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CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
Prob. 27–4A (FIN MAN); Prob. 12–4A (MAN) (Concluded)
4. Percentages of total activity cost that are value- and non-value-added:
V
alue-added………………………………………
…
39%
5. The ER has 61% of its total costs as non-value-added. This is a very significant
$ 62,400
Percent of Total
Department Cost
Activity
Cost
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
Prob. 27–1B (FIN MAN); Prob. 12–1B (MAN)
1. HD Hogg’s purchasing policy is very short-sighted. It does not involve
developing partnerships with suppliers. HD Hogg should consider changing
its arm’s-length policy and work on building a long-term supply chain strategy
with its suppliers. With a supply chain strategy, HD Hogg can begin to
2. The hidden costs beyond the price include the costs associated with the
higher inventory required by Iron Horse Frames’ delivery schedule. These
inventory costs include additional space, handling, obsolescence, financing,
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
Prob. 27–1B (FIN MAN); Prob. 12–1B (MAN) (Concluded)
3. If the financing costs are 12%, then the additional cost of the inventory could be
determined as follows:
At the beginning of July, the new shipment of 4,500 frames arrives. Assuming that
the frame supply runs out by the end of the quarter, the average inventory for the
The inventory carrying cost can be estimated as follows:
Average frames in inventory for the quarter………………
…
2,250
×
Price per frame…………………………………………………
…
$300
Total inventory investment……………………………………
…
$675,000
Interest rate per quarter (12% ÷ 4)……………………………
…
3%
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
Prob. 27–2B (FIN MAN); Prob. 12–2B (MAN)
1. Value-added time:
Stamping……………………………………………………………
…
5 min.
Non-value-added time:
Wait time:
Within-batch wait time—stamping (39 × 5 min.)……………
…
195 min.
Within-batch wait time—final assembly
Move time:
Move from stamping to final assembly………………………
…
10 min.
Move from final assembly to testing…………………………
…
25
Total move time……………………………………………………
…
35 min.
Total non-value-added time……………………………………… 2,045 min.
2. The existing process is very wasteful. The company could improve the process
by changing the layout from a process orientation to a product orientation. Each
appliance model could be formed into a production cell. Each cell would have
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
Prob. 27–3B (FIN MAN); Prob. 12–3B (MAN)
$189,000
2,100 hours
3. a. Raw and In Process Inventory*
Accounts Payable 1,979,500
*10,700 units × $185 per unit
b. Raw and In Process Inventory*
Conversion Costs 189,000
*10,500 units × $18 per unit
4. Raw and In Process Inventory:
$1,979,500 + $189,000 – $2,070,600 = $97,900
1,979,500
189,000
$90 per hour
1. Budgeted Cell Conversion
Cost Rate ==
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
Prob. 27–3B (FIN MAN); Prob. 12–3B (MAN) (Concluded)
5. Lean accounting is different from traditional accounting in a number of respects.
Most importantly, lean accounting is simplified and uses minimal control. As a
result, the number of transactions is reduced, and the control intervals between
adjacent work in process transaction points are widened. In many lean
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
Prob. 27–4B (FIN MAN); Prob. 12–4B (MAN)
1.
0
20000
40000
120000
Pareto Chart of Activities
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
Prob. 27–4B (FIN MAN); Prob. 12–4B (MAN) (Continued)
2. Activity classifications:
Activity
Cost
Correcting invoice errors……
…
$7,500
Disposing of incoming
materials with poor quality…
…
15,000
Disposing of scrap……………
…
27,500
Expediting late production…… 22,500
Final inspection………………… 20,000
3. Percent of total activity cost for each quality cost (and nonquality cost)
classification:
Prevention………………………………………… 6%
Percent of Total
Department Cost
Activity
Cost
$ 15,000
50,000
Internal failure
Internal failure
Appraisal
Quality Cost Classification
Cost of Quality Non-Value-Added
Non-value-added
Value-added
Non-value-added
Non-value-added
Non-value-added
Classification
Classification
Value-Added/
Activity
External failure
Internal failure
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
Prob. 27–4B (FIN MAN); Prob. 12–4B (MAN) (Concluded)
3. Percentages of total activity cost that are value- and non-value-added:
V
alue-added………………………………………… 65%
4. The company has 65% of its total costs as value-added. However, there is still room
for significant improvement. Internal failure represents 26% of the total costs. This
$162,500
Percent of Total
Department Cost
Activity
Cost
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
CP 27–1 (FIN MAN); CP 12–1 (MAN)
The controller should confront the plant manager. The plant manager is attempting
to skew the sampling results by giving the sampled items special treatment. The
original intent of the sampling plan is to represent the average performance of the
manufacturing process. Thus, the tagged items should receive no better treatment
than the average product being produced. The plant manager’s memo will cause the
lead times reported to central management to be much better than they actually are.
Thus, it is possible that salespersons and marketing personnel will begin to make
shipping commitments to customers based on the reported lead times. Since the plant
is unable to perform for all products at the reported levels, customers may be left
angry when the commitments are not met.
CASES & PROJECTS
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
CP 27–2 (FIN MAN); CP 12–2 (MAN)
Clark’s claim that the inventory doesn’t cost the company anything is likely not true. At
the very minimum, inventory requires working capital to be used. The financing cost
associated with the working capital represents a cost to the company. In addition, the
inventory requires space, insurance, security, and movement. Thus, these additional
costs will be incurred to store the inventory. Beyond the carrying (interest) and storage
CP 27–3 (FIN MAN); CP 12–3 (MAN)
All three charts indicate a steadily deteriorating situation. It seems clear that Maxxim is
not employing lean strategies. The inventory is growing steadily, yet the company
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
CP 27–4 (FIN MAN); CP 12–4 (MAN)
Non-Value-
Total Classifi- Added
Cost cation Costs
Processing sales orders $ 68,000 17% VA
Resolving supplier quality
problems 56,000 14% NVA 56,000
Reissuing corrected
purchase orders 40,000 10% NVA 40,000
The activity information can be separated into the value-added and non-value-added
components. When this is done, it becomes clear that the company has a large
percentage of non-value-added activities. Seventy-two percent of Pryor's factory
overhead effort is non-value-added. Activities such as expediting, disposing of scrap,
The general ledger report provides information only about where money is spent, such
as salaries or supplies, not how the resources were used. Thus, the general ledger
PRYOR COMPANY
Activity
Value-Added/Non-Value-Added Activities Report
Percent
of Total
CHAPTER 27 Lean Principles, Lean Accounting, and Activity Analysis
CP 27–5 (FIN MAN); CP 12–5 (MAN)
This would be a good assignment for groups of students to report back to the class. Each
of the groups will likely go to different restaurants at different times of the day and will
have different results. The results could be shared with the class, and “averages” could
be determined for the various non-value-added categories. The following types of
activities will likely be noted in students’ reports:
Waiting to be seated………………………………………
…
Non-value-added
Being seated………………………………………………
…
Value-added
Waiting to give drink order………………………………
…
Non-value-added
Giving drink order…………………………………………
…
Value-added
Waiting to receive drink…………………………………
…
Non-value-added
