lean accounting

2. Lean Accounting is a business management tool that
focuses on reducing waste from production processes
and maximizing 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
 At the lowest possible cost

3. THE SEVEN FORMS OF WASTE
1. • Overproduction
2.
• Waiting
3. • Transportation
4.
• Extra Processing
5. • Inventory
6.
• Motion
7. • Defects

4. THE VISION FOR LEAN ACCOUNTING
Provide accurate,
timely, and
understandable
information to
motivate the lean
transformation
throughout the
organization.
Use lean tools to
eliminate waste from
the accounting
processes while
maintaining thorough
financial control.
Fully comply with
generally accepted
accounting principles
(GAAP), external
reporting regulations,
and internal reporting
requirements.
Support the lean
culture by motivating
investment in people,
and empowering
continuous
improvement at every
level of the
organization.

5. FEATURES
• Two principles exist in the lean accounting
business function:
MEASURE MOTIVATE

6. PRINCIPLES OF LEAN THINKING

7. VALUE OF THE PRODUCT
• Value is determined by the customer.
• The value of a product to customer is the
difference between realization and sacrifice.
– Realization is what a customer receives.
– Sacrifice is what the customer gives up for the
basic and special product features (quality, brand
name, and reputation).

8. • 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 to a finished
product in the hands of the customer.
• Non-value-added activities are the source of waste
– Activities avoidable in the short run
– Activities unavoidable in the short run due to current
technology or production methods.
VALUE STREAM

10. Blue: Value-added process time
Red: Non-value-added move
and pre-process wait time
CREATING A FLOW

11. • The cell can produce 12
units per hour
• The production rate is
controlled by the
slowest activity in the
cell
• The cycle time of
operation as the
number of minutes it
takes an operation to
process one unit of a
product

12. • Lean accounting uses a demand-pull system, where
the production is triggered by the customer order
• Eliminates waste by producing a product only when
it is needed and only in the quantities demanded by
customers
– No production takes place until a signal from a
succeeding process indicates a need to produce
PULL VALUE

13. As value is specified, value streams are
identified, wasted steps are removed, and
flow and pull are introduced, begin the
process again and continue it until a state of
perfection is reached in which perfect value is
created with no waste.
SEEK PERFECTION

14. PRINCIPLES AND PRACTICES

16. • Improve quality:
In order to stay competitive in today’s
marketplace, a company must understand its
customers' wants and needs and design
processes to meet their expectations and
requirements.
• Eliminate waste:
Waste is any activity that consumes time,
resources, or space but does not add any
value to the product or services.
Four Goals of leanGOALS OF LEAN ACCOUNTING

17. • Reduce time:
Reducing the time it takes to finish an activity
from start to finish is one of the most effective
ways to eliminate waste and lower costs.
• Reduce total costs:
To minimize cost, a company must produce
only to customer demand. Overproduction
increases a company’s inventory costs due to
storage needs.

18.  Poka – Yoke
 5s visual workplace
 Just in time
 Continuous improvement
 Material management
 Work in process
LIST OF LEAN TOOLSLIST OF LEAN TOOLS

19. The following steps should be implemented in order to
create the ideal lean manufacturing system:
 Design a simple manufacturing system
 Recognize that there is always room for improvement
 Continuously improve the lean manufacturing system
design
STEPS TO ACHEVIE LEAN ACCOUNTING

20. 1. Design a simple manufacturing system
A fundamental principle of lean manufacturing is
demand-based flow manufacturing. In this type of
production setting, inventory is only pulled through
each production centre when it is needed to meet a
customer’s order.
The benefits of this goal include
• decreased cycle time
• less inventory
• increased productivity
• increased capital equipment utilization

21. 2.There is always room for improvement
The core of lean is founded on the concept of continuous
product and process improvement and the elimination of
non-value added activities. “The Value adding activities
are simply only those things the customer is willing to
pay for, everything else is waste, and should be
eliminated.
3.Continuous improvement
A continuous improvement mindset is essential to reach
a company's goals. The term "continuous improvement"
means incremental improvement of products, processes,
or services over time, with the goal of reducing waste to
improve workplace functionality, customer service, or
product performance.

