Lean Accounting

As more and more companies successfully implement a lean approach to manufacturing, they realize traditional accounting negatively represents lean improvements. Because lean thinking breaks the rules of traditional manufacturing systems, it is often at odds with the traditional cost accounting practices designed to support them.

Breaking Tradition

Mass production concentrates on process efficiency and equipment use, often resulting in long run times and large inventory levels. Parts move from department to department, which takes time and requires floor space. With lean, all of the processes needed to manufacture a product are located next to each other, in sequence. Value stream mapping processes improve yield and save money by lowering material costs, reducing labor, and eliminating waste.

Traditional cost-management systems are designed to support mass production and thus do not accurately measure and account for lean improvements and initiatives. Moreover, cost accounting reports are designed to present an accurate public view of a company; they are not designed to help managers improve operations.

With lean manufacturing, some of the most important improvements include lead times, scrap times, and on-time delivery. These non-financial measures are not captured on traditional accounting statements. Moreover, some of the basic concepts behind cost accounting lead to practices that is not lean. For example, in a mass production system, cost accounting tracks inventory transactions as material moves from department to department. It tries to identify value added to material, reporting under-utilized production unfavorably. In response, operations frequently overproduce—one of the seven wastes that lean tries to eliminate.

Lean Accounting

By involving the accounting department in lean initiatives, it is possible to connect lean operations with accounting. This means replacing cost accounting with simpler management reporting and the adoption of value-added principles. Often lean enterprises make radical adjustments in their manufacturing processes, but fail to extend those changes outside of the production area.

Lean accounting concepts are designed to better reflect the operational and financial performance of a business that has adopted lean processes. Some of the most important techniques include organizing costs by value stream, changing the way inventory is valued, and changing financial statements to include non-financial performance measures.

An important tool in lean accounting, value stream costing, allows costs to be organized by value stream instead of by department. The value stream includes everything required to create value for customers associated with the product, including design, marketing, sales, and shipping. This provides realistic and timely cost and profit information for the lean enterprise. Lean accounting also centers on sales and processing costs, reducing the significance of inventory.

Benefits of Lean Accounting

The benefits of lean accounting include the following:

  • Increased sales. Lean accounting provides accurate cost and profitability information, which can be applied to pricing, capital investment, and new-product design information. In addition, it illustrates how lean principles increase capacity, and that long-term financial benefits depend on how that extra capacity is used.
  • Value-added accounting practices save time and money. Lean accounting eliminates scores of transactions, as well as the reports and reconciliations that go with them.
  • Lean-focused information motivates long-term lean improvement. Lean accounting identifies the long-term financial impact of lean practices, preparing management and staff to focus on eliminating waste. It also provides the information needed for initiating further changes and improvements.

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