Get Your Ducks In A Row For Lean Accounting

I have known Russ Field since working with him on a few projects in a large Seattle (now Chicago) based aerospace company. Recently he posted a very (typically Russ) thorough reply on NWLEAN to a question about value stream accounting. I asked him to take the same basic material, clean it up a little, and let me publish it here as a guest post.

Added Feb 21: There are some good comments to this post as well.

Enabling Material-Only Costing in Value Streams

—————– By Russell Field ——————

For some time now, the value stream concept has been a topic of energetic debate. If you choose to implement that approach, you’ll find there is more than one reasonable way to organize them, each with its own requirements for management, measurement and performance assessment.

This discussion centers on the value stream design described in three excellent books:

Aside from my own experiences and observations, these works are the primary references for this article. I recommend them highly for anyone wanting to better understand the concepts and related impacts on the Finance function as a business “leans out”.

NOTE: This article is not an endorsement of this particular value stream form. Rather, it is examination of its enabling and prerequisite conditions.

The really short message, as in so many things, is “Don’t get the cart before the horse!” In this case, if material-only cost accounting procedures (discussed later) are implemented before the factory processes have been realigned and proven, the best which can be expected is a different flavor of misrepresentation.

First, though, some baseline thoughts.


Remember, words have meaning. I’ve seen many discussions derailed because of confusion between these two phrases. The philosophy and practice of “Traditional Standard Costing” is not the same as the “costing of (labor) standards”.

The question is not whether I should know the cost of one widget, or the labor content (time) of that widget, or even the labor contribution ($$) to the cost of that widget; rather, the questions are how I should determine the hourly rate ($$) to apply to the labor content (time), and how I should account for other costs of producing that widget.

BUT – even those questions become academic in a value stream where all products have the same labor content and where all costs are contained within the value stream (more on that later); that’s when we can start talking about the average cost per unit at the value stream level.


As described in AWCO (pg. 36), these are two different concepts.

“Lean Accounting” refers to the use of Lean tools and techniques to make the accounting process more efficient.

“Accounting for Lean” “… represents an accounting process that captures the benefits of a Lean implementation as well as motivates Lean behavior.”


Both PLA (Chapt. 2; pg. 141 et al) and WC (pg. 165 et al) make the point that changes in accounting techniques should be made in conjunction with or immediately following the successful implementation of Lean procedures on the shop floor (we won’t get into Service vs. Production in this article). To change the cost accounting processes BEFORE leaning out Operations merely confuses the situation and causes unnecessary churn.

That said, let’s proceed.

In my opinion, the ability to successfully implement and sustain the accounting techniques described in the books noted earlier is dependent upon getting the process “ducks” into four rows:

  1. Organization by value stream
  2. Elimination of task-level labor tracking
  3. Stabilization of overall value stream-level labor costs
  4. Lowering of inventory levels

Underlying each of these “duck rows” is, of course, a set of enabling conditions.

DUCK ROW #1) Organization by value stream

There’s plenty of material out there on value stream mapping, so for this discussion let’s just say there are some key characteristics:

  1. Similar process flows (or “routings”);
  2. Similar production cycle times (AKA “work content”);
  3. Similar physical size of product;
  4. Ideally, personnel dedicated to the value stream; and
  5. Again ideally, no “monuments” or shared resources (there are, of course, ways of dealing with shared resources and personnel, but I did say “ideally”).

In other words, this approach emphasizes segregation of product families with high similarity in multiple categories. What does all this buy us?

a) If every product follows the same process flow or path, physical segregation and rearrangement is much simpler. Additionally, there is a high likelihood that each product will use each resource (or resource type), further reducing the need for cost allocation between product lines/families.

b) If each product takes about the same amount of time at each task/resource, then the overall work content of all products is about the same.

c) If product size is similar, that helps keep the number of people needed and the need for additional, product-specific moving/handling equipment to a minimum (and supports similar work content).

d) & e) If people and equipment aren’t shared outside the value stream, then all of their costs can be attributed to the value stream.


  1. The major sources of cost are captive within the value stream, so the need for allocation is minimized if not eliminated.
  2. Every product in the value stream population takes about the same flow time and has about the same total work content (which also minimizes allocation requirements).
  3. Some key sources of variation in that flow time and labor content are sorted out of the value stream by design.

