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Lebanon Gasket Case Study Essay Sample

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Creating a lean enterprise: the case of the Lebanon Gasket Company Question: How can the accounting function better serve our senior management team’s strategic planning, control, and decision-making efforts within its current lean environment? Specifically, address issues related to capacity planning, aligning employee incentives with lean goals, and product mix decision making. In contrast with standing costing system, lean accounting proposes the value stream as a single cost collector. A value stream is defined as “all the activities required to bring a product or service from conception through to the customer, including related information processing, logistics, and the collection of money” (van der Merwe and Thomson, 2007, p.29).

Lean organizations dedicate resources to value stream. Costs are recognized as they incurred rather than being inventoried and matched to revenues(G. K. DeBusk and C. DeBusk, 2012a). Lean accounting is definitely important to senior managers in terms of capacity planning, aligning employee incentives with lean goals, and product mix decision making. A Box Score Report emphasizing on unused capacity and practice of direct costing for capacity planning is used for capacity planning under lean accounting system. Exhibit 1 shows a Box Score Report for a hypothetical value stream. Exhibit 1: Box Score Report for a hypothetical value stream

Adapted from G. K. DeBusk and C. DeBusk, 2013, p.47.
Exhibit 1 demonstrates the capacity of production resources that are necessary in satisfying changing demand of the products. Three elements of capacity accounting are productive capacity, non-productive capacity, and available capacities. According to G. K. DeBusk and C. DeBusk (2013), the Box Score Report can be used to do “what-if” analysis and analyze unused capacity for future exploitation. For instance, they may figure out that the nonproductive capacity would drop to 5 percent (15% – 10%). Then they could discover in which way they can free up an additional10 percent of capacity. During the process of implementing lean, senior managers may want to align the incentives of employees with lean goals. Lebanon Gasket Company has been dramatically improving operational performance, which could be an indication that the company successfully gained the incentives of employees with lean goals.

However, the financial results were disappointing. It is noted that the financial results are the outcome of standard costing system. The Lebanon Gasket Company may provide a Value Stream Profit and Loss Statement (see Exhibit 2)to see if the financial results are favorable or not. If they still get unfavorable results, the reason may lie in the large headcount of the employees. If this is the case, the company may refer to average annual salaries as shown on page 7 and collect some other labor related data to see if it is necessary to layoff some employees. Exhibit 2: Value Stream Profit and Loss Statement

Adapted from G. K. DeBusk and C. DeBusk, 2012b, p.26
Exhibit 6 and 7 shown in this article help senior managers make product mix decision making because they are created to fit lean organization environment. From the two exhibits, senior managers can tell which value stream produces higher amounts of products, and which value stream has lower unit cost. Therefore, senior managers can further decide whether or not to apply extra resources to make more profitable products. Accounting information organized by value streams is beneficial to senior managers as it helps them to compare the two value stream in great detail. In sum, senior managers need to use various lean accounting tools such as value stream analysis, box score report, and Value Stream Profit and Loss Statement to make sound decisions. The lean accounting information provided in terms of value streams is important to senior managers.

References:

Van Der Merwe, A., and Thomson, J. (2007). The Lowdown on Lean Accounting, Strategic Finance, 88,8, pp.26-33. G. K. DeBusk and C. DeBusk, (2012a). The Case for Lean Accounting: Part I. Cost Management, 26,3, pp.20-24. G. K. DeBusk and C. DeBusk, (2012b). The Case for Lean Accounting: Part II. Cost Management, 26,4, pp.22-30. G. K. DeBusk and C. DeBusk, (2013). The Case for Lean Accounting: Part III. Cost Management, 26,3, pp.44-48.

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