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To the Graduate Council:

I am submitting herewith a thesis written by Karuppuchamy Ramasamy entitled “A

Comparative Analysis of Management Accounting Systems on Lean Implementation”. I

have examined the final electronic copy of this thesis for form and content and

recommend that it be accepted in partial fulfillment of the requirements for the degree of

A Thesis

Master of Science Degree

I would like to thank Dr. Rupy Sahwney for his continuous guidance, inspiration and

enthusiasm. In addition, I thank him for giving an opportunity to work with different

I am grateful to many people in the Department of Industrial Engineering who have

assisted me in the course of this work. I extend a very special thanks to my CPI team

members Aruna, Li and Kannan for their support to complete this thesis.

My parents have always encouraged and guided me to achieve higher levels in my life

Consequently, important research questions are being raised. Which cost management

based costing and value stream costing. This study evaluates the overhead principles

associated with management accounting alternatives to identify real product cost that will

drive many business decisions. The financial measures commonly used are short-term

and long-term profitability.

1

1.1 Introduction-------------------------------------------------------------------- 1

1.2 Problem Statement------------------------------------------------------------ 2

1.3 Background-------------------------------------------------------------------- 3

1.4 Problems with Traditional Costing and Accounting Methods---------- 7

1.5 Manufacturing Control System--------------------------------------------- 10

2.4 Literature Research-------------------------------------------------------------28

2.5 Conclusion for Literature Review--------------------------------------------35

3.5 Manufacturing Control System (Lean Manufacturing) ----------------- 41

Transition from Traditional to VSC-----------------------------83

in terms of the alignment of each system to the implementation of lean concepts. This

Most researchers agree that activity based costing provides more accurate product

inventory turn over. Moreover manufacturing environments will also play an important

In traditionally, the costs of direct labor and materials, the most important

on direct labor, direct material and overhead allocation. This overhead allocation is based

on the percentage of direct labor usage for each product. In activity based costing, this

overhead cost allocation is traced based on activity level and resource usage of each

activity. On the other hand, value stream costing traces the overhead cost based on

since this is the basis by which all other costs are attached to cost centers and their

products. This process overstates the importance of direct labor and directs attention

away from controlling escalating overhead costs. A distortion from allocating the

relatively small amount of factory and corporate overhead by burden rates on direct labor

was minor. Some experiences reveal that the distortion in reported product costs and, in

production costs and other value-added activities are very important since they are used

a machine consume resources, and products consume activities. These activities trigger

the consumption of resources that are recorded as costs in the accounts. Cost management

Figure 1 Revolution of management accounting

ended up having implications for capital planning, performance metrics, and many other

aspects of the enterprise. For most of this century, traditional costing has been the most

popular cost accounting technique for establishing and measuring the various elemental

costs within a function or department [62]. One of the major differences among three

The figure 1 illustrates the inceptions of various management accounting systems

the three different management accounting from research point of view. The typical

management accounting can be evaluated based on the following criteria.

6

cost include: too much focus on direct labor efficiency; concentrations on cost rather than

on such factors as product quality or process flexibility that have a long-term return; and

cost estimates that incorporate expenses incurred in relation to that product across the

organization’s entire value chain. He claims that standard product costs usually bear no

are highly profitable and by expanding commitments to complex, unprofitable lines.

that can arise as a result of the allocation of overhead on the basis of direct labor. Its main

manufacturing are driven by the measures used to evaluate performance. If traditional

systems, while 80 percent of the executives in the electronic industry were dissatisfied.

often conflict with strategic goals and objectives.

