In its simplicity the inspiration behind lean is to be able to identify and then eliminate those things to do not add value to a company or a process. Businesses took this idea of lean and began to focus it in on their core processes; in order to make their business more efficient with current resources. Lean strives for the elimination of the wastes in the value stream in order to create efficiency (1). The value stream consists of all of the functions that are required to support operations (2). In order for operations to be efficient all parts of the value stream including the people and equipment must be considered. Once a company begins taking on this mentality of eliminating waste most products or services are pulled through the system which will strive to reduce inventory levels, manage more on-time deliveries, and improve quality. By implementing this into a company the reverberations of the removing excess waste will eventually hit the financial statements and how to account for the changes.
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When lean techniques began to hit the manufacturing and business world the traditional costing methods did not continue to support the business processes. With the new techniques used and then continually using the traditional methods of accounting the numbers did not give a fair representation of where a company stood. What was happening on the shop floors was not being translated into information that was on the financial statements. The problem with the traditional methods such as activity based or standard costing was that these did not show the cost savings created by lean manufacturing techniques (5). The need for the financial numbers to match manufacturing methods is imperative for decision making to be effective. Some of the cost methods that are being used under lean accounting are value streaming, changing inventory valuation techniques and modifying financial statements to include non-financial information (5). Lean accounting must utilize these ideas as well as stand behind the principles such as simple business accounting, accounting that supports the lean transformation, clear and timely communication of information as well as planning for the future (11). Lean accounting can also make the accounting function itself lean. Lean accounting stream lines its processes to create efficiency and the same can be used to make the accounting of lean production lean. Some things that can be eradicated are excess transactions that don't need to occur, reports may be able to be consolidated or in respect to signing off on things, this too could be made into a system that is automated to free up time.
Tools of Lean Accounting:
The value stream used in combination with lean accounting can create more visibility and better decision-making (2). As noted by many specialists the main steps to creating a lean environment using the value stream begins with identifying value. The value is whatever the customer is willing to forfeit in order to obtain the product or service. Value is something that a company must have over their competitors in order to keep their demand higher. Once identified what value is needed and how they can create it begins the development. The next step is mapping the value chain, this is used to identify each component used to create the product or service. Once each component has been mapped then a company can begin to pinpoint which areas are creating waste or adding value. Creating flow through the value stream is enabled by making each point efficient and in sequence with the goal of the whole stream. The next step that is reliant on the customers is to establish a pull. The customers will pull the value through the system and create the demand needed that is needed by a company to then build the product or service. Lastly, a company should focus on this process and try to perfect the steps and value creation. Using and implementing these steps will change the way a company measures and evaluates its results. According to Jan P Brosnahan, other benefits of restructuring the measurement process can include better communication, reduction of inventory, and improved decision making. Communication is improved because the use of value stream management tears down the previous functional silos because each part of the value stream must work together. Using the pull technique, inventory can be reduced because a company will only buy and keep on hand the amount that are immediately required. Lastly, VSM will allow companies to reevaluate their measurements that will better reflect the financial performance of the implementation of lean manufacturing techniques (2).
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Another technique used in lean accounting is the concept of box scores which is centered on management controls and continuous improvement. Value stream box scores utilize value stream performance; operational performance measurements, financial performances and how the value stream capacity is being used to create the scoring metrics (7). These measurements can narrow down each specific aspect and its performance against the objective of each part. The spotlight is on the different parts of the value stream rather than the individual portions of the stream. The main goal of implementing a box score system is meant to fix the disconnect between the shop floor and the financial statements (8). On the surface this seems like a very in-depth look at each function, but how can a firm spend substantial money and time of measuring each part of the value stream. Such a focus can become too narrow minded or costly to continue to implement.
When a company employs lean manufacturing inventories will be substantially reduced. Using a lean accounting mentality the company will need to alter its valuation of inventory so that it correctly reflects inventory levels. An additional costing method used in order to promote lean manufacturing is target costing. Target costing is centered on the customer and the value that needs to be created to ensure acceptance of the product. This approach determines customer needs, understand the value a customer places on the product and then target the costs towards these answers. Target costing is used to determine the actual costs needed to add value while focusing on the customer they can continue to improve their process (9). Target costing may be extremely costly in time to narrow down the customers wants and then to focus their costs solely on customer needs. This exact scenario is why many businesses decided to standardize products in order to minimize this type of cost.
