How does lean accounting work

Although tax accounting financial statements do not conform to GAAP, no one outside of accounting sees them. Plain English financial statements can report the same revenue and profit as GAAP financial statements, but in a way that you can clearly see items that are merely GAAP requirements…e.

How do we get from where we are to where we want to be? This year was the 15 th annual session of the Lean Accounting Summit. Every year there are impressive presentations from companies that have adopted Lean Management Accounting. However, those companies are in the minority. Fifteen years ago those of us at the first Lean Accounting Summit believed that the combination of a good idea and hard work would change the management accounting landscape.

The reality is that in spite of that belief, we have had to face the reality that getting financial executives to experiment, and then abandon standard cost accounting is more difficult than we expected. It is asking them to challenge what they were taught at the beginning of their accounting careers in college and practiced ever since. During the past fifteen years of attending, and speaking at the Lean Accounting Summit I have met accounting professors that are willing to teach the next generation of accountants that there is a better way.

Until we get the accounting academic community to understand this, and remove obsolete methods of management accounting from the curriculum, we will continue to have an uphill battle. On the other hand, it is encouraging to see the number of companies that have embraced Lean Management Accounting grow over the past fifteen years. The number of industries, beyond manufacturing, that now attend the Lean Accounting Summit and the enthusiasm that this next generation of accountants shows for experimenting with ideas beyond the traditional standard cost accounting model is encouraging.

I believe this bodes well for the future as this generation moves into senior financial management positions. Hopefully, this will give them the information they need to have a meaningful discussion with their accounting partners about experimenting with alternatives that serve their business needs better. Womack and Daniel T. Orry has studied lean production in both the U. He has taught workshops on management accounting in a lean business and given workshops on lean leadership to senior executives.

Most recently, he is a co-author of The Lean Strategy. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment.

Article by Mike DeLuca. Leading Lean in Finance at Turner Construction. The Value Add Accountant. Friend's Email Address. Your Name. Your Email Address. Send Email. Then in December, guess what senior leadership was worried about? Jean : This is one of the challenges for lean accounting; [traditional accounting] is very deeply embedded in our educational system.

But the good news is that everything we talk about with lean accounting can comply with generally accepted accounting principles. They completely supported everything we did. Josh : When getting folks in the accounting group or the finance group to go and see, to go learn what operations is doing, what are some of the tips that you give or some of the advice or exercises that help them?

Art : Because we started lean at Wiremold — the first three or four kaizen teams that we had — I wanted to make sure that my management team members were on these kaizens. Of course, Orry, ever the finance guy, kept track of how much it costs to do this because the mentality in traditional accounting is that if you want to get productivity, you must spend a lot of capital money.

He kept track, very detailed track of how much it cost us during the week to go from a minute setup to five minutes. Mike : In the way we approached kaizen events, there was a finance person who was shoulder-to-shoulder with the operations folks for the preparation before the kaizen, attended the entire event, and was an integral part of developing the measurement plan coming out of the event.

Because those of us in finance tend to understand and work Excel a lot better than other folks, we were integral in helping the operations folks come up with really easy ways to find the data, do the reporting — and like you all have said — it was largely operational data and not financial data.

Everyone on my team was assigned a primary operational area. Jean : I really feel there are two parts to this deep understanding and engagement with the work. You must truly think that it is real work to go and learn, as Art said. To go to a kaizen event, to go as Mike said, to go participate in a huddle. It is the head and the heart combined that really creates the kind of environment where transforming all our work actually happens.

Certainly, on the shop floor, people have given ideas and suggestions for a long, long time and no one listened to them. Jean : In accounting, while we know that the person who does the job is the one who can see the waste, I think we have an added barrier.

Often, they see a very small slice of the work. One of the things that aligns so well with learning to see and asking questions, is to have people really understand what the purpose of your work is. Maybe we call that value add, but what is the purpose of this job? Josh : Why should owners and executives care about the accounting practices in their company, care about lean accounting? Why should they care? Nick : The way I describe it is very similar.

