Value Stream Costing Mahmoud Al-Odeh, PhD Bemidji State University A member of the Minnesota State Colleges and Universities system, Bemidji State University is an affirmative action, equal opportunity employer and educator. Objectives • Value Stream Costing (VSC) • Drawbacks in standard costing • Case study on implementing VSC. Value Stream Process GATHER DATA PERFECTION DEVELOP ACTION PLAN DEVELOP FUTURE STATE DEVELOP CURRENT STATE Value Stream Costing • Developed in 2003 by Maskell and Baggaley as an instrument to facilitates the calculation of production cost. • VSCA shows how resources are used within value stream. • VSC main advantage the simplicity in use, which helps reducing waste. Value Stream Costing • VSC deals with tracking revenue and the associated variable costs required to generate revenue. • Not to spend funds unless they are associated with generating revenue. • VSC provides better information for decision-making it has a positive impact for effective cost control. Value Stream Costing • VSC is typically calculated weekly (bi-weekly or monthly) and it takes account of all the costs in the value stream. • No distinction between direct costs and indirect costs; all the costs within the value stream are considered direct. • Costs outside of the value stream should be eliminated. • The total value stream cost includes all labor costs; both traditionally direct costs and traditionally indirect costs. Value Stream Costing • The production material costs are generally calculated from how much material has been purchased for the value stream during a particular week. • For this material cost to be valid there needs to be low raw materials and work-in-process inventories; and these inventories must be under good control. • If inventories are low, then the materials brought during that week will be used quickly and will accurately reflect the material cost of the product manufactured that week. Value Stream Costing • Machine cost is calculated based on the time life of the machine to find the cost per minute. • Support costs like spare parts and soft tooling are purchased for the value stream and the costs of consumables, supplies, and other day-to-day expenses are assigned to the value stream. Value Stream Costing Material Cost Machine Cost Employee Cost Value Stream Support Costs Traditional Costing • Traditional costing is designed to support mass production. • Standard costing allocates all overhead to products and relates the overhead to direct labor hours. • Standard costing encourages non lean behavior by focusing on utilization of resources, people’s individual efficiencies, and overhead allocations. • Standard costing calls for elaborate and wasteful data collection systems. • Standard costing does not provide the data needed to support and encourage lean manufacturing. Traditional Costing VSC Reduce the cost by making Make as needed products more product Build just-in-case inventory Focus on Value Stream Costs rather than departments costs Reduce the cost by utilizing Improve the available resources to the maximum Capacity Reduce non- productive time Reduce the cost by optimizing department efficiencies Track direct, indirect, No distinction between direct overhead costs or indirect costs Relates the overhead to All costs of the value stream direct labor are considered direct costs Case Study XYZ industries Bearings UC 208 UC 208 Customer Oder Working Hours Break Raw Material Working day/ week 5000 monthly Two shifts – 12 hours each / day One hour/shift Monthly 7 days Factors used in VSC • • • • • • Total Available Time Productive Time Non-Productive Time Value-Added cost Available capacity Non-value added cost Bearings VSC Process Designing Purchasing Preparation Processing (includes Material Employee Machine Other Total Cost Costs Costs Costs Costs $1.70 $5.20 $6.90 $2.10 $2.10 $460.00 $8.50 $2.80 $471.30 $92.00 $6816.67 $428.54 $7337.21 Assembling, Finishing, Packaging) Maintenance Marketing & Customer Service Shipping Accounting Total $25.00 $577.00 $1.10 $1.10 $1.40 $1.40 $8.08 $33.08 $2.40 $2.40 $6841.95 $431.34 $5.20 $7855.49 Current State Bearings Processing – Before Processing ValueAdded Time Bar cutting 13.89 $166.67 $2.91 $169.58 Upsetting 9.72 $116.67 $2.78 $119.45 Piercing 16. 67 $200.00 $2.86 $221.86 Annealing 180.56 $306.58 $2473.24 CNC machine 145.83 $22.00 $97.38 $1869.38 Drilling 90.28 $25.00 $8.61 $1116.94 Threading 48.611 $24.00 $583.33 $7.42 $614.75 Inspection & Packing 62.5 $2.00 $750.00 Total 568.06 hours $92.00 Material Costs $19.00 Employe Machine e Costs Costs $2,166.67 $1,750.00 $1,083.33 $6,816.67 $428.54 Other Costs Total Cost $752.00 $7337.21 Future State Bearings Processing – After Processing Bar cutting Upsetting ValueAdded Time Material Costs 13.89 Employe Machine Other e Costs Costs Costs Total Cost $166.67 $2.91 $169.58 9.72 $0.00 $116.67 $2.78 $119.45 Piercing 16.67 $19.00 $200.00 $2.86 $221.86 Annealing 90.28 $0.00 $1083.33 $306.58 $1389.91 145.83 $22.00 $1750.00 $97.38 $1869.38 Drilling 90.28 $25.00 $1083.33 $8.61 $1116.94 Threading 48.61 $24.00 $583.33 $7.42 $614.75 Inspection & Packing 62.50 $2.00 $750.00 $752.00 477.78 hours $92.00 $5733.33 $428.54 $6253.88 CNC machine Total Achievements Factor WIP Value- added time Non-Value- added time Not used Total time available/ Month Total Cost Productive time Non- productive time Available capacity Value-Added cost Non-value added cost Customer not ready to pay Before After 82.72 69.57 568.1 hours 477.8 hours 47.37 hours 39.83 hours 56.57 hours 154.4 hours 672 hours 672 hours $7337.21 $6253.88 85% 71% 7% 6% 8% 23% $6816.67 $5733.33 $568.44 $478.00 $1083.33