Lean accountings principle of clear and timely communication can be achieved by "plain English" financial statements and by including non-financial performance on the statements (11). The idea of making the financials plain can make it easier for everyone in the company to read and understand them. By attempting to implement something like this it can try to reduce the questions of what do the numbers mean to straight into what needs to be done. This type of plain can allow for more visibility within a company since nothing is meant to be hidden by numbers and their meaning.
Benefits of Lean Accounting
The possibility of better decision-making. Some of the benefits that lean accounting can bring to a company implementing lean manufacturing techniques. By aligning the accounting to the techniques, lean accounting can provide better information for decision making which if used correctly can increase sales (6). Using standard costing may show lower margins or even incorrectly show that a product or service should be outsourced rather than made in house. Being able to correctly identify where costs should be allocated and what costs are necessary for production can improve the information needed for decision-making. Secondly, lean accounting can reduce costs if correct decisions are made. With costs changing due to new techniques lean accountings use can help to eliminate unnecessary parts of production. By means of eliminating waste
Elimination of transactions and excess reports. The accounting department itself can save money by eliminating redundant reports and transactions (6). In an example by Kennedy and Brewer they did on a Midwest firm shows that they were able to slowly eliminate transactions. Working on the production process and the values that need to be added created more streamlined processes. Eliminating things and streamlining allowed for the company to track things more easily and reduce the number of transactions required for each part of the process as well as reduce the number of reports necessary (9). This elimination of the transactions and reports is faithfully aligned with the lean principles. Doing away with reports that are no longer needed can reduce costs and free up time from those that previously had to run them.
Reduced Inventory. Using the lean technique most products will be pulled through the production process. Focusing on customer demands will decrease the inventory levels since a company does not need to continue to predict the levels needed. Having to predict the quantities can lead to overproduction that will just end up sitting in warehouses. Also, there is a huge drop-off when a company switches from the traditional methods to lean. Traditionally, there was a tendency to accumulate inventories, but lean pushes for such a low number this will reduce inventory on the books.
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Non-financial information included in financial statements. Unlike traditional accounting very little was taken into account about the non-financial effects that occurred during manufacturing. By taking into account the non-financial aspects may assist in looking long-term in decision-making. Having the information from box scores, the value stream, and the plain financial statements these can all help plan for the future of lean. The more information at a company's finger tips allows them to make better decisions for the now and the long-term. Providing this information can even create metrics that can contain non-monetary units into the equations. Introducing non-financial information will also assist in the lean accounting tactic of plain statements. Using both types of information can allow the non-financial information to help readers understand the numbers on a financial statement.
Better communication. To build a lean environment all functional areas of an organization must work together in order for the value stream to be efficient. By having different departments working together they will have to have more collaboration of each area. Everything benefits from the value stream teams working together to improve product flow and each employee understands the key drivers that will make a difference in the firm (2). The increased communication can facilitate decisions and also the collaboration can help solve issues sooner since each area will be on the same page with the same information.
Barriers to Lean Accounting
A barrier that lean accounting may have on managers is that under the lean approach inventories are heavily reduced. By reducing inventories less money will be tied up in the inventory, but the profits of a company will decrease. On immediate glance a company would turn away from any implementation that will show a decrease in their profits. This scenario may also lead to employees not accepting the approach and will deter the implementation process. Employees must understand the new process and be behind it in order for it to be successful. Other barriers to implementing a lean accounting approach can include organizational, educational, professional, individual barriers. Organizationally the company will have to integrate operations and accounting together. This can lead to challenges from transitioning from the previous silos that encouraged isolation of departments. Employees must be educated on this new technique and effectively trained beforehand. Lastly, the individual themselves in the company may present a barrier. Most often people are opposed to changes due to fear of the unknown (10). The traditional methods may have instilled conservatism and this will need to be fostered to transition more smoothly into lean accounting.
