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Cost Accounting Approaches: The Lean Success Case Author: Bassima Hout Online Pub Date: January 04, 2017 | Original Pub. Date: 2017 Subject: Accounting, Cost Accounting, Management Accounting Level: Basic | Type: Indirect case | Length: 4776 words Copyright: Bassima Hout 2017 Organization: Toyota Corporation, General Motors, Chrysler, Ford | Organization size: Large Region: Not applicable / global business | State: Industry: Manufacture of motor vehicles, trailers and semi-trailers Originally Published in: Publisher: SAGE Publications: SAGE Business Cases Originals DOI: http://dx.doi.org/10.4135/9781473996588 | Online ISBN: 9781473996588 SAGE Bassima Hout 2017 SAGE Business Cases Bassima Hout 2017 This case was prepared for inclusion in SAGE Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes. 2017 SAGE Publications Ltd. All Rights Reserved. This content may only be distributed for use within University of Queensland. http://dx.doi.org/10.4135/9781473996588 Page 2 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases Case Learning Outcomes Upon completion of this case, students will be able to: understand the developments in cost accounting systems understand the difference between income statement presentation under traditional versus lean costing methods analyze managerial performance using both traditional and lean tools evaluate and conclude on managerial performance using traditional and lean tools. Auto Manufacturing Industry Economic crisis In 2008, the world economy crashed and so did the \"Big Three\" US car manufacturers. General Motors filed for bankruptcy, Ford Corporation reported a $12.7 Billion loss, and later in 2009 Chrysler went into bankruptcy protection. However, their Japanese counterpart, Toyota Motor Company, sustained its leadership in the car industry. Toyota Motor Company considered \"this headwind as a valuable opportunity to turn it into a more flexible and stronger company...\" (The Auto Channel, 2008). U.S. auto manufacturers had structural limitations imposed on their operational flexibility. Despite lower consumer spending, the companies decided that cutting production was not the solution. They operated under a traditional manufacturing system, and because of variable costs, mainly inventory and labor, manufacturers had no leeway for making cuts. For example, GM's structural limitation was evident in the Arlington manufacturing site. To keep pace with technology and product innovation, GM had to build a new separate building for its body shop rather than modernize the existing facility. Thus the transfer of production from the body shop to the final assembly endured more motion and consumed more time than under optimal conditions. But, GM could not afford to shut down the site for renovation due to extensive committed labor costs. Adding to its operational inflexibility were transportation costs associated with pre-existing contracts with suppliers, 78% of which were scattered in Michigan, Canada, and Mexico (Hawkins & Shirouzu, 2006). The labor force was unionized, and therefore protected for minimum wage, benefits, and layoff policies (UAW: United Auto Workers). UAW workers were entitled to 95% of their pay if the plants shut-off, which is equivalent to $1,545 per car, health care benefits of $1,635 per car, and holiday pay of $630 per car (Taylor, 2007). The other option for the auto manufacturers was to keep Detroit's normal production and either sell excess inventory to car rental agencies at $3,000-$5,000 discounts per vehicle damaging the resale value of used cars in the short-term, or pay $1,250 per vehicle to dealers to store them (Taylor, 2007). GM and Ford each incurred close to $2 billion leasing losses in the second quarter of 2008 (Welch, 2008). In either case, fixed and committed costs already incurred would be allocated over a larger number of units produced, reducing the cost per vehicle. However, the hidden embedded costs as deferred inventory costs and concealed actual expenses on the income statement contributed further to Big Three losses. The hidden costs are those fixed overhead costs, already incurred, but capitalized under absorption costing into inventories in compliance with US GAAP. Under these restrictions, the Big Three flooded the market with Page 3 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases new cars, despite the sharp drop in demand. To move their inventory, manufacturers offered car dealers incentives to store the excess inventory