# Financial and Managerial Accounting Study Set 1

## Quiz 28 :Lean Principles, Lean Accounting, and Activity Analysis

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Ethics and professional conduct in business In August, Lannister Company introduced a new performance measurement system in manufacturing operations. One of the new performance measures was lead time. The lead time was determined by tagging a random sample of items with a log sheet throughout the month. This log sheet recorded the time that the item started and the time that it ended production, as well as all steps in between. The controller collected the log sheets and calculated the average lead time of the tagged products. This number was reported to central management and was used to evaluate the performance of the plant manager. The plant was under extreme pressure to reduce lead time because of poor lead time results reported in September. The following memo was intercepted by the controller. How should the controller respond to this discovery?
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Ethics and professional conduct in business:
The controller should take the memo from the plant manager to the employees seriously. He needs to ensure that the plant manager retracts the memo. This is because:
• Lead times are a measure of the plant manager's performance. The purpose of tagging is to establish lead times and attempt to reduce them. However, the plant manager has instructed workers to give preferential treatment to tagged items, in order to show reduced lead times.
• The plant manager's instructions to workers will result a better report for the plant, but will delay the normal schedule for other items.
• The plant manager has shown a lack of integrity and ethics through his memo. Noting the correct lead times is expected in the normal course.
• There is no attempt by the manager to shorten overall lead times for all items, tagged or untagged.
• The controller should pull up the plant manager for failure to take his duties and responsibilities seriously. The plant manager has not acted in the best interests of the company, but has attempted to falsify performance. The plant manager is responsible for improving productivity in the plant and has failed to do so.

What is the benefit of the lean philosophy?
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Lean philosophy is followed by the lean enterprises in their businesses to manufacture the products or provide services with high quality, low cost, fast response and immediate availability. Lean manufacturing, sometimes called just-in-time processing accomplishes these objectives in a manufacturing setting. The benefits of lean philosophy are as below:
Reducing inventory: Lean manufacturing views inventory as wasteful and unnecessary and thus emphasize reducing or eliminating inventory. Under traditional manufacturing system, inventory often hides underlying production problems like shortage of trained employees, unreliable suppliers, or poor product quality. Lean manufacturing solves and removes production problems through reduction or elimination of raw materials, work-in-process and finished goods.
Reducing lead times: Lead time is the time that measures the time interval between a product entering production and completion of the product. It means, lead time measures the time taken for manufacturing a product. The lead time can be further classified as Value-added lead time and Non-value-added lead time.
Value-added lead time is the time which is spent for converting the raw materials into a finished product.
Non-value-added lead time is the time which is spent while the unit of a product is waiting to enter the next production process or is moved from one process to another. The waiting time and moving time is called Non-value-added lead time.
Value-added ratio is the ratio which indicates the extent of value-added lead time in the total lead time, which is expressed in terms of percentage. A manufacturing system which has high value-added ratio is a good manufacturing process which produces quality products with in short time.
The lead time in a lean manufacturing system is reduced by reducing the batch sizes in the processes, thereby reducing the waiting time. A batch size is the amount of production in units of product that is produced after a setup. If batch size is large, the waiting time will be more which leads to increase in waiting time. The reduction in overall waiting time leads to reduction in lead times.
Reducing Setup time: A setup is the effort spent preparing an operation or process for production. A batch size is the amount of production in units of product that is produced after a setup. If setups are long and costly, the batch size for the related production is normally large. Large batch sizes allow setup costs to be spread over more units and thus reduce the cost per unit. However, large batch sizes increase inventory and lead time. The setup time in a lean manufacturing system is reduced by reducing the batch sizes in the processes, thereby reducing the setup time
Emphasizing pull manufacturing: In Pull manufacturing, the products are manufactured only when the customer needs and orders the product. As a result, the manufacturers normally maintain low inventory. In pull manufacturing, products can be thought of as being pulled through the manufacturing process. In other words, the status of the next operation determines when products are moved or produced. If the next operation is busy, the production stops so that work in process does not pile-up in front of the busy operation. When the next operation becomes free, the product is moved to that operation.
The inventory levels in pull manufacturing are usually low when compared to inventory levels in push manufacturing. As a result, the funds invested in inventory will be minimized, and the carrying and storage cost of inventory also gets reduced. Hence, lean manufacturers prefers pull or "make to order" manufacturing than push manufacturing, because it reduces the inventory levels and investment in inventory.
Emphasizing Zero defects: Lean manufacturers usually prefer to produce products without any defects, because the products having defects will be poor in terms of quality. As a result, poor quality increases the costs. In general, lean manufacturers attempts to eliminate poor quality, because poor quality creates troubles to the manufacturers, which are as follows.
