Lean Financial Management: Production Cost Analysis

The purpose of a value stream income statement is to analyze current value stream costs compared to current value stream performance measures to determine root cause analysis of current costs.

Actual production costs for any value stream include the labor costs for people that work in the value stream, costs to own, lease, operate and maintain machines in the value stream, a portion of the facility/factory costs and any other production cost that can be directly attributed to the operation of a value stream.

It’s important for the entire accounting function in a lean manufacturing company to learn & understand the relationships between value stream performance measures and actual production costs on a value stream income statement. Understanding the root causes of value stream performance measurements reveals direct insights into the current state of production costs and also what improvements can be made operationally to reduce and/or better control production costs. Let’s look at some examples.

The cost of labor & machines in any value stream can be explained by understanding value stream productivity. A typical lean productivity measure is output / resources to produce the output. The output numerator is usually related to revenue. The resource denominator is usually based on number of people, actual hours worked by people or machines.

The primary root cause of low productivity is the resources are spending too much time on wasteful activities, rather than the activities that generate revenue. Eliminating the waste frees up capacity, increasing revenue without a corresponding increase in costs.

Labor and machine costs increase when additional capacity is needed.

Machine maintenance costs can be understood better by understanding the root causes of downtime. Reducing downtime will reduce these costs, as well as increasing productivity.

On a typical value stream income statement, actual material, labor and machine costs will account for the overwhelming majority of value stream costs, possibly up to 80% of total costs. Accounting should concentrate all efforts understand the root causes of these 3 costs using lean performance measures to create value-added financial analysis.