and to push for sales. Notwithstanding restructuring efforts, the U.S. government had to interfere to bail out the auto industry. The U.S. government authorized $10 billion in aid to Chrysler, which led to its ownership of 8.6% of the company's equity (Durbin, 2011) and $50 billion to General Motors Co. which entitled the government to control 61% of its equity (Beach, 2014). Ford refused the government offer for bailout. \"At a deeper level, the question is whether GM and Fordthe companies that perfected mass production -can fundamentally change their culture to the new lean production system\" (Schifferes, 2007). In 2004 GM embarked on a restructuring plan to go lean in its operations by introducing a global manufacturing system. For decades GM has been using the mass assembly-line technique, whereby \"each division had its own manufacturing processes, its own parts, its own engineering, and its own stamping plants\" (Holstein, 2009). The new manufacturing system would use the same production procedure across the global plants. The plants restructuring would encompass flexibility for each type of vehicle, integrating design and manufacturing to gain efficiencies. The flexibility is based on sharing a \"common platform, including engines and transmissions\" (Schifferes, 2007) for each type of car (small, medium, or truck). However, supplier relationships remained a major problem for production, which constituted 85% of car makeup. Many of suppliers who were pressured to reduce cost shifted their production outside the U.S. This in turn had tremendous effects on GM's transportation costs. Ford also faced legacy cultural problems in trending towards lean production. Further restructuring efforts were applied at the auto manufacturers after government intervention in 2008. All of the restructuring involved cost cuts, with the manufacturers shutting down plants, reducing production, dropping product lines, and laying-off workers. Chrysler took on two restructuring efforts by cutting 1.1 million vehicles and 26,000 workers (Welch, 2008). GM planned to reduce its manufacturing plants from 47 to 33. In addition, it entered into negotiations to sell its Saab brand and its transmission plant in France. It also, planned to phase-out its Saturn brand and cut 47,000 jobs (Vorman, 2009). Ford, which was losing money from its core car and truck business, decided to close five manufacturing plants including Cleveland Casting Plant and Maumee stamping plant and 35,000 jobs cuts (Schoenberger, 2011). On the other hand, Toyota had maintained a TPS (Toyota Production System) operating system, grounded on a lean rather than traditional manufacturing system. In the face of economic crisis, Toyota promptly adapted its production, whereby it perceived the economic crisis as an opportunity to \"develop human resources and thus work to establish a company with true strength and long-term stability. To this end, we will aim to eliminate waste and review the process and structure of every aspect of our operations\" (The Auto Channel, 2008). A key to the effectiveness of lean operations is to use freed capacity resulting from eliminating waste in the manufacturing processes. Waste involves any activity that does not add value to the customer but rather adds to the costs of production. Toyota believes that management efficiency lies in eliminating or reducing those non-value added activities, such as storing merchandise inventory, idle labor hours, machine breakdowns, transportation costs from suppliers of parts and raw material, while maintaining and improving products 'quality. By applying their lean strategy, Toyota achieved profits during the economic crisis: increasing growth in global operations through utilizing opportunities available in their product line-up (The Auto Channel, 2008). The gap between the cost of US cars and Japanese cars grew to $2,900 (Taylor, 2007). Toyota had implemented lean operations for decades with its customer- Page 4 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases focused philosophy, just-in-time inventory system (pull system), and focus on eliminating waste. Their customer focus was a long-term strategy that assessed customers' family planning and preferences (Key to Toyota's success). Accordingly, Toyota embarked on ecocars long before the Big Three. \"A tale of two auto plants\" illustrates the competitive advantage of Toyota's production system in San Antonio, Texas, where Toyota applied a system of waste reduction, continuous improvement, and