Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Lean Accounting Main Page | JIT
Main Page | Japanese Management Main Page
The purpose of this note is to provide a sketch of lean accounting as it has evolved from earlier work on JIT and TOC accounting. Although some new terminology appears in recent articles, it is not clear how much is really new in terms of concepts and techniques. Most current descriptions of lean enterprise concepts and lean accounting concepts can be found in much older articles and books related to just-in-time and the theory of constraints (e.g., see MAAW's JIT section, TOC section, Japanese management section, Chapter 8, and my summary of Kaizen: The Key To Japan's Competitive Success), but there are some new developments as I indicate below.
Several articles related to accounting in a JIT environment were published during the 1980's before the terms "lean enterprise" and "lean accounting" became popular. For example, Foster and Horngren (1987) 1 outlined the elements of what many now refer to as lean accounting. According to these authors, accounting systems in a JIT environment emphasize the direct traceability of costs, a reduction in the number of cost pools, less emphasis on traditional material, labor, and overhead variances, and a reduction in the frequency and detail involved in reporting purchases and deliveries. In addition, cost planning and cost reduction starts before production begins, and emphasis is placed on the simplification of all activities.
In a much more recent article, Kennedy and Brewer (2005) 2 illustrate two lean accounting concepts they refer to as 1) a value stream cost analysis and 2) a lean income statement. A value stream includes all the value-added activities involved in providing specific products and services to customers. The table below shows the format of the value stream cost analysis that appears in Table 1 on page 31. The idea is to identify areas of waste, bottlenecks, and opportunities to more effectively manage capacity.
| Value Stream Cost Analysis | ||||
| Totals | Sales | Production | Other functions etc.... | |
| Employees | Dollar amount | Dollar amount | Dollar amount | Dollar amounts |
| Productive | % | % | % | % |
| Nonproductive | % | % | % | % |
| Other | % | % | % | % |
| Available capacity | % | % | % | % |
| Machines | Dollar amount | Dollar amount | Dollar amount | Dollar amounts |
| Productive | % | % | % | % |
| Nonproductive | % | % | % | % |
| Other | % | % | % | % |
| Available capacity | % | % | % | % |
| Average conversion cost | Dollar amount | Dollar amount | Dollar amount | Dollar amounts |
The lean income statement format is illustrated below following Kennedy and Brewer's illustration on page 32. This statement shows the inventory change effect (hidden in traditional statements), actual costs (without confusing variance adjustments from standard to actual), and emphasizes the performance of each value stream. I believe these two accounting illustrations do represent something new in the lean enterprise accounting literature.
| Lean Income Statement | ||||
| Value Stream #1 | Value Stream #2 | Sustaining Costs | Total Plant | |
| Sales | $ | $ | $ | $ |
| Costs: | ||||
| Material purchases | $ | $ | $ | $ |
| Personnel costs | $ | $ | $ | $ |
| Equipment costs | $ | $ | $ | $ |
| Occupancy costs | $ | $ | $ | $ |
| Total Costs | $ | $ | $ | $ |
| Values stream profit before inventory change |
$ | $ | $ | $ |
| Decrease (Increase) in inventory | $ | $ | $ | $ |
| Value stream profit | $ | $ | $ | $ |
| Shipping costs | $ | $ | $ | $ |
| Corporate allocation | $ | $ | $ | $ |
| Net operating income | $ | $ | $ | $ |
| Return on sales | % | % | % | % |
| Notes: | ||||
In another article, Maskell and Baggaley (2006) 3 indicate that lean accounting includes simple accounting, visual performance measures, value stream boards, value stream costing, target costing, visual management, box scores for decision making, Hoshin policy deployment, a 3P system for capital planning, and stronger internal controls. See the note below for more on this paper.
In an article somewhat critical of lean accounting, Van der Merwe and Thomson (2007) 4 state that "Lean accounting refers to attempts to derive monetary management information based on Lean principles." They question the assertions of lean accounting, i.e., 1) that accounting is the problem, 2) that all conversion costs are fixed (defined as value stream costs except materials and purchased outside services), and 3) that lean accounting supports external reporting.
An obvious question for TOC advocates, is whether throughput accounting is considered lean accounting by lean accounting advocates? The answer to this question is not clear to me, but throughput accounting is part of the theory of constraints, and Goldratt and other TOC advocates have been very critical of traditional accounting since The Goal was published in 1986. Traditional accounting was certainly a problem for Alex Rogo in The Goal (See the summaries of The Goal and What is this thing called TOC). One thing that is fairly clear is that the question for both JIT (lean) and TOC advocates is how to design an accounting system that does not conflict with the concepts and practices of these two popular management concepts.
