Chapter 26(12) Lean Manufacturing and Activity Analysis 482
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Nonfinancial Measure—A performance measure that has not been stated in dollar terms.
Raw and In Process (RIP) Inventory—The capitalized cost of direct materials purchases, labor,
and overhead charged to the production cell.
Relevant Check Up Corner and Exhibits
Exhibit 7—Transactions Using Lean Accounting—Anderson Metal Fabricators
Check Up Corner 26(12)-2 – Lean Accounting
SUGGESTED APPROACH
manufacturers.
1. Raw and In-Process (RIP) Inventory: One of the ways lean manufacturing seeks to reduce
accounts are combined into Raw and In-Process (RIP) Inventory.
2. Conversion Costs: Since workers are cross-trained to perform both direct labor and indirect labor
3. Direct Tracing of Overhead: Since production layouts are organized into specific product cells, it is
easier to trace overhead costs to products. For example, if you have three machines each making
three different products, the depreciation for the machines must be added up and divided among the
three products. If the layout is changed so that each machine makes only one product, you know
exactly how much depreciation needs to be assigned to each product.
DEMONSTRATION PROBLEM—Accounting in a Lean Manufacturing
System
To simplify the accounting under lean manufacturing to a principles level, the text only illustrates
scenarios where there is no variance between actual and budgeted manufacturing costs.
Assume that LeForge Industries manufactures ceramic bakeware in a lean manufacturing system. The
materials cost to make one of LeForge’s baking dishes is $2. The budgeted labor and overhead costs for
100,000 production hours are $400,000. Each dish requires 0.75 hours of processing time. During
February, 11,000 baking dishes were produced.
Chapter 26(12) Lean Manufacturing and Activity Analysis 483
First of all, point out that the conversion cost per unit is $3. This may be calculated as follows:
$400,000
Budgeted Conversion Cost Rate $4 per production hour
100,000
Conversion Cost per Unit $4 per hour 0.75 hours per unit $3
Next, illustrate the journal entries. The purchase of the materials to make the 11,000 dishes would be
recorded directly into Raw and In-Process Inventory, as follows:
Raw and In-Process Inventory 22,000
Accounts Payable 22,000
After recording materials, LeForge would need to determine the amount of conversion costs that should
be applied to the 11,000 dishes. LeForge’s conversion cost is $3 per unit; therefore, $33,000 of
conversion costs would be applied into Raw and In-Process Inventory.
Raw and In-Process Inventory 33,000
Conversion Costs 33,000
You may want to mention that actual conversion costs (such as wages paid to factory workers, supplies
used, depreciation on factory equipment, etc.) would be debited to the conversion costs account as they
are incurred.
The 11,000 completed units are transferred to finished goods based on their production cost, which
includes $2 per unit for materials and $3 per unit for conversion costs.
Finished Goods Inventory 55,000
Raw and In-Process Inventory 55,000
Assume 10,700 of the units completed were sold to customers at a sales price of $9 per unit. Shipping the
dishes to customers would be recorded with the following entries:
Accounts Receivable 96,300
Sales 96,300
Cost of Goods Sold 53,500
Finished Goods Inventory 53,500
This leaves $1,500 (300 units × $5/unit) in the finished goods inventory account.
CLASS DISCUSSION—Nonfinancial Measures
Chapter 26(12) Lean Manufacturing and Activity Analysis 484
Ask your students to develop nonfinancial measures for a pizza-delivery business. Remind them that
It may be helpful to allow your students to discuss their ideas in small groups before opening the floor for
a full-class discussion.
Possible responses: Expect a variety of responses here but students should focus on delivery time,
name a few.
OBJECTIVE 3
Describe and illustrate activity analysis for improving operations.
SYNOPSIS
Learning Objective 3 discusses the usefulness of activity analysis in helping companies control the cost of
external failure costs decrease, the percent of good units increases. Gifford Company is introduced to
illustrate the management of quality costs. Exhibit 10 presents the company’s quality control activities
along with their cost and cost of quality classification. Exhibit 11 presents a Pareto chart that helps
management prioritize its quality improvement initiatives. For example, the chart indicates that rework
added activities even more valuable and to eliminate or reduce non-value added activities. If a non-value-
added activity cannot be eliminated, then the objective is to complete them as efficiently as possible.
Exhibit 13 shows the value-added and non-value-added activities for Gifford Company. Learning
Objective 3 concludes with a discussion of process activity analysis. A process is a series of activities that
process.