just-in-time inventory (Hawkins & Shirouzu, 2006). Although both factories were located in the heart of TexasGM in Arlington and Toyota in San Antonioeach had a different structural and operational system. GM's factory had been in operation in Arlington for over 50 years, employing 3,000 workers. Despite renovation efforts in 2000, unlike Toyota, GM was bound by its long-term workers' benefits, high wages, and layout constraints. It had to use long conveyers to transport its production from one process to the other, which consumed unnecessary throughput time. Older machinery meant more breakdowns and idle labor hours. Its suppliers were dispersed causing high transportation costs and potential for delivery delays. Toyota, on the other hand, established its competitive advantage at its factory on lean operational and structural bases. The factory occupied one-third the space of GM's factory. It employed workers at $35/hour, less than half the hourly wage of GM workers. Its new machinery saved Toyota on maintenance and breakdown costs. The necessary parts to complete production were enclosed within each vehicle to save time and motion and prevent errors. In addition, Toyota was able to convince 21 of its suppliers to establish their factories around its San Antonio site (Hawkins & Nouhiko, n.d.). Recent economy In 2014, the Big Three auto manufacturers turned their losses into profits. Restructuring, government bailout, and union negotiations resulted in cost cuts. The labor force was cut and wages were controlled, plants reduced, and unprofitable product lines dropped (AP Business Staff, 2011). According to Van Conway, a consultant and founder of turnaround firm Conway MacKenzie. \"If all of us were to put ourselves back in 2009, could we imagine that GM could have done an IPO and these companies would be enjoying this level of profit? I don't think so\" (AP Business Staff, 2011). Ford was the only company to gain customer's confidence by surviving without governmental interference (Navellier, 2014). \"Ford was leaner in its vision\" (Lool, 2010). Since 2006, Ford has invested in the future to meet customers' preferences. The company improved the quality of its products, and invested in energy-saving electric and hybrid manufacturing plants (Lool, 2010). But it is still far from Toyota's lean. For example, to ensure quality and reduce cost, Toyota \"pull the cord,\" i.e., stops the production line 2,000 times/week to fix quality problems, while Ford averages only 2 times/week (Schifferes, 2007). But Toyota remained the world's biggest auto manufacturer with a sales increase of 16% and profits up by 90% to $17.9 billion (Petroff & Yan, 2014). Approaches in Cost Accounting Traditional costing system The primary purpose of accounting information, whether internal or external, is to provide management and investors with useful information to make sound decisions. \"When standard Page 5 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases cost accounting was developed in the early 1900s, most companies' cost structures consisted of 60% direct labor, 30% materials and 10% overhead\" (Kroll, 2004). Manufacturing cost structures included very little for overhead, therefore companies allocated overhead costs to products in the same proportion as direct labor. It was volume driven. For example, consider when a company is producing two products, a standard and a customized product. Although the customized product might consume more overhead in terms of indirect material, supervision, the overhead would be allocated equally to both products based on the number of units produced. This would understate the unit cost of the customized product. \"Overhead was so insignificant that even if the allocation was incorrect, it wasn't a big deal\" (Kroll, 2004). However, as machinery and processes in factories evolved, a new era of cost accounting arose. As manufacturers adjusted their approach to cost structures, they changed their cost accounting techniques and tools. Traditional used tools such as standard cost of sales and variance adjustments on the income statement (Table 1), budgeting and performance reports, and variance analysis and responsibility centers. Accountants could no longer use the direct labor cost driver as the trigger for all indirect manufacturing costs. Determining and selecting an appropriate cost driver for indirect costs became a must. Cost accounting tools using multiple cost drivers were adopted. For example, utilities expense might be triggered by the