Question

A company has adopted a lean production philosophy and, as a result, has cut its inventory levels significantly. Describe the impact on the company’s external financial statements as a result of this inventory reduction. Also describe the impact of the inventory reduction on the company’s internal financial statements, which are prepared using variable costing.

Answer 1

LEAN PRODUCTION: Lean production philosophy centers on the elimination of waste in all forms in the workplace. Specific lean method include just in time inventory management, Kanban scheduling systems

Advantages:

1. Eliminates waste: lean principles aim to minimize all forms of waste, from resources as varied as material defects to worker ergonomics. Many sources of waste are easy to identify and correct.

2. Worker satisfaction: implementing lean principles in your company requires input and participation from your production staff. They are often in the best place to see where waste and inefficiency occurs. Involve sincere efforts in their working.

3. Just in time: jit is a strategy that suggests large inventories are wasteful of company resources. Business equity tied up inventories of raw and finished goods interferes with cash flow. Money is also saved through reduced warehousing needs.

4. Competitive advantage: beyond simply reducing costs and improving efficiency, lean production techniques introduce systems and develop skills with your staff that supports changes in the workplace that new sales create.

Internal financial statements of lean accounting:

1. Inventory costs are the lowest point because soft production depends on customers’ requests rather           than market demands.

2. Direct labor cost is at their lowest levels and indirect costs play an important role in lean manufacturing.

3. The products are remodeled during the production processes, which contributes to reducing the loss or loss         as much as possible.

4. Lean industrialsation grows with relative stability in the size of a single point and this helps reduce lost time or time of transportation for production inputs.