Introduction: Issues with Traditional Accounting
Today, more and more organizations come to realize that traditional accounting systems are actively anti-lean. Specifically, the traditional accounting system and practices are often large, complex, wasteful processes requiring huge amounts of non-value work. They provide measurements and reports like labor efficiency and overhead absorption that motivate large batch production and high inventory levels, which in reality, often of no use to management. Apart from that, they have no good way to identify the financial impact of the lean improvements taking place throughout the company. On the contrary, the financial reports will often show that bad things are happening when very good lean change is being made. As a consequence, very few people in the company understand the reports that emanate from the accounting systems, and yet they are used to make important and far-reaching decisions.
Defining Lean Accounting
Lean accounting is a relatively new concept. Generally speaking, Lean accounting is accounting for the lean enterprise, where it seeks to move from traditional cost accounting to a system that measures and motivates good business practices in the lean enterprise. In this context, applying lean principles to accounting can be part of this system. Lean accounting is an attempt to derive monetary management information based on lean manufacturing principles. Lean thinking emphasizes an overall systems approach and lean accounting, by adopting the flow-path as its guiding principle, places the systems view ahead of casualty, the principle appropriate to the decision science domain.
There are four universal aspects of decision support information with which any management accounting approach must comply: 1. scope, 2. focus, 3. causal insights, and 4. cost behavior insights. The flow-path principle by its very nature deals with only those consumption relationships physically touching the product and these results in compromises in lean accounting’s decision support capabilities. Self-praises are best set aside until lean accounting demonstrates an ability to meet decision science demands in a broad spectrum of enterprise optimization scenarios. As The Toyota Way clearly affirms, the types of decision-related intricacies are without peer on the playground of the principle of causality.
Benefits of Lean Accounting
There are many benefits can be reaped should an organization adopt the concept and practices of lean accounting. Firstly, the lean accounting concept able to provide accurate, timely, and understandable information to motivate the lean transformation throughout the organization and for decision-making leading to increased customer value, growth, profitability, and cash flow. Secondly, a company also can often use lean tools to eliminate waste from the accounting processes while maintaining thorough financial control. Thirdly, it is also argued that lean accounting is fully complying with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements. Last but not least, a lean accounting also can support the lean culture by motivating investment in people, providing information that is relevant and actionable, and empowering continuous improvement at every level of the organization.
Impact of Lean Accounting to Organization
As with any management ideas, it can exert much impact to the final results to an organization, be it operation, human resource, marketing or finance. Generally speaking, in such a complex business environment we are facing today, the impact of lean accounting to organization is generally positive. Just to state a few examples first: The results from application of lean thinking and lean accounting is hardly arguable. For example, quoting from the source: Lean Advisors, Ontario, Canada, www.leanadvisors.com, some remarakle success stories from application of lean accounting is as follow. Gorton’s says it more than met its original goal of lowering inventories by 40% to 50%. Apart from that, Xantrex Technology Inc. says in one area it managed to reduce lead times from eight weeks to one day and improve productivity 100%. Last but not least, Whirlpool Inc. says its Oklahoma plant had a quality improvement of more than 40% over the past two years.
Of course, lean accounting can exert much impact to the organization. The first huge benefit or impact is that it often able to solve the weakness of traditional accounting system or process. Today, different metrics are needed in a lean environment to motivate the right behaviors and to provide better information. Lean accounting will enable us many ways of creating financial reports that provide manufacturing people with the information they need. Although the traditional type of standard costing system is probably still needed for financial reports, but it will never provide accurate costing information or measure lean implementation savings.
Lean accounting concepts are designed to better reflect the financial performance of a company that has implemented lean manufacturing processes. These may include organizing costs by value stream, changing inventory valuation techniques, and modifying financial reports to include nonfinancial information. For this, lean accounting able to enhance the financial management process of a company, and thus enable management to come out with a more timely and fast decision to market. This would equal to a faster response time to market.
To reduce lead times and create more capacity. Besides, another positive impact the lean accounting system can have to the organization is to reduce lead times and create more capacity. This is because, as lean concept reduce waste and the implementation of efficient process value chain, many waste and weak process in the value system are being streamlined.
To increase productivity. As mentioned above, lean accounting, supportive of lean manufacturing process, can enhance the effectiveness and efficiency of the value chain or network of a company. This in turn can increase the productivity of a company due to the reduction of waste in the business process.
To reduce total cost per product/unit. As waste is reduced, it is reasonable for us to expect that the total cost per product per unit for a company can be reduced significantly.
Last but not least, the application of lean accounting can motivate employees to practice lean principles and implement lean accounting ideas. This in turn can enhance the lean culture in an organization, which could easily transform into sustainable growth rate and superior financial performance for the long term of a company.
