CHAPTER 15
LEAN ACCOUNTING AND
PRODUCTIVITY MEASUREMENT
DISCUSSION QUESTIONS
1. Lean manufacturing is an approach de-
signed to eliminate waste and maximize
customer value. It is characterized by deliv-
ering the right product, in the right quantity,
with the right quality (zero-defect) at the
exact time the customer needs it and at the
lowest possible cost.
2. The five principles of lean thinking are:
(1) Precisely specify value by each particular
product; (2) Identify the “value stream” for
each product; (3) Make value flow without in-
terruption; (4) Let the customer pull value
from the producer; and (5) Pursue perfection.
3. Two types of value streams are the order
fulfillment value stream and the new product
value stream. The order fulfillment value
stream focuses on providing current prod-
ucts to current customers. The new product
value stream focuses on developing new
products for new customers.
4. A value stream may be created for every
product; however, it is more common to
group products that use common processes
into the same value stream. One way to
identify the value streams is to use a simple
two-dimensional matrix, where the activities/
processes are listed on one dimension and
the products on a second dimension.
5. The key factors in being able to produce
low-volume products with great variety are
lower setup times and cellular manufactur-
ing. Reducing setup times and using manu-
facturing cells eliminates considerable wait
and move times so that cycle time is dramat-
ically reduced.
6. Demand-pull means producing only the
products when needed and in the quantities
needed. Demand-pull systems reduce/
eliminate work-in-process and finished
goods inventories. Inventories are the most
significant source of waste in a manufactur-
ing firm.
7. Eight sources of waste are: (1) Defective
products; (2) Overproduction of goods not
needed; (3) Inventories of goods awaiting fur-
ther processing or consumption; (4) Unnec-
essary processing; (5) Unnecessary move-
ment of people; (6) Unnecessary transport of
goods; (7) Waiting; and (8) The design
of goods and services that do not meet the
needs of the customer.
8. A focused value stream is dedicated to one
product. It includes all the activities and steps
necessary to produce, deliver, and service
the product after it is sold. The resources,
people, and equipment to accomplish this are
all exclusive to the value stream, making all
the costs directly trace-able to the product
produced by the value stream.
9. Facility costs are assigned using a fixed
price cost (e.g., total cost/total square feet).
If a value stream uses less square feet, it
receives less cost. Thus, the purpose of this
assignment is to motivate value-stream
managers to find ways to occupy less
space. As space is made available, it can be
used for new product lines or to accommo-
date increased sales.
10. Units shipped are used to discourage the
production of excess inventories. It also en-
courages the reduction and elimination of
existing finished goods inventories. The unit
cost increases if more units are produced
than sold. The unit cost decreases if more
units are shipped than produced.
11. If the products in the value stream are quite
similar, then the average cost will approxi-
mate the actual unit product cost. If the
product mix is relatively stable over time,
then the average unit cost can be a good
signal of overall changes in efficiency within
the value stream.
12. Value streams often have excess capacity.
In certain decisions, such as make-or-buy or
accept-or-reject special orders, the change
in profitability is the key factor in assessing
which way to go. In these cases, knowledge
of individual product cost is not needed and,
in fact, may be misleading.
13. Total productive efficiency is the point where
technical and allocative efficiency are
achieved. It is the point where the optimal
quantity of inputs is used to produce a given
output.
14. Technical efficiency means that for any mix
of inputs, no more of any one input is used
than necessary. Allocative efficiency means
that the least costly and most technically
efficient mix is chosen.
15. Productivity measurement is a quantitative
assessment of productivity changes.
16. If the productivity ratio (output/input) has
only one input, then it is a partial measure. If
all inputs are included, then it is a total
measure of productivity.
17. An operational productivity measure is ex-
pressed in physical terms, whereas a financial
productivity measure is expressed in dollars.
18. Partial measures can be misleading since
they do not consider possible trade-offs
among inputs. They do, however, allow
some assessment of how well individual fac-
tors are being used and, additionally, often
serve as input to total measures. Total
measures are preferred because they pro-
vide a measure of the overall change in
productivity, and they allow managers to as-
sess trade-offs among inputs.
19. A base period serves as a standard or
benchmark for assessing changes in pro-
ductive efficiency.
20. Profile measurement and analysis computes
a series of operational partial productivity
measures and compares this series with the
corresponding series of the base period
to assess the nature of the productivity
changes. Profile analysis does not indicate
whether productivity changes are good or
bad when trade-offs among inputs exist. No
value is attached to productivity changes.
21. Profit-linked productivity measurement and
analysis is an assessment of the amount of
profit change—from the base period to the
current period—attributable to productivity
changes.
22. Profit-linked productivity measurement
allows managers to assess the economic
effects of productivity improvement
programs. It also allows valuation of input
trade-offs—a critical element in planning
productivity changes.
23. The price-recovery component is the differ-
ence between the total profit change and the
change attributable to productivity effects.
