Chapter 17 – The Management and Control of Quality
17-62 (Continued-1)
Education—employees as well as managers need to be educated regarding the
reasons for change (i.e., the business purpose for the change); as well, these
the “lean enterprise,” employee compensation and incentive plans might have to
be reconfigured.
While not specifically asked for, the instructor at this point might mention the
following anticipated benefits of moving to “lean:”
Strategic benefits—see (1) and (2) above
Short-term Cost Savings—associated with efficiency improvements/elimination of
Increased Sales and Market Share (due to reductions in cycle times and delivery
times, and to increases in quality)
4. Management accounting systems should be constructed to support managerial
initiatives and prerogatives, such as transformation of an organization to a “lean
enterprise.” Broadly speaking, this change affects accounting-system design in at
least the following ways:
Rather than periodic departmental-based cost reports, cost reporting is done on
a value-stream basis (see example in this chapter as well as Chapter 18 for
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Chapter 17 – The Management and Control of Quality
17-62 (Continued-2)
Internal reporting is vastly decentralized (consistent with the “flattened”
organizational structure that may accompany a switch to “lean”), with information
prepared on a real-time basis; in this environment, the focus of the accounting
reports is on the efficacy of business processes that constitute each specified
value stream.
As stated on p. 14 of the Statement of Management Accounting (IMA, 2006),
performance to customer demand
involvement activities of team members
safety
5. Sources of additional information regarding “lean” and “accounting for lean:”
a. B. Maskell and B. Baggaley, Practical Lean Accounting: A Proven System for
Measuring and Managing the Lean Enterprise. New York: Productivity Press,
2004.
b. N. J. Sayer and B. Williams, Lean for Dummies. Hoboken, NJ: Wiley Publishing,
Inc., 2007.
c. Breakthrough Management Group, The Complete Idiot’s Guide to Lean Six
Sigma. New York: Penguin Group (USA), Inc., 2007.
d. R. J. Schonberger, Best Practices in Lean Six Sigma Process Improvement: A
Deeper Look, Hoboken, NJ: John Wiley & Sons, Inc., 2008.
e. A. van der Merwe and J. Thompson, “The Lowdown on Lean Accounting: Should
Management Accountants Get on the Bandwagon—or not?” Strategic Finance
(February 2007), pp. 26-33.
f. J. P. Brosnahan, “Unleash the Power of Lean Accounting,” Journal of
Accountancy (July 2008), pp. 60-66.
g. R. J. Schonberger, “Lean Performance Management (Metrics Don’t Add Up), Cost
Management (January/February, 2008). (Copyright Thompson/RIA, 2008.)
h. B. H. Maskell and F. A. Kennedy, “Why Do We Need Lean Accounting and How
Does It Work?” The Journal of Corporate Accounting & Finance (March/April,
2007). (Copyright Wiley Periodicals, Inc., 2007.)
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Chapter 17 – The Management and Control of Quality
17-62 (Continued-3)
i. R. Cooper and B. Maskell, “How to Manage Through Worse-Before-Better,” MIT
Sloan Management Review (Summer 2008), pp. 58-65.
j. Websites:
http://www.leanaccountingnews.com
http://www.leanaccountingsummit.com
http://www.maskell.com/lean_accounting.html
https://www.imanet.org/publications_statements.asp
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Chapter 17 – The Management and Control of Quality
17-63 Implementation of Lean Accounting (25 Minutes)
This question is intended for class discussion. Here are some examples of points that
could be included in the discussion. The overview is that while many of the
implementation steps have been taken, the process of implementing a new system,
lean accounting, is likely to be a continuing challenge, as problems arise, new
employees are added, and changes in the competitive environment require the VSM to
be adapted.
1. As described in the problem, Watlow has implemented the first four of the
principles of lean: Customer value, Value Streams, Pull and Flow (inventory
reduction), and Empowerment (coordination and communication for employees).
2. Though not included in the description of Watlow’s implementation of lean, it is
likely that significant training was needed to prepare Watlow’s employees for the
new system, lean accounting. The challenge facing Watlow is to continue this
3. It will likely be a challenge for Watlow to sustain the energy and goodwill that was
generated in the employees as they felt included and valued in the
implementation of the new system. The article cited below indicated that many
4. Will the implementation, by producing operating efficiencies, require the
reduction in facilities or the lay-off of certain personnel, or can this excess
Source: Jan P. Bosnahan, “Unleash the Power of Lean Accounting,” Journal of
Accountancy, July 2008, pp. 60-66.
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Chapter 17 – The Management and Control of Quality
17-64 Value-Stream Income Statement (25 Minutes)
The value stream income statement is shown below. Note that the temporary $28
million effect on income due to the decrease in inventory is separated so that the
company can adjust operating income and interpret the long-term operating income by
eliminating the temporary effect of the inventory decrease.