1) Scrap
2) Re-processing of returned products
3) Interruption in the production process
4) Dissatisfaction to customers
5) Warranty costs and expenses
Lean manufacturers attempts to get rid of the above disadvantages by producing the products with zero defects. This can be achieved by adopting Six Sigma, which improves the product quality and manufacturing processes and reduces the costs to the manufacturer.
Employee Involvement: Traditional manufacturing system often values direct labor employees only for their manual labor, whereas lean manufacturing values labor for contribution beyond labor tasks, using employee involvement. Employee involvement is a management approach that grants employees the responsibility and authority to make decisions about operations. Employee involvement is usually applied in lean manufacturing by organizing employees into product cells.
Emphasizing Product-Oriented Layout: In lean manufacturing system, the manufacturing process is organized around a product, which is called a product-oriented layout. Organizing work around products reduces:
1) Moving materials and products between processes
2) Work in process inventory
4) Production costs
The above reductions leads to benefits of lean philosophy.

Lean principles The chief executive officer (CEO) of Platnum Inc. has just returned from a management seminar describing the benefits of the lean philosophy. The CEO issued the following statement after returning from the conference: This company will become a lean manufacturing company. Presently, we have too much inventory. To become lean, we need to eliminate the excess inventory. Therefore, I want all employees to begin reducing inventories until we make products "just-in-time. " Thank you for your cooperation. How would you respond to the CEO's statement?
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Lean philosophy is followed by the lean enterprises in their businesses to manufacture the products or provide services with high quality, low cost, fast response and immediate availability. Lean manufacturing, sometimes called just-in-time processing accomplishes these objectives in a manufacturing setting.
Lean manufacturing company always emphasizes to manufacture high quality products with low cost. The CEO of the company told the employees that we need to eliminate the excess inventory we had at present to become a lean manufacturing company. The CEO of the company told the employees to begin reducing inventories until we make products "just-in-time".
Reducing or eliminating excess inventory is one of the important principles of lean philosophy. Taking initiative for implementing lean philosophy by communicating employees to eliminate the excess inventory is a good move by the CEO. However, eliminating excess inventory alone cannot make a company a lean manufacturing system. There are several other principles which a company needs to follow and implement to become a lean manufacturing system. They are as follows:
Reducing lead times: Lead time is the time that measures the time interval between a product entering production and completion of the product. It means, lead time measures the time taken for manufacturing a product. The lead time can be further classified as Value-added lead time and Non-value-added lead time.
The lead time in a lean manufacturing system is reduced by reducing the batch sizes in the processes, thereby reducing the waiting time. A batch size is the amount of production in units of product that is produced after a setup. If batch size is large, the waiting time will be more which leads to increase in waiting time. The reduction in overall waiting time leads to reduction in lead times.
A company implementing lean manufacturing system also needs to reduce the lead time by decreasing batch sizes in the manufacturing processes.
Reducing Setup time: A setup is the effort spent preparing an operation or process for production. A batch size is the amount of production in units of product that is produced after a setup. If setups are long and costly, the batch size for the related production is normally large. Large batch sizes allow setup costs to be spread over more units and thus reduce the cost per unit. However, large batch sizes increase inventory and lead time. The setup time in a lean manufacturing system is reduced by reducing the batch sizes in the processes, thereby reducing the setup time. Hence, a company implementing lean manufacturing system also needs to reduce the setup time by decreasing batch sizes in the manufacturing processes.
Emphasizing pull manufacturing: In Pull manufacturing, the products are manufactured only when the customer needs and orders the product. As a result, the manufacturers normally maintain low inventory. In pull manufacturing, products can be thought of as being pulled through the manufacturing process. In other words, the status of the next operation determines when products are moved or produced. If the next operation is busy, the production stops so that work in process does not pile-up in front of the busy operation. When the next operation becomes free, the product is moved to that operation.
The inventory levels in pull manufacturing are usually low when compared to inventory levels in push manufacturing. As a result, the funds invested in inventory will be minimized, and the carrying and storage cost of inventory also gets reduced. Hence, lean manufacturers prefers pull or "make to order" manufacturing than push manufacturing, because it reduces the inventory levels and investment in inventory.
Hence, a company implementing lean manufacturing system also needs to implement pull manufacturing for reducing or eliminating inventory levels.
Emphasizing Zero defects: Lean manufacturers usually prefer to produce products without any defects, because the products having defects will be poor in terms of quality. As a result, poor quality increases the costs. In general, lean manufacturers attempts to eliminate poor quality, because poor quality creates troubles to the manufacturers, which are as follows.