What is the relevant and reliable information that all internal customers need to be able to do that on a consistent basis?

A lot of what you think is good information is not. Every time I give a speech someplace, I always ask for a show of hands as to how many people believe that the standard cost of every product in their company is correct? No one ever, ever puts their hand up. Lean on the other hand is going to give you very accurate, very up to date information that you can make decisions on, and on top of that, it costs you a whole lot less to do lean accounting than it costs you to do traditional accounting.

We got rid of move tickets, routings, and labor tickets and all this kind of stuff that was very expensive to collect. Not only do you get better information to make decisions on, but it costs you less to do it.

Also, it means we have people doing work that nobody uses. I think this is really, really important. An even bigger reason is respect for people. Speaking in [accounting] language no one understands and expecting people to learn is disrespectful. Giving people work that has no meaning and expecting them to do it to the fourth decimal is disrespectful. Respect is a core component of the type of companies we are when we really become lean companies. It was a significant chunk that my team was doing financial planning and analysis on.

Saying, this is what it cost us last July; how helpful is that? Out of respect for the end-user of the information and the great skill of the finance team, we came up with a great set of current and leading indicators and discovered a multi-hundred-million-dollar problem as it was emerging.

We had countermeasures in place before it turned into really a serious financial situation. This ability to sense and respond in real-time is very important. Jean : I was helping a company that had some plants, and they started their lean efforts in a third of those plants, implementing pull systems and eliminating a huge amount of work-in-process inventory and finished goods inventory.

In other words, traditional cost accounting is unfit in a lean manufacturing environment. Thus, lean accounting was developed to counteract questions that standard cost accounting was unable to answer. In short, standard cost accounting values overproduction, which goes against the fundamental goal of lean manufacturing.

Furthermore, as the manufacturer produces fewer products, traditional financial statements will indicate an increase in the cost of completing each unit. Labour and overhead are categorised as "deferred costs" as they are not absorbed as quickly. The effect of this is inaccurately priced finished goods, which makes the business less competitive.

Lean accounting, on the other hand, reveals costs that are otherwise misinterpreted or hidden, such as labour and machinery, and uses objective metrics that support lean initiatives. Standard cost accounting categorised overhead as fixed costs.

In lean accounting, they are variable costs and are assessed case-by-case. Nevertheless, cost accounting is not entirely ineffective. It is just unsuited for a lean environment. Value streams are the most vital core element of lean accounting. A value stream is everything that goes into getting a product sold. It starts from a sales process and goes all the way to purchasing, production, and shipping.

A lean organisation views each department as value streams, or profit centres, and focuses on enhancing the productivity of these value streams. The ultimate goal of lean manufacturing and lean accounting is to flow orders through these value streams as fast as possible but still maintain the highest quality of products.

Variances of costs, material usage, or labour rates recorded in traditional financial statements are often difficult to understand for non-finance individuals. In lean accounting, financial and operational reporting are done at the value stream level and is typically conducted weekly.

As a result, financial statements in lean accounting are generated faster and in an easy to understand manner, or in plain English, showcasing vital operational measurements that every member of the business can grasp and use.

An additional notable advantage for having plain English financial reports is it displays actual revenue earned and the actual costs incurred for the period being reported. As previously mentioned, a manufacturing business that implements lean methodology will emphasise eliminating waste and focusing on achieving the shortest possible production cycle to meet customer demand.

By going lean, manufacturers will need to divide the organisation into various workgroups, or cells, and cross-train each worker so they will be able to perform all activities to produce the finished product.

This approach is opposite to the traditional production process, where parts and materials move across the factory for assembly. By dividing the organisations into working groups, which are also the value streams, employees will focus more actually design, engineer, sell, and market products that bring value to a customer.

Once manufacturers start to offer products that meet customer demand, their loyalty, business growth, and profits also increase as a result.