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Chapter 17 – The Management and Control of Quality
PROBLEMS
17-65 Research Assignment, Strategy (60 Minutes)
1. As noted in the forward to the article (HBR, July-August, 2005, p. 107):
When the Gallup Organization applied Six Sigma principles to sales and
service groups at several companies, it learned how much performance
variation exists between seemingly similar work groups. Managing that
variability can raise overall performance by orders of magnitude and can
create organic growth.
In Chapter 17, we discuss the notion of improving quality through a reduction in
variation from standard. However, this discussion was made solely within the context
of a manufacturing setting. Thus, in that context, students come to realize that quality
can be measured by the extent to which there is variation in product specifications.
2. Six Sigma, as developed and applied in a manufacturing setting, focuses on
underlying engineering (or economic) relationships and in this sense is considered
data-driven, rational, and analytical. In short, typical Six-Sigma implementations
require the use of rigorous analytical standards; the goal is to refine and continuously
improve production processes to achieve consistent and predictable quality.
At one level, the Human Sigma model developed by the authors of this article is
Sigma represents a way to manage the employee-customer encounter.
3. The authors propose that a single overall metric, called the “Human Sigma score,”
which combines two performance indicators—employee and customer engagement.
(The particulars regarding this metric are provided on page 114 of the article.) At its
heart, this metric summarizes the emotional engagement of an organization’s
employees (human capital) and the organization’s customers. The goal is to use this
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Chapter 17 – The Management and Control of Quality
17-65 (Continued)
The authors hypothesize that emotional attachment, both from customers and from
employees, is an important leading indicator (or predictor) of financial performance.
They state (p. 110) that “Performance metrics that acknowledge the importance of
emotional engagement—on the part of both employees and customers—provide
much stronger links to desired financial and operational outcomes.”
To support this claim, they provide data from a large retail bank in the U.S. Data from
this source (see p. 109) indicate that the relationship between emotional satisfaction
and performance (e.g., attrition rate of customers and average monthly spending of
customers) is stronger than the relationship between degree of “rational satisfaction”
4. The authors offer (pp. 113-114) three suggestions for how to manage and reduce
customer and employee engagement at the local level (i.e., at the level where
performance variation occurs):
a) Centralize Responsibility for Human Sigma—based on the preceding arguments,
customer and employee engagement need to be managed “holistically,” not
needed. This would be the case if the organization as a whole is experiencing
relatively low Human Sigma scores or if parts of the organization are consistently
generating low HS scores.
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Chapter 17 – The Management and Control of Quality
17-66 Benefits of Switching to JIT (60 Minutes)
1. A JIT manufacturing approach is considerably different from a conventional
manufacturing system. Under JIT, an output is produced only when
demanded by the customer (internal or external). At the core of JIT is a
strong commitment to quality (i.e., eliminating or reducing processing
2. The response to this question can be crafted around an examination of
Exhibit 17.3. As indicated in this exhibit, the management accountant,
because of expertise in the area of measurement, can supply to
management relevant cost information and relevant nonfinancial
performance indicators associated with a change in manufacturing process,
such as a move to JIT.
Specifically, the management accountant can help estimate the financial
savings associated with inventory reductions and with manufacturing
efficiencies associated with JIT (e.g., reduction of scrap and rework costs),
3. Annual benefits associated with the proposed move to JIT—in general,
improvements in quality, such as those associated with the adoption of JIT,
result in two separate benefits: increases in revenues (or, contribution
margin), and decreases in costs.
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Chapter 17 – The Management and Control of Quality
17-60
Chapter 17 – The Management and Control of Quality
17-66 (Continued-1)
Estimated decrease in annual inventory carrying costs:
Pre-JIT Inventory Holdings:
Raw materials = 40,000 × $15 × (4 ÷ 12) = $200,000
WIP Inventory = 40,000 × $25 × (3 ÷ 12) = $250,000
Finished Goods = 40,000 × $40 × (2 ÷ 12) = $266,667
Average Inventory Holdings = $716,667
Post-JIT Inventory Holdings:
Raw Materials = 50,000 × $12 × (2 ÷ 12) = $100,000
WIP Inventory = 50,000 × $20 × (1.5 ÷ 12) = $125,000
Finished Goods = 50,000 × $30 × (1 ÷ 12) = $125,000
Annual Net Financial Benefit (Cost) of Switching to JIT
4. Based solely on the short-term financial effect, ABC should replace the equipment
and move to JIT. The annual pre-tax net benefit of $486,667 greatly exceeds the
5. Additional considerations:
This decision is technically a capital budgeting decision; as such, the future
cash flows should be stated on an after-tax basis and discounted (at the
weighted-average cost of capital) back to present value.
Is the assumption regarding a constant sales price between the two alternatives
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