Question

Two-page paper: Using the material in the readings, assess your thoughts on the case and the challenges (cultural, accounting, etc.) that had to be overcome to implement lean accounting.

Case Study- Creating the Course and Tools for a Lean Accounting System.docx

Answer 1

Lean Accounting is the general term used for the changes required to a company’s accounting, control, measurement, and management processes to support lean manufacturing and lean thinking. Most companies embarking on lean manufacturing soon find that their accounting processes and management methods are at odds with the lean changes they are making. The reason for this is that traditional accounting and management methods were designed to support traditional manufacturing; they are based upon mass production thinking. Lean manufacturing breaks the rules of mass production, and so the traditional accounting and management methods are (at best) unsuitable and usually actively hostile to the lean changes the company is making. Everybody working seriously to implement lean thinking in their company eventually bumps up against their accounting systems. It soon becomes clear that traditional accounting systems are actively anti-lean. Lean improvements showing cost increases as a result of the way standard costing applies labor and overhead costs. There is many an excellent lean strategy that has been cancelled or held back because the standard costing system shows a negative impact. The lean team working hard to eliminate waste from the value stream only to find that profitability goes down owing to the adjustments made by significant inventory reduction. Looking at the other side of this same problem, the finance people are told about all the savings being made in operations but they see (at best) no financial improvement; and often a negative impact.

They are large, complex, wasteful processes requiring a great deal of non-value work.

• They provide measurements and reports like labor efficiency and overhead absorption that motivate large batch production and high inventory levels.

• 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.

• 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.

• They use standard product (or service) costs which can be misleading when making decisions related to quoting, profitability, make/buy, sourcing, product rationalization, and so forth. Almost all companies implementing lean accounting are making poor decisions, turning down highly profitable work, out-sourcing products or components that should be made in house, manufacturing overseas products that can be competitively manufactured here at home etc.

While Lean Accounting is still a work-in-process, 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.” 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.

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