Academic journal article Journal of Accountancy

The Lowdown on Lean Accounting: A New Way of Looking at the Numbers

Academic journal article Journal of Accountancy

The Lowdown on Lean Accounting: A New Way of Looking at the Numbers

Article excerpt

EXECUTIVE SUMMARY

* LEAN MANUFACTURING PRINCIPLES FOCUS on eliminating waste and producing only to meet customer demand. They also typically require a company to move from a functional division of work to work cells where all of the processes needed to manufacture a product or line occur next to each other in sequence.

* AS COMPANIES IMPLEMENT A LEAN APPROACH to manufacturing, CPAs have begun to realize many standard cost accounting practices no longer make sense. A growing number of businesses are implementing lean accounting concepts to better capture the performance of their operations.

* SINCE STANDARD COST ACCOUNTING DOESN'T work in a lean operation, adherents propose a new way of looking at the numbers. Rather than categorizing costs by department, they organize them by value stream, which includes everything done to create value for a customer the company can reasonably associate with a product or product line.

* WHILE USING ALTERNATIVE ACCOUNTING CONCEPTS solves some problems, it is not a panacea. CPAs may have difficulty accurately pricing products and determining profitability when they analyze performance by value stream rather than by individual product. The approach also may emphasize speed and quality almost to the exclusion of cost concerns.

* WHEN MOVING TO LEAN ACCOUNTING, CPAs may want to supplement the company's standard financial statements with additional information that captures 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.

As with many companies that implemented what are referred to as "lean" processes in their manufacturing operations, Landscape Structures Inc. has seen significant benefits. Manufacturing lead times dropped 90%, inventory turnover jumped 50% and production capacity was freed up by about 25% each year. According to CFO Fred Caslavka, CPA, the privately held manufacturer of playground equipment in Delano, Minnesota, has "had some big successes" from applying lean manufacturing processes to its business.

In contrast to traditional mass-production operations, a lean company emphasizes eliminating waste, boosting inventory turnover and reducing inventory levels. The focus is on achieving the shortest possible production cycle and producing only to meet customer demand. The benefits generally are lower costs, higher product quality and shorter lead times.

As a company implements this approach to doing business, its financial statements often show a temporary hit to the bottom line as deferred labor and overhead move from the inventory account on the balance sheet to the expense section of the income statement, lowering profits. (See the glossary on page 71 for definitions of key terms.) This means a company's financial statements may not reflect the true financial benefits of lean manufacturing. This dichotomy in actual vs. reported performance presents a challenge to CPAs seeking to accurately account for a lean company's finances. As a result, CPAs, operations personnel and consultants have begun to question the role of standard cost accounting. This article explains the basics of lean manufacturing and why CPAs may need to use alternative accounting practices to help companies better understand the benefits the process brings to their operations.

WHAT LEAN MEANS

Although lean concepts can apply to all aspects of a company's business, to date they've been implemented mostly on plant floors. Adherents range from Pratt & Whitney, a division of $31 billion United Technologies Corp., a maker of building systems and aerospace products, to Lantech Inc., a $70 million Louisville, Kentucky-based manufacturer of packaging equipment.

Lean manufacturing principles differ from mass production in several key ways. For starters, the latter typically concentrates on efficiency and machine utilization, which can lead to long run times and bloated inventory levels. …

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