10

performance measurement system. Many U.S. manufacturers are plagued by an

overemphasis on traditional cost-based performance measurement systems that stress the

maximization of resource utilizations, in particular, direct labor utilization. Given that

many U.S. companies employ a standard cost-accounting system, production managers

often focus their attention on controlling standard costs, often at the expense of customer

acutely aware of direct labor efficiencies and direct labor variances [35].

productivity in different ways. A rigid mass production system leads to a highly

a substantial difference between traditional and lean manufacturing systems in employee

management, plant layout, material and information flow systems and production

11

circumstances. For example in a traditional manufacturing environment work orders

serve as the primary documentary for driving production schedules and tracking costs.

department or workstation only if the units produced are required by the next

workstation. Small lot sizes make it impractical to attach work orders to individual. There

is no clear understanding of which costing method supports lean operations. Different

generally focused on outputs, not inputs or throughputs. On the other hand, Lean

manufacturing is an organizational philosophy, which helps to identify and eliminate

non-value added activities in manufacturing as well as non-manufacturing environments

evaluate and communicate performance against expected results. Management

accounting system should convert this performance measures into cost information,

toward JIT, observed that the companies modified their product costing system to meet

12

the features of cost accounting measures rely on standards, emphasize on variances and

total quality control, reducing inventory levels, faster setup times, reduced lead time and

claim itself a complete JIT company if it continues to use traditional methods of

measuring efficiency and productivity. “Companies may claim to be practicing JIT but

continue to use employee efficiency measures as indicators of performance. If these are

Some articles suggest specific performance measures to support individual

functional teams. On the other hand, Hendricks [42] and Mc Nair [71] suggested a new

objectives and corporate mission. Hendricks [42] also offered the hierarchical

19

include total quality management, maintenance, new product introduction and other

engineering activities. These cross-functional and cross-enterprise processes are a key to

fluctuations. The manufacturing process seems less flexible to handle the demand

variation is the primary reason for the above mentioned problem. But lean environment

handles this situation by addressing the root cause of the problem. The manufacturing

Financially, this improvement will have a major reduction in working capital for the

least understood that management accounting system needs improvement along with

manufacturing environment. This management accounting system acts as a bridge in

Lean manufacturing has its roots in the automotive industry [99]. A global study

of the performance of automotive assembly plants during the 1980’s resulted in the

manufacturing is that the customer defines value. Value is viewed “in terms of

20

 Constant engineering change

 Weekly planning

 Long lead times

 Large lot sizes

 Vendor difficulties

 Zero change

 Hourly planning

 Zero lead times

 Lot size of 1

 Vendor synergies

Product design  Life cycle declining

 Constant engineering change

 Many complex components

 Quality improvement over cycle

 Infinite options

 Life cycle much shorter

 Little or no engineering change

 Few complex components

 100% quality at first time

 Limited options

 Focus on variable cost

 Product profitability full stream

 Minimum variable cost beyond

 Cost, flexibility, dependability and

21

scheduling to delivery, and the physical transformation task proceeding from raw

materials to a finished product in the hands of the customer” [99].

out along value stream-lines. Lean manufacturers usually adopt cellular

manufacturing, where each cell contains all the resources required to produce a

specific product or where a series of cell is organized to produce a specific

product. In order to enable products to flow smoothly through the factory to

that improvement is on-going process. Initiatives to reduce effort, time, space and

cost can be conducted continuously. As a result, lean manufacturers adopt a

22

The lean transformational principles presented here are an adaptation of those presented

by Womack and Jones in the follow-up to “The Machine That Changed the World”, the

1996 publication Lean Thinking: Banish Waste and Create in your corporation (Simon &

Schuster, New York, pp 15-26).

are not able to achieve the anticipated benefits. One of the barriers to successful

source of costs (eg.. drivers).

possible on a more detailed level.

from inception.

23

Focus on eliminating waste is leading to increased demand for value added measurements

of performance. Many cost accounting systems divide the overhead apportionment

that overheads are such a large amount of the total product cost that it is important to

departments.

24

Figure 4 Traditional standard costing

emphasizes the need to obtain a better understanding of cost behavior and it divides

overhead costs into various process activities. A process could be described as logical

25

performance measures.

responding organization. The project success rate is low because of the following

reasons.

26

product decisions.

different people and equipment, implying job eliminations and write-offs.

costs.

cause of cost.

