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
      Value stream revenue Obtained weekly based on query of sales data Value stream accountant
      Personnel costs Query of human resources payroll data Value stream accountant
      Materials Purchased Weekly query is run listing the materials issued to the value stream Value stream buyer
      Supplies Logged on separate detail log as ordered to the value stream during week Value stream buyer

      Table 1: Standardized Weekly Data Collection

      Recognize that each value stream usually manages its own weekly records, which are then combined with other value streams at the end of the month. Gathering information regularly makes the data accessible in a timely manner.

      Again, it may be challenging at the onset to gather some cost information, such as personnel cost weekly. Don’t lose heart if you are unable to report everything on a monthly basis. At the beginning of your lean journey start with some items but don’t stress yourself with reporting everything.

  • Step 4. Compile the value stream statements.
    • A simple spreadsheet is ample to compile all the data into the value stream statement. Keep in mind that when we get to the 7th step in this process, all statements are compiled to a facility-wide statement. This means that total facility revenues should equal the sum of the total revenues for each value stream.Total Revenue = Sum of value stream revenuesTotal Cost = Sum of value stream costs + sustaining costs + changes in inventories + allocations + other costs not yet accounted for.
  • Step 5. Select the reporting mechanism.
    • The whole point of collecting and compiling data is for the information to be used as a guide for future decisions. This also means creating reports. These reports should be helpful to whoever needs the information. This means that the reports need to consider the statement user, the frequency of reporting, and where the reported information should be placed so users have easy access to it.In most instances, the weekly data stream statements are made available to the core value stream teams and other plant-level managers, but they are also arranged on value stream metric boards visible to everyone.Transparency or having open-book management is an important aspect of a lean culture that respects and empowers people. Also, with every process and result in a lean organization, there is always room for improvement.
  • Step 6. Test it.
    • Make time to test the format. Schedule a time with statement users to test how well the value stream metrics are working as well as data collection.
  • Step 7. Roll up to facility statement.
    • When you are comfortable with the individual value stream statements, it’s now time to roll them up into one plant or facility statement. When all value stream statements are rolled up to a facility-wide statement, the total facility revenues should equal the sum of the value stream revenues.The total facility cost should equal the sum of the value stream cost plus sustaining costs, changes in inventory, corporate allocations and any other items not identified specifically within a value stream.
  • Step 7. Roll up to facility statement.
    • Now it’s time to gather feedback from all the statement users. This step is vital and you must get feedback from all levels of the organization. This would be a good spread and give you insights from different perspectives.
      Material purchases
      Personnel costs
      Equipment-related costs
      Facility Cost
      Other Cost
      Total Cost
      Value Stream Profit
      Value Stream ROS
      Inventory changes
      Corporate overhead
      Facility Profit

      Table 2: Value Stream Costing Example

      This is a value stream income statement example for an entire facility. The revenue and cost from each of the value streams along with the costs that are not specific to a value stream which we will refer to as sustaining costs are rolled up into this one statement. This makes it easier to see what’s happening in the facility.

      Finally, while the facility-wide statement is normally done and reported on a monthly basis, individual streams may choose to track their revenues and costs on a weekly basis and then sum up the month and carry those over to the facility-wide statement.

      Collecting and reporting more consistently makes the information available in a timely manner. This means the internal customer will be getting the needed information quickly, making the information more valuable and relevant.

The same basis of keeping manufacturing products flowing in step with customer demand can be applied to internal reporting. While gathering data at more consistent intervals can also help efforts to create stability and even flow.
Don’t forget though that the core concept in lean accounting is to cut down transaction burden. So make sure that the effort to collect this data is compensated by the value it creates.