Case Study - Lean Accounting - Traditional Accounting Practices

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Lean Accounting

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Lean Accounting comprises of principles and methods usually very useful to support the management in order to understand the effects on lean transformation on cash flow on profit and loss, and on non financial performances.

Lean Accounting


Traditional Accounting Practices employed during 1979 at Topeka plant does not value in a Lean environment due to lack of– Performance measurement and management– Transactional elimination– Calculation and approximation of Lean financial

benefits– Target costing

Lean Accounting

www.theprofessionalwriters.comLean Accounting

*Source: This figure was adapted from the lean thinking model created byJames Womack and Daniel Jones in their 2003 book Lean Thinking, Free Press Publishing.


Step 1Step 1

This involves an in depth analysis of who is doing what and what is that they are valuing .It is always the customer who defines what they value/want in products /services.

In the case of Topeka though the process of production was streamlined, an exact approximation of the customers need was not taken into account. This resulted in a greater variance between production, sales and accounting

Define value

Lean Accounting


Step 2 Step 2

Many value added are involved and introduced during the process of delivering specific products to the consumers. Usually the services extend beyond the functional bodies.

Thus the employees of an organization should not just manufacture or build quality products but they should manufacture quality products bearing in mind the customers core necessities/view point and giving them the benefit of certain value added services when they buy your product.

This approach and methodology lacked at Topeka.

Identify the value stream

Lean Accounting


Step 3Step 3

The mass production approach was followed at Topeka.This involves– Organized batch and queue production which builds or adds up to – Building up of inventory– Disappointing order to delivery cycle time– Unnecessary and unwarranted rework and waste.

Make the Value Stream

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The lean way of accounting involves– Cellular work plan that binds people and the equipment together

rather than viewing them as functionally separate and specialized departments

– The different parts of equipment sequenced together in manner that reflects the manufacturing process thereby facilitating a continuous one piece flow of production.

– Training the employees to perform all roles within a cell (the function they work for)

Step 3 (Cont’d)Step 3 (Cont’d) Make the Value Stream


Step 4 Step 4

Visual controls are used to generate upstream links in the value stream to commence or initiate extra production. Example: When at a point of use storage bin of component parts become empty the visual controls designed signal the upstream link in the value stream to refill the parts that are exhausted. Paper work is avoided and also not required when a requisition for material is raised. Also while establishing a tackt time (average production time allowed for a unit demanded) which is calculated by taking into account the total available during a period and dividing it by the number of units required by the customer during that period ensures that the pace of productions remain in sync and correlates with the customer demand.

At Topeka although the production processes was streamlined it called or a much faster and analytical inventory control which should have been aligned with the customer.

Implement a pull system

Lean Accounting


Step 5 Step 5

Once a certain amount of stability is established, striving for perfection by eliminating any possible minor irregularities will be the need of the hour. This would involve leveraging process expertise of the front line managers.

Instead of explicitly relying on the managerial level to generate and implement ideas for improvement it’s best to take every ones views. This will result in capitalizing maximum intellectual property to increase productivity and enhance customer satisfaction.

Strive for Perfection

Lean Accounting


From the above findings the analysis reveals that the mass production process employed during 1979 at Topeka does not have value in a Lean environment and it is of prime importance to implement the lean way of accounting to pull Topeka out of the financial crisis. This will definitely help the organization revive its performance

Lean Accounting


However it may be noted that

The application of lean strategy has its impact affecting the cost increase resulting in cost of labor and overhead costs. Due to such a drawback (so called) over the standard costing system, the decision making over implementing such an outstanding strategies has been held back.

Forecasting the upcoming measurements, people tend to follow the customary

(anti-lean) methods to overcome purchase price variances, overhead absorption variations, labor performance etc…. where the conventional practices include mass production, multiple activities oriented jobs, picking the right job to earn time and production cost, building inventory etc…

The proportion of “zeroing” profitability with adjusting the inventory cost

reduction is found to be virtual since it made no impact over the financial improvement as calculated by the finance people.

Lean Accounting

(cont’d)


Lean accounting process involves

Lean Accounting

Value Stream Costing Performance MeasurementDecision makingTransaction eliminationMeasuring the EffectsChanging the Budgeting

Value Stream Costing

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As a lean company is organized by “Value Streams”. The costs are not charged to products but to value streams.

As a result one does not need to determine a unit standard cost for the individual product, which, beyond requiring a remarkable effort, gives just an abstract and can be useless information. This is because it depends on the criteria chosen to allocate indirect costs and on the predicted level of demand. By the definition this is variable and is impossible to predict.

In Lean Accounting costs are reported by value stream and as a result area lot more practical and pragmatic and their calculation far less complex.

Performance Management

Lean Accounting

Management accounting should not just furnish only financial information. It must also compute and gauge the performances at different levels which include procurement cell, value stream, plant, company and these measures. For its effectiveness frequency and timeliness should be ensured.

Measures like delivery on time to the customers and from suppliers, inventory turns, O.E.E., flow index etc should be an integral part management accounting.

The “variances” characteristic of conventional standard costing system which are usually reported after a month require a lot of work and serve no purpose at all.

Management accounting information is usually not very comprehensible to the senior management they do not provide any performance measures and very often encourage anti-lean behaviours (as it happens with the so called competence and absorption variances which are positive if production exceeds the expectations, without any regard to the fact that the extra manufacturing can increase not sales but inventories)

Decision Making

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Important and critical decisions such as– Making or buying, or that of accepting or not

accepting an order, should never be made based on standard costs (which are just conceptual which may run the risk of leading to wrong decisions).

