Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 37

Implementation of Lean Accounting Watlow Electric Manufacturing Company introduced lean principles in 2005 and reported a successful implementation in 2008. Watlow began with the implementation of lean principles and then adopted value stream management (VSM) using the value stream income statement. As expected, the use of VSM achieved better decision making (previously the firm had treated direct labor as a pure variable cost that varied with volume; after VSM it was clear that the behavior of labor costs was far more complex), reduced inventory, reduced cycle times, and improved communication and coordination among employees. It was this latter result, better communication, that surprised Watlow management, as employees began to work as teams that focused on the key success factors for the firm. The steps taken by Watlow to implement lean included:

• Identify the main value streams of the company (Watlow selected value streams consisting of 25-150 employees each; more than 90% of the company’s employees were assigned to a value stream)

• Determine the key measures for achieving the company’s strategic goals (these included measures of quality, safety, on-time delivery, and cost)

• The accounting system was adapted to VSM, including changes in the accounting for materials, labor and overhead

Required Given the implementation of lean as described above, what do you see as the challenges ahead

for Watlow? What features of lean accounting have yet to be implemented?

Step 1 of 2

Management and Control of Quality

Quality is explained as a term associated with customer satisfaction. It is the total level of satisfaction any customer gets from any organization’s products or service. There are two components of quality- Design Quality and Performance Quality. There are various approaches to setting quality related expectations and among those alternatives one is the Cost of Quality (COQ) Reporting. It provides relevant cost and revenue data used for decision-making purposes.