27

activities that supports value stream will be converted in terms of cost and included in

28

volume simple products because overhead cost is allocated on direct labor hours or some

35

In a nutshell topics such as various management accounting systems under a

system from accounting standpoint were studied and academic research work in the area

of management accounting was reviewed. When investigating the literature regarding the

traditional cost accounting. However, few authors have investigated the impact of using

different management accounting alternatives in various manufacturing environments.

performance of management accounting systems are not directly tested under different

lean manufacturing principles like lot size, quick changeover and material handling. In

of using this concept to analyze the lean system to identify management accounting

strategy, which illustrates the research findings of this thesis.

36

manufacturing environment with various scenarios.

A conceptual framework of the LMAS model has four distinct phases of which

across management accounting systems. The figure 8 shows graphically how each phase

37

variables. The background variables are constant throughout the experiment.

38

Figure 9 Components of lead time

39

40

model plays a vital role in this research to collect the output parameters. The management

accounting system layer will calculate the different cost parameters based on simulation

the output of this layer.

The following discussion describes how lean manufacturing factors, different

experiment study.

41

environment. Changeover time mainly depends on the product complexity and how often

minimize non-value added activity. Experiment consider setup time as one of the major

any value to customer but it may be helpful to manage the market fluctuations. However

plays a major role to reduce WIP. This experiment incorporates lot size flexibility to

check the performance measures behavior.

42

requirement order release has been sent to bottleneck operation only. This peacemaker

frozen period. This experiment incorporates pull system setup, which is one of the key

lean principles to achieve lean enterprise level. Further this experiment assumes one

family. Order released to work centers based on production kanban as result of

option will be used as the shop floor dispatching rule as commonly used in other

difficult. Experiment setup allows the user to specify the lot size for each product in the

pre-assigned to each workstation based on the processing time and flow criticality.

43

Table 3.1 Life cycle costs of product and cumulative percentage

44

fixed cost or semi variable cost. The table 3.2 compares the overhead allocation across

different management accounting alternatives.

Table 3.2 Overhead allocation methods for traditional and lean environment

51

= Preventive maintenance time for machine j

The unit production cost for part type i on machine j

52

Inventory handling cost of part i /unit

WIP

=

∑

1

DCi = (TCi + ECi)

∑

NEi

( MPCi + WIPi)

53

in direct operation cost for overhead allocation. The respective departments are

departments. In common, this allocation is based on labor usage or machine hour rate.

Normal costing is used in this study to evaluate overhead cost. Further,

based rates should produce more accurate product costing in advanced manufacturing

environments which means high overhead based manufacturing industry [76].

54

Figure 12 Overhead cost allocation based on traditional costing

55

Overhead rate:($48440)/320 hours

R (29hrs x 151.375)/100 units =$43.89 + 15.89 = 63.93/unit

S (32.2hrs x 151.375)/200 units =$24.37 + 15.89 = 44.41/unit

U (29hrs x 151.25)/200 units =$21.93 + 15.89 = 41.97/unit

56

Lean accounting concepts are designed to reflect the changes or improvements of

the shop floor which run under flow line value stream. It accounts the cost based on value

This chapter already discussed the different overhead methods and advantages. Further it

takes all other cost as direct cost except facility depreciation cost. This cost will be

allocated based on the plant floor square foot usage. This costing tracks the cost on a

and support costs except raw material as value stream overhead. This overhead is

57

58

cannot provide accurate unit cost information on a timely basis.

system to achieve more realistic results.

simulation program accounts for it. The raw material and labor cost per product is shown

in table 3.6.

to find out the optimal product mix. This linear program includes the capacity constraints

costing principles. Table 3.11 shows the product cost calculated based on value stream

costing principles.

59

60

67

0.5

1

30

1.5

10

94579.73

0.5

1

50

1

60

1.5

68

for each accounting is shown in the following table with other experimental factors.

The performance measure is calculated based on the simulation output under each

different experiment setup shows considerable variation in the performance in total net

manufactured in this focused factory environment. Focused factory arrangement has been

widely accepted in modern manufacturing environment to effectively implement the

ideas of just-in-time (JIT), small lot sizes, continuous improvement, and to enhance the

the marketplace by drastically reducing lead times. The net income collected in this study

From the table 4.2, one can observe that the net income increases when changeover time

decreases. The above statement is true for all the management accounting alternatives.

