Lean manufacturing: costing the value stream

What is it about?

Some companies have found that despite their best efforts, trying to implement lean manufacturing techniques (which seek to eliminate/reduce waste in the supply chain) clashes with their accounting methods. As such they can be put off the concept of lean manufacturing altogether, despite its proven benefits. This article argues that value-stream costing (VSC) is a suitable accounting method for companies that have adopted lean techniques. What is value-stream costing? Rather than applying cost of manufacture then overheads, VSC takes into account all of the costs in the value stream, with no distinction between direct and indirect costs. All value streams act as organisational units and ideally there are very few, if any, shared services. This focuses the company’s attention on the resources that are being used throughout rather than on individual products. Before beginning VSC, the company needs to have implemented lean techniques and already be organised according to value streams. What are the benefits? • VSC looks at the processes on the shop floor whilst simplifying the accounting process • It gives equally relevant cost information as activity-based costing (ABC) • VSC also encourages continuous improvement by identifying capacity This paper gives an overview of the literature on VSC and notes that very few companies have adopted this method of costing. To prove how it could work, the authors apply VSC to a real-life case study.

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