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1.  Lean  Accounting  Overview        

Traditional  vs.  Lean  Accounting    

OK,  let’s  get  started  by  discussing  some  of  the  differences  between  traditional  accounting  and  lean  accounting.        And  we’ll  go  ahead  and  begin  by  addressing  the  elephant  in  the  room…  and  one  reason  organizations  hesitate  to  make  any  changes  to  their  accounting  practices…  and  this  elephant  is  known  as  the  Generally  Accepted  Accounting  Principles,  otherwise  known  as  GAAP.        We’ll  discuss  how  lean  accounting  is  compatible  with  GAAP  throughout  this  course…  in  fact,  we  know  of  no  companies  using  lean  accounting  that  have  reported  problems  dealing  with  auditors  so  long  as  they  kept  the  auditors  informed  during  the  changes.        Furthermore,  there’s  nothing  stated  in  GAAP  that  requires  the  use  of  standard  costing.  This  is  a  big  concern  for  people,  so  we  cover  this  point  more  throughout  the  course.        OK,  well  let’s  get  started  by  exploring  some  of  the  reasons  traditional  accounting  doesn’t  support  an  organization’s  lean  journey.    And  as  you’ll  see,  traditional  accounting  not  only  doesn’t  support  lean,  it  can  actually  work  against  it.        One  reason  for  this  is  that  traditional  cost  accounting  considers  inventory  to  be  an  asset,  which  can  motivate  people  to  produce  as  much  as  they  can  leading  to  the  deadly  waste  of  overproduction.    As  such,  when  properly  accounting  for  lean,  it  becomes  clear  that  having  a  focus  on  creating  smooth  flow  and  incredible  customer  value  actually  frees  up  cash  within  the  organization.        Traditional  accounting  also  tracks  detailed  information  by  department  and  motivates  people  to  focus  on  the  success  of  their  department,  even  at  the  expense  of  the  organization.    A  common  example  of  this  silo  thinking  comes  at  the  end  of  the  year  when  departments  scramble  to  spend  their  remaining  budget  dollars  so  they  don’t  lose  them  the  next  year.        In  other  words,  did  everyone  really  need  a  bunch  of  new  office  supplies  on  December  29th  or  did  the  old  

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staplers  work  just  fine?        It’s  because  of  situations  like  this  that  many  companies  who  practice  lean  accounting  actually  consider  the  budgeting  process  to  be  a  waste  and  actually  eliminate  it  all  together.        Next,  traditional  accounting  can  also  expensive  and  wasteful  because  it  tries  to  measure  everything  in  extraordinary  detail,  which  requires  dedicated  people  spending  hours  of  time  preparing  documents  few  people  understand  or  even  use.  This  information  is  not  only  difficult  to  decipher,  it’s  often  provided  too  late  and  doesn’t  align  with  customer  wants  and  needs.    This  traditional  information  can  also  be  misleading,  wrong,  and  even  harmful.        An  example  of  this  is  how  the  cost  and  price  of  products  are  traditionally  determined.    For  example,  labor  costs  are  often  treated  as  variable,  yet  in  reality  they  don’t  actually  vary  that  much  at  all.        Conversely,  lean  organizations  seek  to  determine  what  customer’s  value  and  how  much  they’ll  pay  for  that  value.  In  other  words,  the  price  is  set  by  the  customer  and  through  continuous  improvement  and  elimination  of  waste,  costs  go  down  and  profit  goes  up.        As  we  touched  on  earlier,  traditional  accounting  can  be  complex  and  confusing  to  most  people  in  the  organization.        

Terms  such  as  overhead  absorption,  double-­‐entry  bookkeeping,  debits  and  credits,  accrual,  depreciation,  general  ledger,  variances  and  many  more  terms  aren’t  always  easy  to  understand  without  proper  training.        The  confusing  reports  and  requirements  to  track  everything  in  excruciating  detail  often  contributes  to  accountants  being  isolated  from  the  rest  of  the  organization  and  looked  at  as  bean  counters,  instead  of  important  team  members.        

And,  to  make  matters  even  worse,  the  people  actually  charged  with  making  improvements  don’t  have  the  information,  or  knowledge,  needed  to  develop  and  justify  improvement  projects.    Put  another  way,  when  this  happens,  the  financial  side  of  the  business  often  becomes  a  mystery,  requiring  the  invocation  of  the  oracles  of  Finance.        Conversely,  in  a  lean  organization,  as  transactions  are  eliminated  and  measures  are  simplified,  accountants  are  freed  up  to  become  strategic  partners  in  helping  the  team  continuously  improve  the  value  they  deliver  to  their  customers!        

       

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Supporting  the  Lean  Enterprise    Now  then,  in  order  to  start  freeing  up  accountants  so  they  can  add  more  value  as  internal  consultants,  we  need  to  quickly  clarify  some  confusion  when  we  talk  about  lean  accounting  and  its  role  in  supporting  the  lean  enterprise.          The  confusion  comes  from  a  distinction  you  might  hear  between  “lean  accounting”  and  “accounting  for  lean.”        Often,  people  ONLY  think  of  lean  accounting  as  applying  lean  techniques,  such  as  5S,  to  the  accounting  department;  but  this  is  only  part  of  what  we  call  lean  accounting.        Lean  accounting  also  refers  to  the  different  approaches  accountants  take  to  support  decision  making,  such  as  make  vs.  buy,  pricing  and  costing,  inventory  valuation,  performance  measures,  and,  in  general,  providing  the  right  information  to  the  right  people  at  the  right  time.        As  accountants  begin  to  understand  and  apply  lean  accounting  to  their  organization,  they’ll  transition  from  being  a  roadblock  on  the  lean  journey  to  energy  boost  that  helps  accelerate  value  creation.        With  this  said,  in  order  for  this  to  happen,  the  accounting  process  must  support  the  following  5  principles  of  lean.        

Lean  Principles    First,  organizing  around  value  streams  means  traditional  costing  gives  way  to  value  stream  costing.  And  by  providing  timely  and  visual  information  accounting  helps  support  flow  and  pull.        Next,  performance  measures  change  to  focus  more  on  creating  value  for  the  customer  and  employees  become  more  empowered  when  accountants  work  with  them  to  create  simple  measures  that  can  be  calculated  frequently  and  provide  actionable  information.        Lastly,  all  associates  –  including  accountants  –  drive  to  continuously  improve  their  own  processes  in  support  of  the  overall  pursuit  of  perfection  at  the  organizational  level.        Now  then,  since  principles  guide  behaviors,  a  new  set  of  accounting  tools  are  needed  in  order  to  act  on  these  principles.      As  such,  throughout  the  remainder  of  this  course  we’ll  introduce  and  explain  some  of  the  tools  used  by  lean  accountants  including  value  stream  costing,  target  costing,  box  scores,  and  “Plain  English”  statements.      We  also  promise  to  deliver  this  information  as  clearly  and  concisely  as  possible.        OK,  in  our  next  module  we’re  going  to  cover  some  basic  accounting  concepts  before  diving  deeper  into  more  advanced  topics  like  value  stream  costing.