Ho: Lot Size = 0 358.3579 <.0001

69

income. As shown in table, all main effects, two-way interactions expect changeover and

each group of 4 levels of lot size and 3 levels of changeover time. Even though

indicates that lot size has lesser impact on performance measure compared to changeover

facility. The figure 15 indicates the effect of individual factors on performance measure

of total net income.

Profit

82523.6

±1088.5

30

60

Changeov er

70

performance improvement compare to functional layout. This indicates that greater lot

The table 4.3 shows the total net income for various experimental setups which

trend similar to traditional management accounting but it is more sensitive to change in

to products. It traces the cost from activity level to resource consumption level. Thus this

production and lean production environment.

and the values are shown in table 4.4. The figure 16 predicts the profile behavior of

71

Table 4.3 Activity-based costing

1

1

1

72

Table 4.4 Hypothesis results for activity-based costing

Ho: Lot Size = 0 2023.157 <.0001

Ho: Change Over = 0 4162.509 <.0001

Ho: Material Handling = 0 190.2255 <.0001

Ho: Lot Size * Change Over = 0 358.1846 <.0001

73

a given experimental setup which runs based on activity based cost product mix. The

effect of mean net income across various lot sizes is also statistically significant and the p

value is less than 0.0001. Further, the above statement supports our earlier conclusion

The profile graph indicates the effect of individual factors on performance

this is not true for standard traditional costing and value stream costing. The effect of

relies on the assumption of labor and overhead costs are relevant to resource allocation

decisions. Under ABC, an activity's resources are disaggregated into either flexible or

flexible cost to reflect the cost of an activity's services. Using the quantity of an activity's

operational ABC model are applicable to a wide range of production-related decisions. A

74

The table 4.6 shows the simulation output of total net income for a given

group of products or product family. This value stream costing does not have the concept

considered as period expenses which will be deducted from the overall company profit of

direct. Even though simulation output of value stream costing performance measure

input variable.

Table 4.5 shows that main factors and interaction between lot size and changeover

has considerable impact on output performance measure. The analysis of results shows

Ho: Lot Size * Change Over = 0 60.69 <.0001

75

Table 4.6 Lean accounting (value stream costing)

76

83

Figure 23 Pareto chart for changeover

mass customization, supply chain and other lean thinking initiatives. By comparing all

dedicate individual resources to each value stream or focused factory setup. In practical

84

overcome the drawbacks and enhance the existing value stream costing.

stream and this will lead to replicate the real overhead cost of the value stream.

product flow efficiency. Even though, all the products belong to one product

measurement reports.

85

of the product and it gives less attention to work in process inventory.

failures have been listed in literature review.

86

investment analyzes. This product cost is used to identify the performance measure of

87

station. This flow includes not only machine process time but also all other value added

continuous improvement, we can reduce the total cycle time of the given product and this

business decision and many situations this can’t lead good business decisions.

88

consideration in determining product costs, and ABC costing takes all controllable and

follows the ABC method and it assigns all the cost to particular value stream to determine

processes and activities will result in decisions that lead to better performance in the short

term as well as in the long term. The management accounting should mimic the

business decisions.

predict the practical shop floor characteristics. Many research studies have neglected

89

profit is highly dependent on manufacturing environment. This study further breaks her

labor and overhead. Raw material and direct labor is constant in any management

short-term controllable costs and uncontrollable costs should be considered together to

make better decisions. Shank [85] even suggested that ABC costing should be used to

90

alternatives. For example this study can be extended to service industries. Further the

experiments should be conducted for a wide variety of manufacturing environments like

throughput and mass production. Many industries may not implement lean manufacturing

principles and focused factory arrangements, so the research has to be conducted on other

performance of manufacturing environments. The overhead cost tracing may be tested

with other non-financial performance measures like inventory turns or include these

91

92

3. Al-Mubarak, F., Canel, C., Khumawala, B.M., 2003: A simulation study of focused