1) Scrap
2) Re-processing of returned products
3) Interruption in the production process
4) Dissatisfaction to customers
5) Warranty costs and expenses
Lean manufacturers attempts to get rid of the above disadvantages by producing the products with zero defects. This can be achieved by adopting Six Sigma, which improves the product quality and manufacturing processes and reduces the costs to the manufacturer.
Hence, the company needs to implement Six Sigma, which improves the product quality and manufacturing processes and reduce the costs, for becoming a lean manufacturing company.
Employee Involvement: Traditional manufacturing system often values direct labor employees only for their manual labor, whereas lean manufacturing values labor for contribution beyond labor tasks, using employee involvement. Employee involvement is a management approach that grants employees the responsibility and authority to make decisions about operations. Employee involvement is usually applied in lean manufacturing by organizing employees into product cells.
The company needs to involve employees of the company in the manufacturing process beyond labor tasks, for becoming a lean manufacturing system.
Emphasizing Product-Oriented Layout: In lean manufacturing system, the manufacturing process is organized around a product, which is called a product-oriented layout. Organizing work around products reduces:
1) Moving materials and products between processes
2) Work in process inventory
4) Production costs
A company desires to become a lean manufacturing company needs to adopt product oriented-layout instead of process oriented layout.

Lead time The Swift Mountain Ski Company manufactures skis in the finishing and assembly process. Skis are manufactured in 30-ski batch sizes. The finishing time is 14 minutes per ski. The assembly time is 10 minutes per ski. It takes 8 minutes to move a batch of skis from finishing to assembly. a. Compute the value-added, non-value-added, and total lead time of this process. b. Compute the value-added ratio. Round to one decimal place. The Texas Jean Company manufactures jeans in the cutting and sewing process. Jeans are manufactured in 100-jean batch sizes. The cutting time is 11 minutes per jean. The sewing time is 8 minutes per jean. It takes 15 minutes to move a batch of jeans from cutting to sewing. a. Compute the value-added, non-value-added, and total lead time of this process. b. Compute the value-added ratio. Round to one decimal place.
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Lean principles Soft Glow, Inc. manufactures light bulbs. Their purchasing policy requires that the purchasing agents place each quarter's purchasing requirements out for bid. This is because the Purchasing Department is evaluated solely by its ability to get the lowest purchase prices. The lowest bidder receives the order for the next quarter (90 working days). To make its bulb products, Soft Glow requires 45,000 pounds of glass per quarter. Soft Glow received two glass bids for the third quarter, as follows: • Mid-States Glass Company: $28.00 per pound of glass. Delivery schedule: 45,000 (500 lbs. × 90 days) pounds at the beginning of July to last for 3 months. • Cleveland Glass Company:$28.20 per pound of glass. Delivery schedule: 500 pounds per working day (90 days in the quarter). Soft Glow accepted Mid-States Glass Company's bid because it was the low-cost bid. Instructions 1. Comment on Soft Glow's purchasing policy. 2. What are the additional (hidden) costs, beyond price, of Mid-States Glass Company's bid? Why weren't these costs considered? 3. Considering just inventory financing costs, what is the additional cost per pound of Mid-States Glass Company's bid if the annual cost of money is 10%? ( Hint: Determine the average value of glass inventory held for the quarter and multiply by the quarterly interest charge, then divide by the number of pounds.)
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Lean principles HD Hogg Motorcycle Company manufactures a variety of motorcycles. Hogg's purchasing policy requires that the purchasing agents place each quarter's purchasing requirements out for bid. This is because the Purchasing Department is evaluated solely by its ability to get the lowest purchase prices. The lowest cost bidder receives the order for the next quarter (90 days). To make its motorcycles, Hogg requires 4,500 frames per quarter. Hogg received two frame bids for the third quarter, as follows: • Famous Frames, Inc.: $301 per frame. Delivery schedule: 50 frames per working day (90 days in the quarter). • Iron Horse Frames Inc.:$300 per frame. Delivery schedule: 4,500 (50 frames × 90 days) frames at the beginning of July to last for three months. Hogg accepted Iron Horse Frames Inc.'s bid because it was the low-cost bid. Instructions 1. Comment on Hogg's purchasing policy. 2. What are the additional (hidden) costs, beyond price, of Iron Horse Frames Inc.'s bid? Why weren't these costs considered? 3. Considering just inventory financing costs, what is the additional cost per frame of Iron Horse Frames Inc.'s bid if the annual cost of money is 12%? ( Hint: Determine the average value of frame inventory held for the quarter and multiply by the quarterly interest charge, then divide by the number of frames.)
