Lean Part 11: A New Way of Looking at Accounting

Over the past eight months, we have delved into Lean manufacturing principles that focus on eliminating waste and require that all the processes used to manufacture a product occur in sequence. As businesses implement a Lean approach to manufacturing, CPAs have also begun to discover many standard accounting practices no longer hold water. As a result, an increasing number of companies are implementing Lean accounting concepts to more fully and efficiently capture the performance of their operations.

Lean accounting is a paradigm shift from the traditional departmental view of costs to a value stream orientation, an approach that crosses department boundaries. Since standard cost accounting does not usually work in a Lean operation, adherents propose a new way of looking at the figures. Rather than categorizing costs by department, they are organized and sorted by value stream. This allows for a more defined view of costs as they are incurred for a specific product.

A Lean company emphasizes eliminating waste, boosting inventory turnover, and reducing inventory levels, with a focus is on achieving the shortest possible production cycle. The benefits generally are lower costs, higher product quality, and shorter lead times. Inventory valuation also changes under Lean accounting. Because of the focus on producing only to meet customer demand, inventories tend to be much lower than in traditional manufacturing operations. Thus, while the balance sheet includes a line for inventory, valuing it may take just minutes.

When moving to Lean accounting, CPAs will likely want to supplement the company’s standard financial statements with additional information to capture the resulting improvements. Most CPAs will find the cost information they need to prepare Lean financial statements already is available in the company accounting systems.

While many Lean companies, however, are reluctant to change accounting procedures and transition away from traditional processes and reports, business owners must recognize the new reality of Lean operations and be on guard for misleading results in traditional accounting measurements. In fact, if compiling and using two different views of financial information is required to do that, then a dual system would suffice. Like all Lean tools, a fully integrated application of Lean accounting to management decisions is paramount if a company is to experience the full effects of going Lean.

For more information on the application of Lean accounting, please contact Business Development Advisor, Ralph Brown, at 914-393-9876, or ralph.brown@hvtdc.org.