Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
JIT and Lean Enterprise Main Page |
Lean Accounting Main Page
The main purpose of this article is to describe lean accouning, including its definition, benefits, and implementation. Kapanowski begins with a brief definition of lean. For a more comprehensive definition, see Kapanowski 2016, or Pickering 2017.
What is Lean Accounting?
Lean accounting focuses on product groups or families rather than individual products, and provides financial statements that are easy to understand and use to make business decisions. Traditional absorption cost accounting, and more recently actitvity-based accounting both incorporate the push concept that is incompatible with the lean concept of demand pull. Activity-based costing is also expensive to implement and fits the description of waste from a lean perspective.
The Benefits of Lean Accounting
The main benefits of lean accounting are derived from its simplicity, support for quick management decisions and the elimination of waste. The benefits include:
It is useful to people who are not accountants,
It eliminates the complexity associated with traditional accounting reports,
It provides higher assignable costs and lower allocated costs1,
It includes both financial and non-financial information,
It motivates the right decisions, and
It complies with generally accepted accountng principles.
How to Implement Lean Accounting
A lean organization structure is a prerequisite for lean accounting. Lean accounting begins with a lean budget (hoshin kanri), the first principle from the Toyota production system. The budgeting process should be aligned with continuous improvement (kaizen) techniques, and involve the identification of product groups or families. Performance metrics are defined based on the following quality characteristics:2
Support the company's strategy,
Are few in number,
Include both financial and non-financial information,
Encourage the right behavior,
Are simple, visual, and easy to understand,
Measure the process, not the people,
Compare actual results to goals,
Don't combine different measurements into a single metric,
Are timely, and
Show trends.
Examples of lean accountng metrics based on these charactericts are provided in the illustration below.
After defining the performance metics that provide the basis for reports refered to as box scores (For an example, see Maskell and Baggaley 2006), the direct costs of product families are compiled, including labor, material, and any other costs generated within the product family or group. Occupancy costs (e.g., rent, taxes, insurance, equipement, etc.) are combined to provide the total costs used to determine contribution margins by product/group. Dividing the total costs by the number of units in the product/group provides a unit cost. Other cost are listed below the contribution margin as unallocated. No variances are calculated.
Conclusion
Lean accounting emphasizes easily understandable box score reports and financial statements to support business decisions and continuous improvement initiatives. Lean reporting helps everyone in the organization work to make the process better, cheaper, easier, faster, and safer.
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Notes:
1 U.S. government contracts that require assigning both direct and indirect costs create a limitation for lean accounting.
2 These characteristics are from Cunnigham, J. E., O. Fiume and E. Adams. 2003. Real Numbers: Management Accounting in a Lean Organization. Managing Times Press.
Related summaries:
Baggaley, B. and B. Maskell. 2003. Value stream management for lean companies, Part I. Journal of Cost Management (March/April): 23-27. (Summary).
Baggaley, B. and B. Maskell. 2003. Value stream management for lean companies, Part II. Journal of Cost Management (May/June): 24-30. (Summary).
Brosnahan, J. P. 2008. Unleash the power of lean accounting. Journal of Accountancy (July): 60-66. (Summary).
De Luca, M. 2018. How lean accounting promotes lean in the organization. Cost Management (January/February): 21-26. (Summary).
Fullerton, R. R. 2003. Performance measurement and reward systems in JIT and non-JIT firms. Cost Management (November/December): 40-47. (Summary).
Fullerton, R. R. and C. S. McWatters. 2002. The role of performance measures and incentive systems in relation to the degree of JIT implementation. Accounting, Organizations and Society 27(8): 711-735. (Summary).
Kapanowski, G. 2016. Lean fundamentals for accountants. Cost Management (January/February): 5-14. (Summary).
Kristensen, T. B. and P. Israelsen 2012. Management accounting system problems in context of lean: Development of a proposed solution. In Mitchell, F., H. Norrreklit and M. Jakobsen, eds. 2012. The Routledge Companion to Cost Management. Routledge Companions in Business. (Summary).
Maginnis, M. A. and G. Uminger. 2018. Management accounting in a true lean (TPS) environment. Cost Management (January/February): 27-35. (Summary).
Martin, J. R. Not dated. What is lean accounting? Management And Accounting Web. LeanAccounting.htm
Maskell, B. H. and B. L. Baggaley. 2006. Lean accounting: What's it all about? Target Magazine 22(1): 35-43. (Note).
Patell, J. M. 1987. Adapting a Cost accounting system to just-in-time manufacturing: The Hewlett-Packard Personal Office Computer Division. Accounting & Management Field Study Perspectives, edited by William J. Bruns, Jr. and R. S. Kaplan. Harvard Business School Press: 229-267. (Summary).
Pickering, M. 2017. Implementing lean management reporting in lean enterprises. Cost Management (January/February): 28-36. (Summary).
Toyota Public Affairs Division and Operations Management Consulting Division. 1998. The Toyota Production System: Leaner Manufacturing for a Greener Planet. The Toyota Motor Corporation. (Summary).