CORNERSTONE EXERCISES
Cornerstone Exercise 15.1
1. Total lead time for a batch of 20 units:
Processing time:
Molding ………………………………. 150 minutes
Welding ……………………………… 300 minutes
2. Processing time (20 units): Elapsed time
First unit …………………………….. 45 minutes
Second unit ………………………… 60 minutes (processing begins
3. 12 minutes (for polishing) is now the longest per-unit processing time and so
Cornerstone Exercise 15.2
1. Unit cost = $900,000/15,000 = $60 per unit. The cost is very accurate as the
2. Unit cost = $900,000/15,000 = $60. Each unit of Models A and B receives the
3. First, the unit materials cost is calculated separately:
Model A: $240,000*/3,000 = $80
Model B: $360,000/12,000 = $30
Cornerstone Exercise 15.3
1. Partial Operational Productivity Ratios 2014 Profile*
Labor productivity ratio …………………………... 5.00
2. Partial Operational Productivity Ratios 2015 Profile*
Labor productivity ratio …………………………... 6.00
Cornerstone Exercise 15.3 (Concluded)
3. Partial Operational Productivity Ratios 2014 Profilea 2015 Profileb
Labor productivity ratio …………………………... 5.00 4.00
Material productivity ratio ……………………….. 0.25 0.30
Cornerstone Exercise 15.4
1. Base-period productivity ratios: 5 (labor) and 0.25 (materials). Thus, we have:
PQ (labor) = 450,000/5 = 90,000 hrs.
2. Cost of labor (AQ × P = 112,500 × $14) ……………………. $1,575,000
Profit-linked productivity measure:
(1) (2) (3) (4) (2) – (4)
Input PQ PQ × P AQ AQ × P (PQ – AQ) × P
Labor …………. 90,000 $1,260,000 112,500 $1,575,000 $(315,000)
Cornerstone Exercise 15.4 (Concluded)
3. 2014 2015 (2015 – 2014)
Revenues …………………… $10,800,000 $9,900,000 $(900,000)
*108,000 × $12 + 2,160,000 × $3.40
EXERCISES
Exercise 15.5
Value streams:
Exercise 15.6
1. Departmental times:
Processing time (15 × 60*) ………………. 900 minutes
2. Cellular times:
Unit Elapsed time
3. Time saved = 980 – 396 = 584 minutes (620 minutes for the continuous case)
Exercise 15.7
2. From start to finish, any unit requires 60 minutes; however, because a unit
3. The maximum unit production time for any process within the cell must be
Exercise 15.8
1. Materials, people, equipment, and other resources are dedicated to value
streams to the extent possible. In some cases, there may not be enough spe-
cialized resources for each value stream. For example, the quality engineer is
spread out over several value streams. A portion of his salary (0.40 × $75,000
2. The recommended size of a value stream is between 25 and 150 employees.
3. The most likely option to be exercised is to cross-train Vivian so that she can
function in quality control, eliminating the need for the quality engineer to
4. Unit cost = $2,000,000/25,000 units = $80 per unit. This cost is very accurate
because virtually all of the costs are assigned using direct tracing. Causal
Exercise 15.9
1. First, calculate activity rates:
Cell manufacturing: Driver is conversion time (in minutes):
$76,800/(2,400 + 7,200) = $8 per minute
Engineering: Driver is engineering hours:
Next, calculate product costs:
Model A Model B
Cell:
$8 × 2,400 ………………… $ 19,200
$8 × 7,200 ………………… $ 57,600
Engineering:
2. Average cost = $128,000/200 = $640. The average cost approximates the ABC
costs with very little error, suggesting that the two value-stream products are
Exercise 15.10
1. Week 1
Sales (90 @ $40) ……………………………. $ 3,600
Week 2
Sales (100 @ $40) ………………………….. $ 4,000
2. Week 1: Average cost = Value-stream cost/Units shipped
= $1,800/90 = $20
3. Week 1:
Sales (90 @ $40) ……………………………. $ 3,600
Exercise 15.10 (Concluded)
Week 2:
Sales (100 @ $40) ………………………….. $ 4,000
Materials……………………………………….. (450)
Conversion cost ……………………………. (1,350)
Week 3:
Sales (90 @ $40) ……………………………. $ 3,600
Materials……………………………………….. (500)
Exercise 15.11
1. Seven nonfinancial measures are used (four operational and three capacity).
2. Time-based: on-time delivery and dock-to-dock days; quality-based: first-time
through; efficiency-based: units sold per person and average product cost.
Exercise 15.11 (Concluded)
3. The Planned Future State column sets targets for the various financial and
4. The value stream (processes within the value stream) possesses a certain
amount of capacity based on resources employed. Value-added use of the
5. As quality, time, and efficiency increase, we would eventually expect all of
this to convert into financial gains. Typically, what happens is that elimination
Exercise 15.12
1. Combinations B and D are technically efficient. Combination B can produce
the same output for less of each input than Combination C. Similarly,
2. Once the technically efficient input combinations are identified, then the least
costly combination should be chosen. Input prices are used to value the
Exercise 15.13
1. Output-input ratios (Combination F1):
Materials: 24,000/72,000 = 0.33
Labor: 24,000/36,000 = 0.67
Cost comparison:
Current combination ($8 × 96,000) + ($12 × 48,000) ………… $1,344,000
2. Output-input ratios (Combination F2):
Materials: 24,000/79,200 = 0.30
3. Cost of Combination F2 ($8 × 79,200) + ($12 × 33,600) $1,036,800
Cost of Combination F1 (See Requirement 1 above) 1,008,000
Exercise 15.14
Productivity profiles:
2014: Power: 184,320/23,040 = 8
Exercise 15.15
1. Profit-linked measurement (P = $3 and $15 respectively):
Input PQ* PQ × P AQ AQ × P (PQ × P) – (AQ × P)
2. Price recovery = Total profit change – Productivity-induced change
Total profit change:
2015:
[($8 × 216,000) – ($3 × 10,800) – ($15 × 48,600)] = $966,600
2014: