CHAPTER 15
LEAN ACCOUNTING AND PRODUCTIVITY MEASUREMENT
Continuous improvement implies that efficiency is increasing. Over time, a company can create a
competitive advantage by using fewer inputs to produce a given output or by producing more output for a
given set of inputs. This chapter focuses on lean accounting and the measurement of productivity.
LEARNING OBJECTIVES
After studying Chapter 15, students should be able to:
2. Describe lean accounting.
4. Explain what total productivity measurement is, and describe its advantages.
KEY TOPICS
The following major topics are covered in this chapter (related learning objectives are listed for each
topic):
1. Lean Manufacturing (LO 1)
3. Productive Efficiency (LO 3)
4. Total Productivity Measurement (LO 4)
I. LEAN MANUFACTURING
Lean manufacturing is an approach designed to eliminate waste and maximize 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 and at the lowest possible cost.
Lean manufacturing is distinguished by five principles of lean thinking:
2. Identify the “value stream” for each.
4. Let the customer pull value from the producer.
5. Pursue perfection.
Value is an item or feature for which the customer is willing to pay. It is determined by the customer—at
the very least. Customer value is the difference between realization and sacrifice. 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 (e.g., customer order or concept for a new product) to a finished product in
In order to make value flow without interruption, we need to rely on lean manufacturing. Traditional
batch production is not equipped to deal with product variety; furthermore, move and wait time are
sources of waste. Lean manufacturing reduces wait and move times dramatically and allows the
production of small batches (low volume) of differing products (high variety). The key factors in
achieving these outcomes are lower setup times and cellular manufacturing. Manufacturing cells contain
all the operations in close proximity that are needed to produce a family of products. Exhibit 15.4 (p.783)
shows a proposed cellular manufacturing structure for Model A aluminum wheels.
As the process of becoming lean begins to unfold and improvements are realized, the possibility of
achieving perfection becomes more believable. As the flow increases and processes begin to improve,
more hidden waste tends to be exposed. The objective is to produce the highest-quality, lowest-cost
products in the least amount of time. To achieve this objective, a lean manufacturer must identify and
eliminate the various forms of waste. Waste consumes resources without adding value. The major sources
of waste are listed below.
• Defective products
• Overproduction of goods not needed
II. LEAN ACCOUNTING
A. Focused Value Streams and Traceability of Overhead Costs
Costing systems use three methods to assign costs to individual products: direct tracing, driver tracing,
and allocation. Of the three methods, the most accurate is direct tracing. Exhibit 15.5 (p. 787) is a visual
streams around a family of products.
B. Value-Stream Costing
Because of multitask assignments, cross-training, and redeployment of other support personnel, most
support costs are exclusive to a focused value stream and are thus assigned to a product using direct
tracing. One consequence of increasing directly traceable costs is to increase the accuracy of product
costing. Product cost is calculated by taking the costs of the period and dividing by the output. Focused
value streams provide simple and accurate product costing.
C. Value-Stream Reporting
Costs are collected and reported by value stream. Exhibit 15.7 (p. 791) shows a profit and loss statement
for a plant of Garn Autoparts. Costs outside the value stream (sustaining costs) are reported in a separate
column.
D. Decision Making
In reality, a fully specified and accurate product cost is not needed for many decisions. Waste can be
eliminated at the activity and process levels without knowing product costs. Standard costing variances
provide this information.
E. Performance Measurement
The lean control system uses a Box Scorecard that compares operational, capacity, and financial metrics
with prior week performances and with a future desired state. The lean control approach uses a mixture of
III. PRODUCTIVE EFFICIENCY
Productivity is concerned with the efficient production of output. It specifically addresses the relationship
between inputs and outputs. Total productive efficiency is the point at which both technical efficiency and
allocative efficiency is achieved. Technical efficiency is the condition where no more of any one input is
used than necessary to produce a given output. Allocative efficiency is using a less costly input mix to
produce the same output.
Productivity of a single input is typically measured by calculating the ratio of the output to the input as
follows:
Productivity ratio = Output/Input
Because the productivity of only one input is being measured, the measure is called a partial productivity
measure. If both output and input are measured in physical quantities, then we have an operational
IV. TOTAL PRODUCTIVITY MEASUREMENT
Measuring productivity for all inputs at once is called total productivity measurement. In practice, it may
not be necessary to measure the effect of all inputs. Many firms measure the productivity of only those
factors that are thought to be relevant indicators of organizational performance and success. Two
approaches that have gained some acceptance are profile measurement and profit-linked productivity
measurement.
