Graded Homework: Unit 8 – Lean Accounting Processes 1 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-inprocess 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 2 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. Hydra’s CFO, Nyssa Washington, wants to extend Hydra’s 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. Hydra’s 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, we’ll 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.