DUCK ROW #2) Elimination of task-level labor tracking

There are two sub-elements here: “Stabilize task cycle times” and “Establish a common wage structure”. In order to reach these goals, we must create certain conditions.

a) Stabilize task cycle times

In order to create an environment in which a given task takes the same amount of time and effort regardless of who executes it, we need:

  1. Stable, high-quality processes (“reasonably under control and low variability”, PLA pg. 140/141 et al); this cuts down on how many times a job needs to be done, and how much input is wasted.
  2. Standard work; standardizing process steps helps assure that the job is done the same way each time.
  3. A cross-trained, multi-skilled workforce; in full implementation, this means that any member of the workforce can step in and execute any task.

b) Common wage structure

Note that a cross-training and multi-skilling not only helps stabilize task times, but also aids breaking down the “craftsman/guild” barriers to a common wage. For that, we need:

  1. A cross-trained, multi-skilled workforce
  2. Simplified processes; among other things, this makes cross-training and multi-skilling considerably easier.


1) I no longer need to track how much time was spent executing an individual task; with high quality, standard work and cross-training, I know how long it takes because I know the plan.

2) I no longer need to track who executed the task in order to determine an appropriate rate (accountability/traceability is another issue), because everyone gets paid pretty much the same (within a job category, at least).

In short, I no longer need to run all over the production floor, tracking activity durations or costs at the task level. In fact, to the degree that the process paths and work content are very similar, I don’t even need to track them at the Item level.

DUCK ROW #3) Stabilization of overall value stream-level labor costs

Once I have eliminated the need for task-level labor tracking, then I need only to stabilize my labor population in order to keep my overall value stream labor costs at a fairly constant level.

The high-quality processes I put in place to stabilize my task cycle times will help by assuring that labor is used only for production (and not rework or re-make), but I also need to level my demand, either artificially within my walls or by working with the customer base toward that end (I may also need to level-sequence my product mix if I still have significant difference in work content between products).

In that way, I always have about the same amount of work to be done, and don’t need to bring people in, pull them back out, put them back in, or shake them all about (do the “Production Hokey Pokey”!).


I have a consistent amount of work to be done in the value stream, so I’m able to maintain a fairly fixed workforce population.

DUCK ROW #4) Lowering inventory levels

Once the inventory turn rate gets down to, or drops below the overall value stream cycle time, product is going out the door very soon after completion. Assuming a FIFO approach, I don’t need to put a lot of effort into tracking my inventory costs because a) they’re per current rates and b) there aren’t many pieces anyway.


I don’t have to keep separate track of what I have invested in each lot, batch or item. Even radical changes in material costs flush through the value stream very quickly.


IF I don’t have to mess with spreading/allocating costs;

AND IF every time I make a given product, it takes the same amount of time;

AND IF all the products I make in my value stream take the same amount of time;

AND IF anyone who makes it gets paid the same wage;

AND IF I don’t have to constantly change the size of my labor population,

THEN I can apply a flat hourly $$ rate – based on total value stream cost – to the product’s work standards (planned work content). In fact, at full maturity I may even be able to simply average my total periodic value stream costs over the number of pieces shipped – AKA “average cost per unit” (PLA pg. 124 et al).

If my value stream is fully segregated and mature, this is the closest I need to get to “overhead allocation”. I don’t have to account for variation in order quantity, labor expense or the like because I’ve designed/driven out those variations. I know what the labor content is because of the stable processes and high reliability; there’s no rework to account for because of the high quality; a worker is a worker is a worker from both a skill and pay standpoint, and I’m controlling the number of workers on the payroll (NOTE: Worker interchangeability must not be confused with worker dispensability / replaceability; it can take quite a while to adequately cross-train good personnel).

And the ONLY thing I really need to track is material consumption (you can throw in some consideration for features and characteristics costing if appropriate). Hence the term, “material-only cost system” (WC, pg. 38).

To recap, in order to enable truly simple, material-only costing we need to:

  1. Organize by value stream, driving out key categories of variation;
  2. Work to eliminate the need for task-level tracking of labor input and rates;
  3. Stabilize the overall value stream labor costs; and
  4. Lower inventory levels to less than one value stream cycle (or 5 days as some suggest).

To do all that, the fundamental enablers include:

  1. A value stream organized around product families with high similarity in routings, process time/work content, physical size and the ability to segregate personnel and resources
  2. Stable, reliable processes
  3. Standard work
  4. Cross-trained, multi-skilled workforce
  5. Simplified processes
  6. Stable, level demand

Of course, these enablers presuppose the existence of lower-level enablers (e.g. accurate BOMs and routings, and having appropriate metrics in place).