We also can expected that lean accounting would help provide better visibility to our improvements and help improve our decision making, but the actual benefits have been so much larger than this initial view. The use of lean accounting has really changed the whole way many business entities manage their business, more directly engaging and involving all of our employees.
Better communication. Better communication and coordination to meet customer needs has also resulted from lean accounting, as functional silos have been removed, resulting in improved cycle times for many processes. Everything benefits as the value stream team works together to improve product flow through the value stream, from new product launches through to shipping customer orders. Value stream management has helped each employee better understand the key drivers or metrics that make a difference in our business and how they contribute to the company’s success by helping move those metrics in the right direction.
Reduced inventory. One of the organization implementing lean accounting concept also discover that: Inventory has been reduced by more than 30%. According, the management state that: We changed our metric from the traditional inventory turn measurement, at a macro site level, to a days-of-inventory (DOI) measurement at the site and value stream. We assigned the DOI metric to staff members responsible for buying materials for each value stream. Since buyers must report each week on the amount of inventory purchased and remaining on hand in their value stream, they have exhibited greater interest in managing inventory levels than ever before.
Improved decision making. Value stream management also led to greatly improve decision making. A light bulb went off when we realized we had been treating certain costs as variable costs when in fact the particular costs don’t necessarily vary with increased production volume. For example, total direct labor cost doesn’t necessarily increase as additional volume is put through a factory, if available capacity exists or is made available through improvement initiatives. Through value stream decision making and analysis, a business entity may even discover that turning down business that would have provided additional profitability from a value stream perspective.
According to various readings from news and articles, apparently, there is now an agreed body of knowledge that is becoming the standard approach to accounting, control, and measurement. These principles, practices, and tools of Lean Accounting have been implemented in a wide range of companies at various stages on the journey to lean transformation. These methods can be readily adjusted to meet your company’s specific needs and they rigorously maintain adherence to GAAP and external reporting requirements and regulations. Lean Accounting is itself lean, low-waste, and visual, and frees up finance and accounting people’s time so they can become actively involved in lean change instead of being merely “bean counters.” There are indeed many positive impact where the lean accounting system able to influence an organization. To summarize, companies using Lean Accounting have better information for decision-making, have simple and timely reports that are clearly understood by everyone in the company, they understand the true financial impact of lean changes, they focus the business around the value created for the customers, and Lean Accounting actively drives the lean transformation. This helps the company to grow, to add more value for the customers, and to increase cash flow and value for the stock-holders and owners.
Anton van der Merwe. 2008. DEBATING THE PRINCIPLES: ASKING QUESTIONS OF LEAN ACCOUNTING. Cost Management, September 1, 29-36.
Gwen Moritz. 2008. ‘Lean Accounting’ Described as Aid To Manufacturing. Arkansas Business, September 15, 1.
H Thomas Johnson. 2006. LEAN ACCOUNTING: TO BECOME LEAN, SHED ACCOUNTING©. Cost Management, January 1, 6-17.
Jan P Brosnahan. 2008. Unleash the Power of Lean Accounting. Journal of Accountancy 206, no. 1 (July 1): 60-62,64,66.
Mark C DeLuzio. 2006. Accounting for Lean. Manufacturing Engineering, December 1, 83-84,86,88-89.
Ross Maynard. 2006. PRACTICAL LEAN ACCOUNTING. Review of title_of_work_reviewed_in_italics, clarifying_information. Financial Management, October 1, 33.
Ross Maynard. 2006. WHO’S COUNTING? A LEAN ACCOUNTING BUSINESS NOVEL. Financial Management, July 1, 37.
Ross Maynard. 2008. LEAN ACCOUNTING. Financial Management, March 1, 44-46.
Shauna R Steigerwald. 2006. SME Publishes “Hitchhiker’s Guide”. Modern Machine Shop, May 1, 50.
Lean Management Accounting Workshop Resolves Conflicts Between Lean Thinking and Traditional Accounting. 2009. Business Wire February 25
Lean Management Accounting Workshop Teaches How to Resolve Conflicts Between Lean Thinking and Traditional Management Accounting. 2009. Business Wire February 18
Stephen Barlas, Christopher Dowsett, Mike Osheroff, Kathy Williams. 2008. Implementing Lean Successfully. Review of title_of_work_reviewed_in_italics, clarifying_information. Strategic Finance 90, no. 6 (December 1): 23,61.
Stephen Barlas, Jean-Victor Côté, Paul L Shillam, Lance A Thompson, Kathy Williams. 2007. IMA Issues Statements on Management Accounting. Strategic Finance 89, no. 1 (July 1): 22.
Student and Professor Win Excellence in Lean Accounting Awards from the Lean Enterprise Institute. 2007. Business Wire October 4
Work of Accounting Professor and Student Recognized by Lean Enterprise Institute. 2008. Business Wire October 2