Steadfast Security Devices (SSD) has introduced a just-in-time production process and is considering the adoption of lean accounting principles to support its new production philosophy. The company has two product lines: Mechanical Devices and Electronic Devices. Two individual products are made in each line. Product-line manufacturing overhead costs are traced directly to product lines and then allocated to the two individual products in each line. The company’s traditional cost-accounting system allocates all plant-level facility costs and some corporate overhead costs to individual products. The latest accounting report using traditional cost accounting methods include the following information (in thousands of dollars):

SSD has determined that each of the two product lines represents a distinct value stream. It has also determined that out of the $500,000 ($140,000 + $100,000 + $180,000 + $80,000) plant-level facility costs, product W occupies 24% of the plant’s square footage, product X occupies 20%, product Y occupies 34%, and product Z occupies 12%. The remaining 10% of square footage is not being used. Finally, SSD has decided that in order to identify inefficiencies, direct material should be expensed in the period it is purchased, rather than when the material is used. According to purchasing records, direct material purchase costs during the period were as follows:

Required

1. What are the cost objects in SSD’s lean accounting system?
2. Compute operating income for the cost objects identified in requirement 1 using lean accounting principles. What would you compare this operating income against? Comment on your results.

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Sales Direct material (based on quantity used) Direct manufacturing labor Manufacturing overhead (equipment lease, supervision, production control) Allocated plant-level facility costs Design and marketing costs Allocated corporate overhead costs Operating income Mechanical Devices Product W Product X $1,800 $1,300 400 400 200 140 200 50 $410 250 200 270 100 100 40 $340 Electronic Devices Product Y $2,150 500 500 420 180 220 80 $250 Product Z $1200 200 150 220 80 90 20 $440