Producing a product involves numerous critical inputs such as labor, materials, capital, and energy.
Profile measurement provides a series or a vector of separate and distinct partial operational measures.
Profiles can be compared over time to provide information about productivity changes.
Profit-linked productivity measurement involves measuring the amount of profit change attributable to
productivity change. The Profit-Linkage Rule is as follows:
V. INFORMATION ABOUT EXERCISES, PROBLEMS, AND CASES
Exercises and problems are described below and on the following page according to coverage of content,
learning objective(s), and level of difficulty. The time required to solve the problems is roughly
proportional to the level of difficulty.
In general, basic exercises/problems are fairly simple and straightforward. The text material is relatively
brief; only one or two concepts are covered. Basic exercises and problems should take about 15 to 20
minutes each.
Moderate exercises/problems may take longer and involve more concepts. These problems may have a
“twist” and require more thought. Moderate exercises and problems may take 20 to 40 minutes each.
Challenging problems are more comprehensive and may cover more concepts. The text material is
relatively longer and may include some ambiguity. Challenging problems may take 60 to 90 minutes
each.
Cornerstone
Exercise (CS)/
Exercise/
Problem/Cost
Topic
Learning
Objective
Degree of
Difficulty
CS 15.1
Continuous Flow vs. Departmental Flow
Manufacturing
LO 1
Basic
CS 15.2
Value-Stream Costing
LO 2
Basic
CS 15.3
Profile Productivity Measurement
LO 3
Basic
CS 15.4
Profit-Linked Productivity Measurement
LO 4
Basic
15.5
Value-Stream Identification
LO 1
Basic
15.6
Continuous Flow versus Departmental Flow
Manufacturing
LO 1
Basic
15.7
Bottleneck Operation, Improving Production Flow
LO 1
Basic
15.8
Value-Stream Costing
LO 2
Basic
15.9
Value-Stream Average Costing, ABC Costs as
Benchmarks
LO 2
Basic
15.10
Value-Stream Reporting with Inventory Decrease
LO 2
Basic
15.11
Box Scorecard
LO 2
Basic
15.12
Technical and Price Efficiency
LO 3
Basic
15.13
Productivity Measurement, Technical and Allocative
Efficiency, Partial Measures
LO 3
Moderate
Cornerstone
Exercise (CS)/
Exercise/
Problem
Topic
Learning
Objective
Degree of
Difficulty
15.14
Interperiod Measurement of Productivity Profiles
LO 4
Basic
15.15
Interperiod Measurement of Productivity, Profit-Linked
Measurement
LO 4
Basic
15.16
Basics of Productivity Measurement
LO 3, 4
Moderate
15.17
CPA-Type Exercise
LO 1
Basic
15.18
CPA-Type Exercise
LO 2
Basic
15.19
CPA-Type Exercise
LO 2
Basic
15.20
CPA-Type Exercise
LO 3
Basic
15.21
CPA-Type Exercise
LO 3
Basic
15.22
Focused Value Streams, Product Costing
LO 3, 4
Moderate
15.23
Multiple-Product Value Streams, Product Costing,
Creating Available Capacity
LO 3, 4
Moderate
15.24
Box Scorecard, Special Order Decision
LO 2
Moderate
15.25
Lean versus Standard-Costing-Based Measures
LO 1, 2
Moderate
15.26
Productivity and Quality, Prospective Analysis
LO 3, 4
Moderate
15.27
Productivity Measurement, Basics
LO 4
Moderate
15.28
Productivity Measurement, Technical and Price
Efficiency
LO 3, 4
Moderate
15.29
Cyber Research Case
Challenging
LIST OF ILLUSTRATIONS
Illustration
Topic
Exhibit 15.1
Order Fulfillment Value Stream
Exhibit 15.2
Matrix Approach to Identifying Value Streams
Exhibit 15.3
Garn’s Current Department Layout: Model A Aluminum Wheel Production
Exhibit 15.4
Garn’s Proposed Manufacturing Cell (Model A)
Exhibit 15.5
Value-Stream Costs
Exhibit 15.6
Steel Wheel Value-Stream Costs: Models C and D
Exhibit 15.7
Garn Autoparts Profit and Loss Statement
Exhibit 15.8
ABS Value-Stream Box Scorecard
Exhibit 15.9
Improving Technical Efficiency
Exhibit 15.10
Improving Allocative Efficiency