Value stream costing is an accounting system for tracking revenues and costs for an entire value stream as opposed to individual products as with standard costing.

Why Value Stream Costing?

It’s no surprise that standard costing remains very popular. After all, most people are familiar with it. It’s commonly used to analyze cost, determine the selling price, evaluate product mix, and conduct inventory valuations.

That said, while there are many reasons why each of these rationals falls short, there are two big reasons for switching to lean accounting:

  1. For lean organizations, once the benefits of initial simple waste reduction have been realized it becomes much more necessary to implmement adjustments in the accounting process to better assess organizational performance and drive continuous improvement.
  2. Traditional cost accounting information is usually complex and too late to be helpful. In fact, extensive amounts of time and effort are spent throughout each month, gathering data, formating managerial reports, and analyzing deviations from an obsolete forecast. Many lean professionals compare this process to driving a vehicle forward while only looking at the rearview mirror.

So, while traditional cost accounting may seem effective in at first, you can expect problems in the long run. By contrast, lean organizations focus entirely on continuous process improvement, which requires prompt financial information. This is one of the huge advantages of value stream costing over traditional costing.

Your organization may have just embarked on its lean journey or have many years under its belt. Regardless, if you are still utilizing standard cost accounting and monthly variance reporting, you simply are not going to be able to realize the full benefit of lean.

Lean Accounting Preparation

Regardless of the nuances of your particular approach, implementing lean accounting methods is something that should thoroughly be discussed with all organizational stakeholders. Don’t forget to keep your auditors up to speed throughout implementation as well. On that note, remember that lean costing will meet all GAAP requirements.

While keeping all stakeholders informed will make your annual audit less tedious it will also ensure that you implement a value stream costing system that truly eradicates wasteful transactions and is far more efficient compared to a traditional standard costing system.

8 Steps to Lean Accounting Implementation

It’s vital to recognize that there are numerous approaches to value stream costing. Unfortunately, there simply isn’t a single one-size-fits-all approach to implementing lean costing. That said, the eight steps that follow may work for you as is or at least form a solid foundational framework to build on.

    • Step 1. Identify each value stream’s resources
      • Because this requires evaluating all resources within the company, this process is enforced at the facility level. For value stream costing to be effective, a few things must be in place.
        • Discrete value stream labor: People working within functions such as sales or maintenance should be exclusively allocated to a specific value stream, to the extent possible. While not always practical, your ultimate goal should be each value stream operating as a unique business unit.
        • Minimized monuments: As with human resources, to the extent possible, large function specific areas in production should be eliminated.
        • Stabilized production processes: A basic level of stability should exist in your processes.
        • Stabilized inventory levels: Inventory should not be widly unpredictable.
      • Assigning cost of value streams and keeping allocations to a minimum is very important and will demand substantial changes to your organization’s blueprint of accounts. However, the significance of having consistent, timely, and comprehensive information that supports your value streams repeatedly improves the value they pass on to customers will be worth the trouble needed to make the changes.Always begin with your priceless resources – your people. Understand where your employees execute most of their tasks. If you have an employee allocated to more than one value stream, consider how their cost should be distributed across value streams. That is, what percent of their time do they spend in each value stream.Also, stay cognizant of the lost productivity derived from sharing a resource. Lastly, never lose sight of the fact that two value streams may have conflicting priorities that will demand time and effort to resolve. Because of this, as a general rule, decreasing the need for sharing will generally boost productivity. Yes, the same is true of functional leaders who supervise diverse value streams.
    • Step 2. Design value stream statement format.
        • Who is going to use the value stream statement?
        • What actions and decisions do they drive?
        • What information do they need to act on and make decisions?
      • The principal user of the value stream statement will be the cross-functional value team stream. The various portions of the value stream statement will diversify depending on the type of business you’re engaged in. Here are some examples of value stream statements used in a conventional production facility:
        • Value stream revenue
        • Value stream costs
        • Material cost
        • Conversion cost
        • Facility costs
        • Other costs

You may need to design value stream statements that are suitable to the particular needs of your business. Also, to elaborate, conversion costs in value stream costing are the costs of reconstructing or converting raw materials into finished goods. This also incorporates things such as direct labor.

Now, while value stream costing tries to prevent allocating cost whenever feasible, if costs must be allocated, it’s important to do so in a way that persuades the form of improvements a lean organization wishes to accomplish.

Keep in mind, when making appropriations, you’re applying your best judgment, so be attentive that these allocations shouldn’t be considered precise. In other words, don’t monitor these if it is not reasonable to do so.

  • Step 3. Standardize collection of weekly data.
    • Consider the following:
      • What data are we collecting?
      • Why are we collecting it?
      • How is the data collected?
      • Who is responsible for the data?
    • It is imperative to have standards for gathering the weekly value stream data as this data is going to eventually be compiled into a statement for the whole facility. Ensure that you appoint someone who will be accountable for collecting the data and that standards are adhered to.Primarily, when you are starting lean accounting it may be a struggle to measure things on a weekly basis because of the existing systems that are in place. However, do your best and continuously strive to improve your data collection system.
      Data Element Method of Gathering Data Responsibility
      Units shipped Obtained from the “Units by Week” file location in a VS metrics folder Value stream leaders