Explaining a Value Stream Income Statement

Understanding the value stream income statement (VSPL) is a topic that sometimes arises as lean accounting is introduced. Because the VSPL “looks” different that the regular income statement, people assume there is something wrong with it. In fact, I was once told by someone looking at their company’s new VSPL that “this is a second set of books”.

Here are some tips to help people understand the VSPL:

  • The value stream profit section of a VSPL (value stream revenues less costs) is the true operating income of the company. It contains the revenue from actual shipments and the actual spending of the value stream for the period
  • Support costs are the typical SGA costs, as well as any other costs which are NOT UNDER THE DIRECT CONTROL OF THE VALUE STREAM.
  • The adjustments section, below the value stream profit, is the financial accounting transactions required for financial reporting. The primary financial accounting adjustment is the change in inventory. Another adjustment which can appear here is corporate expenses allocated to plants

The VSPL simply separates the financial accounting adjustments from operational costs. This accomplishes two things:

  • The value stream profit section is easily understood by non-financial people, who have ultimate responsibility for explaining operating income
  • The financial accounting adjustments section is the responsibility of finance to bring the profit number in line with reporting requirements

An income statement based on standard costing mixes the financial accounting adjustments with operating income which makes it very difficult for operational people to explain because they don’t understand the financial accounting adjustments.