A related article by Kennedy, Owens-Jackson, Burney and Schoon 5 includes a discussion of an assessment tool used to determine if measurements are effective in terms of the three attributes of good measures (i.e., technical, behavioral and cultural) defined by Ansari, Bell, Klammer and Lawrence. 6 Using the tool involves answering a series of questions for each measurement related to each of the three attributes (a total of 48 questions) and then placing the results on a graph to show if the measurement is consistent with lean thinking. My initial reaction is that the tool involves too much unnecessary busywork, but it might be useful as a training tool for company employees that have had their heads buried in the sand for the past twenty years. The concepts of lean (mainly JIT and TOC) have been routinely discussed in the management and accounting literature since the 1980's. Those who have been paying attention know that it does not take 48 questions to see that a measurement like machine utilization percentage does not support anything but building excess inventory. A few simple questions like "does it promote throughput?" or "how does it affect TOC's three global measurements?" would do the trick. For other examples, see the Summary ofGoodson's article listed below.7
In another article on lean accounting8, Searcy develops a lean performance score. The following table was adapted from Searcy's Figure 1 and Tables 1-6 to convey the idea. In this example, the lean performance score is based on five elements related to lean performance and a single measurement for each element. According to Searcy, each company should chose their own elements and measurements.
| Elements | Measurements | Baseline | Future State |
Targeted Improvement |
Current Results |
Actual Change |
| Quality | First time through | |||||
| Capacity | Non productive capacity | |||||
| Productivity | Sales per employee | |||||
| Inventory | Dock-to-dock days | |||||
| Costs | Average unit cost |
For a description of how one company implemented value stream management and lean accounting, see the summary of Brosnahan's paper related to Watlow Electric Manufacturing Company.9
Finally, for a new lean financial accounting model that appears to have a lot of potential see the summary of Kristensen and Isaelsen's paper listed in the note below.10
Note: Some more recent summaries related to lean accounting are listed below the footnotes.
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Footnotes:
1 Foster, G. and C. T. Horngren. 1987. JIT: Cost accounting and cost management issues. Management Accounting (June): 19-25. (Summary). Foster, G. and C. T. Horngren. 1988. Cost accounting and cost management in a JIT environment. Journal of Cost Management (Winter): 4-14. Similar arguments appear in: McIlhattan, R. D. 1987. How cost management systems can support the JIT philosophy. Management Accounting (September): 20-26. (Summary) and Vollmann, T. 1990. Changing manufacturing performance measurements. Proceedings of the Third Annual Management Accounting Symposium. Sarasota: American Accounting Association: 53-62. (Summary).
2 Kennedy, F. A. and P. C. Brewer. 2005. Lean accounting: What's it all about? Strategic Finance (November): 26-34.
3 Maskell, B. H. and B. L. Baggaley. 2006. Lean accounting: What's it all about? Target Magazine 22(1): 35-43. (Note). For other articles by these authors see: 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). For more on lean enterprise terminology see Womack, J. P. and D. T. Jones. 1996. Beyond Toyota: How to root out waste and pursue perfection. Harvard Business Review (September-October): 140-144, 146, 148-152, 154, 156, 158. (Summary).
4 Van der Merwe, A. and J. Thomson. 2007. The lowdown on lean accounting. Strategic Finance (February): 26-33.
5 Kennedy, F., L. Owens-Jackson, L. Burney and M. Schoon. 2007. How do your measurements stack up to lean? Strategic Finance (May): 32-41.
6 Ansari, S., J. Bell, T. Klammer and C. Lawrence. 1999. Strategy and Management Accounting: Version 1.1: Module. Irwin.
7 Goodson, R. E. 2002. Read a plant - fast. Harvard Business Review (May): 105-113. (How the rapid plant assessment (RPA) process can tell you if a factory is truly lean in as little as 30 minutes. The process includes two tools: The RPA rating sheet includes 11 categories for assessing leanness, and the RPA questionnaire includes 20 yes or no questions). (Summary).
8 Searcy, D. L. 2009. Developing a lean performance score. Strategic Finance (September): 34-39.
9 Brosnahan, J. P. 2008. Unleash the power of lean accounting. Journal of Accountancy (July): 60-66. (Summary).
10 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).
Other related summaries:
De Luca, M. 2018. How lean accounting promotes lean in the organization. Cost Management (January/February): 21-26. (Summary).
Kapanowski, G. 2016. Lean fundamentals for accountants. Cost Management (January/February): 5-14. (Summary).
Kapanowski, G. 2017. Lean accounting. Cost Management (January/February): 37-41. (Summary).
Maginnis, M. A. and G. Uminger. 2018. Management accounting in a true lean (TPS) environment. Cost Management (January/February): 27-35. (Summary).
Pickering, M. 2017. Implementing lean management reporting in lean enterprises. Cost Management (January/February): 28-36. (Summary).