– An accurate and appropriate decision in situations can be made only by taking into account the actual contribution of the decision in relation to the profit and loss of the value stream in totality

Transaction Elimination

Lean Accounting

In a lean environment controls are built into the work and are indented at instantly identifying and rectifying issues. The successive controls which are based on the processing of huge number of transactions that are completely unworthy.

Also, according to Lean accounting the major impact of elimination of waste is creation of available capacity. What is done with the newly available facility/capacity to be utilized bares a direct impact on the financial status. One can increase sales, lay off people use the capacity another way or expand the business but, there has to be an increase monetarily from the lean changes

Transaction Elimination

Lean Accounting

Lean accounting saves money and the costs are reduced. Most organisations re clue less about the about the cost since thy are deeply embedded into the company's processes. As and ho an organisation takes Lean accounting to the next level, they are able to eliminate many transactions precisely and systematically including the reconciliations, reports and the meetings that are a part of the process. All this is waste. As a process is closer towards stability operationally one will be able to eliminate or most of the traditional accounting and control systems.

A majority of purchasing and procurement processes can be eliminated

as requisition of materials , MRO items, components and supplies area ll brought under controlby using lean management and supply chain methods. This includes the conventional AP3 way match as one begins to expence the materials on receipt back flush them on shipment. The "Perpetual inventory by large, can be eliminated the inventory is brought down under stringent operational control by implementing the visual management and pull systems.

(cont’d)

Measuring the Effects

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Conventional systems are not capable of computing and gauging the actual effects of a lean transformation. They are particularly unable to measure the effects on the “flow”, i.e. the ability to act in response flexibly and promptly to the requests of the market eradicating queues, delays, reworks, scraps and everything else that can hamper or slow down the flow.

In addition attention is given to the production capacity only to brand the surplus capacity waste.

Measuring the Effects (Cont’d)

Lean Accounting

On the contrary lean thinking says free up capacity (in terms of labour or utilization of machines , space etc.) . It is a very apt objective to be pursued because the available capacity means more flexibility and the opportunity to increase the business.

All the values are * 1,00,000

Changing the Budgeting

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By traditional the budgeting process is a yearly “rite”. This is both multifaceted and consumes a lot of time .

During the last quarter of the of the year managers spend a lot of time trying to figure out the future market trends so as to set goals for the following year

Eventually, after endless long discussions at times bad conflicts between the various functions, a budget draft t is approved. Normally what happens is that after two or three months, actual and authentic results materialize reflecting a remarkably different situation from documented budget.


In an economic environment unstable and unpredictable situations and representations like the present one have to be replaced by SOFP (Sales, Operational, Financial Planning)This is a method based on a monthly updation of the budget.

Lean Accounting


A value-stream map (VSM) is an effective way to envisage the logical flow of work and Information/data in a process.

It is a step by step process to understand a procedure and eliminate any kind of waste identified.

If a particular value stream has product diversity (which is evident in Topeka) one can distinguish between the costs assigned to the products based on its features and characteristics. This has the following advantages– Shows how and where the productivity costs are incurred– One can easily identify areas of wastage– Does not show standard cost but depict the actual cost.– Identifies bottlenecks and– Brings forth opportunities to manage capacity more effectively

Lean Accounting


1. Who is the customer?2. Match customer needs to product features3. Customer satisfaction

1. Who is the customer?2. Match customer needs to product features3. Customer satisfaction

4. Specification to meet customer need5. Customer value weighting6. Customer value of product and service

4. Specification to meet customer need5. Customer value weighting6. Customer value of product and service

7. Value and features/characteristics8. Target costs for product/service9. Target costs for major components

7. Value and features/characteristics8. Target costs for product/service9. Target costs for major components

10. Match target costto processes11. Continuousimprovement

10. Match target costto processes11. Continuousimprovement

Thus an effective cost analysis will redeploy any idle capacity ( if any) to increase its sales rather than reducing the existing operating capacity.


It was difficult to understand in the inventory of profits because it concealed the “ inventory effect “ in the cost of goods sold.

The adjustments made to the income statement by using the Standard costing method was not understood by a non accounts person.

Cost was not interpreted or depicted from a value stream perspective. The product versus period cost distinction met only the financial requirements and no insight to the operations personnel

Lean Accounting


By implementing the value stream mechanism the new income statement that will be generated will be able to depict

Simplicity of the transactions by putting together the actual costs with each component of the value stream, and dividing the impact of inventory fluctuations on the profits.

Also separating, organization-sustaining costs (costs that can’t be traced to specific value streams)and corporate allocations from value stream profitability.

Cost allocations that are arbitrary are avoided, the only exception being occupancy costs. These are allocated to the value streams based on square foot to encourage minimization if the occupied space.

The profit for the total plant reconciles with profit reported using an absorption format. However, unlike absorption costing, the fundamental detail of the values stream statement is comprehensible to non accountants.

Lean Accounting


A more receptive accounting and finance group with enhanced morale, staff utilization, and greater integration With and support of the operations of the business.

A More practical, accurate, judicious, and consistent management information is ensured ensuing improved decision-making.

Streamlined business so as to decrease cycle time. This Improves the cash flow and profitability.

Elimination of non-value-added activities to increase the capability and enable the staff to focus on more value-creating activities like business intelligence and analysis.

Lean Accounting

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Masters

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Lean Accounting

www.theprofessionalwriters.com [email protected]

+91-9989699562

Case Study - Lean Accounting - Traditional Accounting Practices

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