number of machine hours and by the number of late night shifts. Later, ABC (activity-based costing) techniques were developed and used. Table 1: Traditional Income Statement. Current Year Previous Year Net Sales 100,000 90,000 Less: Standard Cost of Sales 48,000 45,000 Material Price Variance (3,000) 10,000 Material Usage Variance (2,000) 5,000 Labor Efficiency Variance 7,000 (8,000) Labor Rate Variance (2,000) 9,000 Overhead Volume Variance 2,000 2,000 Overhead Spending Variance (2,000) Page 6 of 14 8,000 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases Overhead Efficiency Variance 16,000 (17,000) Total Cost of Sales 64,000 54,000 Gross Profit 36,000 36,000 Source: Kroll (2004). Activity-based costing (ABC) ABC techniques analyze organizational operations into activities such as order processing, design changes, and customer relations. By doing so, some indirect costs, which are allocated as a product cost, become easily traceable to the identified activities. This reduces the allocation process, which in turn reduces allocation errors and improves product costing. Chrysler claims that it saved hundreds of millions of dollars. ABC showed the true cost of certain parts Chrysler made was 30 times original estimates, \"a discovery that persuaded the company to outsource the manufacture of many of those parts\" (The Economist, 2009). Lean costing systems Lean operations and accounting tools and techniques have gained popularity in recent years. The main focus in lean is waste and cost reduction. Grounded on value-added activities that customers are willing to pay for, Toyota Production System (TPS) is now synonymous with lean production. Such value-added activities include new vehicle design, costs of assembling and painting the vehicle, seatbelts, and airbags. Non-value added activities are those additional costs incurred by the producer that do not increase the selling price. These are activities such as maintenance, floor clean up, and moving the material to the factory. In lean operation and accounting, the company analyses the value stream: all activities from raw material purchases to conversion into finished product and customer delivery to identify and eliminate waste, and improve operational effectiveness. Seven general wastes are identified in lean operations: \"over-production and early productionproducing over customer requirements, producing unnecessary materials / products waitingtime delays, idle time (time during which value is not added to the product) transportationmultiple handling, delay in materials handling, unnecessary handling inventoryholding or purchasing unnecessary raw materials, work in process, and finished goods motionactions of people or equipment that do not add value to the product over-processingunnecessary steps or work elements / procedures (non-value added work) defective unitsproduction of a part that is scrapped or requires rework\" (1000 ventures, n.d.). Traditional cost accounting tools shift to value formation analysis tools (Maskell & Baggaley, 2001). \"Traditional management accounting measurement systems focus on such issues as Page 7 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases monthly variance reporting and earned hours, and are used for monitoring and judgment\" (Maskell & Baggaley, 2007). Instead, lean tools focus and push for continuous improvement. Each working cell is provided with a set of performance measures and clear guidance and empowerment for immediate action to fix any problem it might face such as, pulling the cord. Clear and timely information for decision-making is provided rather than monthly. Its focus is on the costing the value stream rather than the product itself. This in turn encourages continuous improvement (Institute of Management Accountants, 2014). \"Indeed Taiichi Ohno, the father of the TPS, is quoted as saying: 'It was not enough to chase out the cost accountants from the plants. The problem was to chase cost accounting from my people's minds'\" (Vinas, 2007). Lean Accounting Unlike traditional/standard costing, lean accounting provides financial information that focuses on the value stream material inventory, processing costs, occupancy costs (Table 2). Thus it reveals \"savings and costs that might otherwise be misinterpreted or hidden\" (McKenna, 2011). The lean focus is on assessing continuous improvement and waste reduction, such as scrap and inventory. According to Cunningham, with lean financial statements: \"Managers easily can see whether material use, scrap rates and labor costs for a product line are moving up or down. Inventory valuation also changes under lean accounting. Because of the focus on producing only to meet customer demand, inventories tend to be much lower than in traditional manufacturing operations. For instance, rather than including labor and overhead expenses in the cost of goods sold, a lean financial statement will show materials, labor and overhead as separate line items. That way the company will recognize labor and overhead expenses when it incurs them rather than having them get wrapped into inventory on the balance sheet.