So what? My whole point is that there’s more to successfully implementing Lean Accounting techniques described in PLA, WC and AWCO than simply ceasing or starting to gather certain data or collect certain costs. If you already have these enablers in place, then you are better positioned to embrace the related accounting practices.

NOW – the BIG question is, “How do we manage our business until we can get these enablers firmly in place?”

I refer you again to the books noted above. All offer some good thoughts on this subject, but I will reiterate the sentiments expressed under the heading of “MATURITY PATH OF ‘ACCOUNTING FOR LEAN'”. Bottom line: “Don’t get the cart before the horse!”

Your current accounting processes are likely adequate for traditional manufacturing environments, especially those which are still largely mass-production oriented (PLA, pg. 4 et al). Both PLA and WC specifically discuss synchronizing the evolution of Lean Production Operations and “accounting for Lean” (and yeah, I capitalized it).

6 Replies to “Get Your Ducks In A Row For Lean Accounting”

  1. I have to admit that I greatly dislike this title. It is not that I have any fundamental disagreement with any of the premises you lay out but this topic never fails to make me grimace when I hear it. In some ways I wish Maskell and others would simply never bring it up. Here’s my problem: this gives every accountant in the world a huge excuse as to why they don’t have to get in the canoe and start paddling.

    I have actually experienced accountants use every precursor you mention (also from Maskells book) as an excuse not to use Lean Accounting right now. The problem is in the degree to which your ducks need to be in a row. If it was possible to get your ducks into perfect rows without lean accounting, then you wouldn’t really need lean accounting at all. The fact is, traditional accounting is one of the road blocks to implementing lean. At some point it will be the bottleneck to success.

    My other problem with this discussion is that changing to lean accounting practices is a huge cultural change that does not occur overnight. In fact, in a large organization it may take a year or more just to get people convinced of its necessity. So if someone waits until their “ducks are in a row” to implement lean accounting, it may be another year or more to use the principles in any meaningful way. In the mean time, your lean implementation may be stalling out because the accounting department isn’t giving you good feedback on your progress. I honestly believe that you have to implement lean accounting in parallel with the rest of your lean implementation.

    My take on this is that you have to ask the same questions we ask for every other process in lean. What is the purpose? What is the problem? The purpose of accounting is to assist in managing your business and to drive improvement. If your accounting system is driving the wrong improvement for your area then that needs to change. As long as you keep asking this question as you go through your lean journey, you go to the books to find some answers, then you will implement lean accounting as you need it.

    1. Kris –
      What title would you suggest? (seriously – I struggled a bit with the title).

      I share your overall concerns about reluctance to offer up “prerequisites” to people who are not aligned with the goals of the program. You are getting into core issues of the psychology of organizational change. The technical issues raised (as you point out) often obscure the underlying needs and concerns of the people raising them.

  2. I’m not sure of the title but the message I would deliver is something along the line of:

    Start executing “Lean Accounting” right now and…
    Start understanding “Accounting for Lean” right now.

    Lean accounting is a do tommorow proposition. There is no reason not to start eliminating waste from the accounting processes right away. For me, the difference between “lean accounting” and “accounting for lean” is not nearly as black and white as some people make it out to be. In my mind, accounting for lean is a description of the ideal state of accounting.

    In manufacturing you can eliminate a lot of waste without a deep understanding of the ideal state for a value stream but the improvements will falter as soon as the low hanging fruit is picked. I think accounting is the same way. You need to start eliminating accounting waste right now but at the same time you need to start putting a vision together for where your accounting systems are going. You don’t wait until the manufacturing processes are all lined up to put this vision together. You put this vision together at the same time you put the vision to line the manufacturing up. These things should be going in parallel, not series.

    Like so many things in the thinking production system, lean accounting and lean manufacturing are paradoxical. You need to have good stable lean manufacturing in order to have lean accounting but you also need lean accounting to drive you to good stable lean manufacturing. I think Maskell’s maturity path is one of the best descriptions I have seen of one way to overcome this paradox. It proposes that you need “x” stabilty in lean manufacturing before you do “y” in lean accounting and I have used his evaluator as a great tool to support this. The thing that I always thought was somewhat missing in that equation was how y could affect x. I think anyone who has implemented lean has reached points where the accounting system was holding the culture back from making change. In addition, I think the accounting system could become the driver for change much earlier in an organizational change then Maskell proposes. I actually think that to some degree, Accounting for Lean could drive your lean conversion.

