Lean Accounting

1. Lean Accounting

2. W. Edwards Deming – quality and efficiency TaiichiOhno & Shigeo Shingo – Toyota Production System Background

3. Overproduction • Inventory • Overprocessing • Defects • Motion • Waiting • Transport Study of Waste

4. Waste and costs are not the same. • Recognize the difference of cost vs. cost per unit. - employee costs & warehouse costs remain the same but cost per unit decreases as production increases. But what if excess production cannot be sold? More waste. More Waste

5. Instead we should attempt to remove inputs (costs) that would then increase outputs or reduce the overall cost to produce units that can be sold. Managing Waste

6. 5 Steps to become a Lean Manufacturer • Define value. • Identify and map the Value Stream. • Organize the Value Stream into a production model. • Implement a pull system to control the flow of work. • Commit to constant improvement. Lean Manufacturing

7. Lean manufacturing has existed for some time, but a corresponding accounting system has lagged. • Accountants still want to focus on the “building blocks” of production: direct materials, direct labor, and manufacturing overhead. • Lean manufacturing needed a system that will cost the value stream, not just the individual unit. Need for a new accounting

8. Value Stream Costing (VSC) • Focuses on the complete process rather than cost per unit • Includes ALL costs that go into making a product • No allocations based on estimated production or standard • No difference between direct or indirect costs • Typically analyzed weekly instead of monthly Value Stream Costing

9. To correspond to the ideas of Lean Manufacturing, Lean Accounting needs to: • Focus on the overall process (the Value Stream), • Provide useful & timely information that operations managers can understand, and • Account for total costs, not per unit costs. Lean Accounting

10. Three reasons to leave Standard Costing • Standards are set annually (what if they are wrong?) • Variances can be misleading. • Even good variances can be detrimental to business. Reasons to leave standard costing

11. Purchase Price Variance – favorable variance if cost is lower than standard. Purchasers typically receive discounts for purchasing high quantities. Also, sellers may sell subpar materials at a lower price. • Volume Variance – allocation (or absorption) of overhead is based on production. This variance encourages overproduction which may lead to a surplus of finished goods inventory on hand. • Labor Variance – increasingly smaller portion of production. Is this even efficient to track in such detail? Reasons to leave standard costing – cont.

12. Variances  • Developed in the 1900s. • Manufacturing world has changed since then. - In the 1900s manufacturing was labor intensive so overhead was applied based on labor. - Today labor is typically 5% - 15% of the total cost. Standard costing problems

13. Recording of inventories – Good or Bad? • Can be good to assist with ratios, but… • Can be bad if inventory has become obsolete and must be written off or sold at steep discounts. • Lean deals with this by keeping inventories at a minimum. Traditional accounting problems

14. Conversion may take several years to complete • Using up inventory stores may decrease net income • Sales may decline • Middle management (performance evaluations) • Business schools lack of exposure to the subject Reasons to avoid lean accounting

15. Examine correct production levels (demand) • Commitment to continuous improvement • Buy-in from upper management • Employees must see a benefit (no lay-offs) • Eliminate unnecessary transactions • Lean manufacturing and lean accounting must work together How to make lean successful

16. Accounting has always been a historical function • Typically seen as non-value added • Lean provides the opportunity to be a more real-time dashboard of current operations Conclusion