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Lean principles Reliant Products Inc. manufactures electric space heaters. While the CEO, Lynn Jennings, is visiting the production facility, the following conversation takes place with the plant manager, Aaron Clark: Lynn: As I walk around the facility, I can't help noticing all the materials inventories. What's going on? Aaron: I have found our suppliers to be very unreliable in meeting their delivery commitments. Thus, I keep a lot of materials on hand so as to not risk running out and shutting down production. Lynn: Not only do I see a lot of materials inventory, but there also seems to be a lot of finished goods inventory on hand. Why is this? Aaron: As you know, I am evaluated on maintaining a low cost per unit. The one way that I am able to reduce my unit costs is by producing as many space heaters as possible. This allows me to spread my fixed costs over a larger base. When orders are down, the excess production builds up as inventory, as we are seeing now. But don't worry-I'm really keeping our unit costs down this way. Lynn: I'm not so sure. It seems that this inventory must cost us something. Aaron: Not really. I'll eventually use the materials and we'll eventually sell the finished goods. By keeping the plant busy, I'm using our plant assets wisely. This is reflected in the low unit costs that I'm able to maintain. If you were Lynn Jennings, how would you respond to Aaron Clark? What recommendations would you provide Aaron Clark?
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Lean as a strategy The American textile industry has moved much of its operations offshore in the pursuit of lower labor costs. Textile imports have risen from 2% of all textile production in 1962 to over 70% in 2012. Offshore manufacturers make long runs of standard mass-market apparel items. These are then brought to the United States in container ships, requiring significant time between original order and delivery. As a result, retail customers must accurately forecast market demands for imported apparel items. Assuming that you work for a U.S.-based textile company, how would you recommend responding to the low-cost imports?
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Lean features Which of the following are features of a lean manufacturing system? a. Production pace matches demand b. Centralized work in process inventory locations c. Push scheduling d. Receive raw materials directly to manufacturing cells Lean features Which of the following are features of a lean manufacturing system? a. Centralized maintenance areas b. Smaller batch sizes c. Employee involvement d. Less wasted movement of material and people
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Lead time Sound Tek Inc. manufactures electronic stereo equipment. The manufacturing process includes printed circuit (PC) board assembly, final assembly, testing, and shipping. In the PC board assembly operation, a number of individuals are responsible for assembling electronic components into printed circuit boards. Each operator is responsible for soldering components according to a given set of instructions. Operators work on batches of 45 printed circuit boards. Each board requires 5 minutes of board assembly time. After each batch is completed, the operator moves the assembled boards to the final assembly area. This move takes 10 minutes to complete. The final assembly for each stereo unit requires 15 minutes and is also done in batches of 45 units. A batch of 45 stereos is moved into the test building, which is across the street. The move takes 20 minutes. Before conducting the test, the test equipment must be set up for the particular stereo model. The test setup requires 25 minutes. The units wait while the setup is performed. In the final test, the 45-unit batch is tested one at a time. Each test requires 9 minutes. The completed batch, after all testing, is sent to shipping for packaging and final shipment to customers. A complete batch of 45 units is sent from testing to shipping. The Shipping Department is located next to testing. Thus, there is no move time between these two operations. Packaging and labeling requires 10 minutes per unit. Instructions 1. Determine the amount of value-added and non-value-added lead time and the value-added ratio in this process for an average stereo unit in a batch of 45 units. Round percentages to one decimal place. Categorize the non-value-added time into wait and move time. 2. How could this process be improved so as to reduce the amount of waste in the process?
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Lead time Master Chef Appliance Company manufactures home kitchen appliances. The manufacturing process includes stamping, final assembly, testing, and shipping. In the stamping operation, a number of individuals are responsible for stamping the steel outer surface of the appliance. The stamping operation is set up prior to each run. A run of 40 stampings is completed after each setup. A setup requires 60 minutes. The parts wait for the setup to be completed before stamping begins. Each stamping requires 5 minutes of operating time. After each batch is completed, the operator moves the stamped covers to the final assembly area. This move takes 10 minutes to complete. The final assembly for each appliance unit requires 22 minutes and is also done in batches of 40 appliance units. The batch of 40 appliance units is moved into the test building, which is across the street. The move takes 25 minutes. In the final test, the 40-unit batch is tested one at a time. Each test requires 8 minutes. The completed units are sent to shipping for packaging and final shipment to customers. A complete batch of 40 units is sent from testing to shipping. The Shipping Department is located next to testing. Thus, there is no move time between these two operations. Packaging and shipment labeling requires 15 minutes per unit. Instructions 1. Determine the amount of value-added and non-value-added lead time and the value-added ratio in this process for an average kitchen appliance in a batch of 40 units. Round percentages to one decimal place. Categorize the non-value-added time into wait and move time. 2. How could this process be improved so as to reduce the amount of waste in the process?