22. What can you expect to gain from successful and
sustainable lean implementation?
 A complete overhaul of your organisation’s culture.
 Process that are free of waste and deliver products
and services that are of high quality.
 Products that have been engineered to work once
produced and are designed to be build with the least
amount and effort and cost.
BENEFITS

23.  Drastically improved margins.
 Reduced lead times
 Reduced inventories
 Maintenance programs that extend the useful
life of assets
 Less costly rework
 Satisfied customers
 Growth

25. ACTIVITY BASED COSTING
A costing method that identifies the activities
performed within the organization as it
delivers its goods and services and assigns
costs to products, based on the number of
activities the organization used in producing
them.

26. PRODUCTS
REQUIRE
ACTIVITIES
ACTIVITIES
CONSUME
RESOURCES
PEOPLE
MANAGE
ACTIVITIES

27. APPLICATIONS OF ABC
• Product lines differ in volume and
manufacturing complexity.
• Product Diversity or Multiple Products
• High Overheads
• The manufacturing process or number of
products has changed significantly

28. • Customer Diversity
• Stiff Competition
• Products do not consume costs directly
• Money is spent on activities
• Activities are consumed by product/services

29. Steps For Implementation of
Activity Based Costing

30. 1. Identify and classify the activities related to
the company’s products or services.
Hierarchy of activities
Unit – Level
Batch – Level
Product – Level
Customer-Level
Facility -Level

31. 2. Estimate Cost of each activity.
3. Calculate a cost-rate driver for each activity.
4. Assign activity costs to products using cost-
driver rate.

32. Activity Based Costing - Advantages
1. Product cost determination under activity-
based costing is more accurate and reliable
because it focuses on the cause and effect
linkage of costs and activities in the context of
producing goods.
2. Fixation of selling price for multi-products
under activity-based costing is fair and correct
because overheads are allocated on the basis of
relevant cost drivers.

33. 3. Control of overheads consisting of fixed and
variable becomes possible by controlling and
monitoring activities. Linkage between cost and
activities are clearly identified in activity-based
costing and thus provides opportunities to control
overhead costs.
4. Sufficient information can be obtained to make
decisions about the profitability of different
product lines.
5. Fair allocation of overheads occupy a
considerable portion in the total cost components.

34. Disadvantages Or Limitations Of
Activity-Based Costing
1. Difficult to identify the overall activities that
influence costs.
2. Not easy to select the most suitable cost drive.
3. Difficult to evaluate cost on the basis of
activities.
4. Not suitable for small manufacturing concerns.

35. Conclusion
• An efficient means of developing a comprehensive picture of
a business’ costs and expenditures, as they relate to products
and services. ABC is simple to implement and can provide a
host of benefits including the following:
1. Activity-based costing is applicable to a wide range of
business needs. It may be used to look at a small portion of
production or at the full scope of business operations.
2. With ABC, businesses can respond to inefficiencies. By
identifying areas that are absorbing too many resources,
managers can reallocate funds to more profitable areas.
3. Activity-based costing provides a more direct means of
controlling company funds. With ABC, businesses can
manage exactly where funds are going and how resources
are being used.

36. CVP ANALYSIS

37. Break Even Point
Break-even is the point of zero loss or profit. At break-
even point, the revenues of the business are equal its
total costs and its contribution margin equals its total
fixed costs. Break-even point can be calculated by
equation method, contribution method or graphical
method.