\" (Kroll, 2004) Lean and traditional accounting tools Income statements Comparative traditional income statements, issued for external compliance purposes, measure a company's profitability over a period of time. As a tool, the gross profit percentage is used to measure this progress over time. However, these financial statements fail to reveal certain operational improvements, such as waste reduction, because all manufacturing costs are grouped together and embedded within the cost of goods sold. Lean income statements unveil the breakdown of cost of goods sold the material, labor, and overhead used, allowing companies to measure operational improvements. Table 2: Lean Income Statement. Current Year Previous Year Net Sales Page 8 of 14 100,000 90,000 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases Cost of Sales: Purchases 25,300 34,900 Inventory Material: (increase)/decrease 6,000 (6,000) Total Material Costs 31,300 28,900 Factory Wages 11,000 11,500 Factory Salaries 2,100 2,000 Factory Benefits 7,000 5,000 Services and Supplies 2,200 2,500 Equipment and Depreciation 2,000 1,900 Scrap 2,000 4,000 Total Processing Costs 26,300 26,900 Building Depreciation 200 200 Building Services 2,200 2,000 Total Occupancy Costs 2,400 2,200 Processing Costs: Occupancy Costs: Page 9 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 Total Manufacturing Costs: SAGE Business Cases 60,000 58,000 Inventory/Labor, Overhead: (Increase)/Decrease 4,000 (4,000) Cost of Sales 64,000 54,000 Gross profit 36,000 36,000 Source: Journal of Accountancy (Kroll, 2004). Production System: Push versus Pull In traditional operations, manufacturers use cost-cutting strategies that encourage mass production. The fixed factory overhead such as factory rent, machinery depreciation, insurance, is allocated equally over the units produced as part of the product cost. It becomes an expense on the income statement as cost of sales only when the units produced are sold. So the larger the number of units produced relative to those sold, the lower fixed factory overhead included in cost of sales, the higher the profits. Table 3 illustrates two cases with the same fixed factory overhead and same unit sales. In case 1 the number of unit produced (10,000) is half that of case 2 (20,000) which had a positive impact on the profitability of case 2, by reducing the cost of sales. Table 3.Traditional Operations Promoting Mass Production. Case 1: 10,000 units produced a Total Fixed Factory overhead $100,000 b Units Produced 10,000 c Cost/Unit =a/b 10.00 d Units sold 7,000 Fixed factory overhead included in cost of sales: dxc $70,000 Case 2: 20,000 units produced Page 10 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases a Total Fixed Factory overhead $100,000 b Units Produced 20,000 c Cost/Unit =a/b 5.00 d Units sold 7,000 Fixed factory overhead included in cost of sales: dxc $35,000 The unsold units remain as inventory, which requires storage, and further push efforts in marketing and advertising to sell to customers. In addition, workers receive incentives for extra output productivity. However, lean strategies promote pull production and just-in-time inventory systems. . Their manufacturing process is triggered by customer orders. That is, the manufacturer does not produce and stock up on merchandise unless there are customer orders. So the raw material is purchased according to manufacturing needs and all finished goods are delivered to customers. Budgets and variance analysis Traditional budgets and variance analysis tools also support a push production system. In a traditional cost accounting system, companies measure results against a budget. A formal budget is prepared a few months ahead of the fiscal year from which a standard cost per unit is developed. The budgeted manufacturing costs: material, labor, and overhead are divided by the planned level of units of output, and a standard cost per unit is