IsProductCostingHelpfultoLeanCompanies?

BrianH.Maskell,President,BMAInc. I was recently criticized by some venerable members of the cost & management accounting community.ImadeacommentthatIfeltproductcostingwaslargelyunhelpfulforleancompanies.Itseems Ihitanervewithmycommentsbecausethesecriticismswereharshandpersonallyinsultingbothtomyself andourcustomers.InthispostingIwouldliketogivearecentexampleillustratingsomeofmyconcerns aboutproductcosting.

Ivisitedacompanyinthelastfewweeksthatmakesdailyconsumerproductsthatweallbuy.The companyhasastrategicimperativetobecomealeanorganization,andhasengagedmycompanytoassist themwithLeanAccounting.WhenIvisitedoneoftheprimaryplants,Iwasgivenapresentationoftheir currentstandardcostaccountingsystem. ACTIVITYBASEDSTANDARDPRODUCTCOSTING Theplantcontrollershowedusanexampleofthestandardcostcalculationforoneoftheplant's primaryproducts.ThecompanyhasawellimplementedABCcostingsystemthatmakessensible,pragmatic useofcostdrivers.Buttheproductdemonstratedrequiresaround150linesofcalculationstoestablishcost. Duringthediscussiononeofthecorporatepeoplestatedthattheseproductcostsdidnottakealotofwork todevelopbecausethedatawasallaccuratelyavailablewithintheERPsystem.Thecontrollerheatedly beggedtodiffer.Heexplainedthathespendsagreatdealofhistimemaintainingthissystem,andthisleads tohimhavingtodoalotofovertime,especiallyatmonthend.Noonewasabletotellusonthespothow manytransactionsarerequiredtomaintainandrunthissystem.Itisclearlyaverytimeconsumingand onerousamountofworkusingthousandormillionsoftransactions. VARIANCEANALYSIS Thecontrolleralsoshowedusthevarianceanalysisreports.Theseshowthedetailed,linebyline variances for each cost driver. The corporate person explained that these reports are very helpful for identifyingissuesandproblemswiththeproductionandleadstosubstantialprocessimprovements.This timetheplantmanagerbeggedtodiffer.Hestatedthattheinformationwastoocomplicated,toolate,and mostly irrelevant to the process. He has to spend a lot of time "explaining" the variances to various managerseachmonth.Healsostatedthatthenewlyintroduceddailycell&processmeasuresandthedaily

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IsProductCostingHelpfultoLeanCompanies? Page2

10minute,standupmeetingsweremuchmorehelpfultoidentifytheissuesandproblems.Andmoreto thepointhisshopfloorteamandotherpeopleusethesedailymeasurementstocreateongoingproblem solvingandimprovement. DECISIONMAKING Atanothermeetingitwasexplainedthattheproductcostsareusedtoprovideaseriesofreports that show the profitability of the products by region, by product family, by channel, and other useful analysis.Thepurposeofthesemarginreportsissothattheproductmanagers,regionalmanager,andother seniorpeoplecanrationalizetheirproductofferingsandsalespromotionsandmaximizeprofitability.Once again,thepeoplethatreceivethesereportswereadamantthattheywouldnotusethesereportstomake thiskindofdecision.Theystatedthattheyalwaysusesomekindofadhocmaterialcontributionmarginor incrementalcostmethodbecausethatshowsthetruesituation.Therewasalsowideagreementthatalmost nobodyintheplantsortheofficesreallyunderstandshowtheproductcostsarecalculated.Thiscanlead tobaddecisionswhentheinformationis notwell understood. INVENTORYVALUATION Thecompanydoesnotusethestandardproductcoststovalueinventory.Thestandardproduct costsareretainedthroughouttheyearbuttheyarealsorecalculatedeachmonthendtoprovidetheso calledactualcosts.OneofthepeopleworkingintheITsharedservicesdepartmenttoldusthatthisvariance analysisandapplicationprocessissotransactionheavythatittakesaround20fullhourstojustrunthe program.Thisoftendelaysmonthendby2days. ACCURACY. WhenwebegantodiscusstheeffectivenessoftheABCproductcostswelookedatanexampleof anewlydesigned"lean"productflow.Thisflowhasfourseparateworkstationscomprisingmachinesand manualoperations.Wesawthattwoproductstookthesametimetoflowthroughthebottleneckoperation, andthereforetheproductioncostisthesameforbothproductsbecausetheyflowthroughthecellatthe samerate.Whenwelookedatthestandardcostfortheseitemstheyweredifferentbecausetheirtotal laborandmachinetimesweredifferent.The standard costs were wrong in both cases. CONCLUSION Aftercarefuldiscussionofthesetwoproducts,everyonerecognizedthatnotonlywasthestandard costingahugeamountofworktomaintain,usesvastnumbersoftransactions,doesnotprovideuseful informationfordecsisionmakingorimprovement,doesnotevenvalueinventory,delaysthemonthend, andissocomplicatedalmostnobodyunderstandsit.Butalsothecalculationsgivethe wrongcosts. Thesekindsofexamplesleadmetoconcludethatproductcostingisnothelpfulforcompanies aspiringtoleantransformation.

BMA Inc.
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BMA Europe Ltd.

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