Please answer a and b! Graded Homework: Unit 8 Lean Accounting Processes

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Hydra Manufacturing

Hydra Manufacturing makes fuel pumps for OEMs (original equipment manufacturers) of motor

vehicles. The accounting department is very proud of their control system. A description follows.

Annual blanket sales orders from the OEM customers are entered into the ERP system at the

beginning of the year. The quantities specified in the orders are only guaranteed for the first

month. One week before the beginning of each month the OEMs submit a revised quantity for

the coming month, and if applicable, revised estimated monthly quantities for the remainder of

the year. These updates are automatically entered in the ERP system upon receipt. The ERP

system revises the production schedule based on the updated order information, along with the

information reported from the shop floor. It also updates material forecasts for the Purchasing

Department. Based on the forecasts for various materials, the buyers solicit bids from at least

three suppliers whenever possible to ensure competition will yield the lowest possible purchase

price.

The ERP system also uses the order information to automatically generate bills of materials and

route sheets for production. When production is scheduled to begin, the manager of the

department housing the initial production process uses the ERP system to prepare work orders,

move tickets, and materials requisitions. The supervisor also sends a signal to accounting to

prepare an open work order file. The warehouse issues the materials and the perpetual

inventory system is automatically adjusted to reflect the issuance.

All workers in each department record their time at least twice daily (at lunch break and at the

end of their shift), allocating their time using over thirty different job codes representing various

types of direct labor operations and indirect labor activities. Workers completing a direct labor

operation are supposed to enter their time upon completion of the operation for a batch, but

sometimes they forget or wait until breaking for lunch or ending their shift to enter the data.

There are often errors in the entries, and discrepancies between the sums of the time entered

by the workers and their time clock hours used for payroll. The accounting department spends a

lot of time reconciling the labor reports from the workers with the time clock data. They also

review labor time reports weekly, and they believe between their review and the reviews of the

labor variance analyses by the departments, most of the data entry errors are discovered and

corrected.

At the end of each shift, good units, scrapped materials, and any defective units discovered

during production are recorded for each job in the department. There is a weekly meeting in

each department on each shift to discuss the weekly labor, materials and overhead variances.

When an operation is completed for all the units in a batch, the batch moves to the next

process. Paper copies of the work order and move ticket accompany the materials and work-in-

process as it moves from process to process on the shop floor. If there is too long a queue of

jobs waiting in the next department, the batch may be returned to the warehouse until it is

scheduled to run in the next department. In either case, the status of the order is updated in the

ERP system. At any time, Hydra personnel can look up the current status and location of any

batch. The system will also have the current cost of the job at standard, based on its stage of

completion. The workers at each process enter the labor, and any additional materials and parts

that may be required in the same manner as at the initial process.

Once the batch passes final inspection (including re-inspection of any units sent back to

production for rework), it is returned to the warehouse to be shipped to the customer. The

transfer from final inspection to the warehouse is recorded and it automatically moves the units

in the batch from work-in-process to finished goods. A signal is sent to accounting to close the

Graded Homework: Unit 8 Lean Accounting Processes

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work order file. Once the batch is shipped, another entry moves the units from finished goods to

cost of goods sold at standard cost.

The workers complained about the amount of time they spent entering labor data and

production results in the computer, and the variance report review meetings were sometimes

acrimonious, especially if there were significant unfavorable variances. Accounting spent a lot of

time reconciling the time data, and they did cycle counts of inventory, making sure that all parts

and products were physically counted at least once per year. However, accounting felt all the

work was worthwhile. Keeping on top of labor and inventory meant that they could be confident

of the job status in the ERP system to respond to customer inquiries. They rarely had significant

year-end adjustments to make, and the annual audit usually went smoothly. They were able to

finish monthly financial statements within five business days of month end, and they had good, if

not final, annual numbers within three weeks of the year end.

Hydra is now undergoing a lean transformation. They have not yet organized by value stream,

but they do have a few pilot production cells in place. They have only just begun reducing the

number of material suppliers to certified suppliers that can provide defect free on-time delivery.

They do have lean operating performance measures in their pilot cells and have established

day-by-the-hour reporting throughout the factory. They are confident in the accuracy of their bills

of materials and labor routings, and they have accurate records for scrap and rework. Their

inventory records are also fairly accurate.

Hydras CFO, Nyssa Washington, wants to extend Hydras lean transformation to the

accounting function. She has hired you as a consultant to recommend changes Hydra can

implement at their current state of lean implementation. Hydras Controller, Arthur Dent, has

grave reservations about changing the Accounting system.

I hear those lean folks in operations saying accounting is waste, but we have a

good system in place that gives us accurate information for reporting and good

control of our assets. If we cut corners in accounting, well lose control of our

assets and have unreliable reports. Then those folks in operations will realize

just how valuable accounting really is.

Required:

Write a memo in good form to Nyssa Washington, CFO and Arthur Dent, Controller. Your memo

should:

A. Explain how accounting can be considered waste while also being considered valuable.

B. Recommend two accounting process changes Hydra can implement in their current

state of lean transformation, and explain how each of your recommended changes

would reduce waste while maintaining or even improving asset control and reporting

accuracy.