developed. The standard cost is applied to the units produced and eventually appears in the traditional income statement under standard cost of sales, based on the units sold (Table 1). Actual costs of material, labor, and overhead vary from those budgeted. The difference between the budgeted and actual costs is considered an efficiency variance. For each of the three manufacturing inputs, the efficiency variance is further analyzed into usage and price variance. The usage variance represents differences between budget and actual consumptions of units of material (material usage variance), labor hours (labor efficiency variance), or overhead driver units (overhead efficiency variance). The price variance represents differences between budget and actual purchase price of material (material price variance), hourly labor wage (labor rate variance), and overhead (overhead spending variance). For example, the human resource department would justify the labor rate variance, while the factory supervisor would be responsible for all three inputs' usage variances. Favorable variances support over-production and over-purchases, in line with mass-production strategies. \"Financial planning in lean organizations is more dynamic than is usual in traditional companies. The planning and budgeting process is done every month (typically) and is used to create an integrated \"game plan\" across the organization. The process is Page 11 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases commonly called sales, operations, and financial planning (SOFP)\" (Institute of Management Accountants, 2014). Discussion Questions 1. The Big Three auto manufacturers failed to sustain profitable operations during the 2008 economic crisis. Identify at least TWO major constraints in their traditional operational system that hindered adapting their production to the economic conditions. Explain and provide examples from the case to support your answer. 2. Toyota was able to sustain its profitable operations despite the economic crisis. List at least FOUR advantages in its lean production system. Provide examples from the case to support your answer. 3. Financial statements analysis: a. Traditional Income Statement (Table 1): The gross profit and gross profit percent are useful analysis tools for evaluating performance in a traditional cost accounting system. Use the traditional Income statement in Table 1 to determine the following. i. The difference in dollar amount of Gross Profit over the two years presented. ii. Determine the Gross Profit % for each year. iii. Based on Gross Profit % above, which year is more profitable? iv. Based on your knowledge of traditional cost accounting system and related analytical tools discussed in class: 1. Identify for each of the presented years, whether the variances used to adjust the standard Cost of Sales are favorable or unfavorable. 2. Provide a brief explanation of the noted change in variances above over the presented years. b. Lean Income Statement (Table 2). i. Prepare a vertical analysis by calculating the percentage of each component of Cost of sales to Net Sales. (Round to the hundredth, two decimals). ii. Select the most significant components of cost of sales that you believe are noteworthy for assessing Lean operations' performance, and comment on their change (as a percent of Net sales). iii. I n y o u r o p i n i o n a n d b a s e d o n y o u r a n a l y s i s a b o v e , w h i c h y e a r demonstrates a better performance? c. Which income statement presentation provides a better basis for managerial performance assessment: Lean or Traditional? Justify in terms of profitability and operational efficiency (Waste reduction). Further Reading Hawkins, L., Jr., and Shirouzu, N. A tale of two auto plants: Pair of Texas factories shows how s t a r t i n g f r e s h g i v e s T o y o t a a n e d g e o v e r G M. GM Inside News. Retrieved from http://www.gminsidenews.com/forums/f37/gm-vs-toyota-tale-two-auto-plants-31822/ Holstein, W. (2009, Jun 1). Who's to blame for GM bankruptcy? Business Week. Retrieved from http://www.businessweek.com/lifestyle/content/jun2009/bw2009061_332081_page_2.htm Taylor, A., III. (2007, Jan 26). Behind Ford's scary $12.7 billion loss. www.money.cnn.com. R e t r i e v e d f r o m http://money.cnn.com/2007/01/26ews/companies/pluggedin_taylor_ford.fortune/index.htm Page 12 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases Bibliography 1000 ventures. (n.d.). Toyota's holistic approach to waste elimination. 