    My mental model for these two system (lean accounting and lean manufacturing) is that of race cars with rubber bands tied between them. Lean manufacturing is going to get ahead for periods of time and the accounting systems will eventually hold them back. The manufacturing naturally (but stubornly) pulls the accounting system forward. Then the accounting system can actually get ahead and set the right metrics and goals for the organization that will pull the manufacturing processes forward.

    If you can get your CFO and your COO to understand that they are in this type of race, then you win. They should be trying to race ahead of each other at all times while also realizing that they have to pull the other group with them whenever they get ahead. It is a little more subtle then this in reality as portions of accounting will be ahead while other portions will be behind. Fundamentally, this is what we are trying to get to.

  3. Hi, Kris –
    I take neither credit nor blame for the title! :^)

    The Maskellian VS model is just one approach to VS alignment. This article was not meant to be an endorsement, or even a guide, but rather a 30,000-ft. examination of the basic theory and operating assumptions supporting that model. The article is necessarily simplistic; every company’s situation is a little different, so the response details will vary.

    I agree that Lean Accounting can/should be embraced immediately, but Accounting for Lean – if implemented before enough enablers are in place – ends up as just another flavor of “wrong”, and may sour further efforts.

    ON THE OTHER HAND, as you so appropriately noted, understanding Accounting for Lean can help a company change the way they think about their business and move toward leaner policies and practices. Implementing the simplified accounting practices, though, is better done in coordination with actual changes to the operational aspect (as Maskell himself suggests).

  4. In the whole debate of Lean Vs Standard Costing, there seems to be a basic assumption that there is only one system of costing.

    Costing and Management Accounting text books clearly state that there is no one single system of cost accounting. Different systems exist to serve different needs. Managers use differential costs for decision making, standard costs for control/pricing, full cost for inventory valuation etc.

    So why cant lean accounting system exist in parallel with standard costing until all lean efforts stabilize? Such a system can highlight the lean improvements.

    I think the problem arises when management accountants and managers start using standard costing measures to evaluate lean improvements.

  5. Perhaps I just have a different perspective on all of this. After all, I’ve been in the trenches for a while. As a self-proclaimed change agent who happens to be a plant controller, the implementation of Flow Accounting does not have to wait upon the operations folk getting their ducks into rows.

    Now, let me first explain that “accounting for Lean” is a subset of Flow Accounting (i.e. accounting for Flow) and has been developed to support companies which are implementing that subset of what Demming called the Profound Body of Knowledge known as Lean Process Improvement, as derived from the Toyota Production System. Currently there exist two subsets of Flow Accounting – Accounting for Lean(LA), and Constraints Accounting (CA) (developed in support of Goldratt’s Theory of Constraints). Flow Accounting(FA), is of course a subset of Managerial accounting, as is Traditional Cost Accounting (TCA). TCA of course has subsets including full absorption costing, Activity Based Costing, and others. Flow accounting seeks to provide actionable information at the lowest levels within an organization in order to support decisions that move the organization, at the highest level, toward it’s goals. Traditional Cost Accounting, on the other hand, seeks to distribute all business costs in a clearly defined manner, to each unit of production. TCA is not wrong, per se, in fact for high-volume production systems, like say an oil refinery, TCA is probably better than LA or CA.

    But we are here to talk about companies that have adopted a Lean process improvement philosophy and are at some point along the path to becoming a Lean Enterprise. For these organizations, we must recognize a couple of things. First, there is a fundamental truth about people. People will behave according to the way they are being measured. As accountants, we have a unique and awesome ability to effect change within our organizations simply by ensuring that we are measuring the organization appropriately. What is necessary for the accountant is that we must look ourselves in the mirror, and accept that we ARE the problem and the we must change. You are not just some bean-counter that reports results periodically. You are the person everyone looks to to tell them how they are performing and right now, if you are still reporting using TCA as your organization struggles to implement Lean, then your actions are having an adverse impact on the organization. As one of my mentors says “we are all a balance sheet. To our companies we are either an asset or a liability…” If you are not transitioning your accounting & finance organization from TCA to LA, then you have become a liability.

    Companies do not become Lean over night. Likewise their accounting and finance organizations do not flip a switch and move from TCA to LA over night. If you are reading this comment, and you’ve found yourself to be a liability, here’s what you need to do – get your ass back on the asset side of that balance sheet!

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