Original Date: 06/05/2006
Revision Date: / /
Best Practice : Lean Cost System
Rockwell Collins had a labor and material standards-based cost accounting system that was very labor-intensive. Overhead rates were developed at a high level and spread across all products in the company. As part of a corporate effort to focus on life cycle value stream mapping, Rockwell Collins transitioned to a new method of manufacturing cost recovery using material as the base with conversion factors for labor. Product cost pools were created that replaced outdated overhead pools and aligned cost more accurately to the specific products, supporting improved company business decisions.
Rockwell Collins’ Cedar Rapids facility previously used a traditional cost accounting system that required labor standards – a labor realization program with detailed labor performance reporting (Figure 2-9). In recent years the touch-labor component of products at Rockwell Collins had dropped significantly. This previous system was labor- intensive and lacked variance analysis tools. During 2002 this cost accounting system was reviewed for possible changes as part of a transformation strategy that refocused the company on enterprise life cycle value stream management (LCVSM), an approach that integrates and coordinates processes (i.e., planning, order capture, development, manufacturing, service and support). Process integration and coordination tighten and streamline the actions and decisions that drive customer value. Overall corporate goals in LCVSM optimization include supporting cellular manufacturing processes, giving cells greater flexibility, aligning factory measures with financial commitments, and improved alignment with LCVSM concepts.
Rockwell Collins changed its financial system in 2004 to a standard cost based on material, material-related overhead (MRO), and conversion costs developed and allocated for each product cost pool (PCP) – a group of like systems with similarities such as functionality, technology, capital test equipment, and use of a common support team (Figure 2-9). Allocating capital and other costs to product cost pools creates greater awareness and increased scrutiny of investment costs being charged directly to the primary users. Conversion and activity rates are developed and updated quarterly for each PCP. Centers of Excellence (COEs) – or manufacturing cells – were established for parts of the company that support more than one PCP, such as a process center. COE conversion costs become a fixed assessment that flows to product cost pools. COE costs flow back to PCPs based on amount of material routed through the COE. The lean cost goal is to accurately align cost to each product, resulting in better decisions. Ultimately a product’s standard cost is comprised of three items that include material standard cost, MRO, and conversion costs. (PCP conversion costs include prorated COE costs.)
Material forms the standard basis in the new system versus both material and labor (Figure 2-10). In addition to eliminating labor standards/labor performance reporting and associated processes and systems, the new cost system provides corporate enablers that include: Better alignment and support for corporate LCVSM goals
Better visibility and accountability at product cost level
Emphasis on capturing cost assumptions from product conception to bidding and execution
Better collaborative work within PCPs, providing new productivity measures such as acceptance rate, on- time delivery, schedule attainment, material shortages, and other key metrics
The implementation of the Lean Cost System has enabled Rockwell Collins to make better business decisions that have promoted sustainable and profitable company growth.
Figure 2-9. Old Income Statement Flow
Figure 2-10. New Income Statement Flow
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