1000 ventures. Retrieved from http://www.1000ventures.com/business_guide/lean_7wastes.html *AP Business Staff. (2011, May 2). Chrysler turns first profit since bankruptcy. Cleveland.com. R e t r i e v e d f r o m http://www.cleveland.com/business/index.ssf/2011/05/chrysler_turns_first_profit_si.html Business Guide/Lean Production. (n.d.). Retrieved October 25, 2014, from 1000ventures.com: http://www.1000ventures.com/business_guide/lean_production_main.html Beach, E. (2014, April 30). US Government says it lost $1.2 billion on GM bailout. Reuters. Retrieved from http://www.reuters.com/article/2014/04/30/us-autos-gm-treasuryidUSBREA3T0MR20140430 *Durbin, D.-A. (2011, May 2). Chrysler turns first profit since bankruptcy. CNSNews.com. Retrieved from http://cnsnews.comews/article/chrysler-turns-first-profit-bankruptcy Evan Hirsh, A . K . (n.d.). 2015 Auto industry trends. Strategy &. Retrieved from http://www.strategyand.pwc.com/perspectives/2015-auto-trends Gerth, R. J. (2007, Jan). Innovate or Die. Center for Automotive Research. Retrieved from: http://www.cargroup.org/?module=Publications&event=View&pubID=78 Hawkins, L., Jr., & Shirouzu, N. (2006, May 24). A tale of two auto plants: Pair of Texas factories shows how starting fresh gives Toyota an edge over GM. GM Inside News. Retrieved from http://www.gminsidenews.com/forums/f37/gm-vs-toyota-tale-two-auto-plants-31822/ Holstein, W. (2009, Jun 1). Who's to blame for GM bankruptcy? Business Week. Retrieved from http://www.businessweek.com/lifestyle/content/jun2009/bw2009061_332081_page_2.htm Institute of Management Accountants. (2014). Accounting for the Lean Enterprise. Major Changes to the Accounting Paradigm. Retrieved from http://www.imanet.org/docs/defaultsource/thought_leadership/management_control_systems/accounting_for_the_lean_enterpris e.pdf?sfvrsn=3 K e y t o T o y o t a ' s s u c c e s s. ( n . d . ) . R e t r i e v e d f r o m http://www.nyenrode.nl/businesstopics/sustainability/Pages/KeytoToyota'ssuccess.aspx Kroll, K. M. (2004, July). The lowdown on lean accounting. Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2004/Jul/TheLowdownOnLeanAccounting.htm? action=print Lool, S. (2010, Nov 8). Ford: The remake of an American icon. Forbes. Retrieved from http://www.forbes.com/sites/greatspeculations/2010/11/08/ford-the-remake-of-an-americanicon/#16e3f7ff110b Maskell, B. H., & Baggaley, B. L. (2001). Future of management accounting in the 21st century. Journal of Cost Management. Maskell, B. H., & Baggaley, B. L. (2007). Lean Management Accounting. BMA, Inc. Retrieved from http://www.maskell.com/subpages/lean_accounting/articles/lean_management_accounting.ht ml Maskell, B. H., & Baggaley, B. L. (n.d.). Lean Accounting: What's it all About? Retrieved from http://www.maskell.com/subpages/lean_accounting/articles/Lean_Acctg_Whats_It_All_About. pdf McKenna, A. (2011). One supports the other, a lean manufacturing environment benefits from l e a n a c c o u n t i n g p r a c t i c e s. I s s u e s & I n s i g h t s. R e t r i e v e d f r o m : http://www.amllp.com/resources/issues-insights/item/545-one-supports-the-other-a-leanmanufacturing-environment-benefits-from-lean-accounting-practices Navellier, L. (2014). Ford turns a profit after turning down bailout. Retrieved from Page 13 of 14 Cost Accounting Approaches: The Lean Success SAGE Bassima Hout 2017 SAGE Business Cases http://www.nasdaq.com/investing/ford-turns-a-profit-after-turning-down-bailout.aspx Petroff, A., & Yan, S. (2014, May 8). Abenomics pays: Toyota profits up 90%. CNNMoney. Schifferes, S. (2007, Feb 27). The triumph of lean production. BBC News. Retrieved from http:/ews.bbc.co.uk/2/hi/business/6346315.stm Schoenberger, R. (2011, Jan 29). Turning around an American icon, how Ford went from l o s i n g m o r e t h a n $ 3 b i l l i o n t o p o s t i n g b i g p r o f i t s. Cleveland.com. Retrieved from http://www.cleveland.com/business/index.ssf/2011/01/turning_around_an_american_ico.html Smouse, B. (2015, Jul 25). Report: Detroit's Big 3 automakers drive U.S. economy. USA Today. Retrieved from http://www.usatoday.com/story/money/cars/2015/07/25/aapc-reportshow-increase-in-american-vehicle-sales/30649717/ Taylor, A., III. (2007, Jan 26). Behind Ford's scary $12.7 billion loss. www.money.cnn.com. R e t r i e v e d f r o m http://money.cnn.com/2007/01/26ews/companies/pluggedin_taylor_ford.fortune/index.htm The Auto Channel. (2008, May 8). Toyota 2008 financial results-good forecasts-bad e n h a n c e d w i t h v i d e o r e p o r t. Retrieved from