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

Mechanical Devices Electronic Devices Product A Product B Product C Product D Sales Direct material (based on quantity used) Direct manufacturing labor Manufacturing overhead (equipment lease, $1,400 $1,000 200 150 $1,800 150 120 500 300 supervision, production control) Allocated plant-level facility costs Design and marketing costs Allocated corporate overhead costs Operating income 180 100 190 30 $200 400 160 210 40 190 60 84 240 100 20 $210 $280 Mechanical Devices Electronic Devices Product A Product B Product C Product D Direct material (purchases)$420 $240 $500 $180