01 lean accounting intro - overview · 2015. 12. 3. · 1. lean accounting overview! page 3...
TRANSCRIPT
1. Lean Accounting Overview Page 1
1. Lean Accounting Overview
Traditional vs. Lean Accounting
OK, let’s get started by discussing some of the differences between traditional accounting and lean accounting. And we’ll go ahead and begin by addressing the elephant in the room… and one reason organizations hesitate to make any changes to their accounting practices… and this elephant is known as the Generally Accepted Accounting Principles, otherwise known as GAAP. We’ll discuss how lean accounting is compatible with GAAP throughout this course… in fact, we know of no companies using lean accounting that have reported problems dealing with auditors so long as they kept the auditors informed during the changes. Furthermore, there’s nothing stated in GAAP that requires the use of standard costing. This is a big concern for people, so we cover this point more throughout the course. OK, well let’s get started by exploring some of the reasons traditional accounting doesn’t support an organization’s lean journey. And as you’ll see, traditional accounting not only doesn’t support lean, it can actually work against it. One reason for this is that traditional cost accounting considers inventory to be an asset, which can motivate people to produce as much as they can leading to the deadly waste of overproduction. As such, when properly accounting for lean, it becomes clear that having a focus on creating smooth flow and incredible customer value actually frees up cash within the organization. Traditional accounting also tracks detailed information by department and motivates people to focus on the success of their department, even at the expense of the organization. A common example of this silo thinking comes at the end of the year when departments scramble to spend their remaining budget dollars so they don’t lose them the next year. In other words, did everyone really need a bunch of new office supplies on December 29th or did the old
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staplers work just fine? It’s because of situations like this that many companies who practice lean accounting actually consider the budgeting process to be a waste and actually eliminate it all together. Next, traditional accounting can also expensive and wasteful because it tries to measure everything in extraordinary detail, which requires dedicated people spending hours of time preparing documents few people understand or even use. This information is not only difficult to decipher, it’s often provided too late and doesn’t align with customer wants and needs. This traditional information can also be misleading, wrong, and even harmful. An example of this is how the cost and price of products are traditionally determined. For example, labor costs are often treated as variable, yet in reality they don’t actually vary that much at all. Conversely, lean organizations seek to determine what customer’s value and how much they’ll pay for that value. In other words, the price is set by the customer and through continuous improvement and elimination of waste, costs go down and profit goes up. As we touched on earlier, traditional accounting can be complex and confusing to most people in the organization.
Terms such as overhead absorption, double-‐entry bookkeeping, debits and credits, accrual, depreciation, general ledger, variances and many more terms aren’t always easy to understand without proper training. The confusing reports and requirements to track everything in excruciating detail often contributes to accountants being isolated from the rest of the organization and looked at as bean counters, instead of important team members.
And, to make matters even worse, the people actually charged with making improvements don’t have the information, or knowledge, needed to develop and justify improvement projects. Put another way, when this happens, the financial side of the business often becomes a mystery, requiring the invocation of the oracles of Finance. Conversely, in a lean organization, as transactions are eliminated and measures are simplified, accountants are freed up to become strategic partners in helping the team continuously improve the value they deliver to their customers!
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Supporting the Lean Enterprise Now then, in order to start freeing up accountants so they can add more value as internal consultants, we need to quickly clarify some confusion when we talk about lean accounting and its role in supporting the lean enterprise. The confusion comes from a distinction you might hear between “lean accounting” and “accounting for lean.” Often, people ONLY think of lean accounting as applying lean techniques, such as 5S, to the accounting department; but this is only part of what we call lean accounting. Lean accounting also refers to the different approaches accountants take to support decision making, such as make vs. buy, pricing and costing, inventory valuation, performance measures, and, in general, providing the right information to the right people at the right time. As accountants begin to understand and apply lean accounting to their organization, they’ll transition from being a roadblock on the lean journey to energy boost that helps accelerate value creation. With this said, in order for this to happen, the accounting process must support the following 5 principles of lean.
Lean Principles First, organizing around value streams means traditional costing gives way to value stream costing. And by providing timely and visual information accounting helps support flow and pull. Next, performance measures change to focus more on creating value for the customer and employees become more empowered when accountants work with them to create simple measures that can be calculated frequently and provide actionable information. Lastly, all associates – including accountants – drive to continuously improve their own processes in support of the overall pursuit of perfection at the organizational level. Now then, since principles guide behaviors, a new set of accounting tools are needed in order to act on these principles. As such, throughout the remainder of this course we’ll introduce and explain some of the tools used by lean accountants including value stream costing, target costing, box scores, and “Plain English” statements. We also promise to deliver this information as clearly and concisely as possible. OK, in our next module we’re going to cover some basic accounting concepts before diving deeper into more advanced topics like value stream costing.