Lean Accounting’s Fat Problem – Forbes.com

Lean Accounting’s Fat Problem – Forbes.com

I am really encouraged when I see a mainstream business publication like Forbes.com begin to discuss how better flow can cause problems for traditional cost accounting. I would refer this little piece to any executive, at least as a starting point for a discussion.

Key points:

Unless the accountants understand the way that lean works, in the worst case it seems to them that lean produces losses, not efficiencies. In a typical case, they cannot see the cost advantages.

This is especially a problem if there is a lot of excess inventory in the system. Holding everything else constant, reducing inventory causes two problems. First, it cuts the “assets” side of the balance sheet, and can look like a write-down, when in reality, inventory is simply being converted to cash. (and in today’s economy, cash is a good thing to have). Another effect is that it looks like costs go up because there is less inventory to “absorb the costs.” That is more a problem with the absorption model itself which can report a “profit” even though nothing was sold.

I really liked this analogy:

One presenter at the summit used weight loss as an analogy. When dieting, standard cost accounting would advise you to weigh yourself once a week to see if you’re losing weight. Lean accounting would measure your calorie intake and your exercise and then attempt to adjust them until you achieve the desired outcome.

That is the heart of the whole thing. The Toyota Production System is real time. It is designed to detect and respond to problems immediately. Managing it requires clear undistorted information, not abstract models that include things that aren’t affected by the “right now” decisions. Absorbed overhead costs are not part of the manufacturing function, and often overwhelm the true costs of manufacturing.

The countermeasure?

Value stream accounting was suggested by Bruce Baggaley of BMA as a way out. The company’s revenues and costs are reported weekly for each of the value streams. The costs reported do not include allocations or standard costs, just the costs that actually occurred within the value stream last week.

How to fit this in to your kaizen plan:

Now you are looking only at the actual costs incurred by the shop floor operation. You should be able to look at your kaizen activity, predict the results you will achieve, and then use this weekly report as a CHECK in your PDCA cycle.

“What numbers should we see (as a result of this improvement)?”

“What numbers did we actually see?”

“Is there a difference?”

“Why? What didn’t we understand about our process, our improvement, or our costs?”