Chapter 26(12) Lean Manufacturing and Activity Analysis 485
Key Terms and Definitions
cost of activities.
Appraisal Costs—Costs to detect, measure, evaluate, and audit products and process to ensure
that they conform to customer requirements and performance standards.
Cost of Quality Report—A report summarizing the costs, percent of total, and percent of sales
by appraisal, prevention, internal failure, and external failure cost of quality categories.
to consumers.
Internal Failure Costs—The costs associated with defects that are discovered by the
organization before the product or service is delivered to the consumer.
Non-Value Added Activity—The cost of activities that are perceived as unnecessary from the
customer’s perspective and are thus candidates for elimination.
delivery of products or services.
Process—A sequence of activities linked together for performing a particular task.
Value-Added Activity—The cost of activities that are needed to meet customer requirements.
Relevant Check Up Corner and Exhibits
Exhibit 8—Costs of Quality
Exhibit 11—Pareto Chart of Quality Costs
Exhibit 12—Cost of Quality Report—Gifford Company
Exhibit 13—Value-Added/Non-Value-Added Quality Control Activities
Exhibit 14—Sales Order Fulfillment Process
Check Up Corner 26(12)-3 – Cost of Quality Report
SUGGESTED APPROACH
Display TM 26(12)-4, which presents a Pareto chart showing costs related to quality at Sycamore
Manufacturing. Emphasize that a Pareto chart is simply a bar chart with amounts ranked from the largest
on the left to the smallest on the right. Ask your students to classify each of the costs as a prevention,
appraisal, internal failure, or external failure cost. Next, ask them to produce a cost of quality report using
Chapter 26(12) Lean Manufacturing and Activity Analysis 486
CLASS DISCUSSION—Value-Added and Non-Value-Added Activities
Display TM 26(12)-4, which includes a list of the quality costs for Sycamore Manufacturing. Each of
categorize the quality costs.
The text identifies prevention and appraisal as value-added activities. Internal and external failures are
considered non-value-added. Some consultants in the quality area encourage companies to think of
inspection (an appraisal cost) as non-value-added. Their philosophy is that quality should be designed into
You can probably spark a lively debate on this topic. Ask your students to assume they have taken their
tax information to an accountant in order to have their tax return prepared. The accountant will assign the
tax return to one of her staff to do the actual preparation work. After the return is completed, the
accountant will review it for accuracy. Ask your students if the review is value-added or non-value-added.
need for a review?
Close by reminding students that labeling an activity as non-value-added is a signal that the activity
should be eliminated if possible. If the activity cannot be eliminated, the goal is to reduce the cost of the
activity and/or the time spent on the activity. Managers will not always agree on whether an activity is
value-added or non-value-added.
should point out that inspecting raw materials is the largest cost; therefore, it would draw the most
management attention. Hopefully, this data would motivate management to seek ways to reduce or
eliminate the need for inspecting raw materials through supplier partnering.
Point out that gathering the data presented in TM 26(12)-6 is not an easy task. Costs are usually recorded
in accounting records by department. There may be a general ledger account showing the total wages
expense for quality inspectors, but if inspectors review raw materials and finished products, the total
wages must be allocated between the different types of inspections.
Chapter 26(12) Lean Manufacturing and Activity Analysis 487
ADM OBJECTIVE
Describe and illustrate the use of lean principles and activity analysis in a service or
administrative setting.
SYNOPSIS
All of the lean principles and activity analyses for a manufacturer can be adapted to service businesses or
Relevant Check Up Corner and Exhibits
Made a Decision – Lean Performance for Nonmanufacturing
Type Item Description Video Excel CLGL LO(s) Difficulty Time Est BUSPROG AICPA
ACBSP – Primary Bloom’s ADM Service Real World
Writing
Ethics
MC 1 1 Easy 5 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
MC 2 2 Easy 5 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
MC 3 2 Easy 5 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
MC 4 3 Easy 5 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
MC 5 3 Easy 5 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
LREX 1 Lead time x 1 Easy 10 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
LREX 2 Lean features x 1 Easy 5 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
LREX 3 Lean accounting x 2 Easy 10 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
LREX 4 Cost of quality report x 3 Easy 15 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
LREX 5 Process activity analysis x 3 Easy 10 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
PP Problem n/a Moderate 30 min. Analytic FN – Measurement Managerial Accounting Features/Costs Applying
DQ 1 n/a Easy 5 min. Analytic FN – Measurement Managerial Accounting Features/Costs Remembering
Focus
Assoc Assets
Tagging