As the company transition to lean practices, their accounting system and performance measurement reports have become unreliable, inaccurate and inapplicable to the flow line value streams. The lean production environment led to problems in the current labor reporting, production efficiency and product costing methods. The management wanted to monitor the efficiency, productivity and profitability under the lean production practice.
Yes, the management must change the product costing system of Aero Gear, Inc. in order to align the system with their lean production practice. An aligned management accounting system maximizes profit. An accounting system that fails to provide information that is timely or in a useful format will be rejected by users and will not be beneficial to the management.
Identifying costs at the item level will lead to inaccuracies and will result to irrelevant information. The management should manage the product costing at the aggregate level. It would be preferred to use management financial statements instead of profit and loss statements. The information communicated by the new financial statements should allow readers to easily evaluate the results of changes in the lean business practice. The change from cost accounting to cost management is inevitable.
Attaching direct labor and setup costs to the finished product also creates trouble with the product costing system under lean manufacturing. The old product costing system utilizes direct labor measure as the overhead rate denominator, which is applicable only if the manufacturing capacity is proportionate to direct labor consumption. Also, elimination of all waste is the objective of lean manufacturing. Since lean practices would lead to a lower inventory level, it would create a negative effect on the reported gross and net profit in the profit and loss statement because inventory is recognized as an asset.
Should they hold off making a change despite their dissatisfaction with the current system and continue to look for a better product costing method
Holding off change would only create more inaccuracy in product costing, performance measurement and cost management. The company can employ two or more product costing while evaluating their effectiveness. Lean business practice embraces the concept of continuous improvement. In order to initiate improvement, the company must first adopt a system and then find ways to improve it, if not replace it.
Were there any additional measures they could collect and use to measure flow line performance
The central focus of lean manufacturing is to eliminate wastes. Measures of wastes like scraps, defects and machine-downtime and its impact on the line performance would benefit management decisions. A recommended method of reporting is through a cash flow analysis where it will effectively track the positive aspect of liquidating inventories. Cycle time can be integrated in the analysis. Additional metrics such as tracking the improvements in direct and indirect labor on a weekly or monthly basis would also be helpful.
Was it fair to