Criticisms of Lean Accounting
Complete elimination of traditional methods. A huge impact by integrating these new lean initiatives is that a company will completely eliminate traditional costing such as absorption costing and activity-based. This complete elimination of former methods can have repercussions on the firm during the transition period. There will be a period of time where financials and the floor numbers may not be synchronized. Total disregard for the traditional methods should be avoided. If a company chooses to eliminate them they should do it in a transitional sense in order to avoid conflictions with systems. Also, if possible a company should keep both accounting methods in mind in case not all costs and performance measures can be used for the current production approaches.
Employees must be educated and understand lean accounting. Also, the accountants and information systems employees will have to create these new tools used for lean accounting. This development can be extremely time consuming, but also forces the accountants to take on new roles. The accounting department is just about forced from being a support department to a much more active participant in the information processed through a company. A large part of the implementation of lean accounting is breaking down the silos and every part of firm is meant to work together towards one goal. A dilemma that may arise from this is that when it comes to decision making, the focus is more on group collaboration. Every part of the process must understand lean and how it must implemented by them. When a company is trying to put into practice lean they will have to figure out if their employees understand it, how much training is needed, and once lean has been executed hiring may be steered towards those with knowledge of lean.
Too much continuous improvement? Under the lean mantra focus is centered on continuous improvement. By continually trying to improve processes there may be too much focus on improving things that do not need to be improved. Also, the company may focus some much on the long-term goals on improvement that they may lose focus on the short-term. Having to implement lean requires an overhaul of many routines, but there needs to be a limit on how lean a company reaches. A company should avoid trying to eliminate all waste and attempt to improve everything all at once.
Short-term negative effects. Many times when lean has been put into action the reduction of inventory can decrease profits. This effect on the numbers could sway stock analysts and those that count on financial information day-to-day. As well a rare, but other concern may be that in all areas of reducing costs and processes that are waste could decrease profits in other areas. The price distortions may make it difficult to keep their profits at certain levels. A company will need to ensure that their information available is reliable and that the people that use it understand the issues that will arise from the new method.
Time Consuming and time is money. Using lean accounting requires the acquisition of more data and information to be produced and used by a company. Since a company needs to determine the value that customers demand to then be able to accommodate the customer. To determines the values that need to be added and then identify and eliminate waste that does not add value has the possibility of taking up a lot of time. Employees such as managers need to be fully educated on the lean accounting it is new to them. Lean accounting is heavily focused on the management side of being able to uses the value streams and the information in order to assist the lean production side. Once the education has been completed a company will then need to implement all of the new methods. The implementation process will likely take some time when changing systems. Time is also money, if there is down time or problems a company could lose hours of work trying to ensure the lean processes are working. To decided whether or not this is considered a negative aspect or just a bump in the road a company will have to weigh the benefits to the costs.
Lean accounting was formulated in response to a need created by companies choosing to lean their manufacturing methods. Going lean involves eliminating waste and focusing solely on creating value. In order for the accounting to actually account for lean, a company needs to take on the principles, practices, and educate their employees on the new tools that will be introduced because of lean accounting. Lean accounting can produce benefits for a company including better decision-making and more visibility, but it has to be done correctly and for the right reasons. Lean accounting is not completely errorless so in order for implementation to be successful a company will need to prevent resistance from management and educate employees thoroughly throughout. Lean accounting will continue to make an impact because due to more product variability and production changing their needs to be a method to account for these adjustments. Lean accounting is a necessary accounting method to have because the question of do the financials give a true picture of the business, will always arise. Applying an accounting method to reflect the businesses correct position is a must. The benefits must outweigh the costs associated with the addition of a new accounting method. Although, lean accounting should not be considered before the production or the processes go lean. Lean accounting should be solely used as a support to the changes in the production area.
Unleash the Power of Lean Accounting: Jan P Brosnahan
Keeping it Lean: Brian Maskell; Ross Maynard
Using Dynamic Value Stream Mapping And Lean Accounting Box Scores To Support: Stephen L Woehrle; Louay Abou-Shady
LEAN ACCOUNTING: WHAT'S IT ALL ABOUT?: Frances A Kennedy; Peter C Brewer
Barriers to lean accounting
GAAP Conflicts. According to the Generally Accepted Accounting Principles they allow lean accounting to be used an acceptable form. The goal of lean accounting is to be able to capture the correct information to comply with GAAP, but there are some disagreements among accountants. GAAP accepts lean accounting, but since companies do not like that reducing inventory will decrease profit they may