Chapter 20, Problem 20.35P

Lean accounting. Reliable Security Devices (RSD) has introduced a just-in-time production process and is considering the adoption of lean accounting principles to support its new production philosophy. The company has two product lines: Mechanical Devices and Electronic Devices. Two individual products are made in each line. Product-line manufacturing overhead costs are traced directly to product lines and then allocated to the two individual products in each line. The company’s traditional cost accounting system allocates all plant-level facility costs and some corporate overhead costs to individual products. The latest accounting report using traditional cost accounting methods included the following information (in thousands of dollars):

RSD has determined that each of the two product lines represents a distinct value stream. It has also determined that out of the $400,000 ($100,000 + $80,000 + $160,000 + $60,000) plant-level facility costs, product A occupies 22% of the plant’s square footage, product B occupies 18%, product C occupies 36%, and product D occupies 14%. The remaining 10% of square footage is not being used. Finally, RSD has decided that in order to identify inefficiencies, direct material should be expensed in the period it is purchased, rather than when the material is used. According to purchasing records, direct material purchase costs during the period were as follows:

1. 1. What are the cost objects in RSD’s lean accounting system?

Required

1. 2. Compute operating income for the cost objects identified in requirement 1 using lean accounting principles. What would you compare this operating income against? Comment on your results.