38. Equation approach
The equation method is based on the CVP formula:
Px = Vx + FC + Profit
BEP in Sales Units
At break-even point the profit is zero therefore the CVP formula is simplified to:
Px = Vx + FC
Break-even Sales Units = x =
𝐹𝐶
𝑃−𝑉

39. Example
Calculate break-even point in sales units and sales dollars
from following information:
Price per Unit Rs.15
Variable Cost per Unit Rs.7
Total Fixed Cost Rs.9,000

40. Solution
We have,
p = Rs.15
v = Rs.7, and
FC = Rs.9,000
Substituting the known values into the formula for
breakeven point in sales units, we get:
Breakeven Point in Sales Units (x)
= 9,000 ÷ (15 − 7)
= 9,000 ÷ 8
= 1,125 units
Break-even Point in Sales Dollars = Rs.15 × 1,125 = Rs.16,875

41. CONTRIBUTION MARGIN
APPROACH
Contribution margin is the difference between sales and
variable costs. When calculated for a single unit, it is called
unit contribution margin. Contribution margin ratio is the
ratio of contribution margin to sales.
Contribution Approach Formulas
BEP Sales in Units
Since unit contribution margin (Unit CM) is equal to unit sale
price (p) less unit variable cost (v), So,
Unit CM = p − v
Therefore,
Break-even Sales Units = x = FC ÷ Unit CM

42. BEP in Sales Rupees
Break-even Sales Rupees = Price per Unit × Break-even Sales
Units
Or
Break-even Sales Rupees = FC ÷ CM Ratio

43. Example
Calculate the break-even point in units and in sales dollars
when sales price per unit is Rs.35, variable cost per unit is
Rs.28 and total fixed cost is Rs.7,000.
Solution
Contribution Margin per Unit = ( 35 − Rs.28 ) = Rs.7
Break-even Point in Units = Rs.7,000 ÷ Rs.7 =
1,000
Break-even Point in Sales Dollars = 1,000 × Rs.35
or Rs.7,000 ÷ 20%
= Rs.35,000

44. COST-VOLUME-PROFIT (CVP)
RELATIONSHIPS IN GRAPHIC FORM
A CVP graph highlights CVP relationships over wide ranges of
activity. Viewing CVP relationships in a graph gives managers a
perspective that can be obtained in no other way.
In CVP Graph (also called break-even chart) , unit volume is
represented on the horizontal ( x ) axis and dollars on the
vertical ( y ) axis. Preparing a CVP graph involves three steps
as depicted in exhibit 6–1.

46. Total expense at that sales volume is:
The interpretation of the completed CVP graph is given in
exhibit 6–2. The anticipated profit or loss at any given level
of sales is measured by the vertical distance between the
total revenue line (sales) and the total expense line
(variable expense plus fixed expense).

47. The break-even point is where the total revenue and total
expense lines cross. The break-even point of 350 speakers in
exhibit 6–2 agrees with the break-even point computed
earlier.

48. An even simpler form of the cvp graph, which we call a profit
graph, is presented in exhibit 6–3. That graph is based on the
following equation:
Profit = unit cm × q - fixed expenses
In the case of acoustic concepts, the equation can be expressed as:
Profit = Rs.100 × q - Rs.35,000

49. Contribution margin ratio
In this section, we show how the contribution margin ratio
can be used in cost volume- profit calculations.
As the first step, we have added a column to acoustic
concepts’ contribution format income statement in which
sales revenues, variable expenses, and contribution margin
are expressed as a percentage of sales:

50. This ratio is computed as follows:
For acoustic concepts, the computations are:
In a company such as acoustic concepts that has only one
product, the cm ratio can also be computed on a per unit
basis as follows:

51. The CM ratio shows how the contribution margin will be
affected by a change in total sales. Acoustic concepts’ cm
ratio of 40% means that for each dollar increase in sales,
total contribution margin will increase by 40 cents (Rs.1
sales × cm ratio of 40%). Net operating income will also
increase by 40 cents, assuming that fixed costs are not
affected by the increase in sales.
The cm ratio is particularly valuable in situations where
the dollar sales of one product must be traded off against
the dollar sales of another product. In this situation,
products that yield the greatest amount of contribution
margin per dollar of sales should be emphasized.

52. Cvp analysis
Key calculations when using CVP analysis are the
contribution margin and the contribution margin ratio.
The contribution margin represents the amount of income or
profit the company made before deducting its fixed costs.
Said another way, it is the amount of sales dollars available
to cover (or contribute to) fixed costs.
When calculated as a ratio, it is the percent of sales dollars
available to cover fixed costs. Once fixed costs are covered,
the next dollar of sales results in the company having
income.