The Fundamentals of Value Stream Costing – Part 2 of 3

Value Stream Costing Categories

In value stream costing, we like to categorize value stream costs either as direct costs; shared costs or business support costs.

Direct value stream costs are the costs that a value stream controls through operational activities and decisions. Direct value stream costs are rather easy to identify once value streams have been identified and mapped. From an accounting perspective, value stream direct costs can easily be charged to one value stream when posting to the general ledger. The cause – the spending decision and the effect – the expense posted to the general ledger, are quite clear, direct and natural. The 4 primary types of direct value stream costs are material, labor, machine/equipment costs and other direct costs. Each of these will be discussed in detail later.

Shared value stream costs exist because resources or consumption of goods & services may be shared by value streams. Shared value stream costs are operational in nature and each value stream can influence the total cost through operational practices and decisions, however the actual spending decisions and management of the costs are outside of any one value stream. The 3 primary types of shared value stream costs are facilities & warehouse; production monuments and operational support functions. Each of these will be discussed in detail later.

Business support costs are all the other traditional organizational costs that would be considered selling, general and administrative costs. These costs are typically not assigned or allocated to value streams.

In manufacturing organizations, there could possibly be a 4thcategory of costs – product development. Lean manufacturing organizations consider product development a separate value stream, beginning with product concept and ending with product launch and there would be applicable direct value stream costs for the product development value stream.


Value stream material cost is the actual cost of material consumed by a value stream, and can be identified either at the point of purchase or the point of issuance. Purchased material is used when the 100% of the material goes into one value stream.

If purchased material is shared by multiple value streams, then the material cost would be based on material issued to a specific value stream.

Using material consumed to establish direct cause and effect relationships between material entering a value stream and the 3 operational outcomes – produce and sell (which is the desired outcome); scrap or stock.


Value stream labor cost is based on the employees assigned to work in specific value streams. Through the process of value stream organization, value streams become the primary unit of operational organization, replacing operational departments.

Once these employees have been identified, the simplest method to assign the costs are through a company’s payroll system. Payroll systems have fields such as cost centers or departments, and this allows companies to assign employees and auto post labor costs to the general ledger. Auto posting of labor costs to value streams can be accomplished by modifying the proper field in your payroll system.

If this level of detail poses an issue due to the confidential nature of salaries, it is possible to assign labor costs based on ratio of full-time equivalent employees in a value stream to total employees in all value streams. If this method is preferred, it is recommended to only use whole numbers of full-time equivalent employees and avoid fractions or percentages.

Machine & Other Costs

Value stream machine/equipment costs consist of the depreciation, repairs/maintenance, tooling and utility costs. Value stream maps identify the specific machines in each value stream, and actual costs can be recorded into the general ledger through accounts payable process.

Any other cost which can naturally be charged in the general ledger to one specific value stream can be considered a direct value stream cost. Avoid creating allocation systems in accounting to try to be precise. It’s also important to consider the materiality of any other costs because in most cases labor, machine and material costs make up the majority of direct value stream costs.

In the next blog we will look at shared value stream costs.