http://www.theautochannel.comews/2008/05/09/086514.html The Economist. (2009, Jun 29). Activity-based costing. The Economist. Retrieved from http://www.economist.comode/13933812 Vinas, T. (2007, February). Lean accounting driven by a lean business philosophy. From February 2007 THE CPA LETTER supplement for members in Business & Industry. Vorman, J. (2009, Feb 17). Factbox: Highlights of GM's restructuring plan. Reuters. Retrieved from http://www.reuters.com/article/us-autos-gm-plan-sb-idUSTRE51H04D20090218 Wayland, M. (2015, Feb 22). Toyota's per-car profits lap Detroit's Big 3 automakers. The D e t r o i t N e w s. R e t r i e v e d f r o m : http://www.detroitnews.com/story/business/autos/2015/02/22/toyota-per-car-profits-beat-fordgm-chrysler/23852189/ Welch, D. (2008, Aug 1). Chrysler posts a profit, of sorts. Bloomberg. Retrieved from http://www.bloomberg.comews/articles/2008-08-01/chrysler-posts-a-profit-ofsortsbusinessweek-business-news-stock-market-and-financial-advice http://dx.doi.org/10.4135/9781473996588 Page 14 of 14 Cost Accounting Approaches: The Lean Success Semester 1, 2017 ACCT3104 Management Accounting Case Study Assignment Group Number: Student Name (Student Number)*: 1. The Big Three auto manufacturers failed to sustain profitable operations during the 2008 economic crisis. Identify at least TWO major constraints in their traditional operational system that hindered adapting their production to the economic conditions. Explain and provide examples from the case to support your answer. (Max. 100 words) 2. Toyota was able to sustain its profitable operations despite the economic crisis. List at least FOUR advantages in its lean production system. Provide examples from the case to support your answer. (Max. 100 words) 3. Financial statements analysis: a. Traditional Income Statement (Table 1): The gross profit and gross profit percent are useful analysis tools for evaluating performance in a traditional cost accounting system. Use the traditional Income statement in Table 1 to determine the following. i. The difference in dollar amount of Gross Profit over the two years presented. 2 ii. Determine the Gross Profit % for each year. Current Year Previous Year Gross Profit Net Sales GP % iii. Based on Gross Profit % above, which year is more profitable? iv. Based on your knowledge of traditional cost accounting system and related analytical tools: 1. Identify for each of the presented years, whether the variances used to adjust the standard Cost of Sales are favorable or unfavorable. 2. Provide a brief explanation of the noted change in variances above over the presented years. 1 Material Price Variance 2 Material Usage Variance 3 Labour Efficiency Current Year Amount: F/U* (3,000) F Previous Year Amount: F/U 10,000 U 3 Explanation Variance 4 Labour Rate Variance 5 Overhead Volume Variance 6 Overhead Spending Variance 7 Overhead Efficiency Variance *F: Favourable variance, U: Unfavourable variance b. Lean Income Statement (Table 2). i. Prepare a vertical analysis by calculating the percentage of each component of Cost of sales to Net Sales. (Round to the hundredth, two decimals). Net Sales Cost of Sales: Purchases Inventory Material: (increase)/decrease Total Material Costs Processing Costs: Factory Wages Factory Salaries Factory Benefits Services and Supplies Equipment and Depreciation Scrap Total Processing Costs Occupancy Costs: Building Depreciation Building Services Total Occupancy Costs Total Manufacturing Current Year 100,000 % Previous Year 90,000 25,300 34,900 6,000 (6,000) 31,300 28,900 11,000 2,100 7,000 2,200 11,500 2,000 5,000 2,500 2,000 1,900 2,000 26,300 4,000 26,900 200 2,200 2,400 60,000 200 2,000 2,200 58,000 4 % Costs: Inventory/Labor, Overhead: (Increase)/Decrease Cost of Sales Gross profit 4,000 (4,000) 64,000 36,000 54,000 36,000 ii. Calculate the increase or decrease (as a percent of Net sales) for the following components below and comment on their changes. Current Year % Previous Year % Inventory Material: (increase)/decrease Total Processing Costs Total Occupancy Costs Inventory/Labor, Overhead: (Increase)/Decreas e Cost of Sales Gross profit 5 Increase/ (Decrease )% Explanation and interpretation of changes iii. In your opinion and based on your analysis above, which year demonstrates a better performance? (Max. 50 words) c. Which income statement presentation provides a better basis for managerial performance assessment: Lean or Traditional? Justify in terms of profitability and operational efficiency (Waste reduction). (Max. 50 words) 6