needs.
5s visual workplace
Just in time
Work in process LIST OF LEAN TOOLSLIST OF LEAN TOOLS
The following steps should be implemented in order to create the ideallean manufacturingsystem:
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
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 customers order. The benefits of this goal includedecreased cycle timeless inventoryincreased productivityincreased capital equipment utilization
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.
What can you expect to gain from successful and sustainable lean implementation?
A complete overhaul of your organisations 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
Drastically improved margins.
Reduced lead times
Maintenance programs that extend the useful life of assets Less costly rework
ACTIVITY BASED COSTING
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.
APPLICATIONS OF ABC Product lines differ in volume and manufacturing complexity. Product Diversity or Multiple ProductsHigh OverheadsThe manufacturing process or number of products has changed significantly
Customer Diversity Stiff Competition Products do not consume costs directly Money is spent on activities Activities are consumed by product/services
Steps For Implementation of Activity Based Costing
Identify and classify the activities related to the companys products or services.Hierarchy of activitiesUnit LevelBatch LevelProduct LevelCustomer-LevelFacility -Level
Estimate Cost of each activity.Calculate a cost-rate driver for each activity.
Assign activity costs to products using cost-driver rate.
Activity Based Costing - Advantages1. 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.
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.
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.
ConclusionAn 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: 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. With ABC, businesses can respond to inefficiencies. By identifying areas that are absorbing too many resources, managers can reallocate funds to more profitable areas.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.
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.
ExampleCalculate break-even point in sales units and sales dollars from following information:
Price per UnitRs.15Variable Cost per UnitRs.7Total Fixed CostRs.9,000
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
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
BEP in Sales Rupees
Break-even Sales Rupees = Price per Unit Break-even Sales Units OrBreak-even Sales Rupees = FC CM Ratio
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.
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
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 61.
Total expense at that sales volume is:
The interpretation of the completed CVP graph is given in exhibit 62. 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).
The break-even point is where the total revenue and total expense lines cross. The break-even point of 350 speakers in exhibit 62 agrees with the break-even point computed earlier.
An even simpler form of the cvp graph, which we call a profit graph, is presented in exhibit 63. 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
Contribution margin ratioIn 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:
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:
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.
Cvp analysisKey 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.