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Lean principles Maxxim Inc. prepared the following performance graphs for the prior year: What do these appear to indicate?
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Lean principles Active Apparel Company manufactures various styles of men's casual wear. Shirts are cut and assembled by a workforce that is paid by piece rate. This means that they are paid according to the amount of work completed during a period of time. To illustrate, if the piece rate is $0.15 per sleeve assembled, and the worker assembles 700 sleeves during the day, then the worker would be paid$105 (700 × $0.15) for the day's work. The company is considering adopting a lean manufacturing philosophy by organizing work cells around various types of products and employing pull manufacturing. However, no change is expected in the compensation policy. On this point, the manufacturing manager stated the following: "Piecework compensation provides an incentive to work fast. Without it, the workers will just goof off and expect a full day's pay. We can't pay straight hourly wages-at least not in this industry" How would you respond to the manufacturing manager's comments? Essay Answer: Lean accounting The annual budgeted conversion costs for a lean cell are$663,000 for 1,950 production hours. Each unit produced by the cell requires 15 minutes of cell process time. During the month, 665 units are manufactured in the cell. The estimated materials costs are $160 per unit. Provide the following journal entries: a. Materials are purchased to produce 700 units. b. Conversion costs are applied to 665 units of production. c. 650 units are completed and placed into finished goods. Lean accounting The annual budgeted conversion costs for a lean cell are$144,000 for 1,800 production hours. Each unit produced by the cell requires 9 minutes of cell process time. During the month, 1,000 units are manufactured in the cell. The estimated materials costs are $65 per unit. Provide the following journal entries: a. Materials are purchased to produce 1,050 units. b. Conversion costs are applied to 1,000 units of production. c. 980 units are completed and placed into finished goods. Essay Answer: Lean accounting Formula One Displays Inc. manufactures and assembles automobile instrument panels for both Yokohama Motors and Detroit Motors. The process consists of a lean product cell for each customer's instrument assembly. The data that follow concern only the Yokohama lean cell. For the year, Grand Prix Displays Inc. budgeted the following costs for the Yokohama production cell: Grand Prix Displays Inc. plans 2,200 hours of production for the Yokohama cell for the year. The materials cost is$180 per instrument assembly. Each assembly requires 15 minutes of cell assembly time. There was no November 1 inventory for either Raw and In Process Inventory or Finished Goods Inventory. The following summary events took place in the Yokohama cell during November: a. Electronic parts and wiring were purchased to produce 9,000 instrument assemblies in November. b. Conversion costs were applied for the production of 8,800 units in November. c. 8,650 units were started, completed, and transferred to finished goods in November. d. 8,600 units were shipped to customers at a price of $400 per unit. Instructions 1. Determine the budgeted cell conversion cost per hour. 2. Determine the budgeted cell conversion cost per unit. 3. Journalize the summary transactions (a) through (d). 4. Determine the ending balance in Raw and In Process Inventory and Finished Goods Inventory. 5. How does the accounting in a lean environment differ from traditional accounting? Essay Answer: Lean accounting Com-Tel Inc. manufactures and assembles two models of smart phones-the Tiger Model and the Lion Model. The process consists of a lean cell for each product. The data that follow concern only the Lion Model lean cell. For the year, Com-Tel Inc. budgeted these costs for the Lion Model production cell: Com-Tel plans 2,100 hours of production for the Lion Model cell for the year. The materials cost is$185 per unit. Each assembly requires 12 minutes of cell assembly time. There was no May 1 inventory for either Raw and In Process Inventory or Finished Goods Inventory. The following summary events took place in the Lion Model cell during May: a. Electronic parts were purchased to produce 10,700 Lion Model assemblies in May. b. Conversion costs were applied for 10,500 units of production in May. c. 10,200 units were completed and transferred to finished goods in May. d. 10,000 units were shipped to customers at a price of \$500 per unit. Instructions 1. Determine the budgeted cell conversion cost per hour. 2. Determine the budgeted cell conversion cost per unit. 3. Journalize the summary transactions (a) through (d). 4. Determine the ending balance in Raw and In Process Inventory and Finished Goods Inventory. 5. How does the accounting in a lean environment differ from traditional accounting?