Lean Accounting

Essay Question 1 What are the main benefits and challenges of implementing a lean accounting system in a lean manufacturing environment? Do you anticipate interest in lean accounting will grow, the methods will change, or the concepts will fade out and be replaced with another ‘flavor of the month’? How do you perceive lean principles affecting your career? Justify your answers. I. Lean Accounting Lean accounting often refers to more simplified accounting practices that focuses on eliminating waste, reducing production lead time, and producing products on customer demand.

But Lean accounting does not stand alone. It is enabled by lean thinking and lean production methods. And lean accounting not only needs lean manufacturing, it also facilitates lean manufacturing. 1 That’s why lean accounting is always related to, but not necessarily have to be associated with lean manufacturing. Here are some specific positive reasons that lean accounting is important. 1. Reduces time, cost, and waste by eliminating wasteful transactions and systems. 2. A better way to understand costs, product costs and value stream costs. 3. Provides information for better lean decision making. 4.

Identifies the potential financial benefits of lean manufacturing improvements. 5. Frees up the time for finance people to work on lean improvement. 6. Focuses the business around the value-added activities created for customers. 2 II. Benefits of Implementing a Lean Accounting System in a Lean Manufacturing Environment According to the positive reasons that addressed above, companies can be benefited from implementing a lean accounting system in a lean manufacturing environment in several different ways. 1. Eliminate Waste One of the most important objectives of lean improvement is to eliminate waste from the non-value-added . Chapter 2, “Maturity Path to Lean Accounting”, Practical Lean Accounting. 2. Chapter 1, “Why Is Lean Accounting Important? ”, Practical Lean Accounting. activities and processes of the company. Companies can save costs, free up capacity and improve product quality through eliminating waste. Generally, most of the reduced waste translates into available capacity. Then, companies can make good use of the freed up capacity to generate financial benefits. If the reduced waste saves costs, companies can reinvest the saved working capital into the business and make improvements in production. 2.

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Better Lean Decision Making Lean accounting methods for decision-making revolve around an understanding of the flow of production through the value streams, and the effect of these decisions on the value stream profitability and contribution. Why we need to manage the business through the value streams? It was repeatedly stressed that the primary importance in lean is the focus on the flow of the product from the customer order to its final delivery. 3 We can clearly analyze the performance of the company through three parts on a box score, i. e. , operational performance, capacity usage, financial performance.

Then, it’s easy, clear, and quick to make decisions upon the specific information we need. Especially, the advantages are that we can change some of the information to see how they will affect the profitability and margin, like some of the exercise we did with the outsourcing decision, and the financial information is up to date, often to the current week. 4 3. Time Freed up Employees are often categorized into different value streams so that the time of employee has been freed up by lean accounting, meaning that companies produce the same level of product or services with fewer employees.

And finance people do not have to spend a lot of time preparing the financial statements, because it’s simpler and straightforward, forecasting and budgeting. Another way to conclude is employees’ work efficiency has been improved. Companies will save money if labor cost is reduced, as labor cost is usually the highest expense in the companies. The freed up time not only saves cost, but also can be devoted to lean improvements to pursue the goal of continuous improvement. In addition, companies can use the available time to cross-train employees and create them more skilled. . Chapter 7, “Managing by Value Stream”, Practical Lean Accounting. 4. SMA (2) _Lean Accounting, Decision Making, P23. III. Challenges of Implementing a Lean Accounting System in a Lean Manufacturing Environment Although there are more benefits from the implementation of lean accounting, the challenges do exist. There are always two sides to a thing. And we can’t avoid some challenges during the implementation process. 1. Senior Management Initiative This is the most critical part when implementing lean accounting in a lean manufacturing environment.

Lean implementation across the company will not be successful if senior management is not fully committed. The same situation in Who’s Counting? , the company won’t achieve anything if the executives are not fully supportive. And there will be conflicts between different departments, because they are not on the same boat. 2. Short-term Profitability Companies may find out that there is no short-term financial improvement after implementing lean. And this causes comments such as: “We see wonderful results in operations, but they don’t show up in the financial statements.

If lean is so great, why doesn’t it hit the bottom line? ”5 So lean accounting faces with the challenge that how to present and convince the executive team with different perspective and make sure they don’t give up transforming into lean in the very beginning formation of lean. 3. Traditional Accounting System Stand in the Way For those companies who have already on the right track, it’s harmful for companies to still use the traditional accounting methods. There is a very common example of this problem. Using the traditional accounting methods do not show the financial benefit of lean manufacturing, especially hen there is a sudden reduction in inventory level which has a negative effect on company’s profitability. IV. Future of Lean Accounting Before this course, I didn’t even hear about lean accounting. But, after learning this new concept via different channels, I personally prefer the idea of lean accounting than traditional accounting. Now, people desperately find ways to make things simpler, and easier to understand and use. So, in my opinion, the future for lean accounting is promising in that it saves time and energy, provides understandable information for all others besides the finance . Chapter 4, “Financial Benefits of Lean Manufacturing”, Practical Lean Accounting. people, and is value-added. Lean production is a model for the future—it may well become an essential element of a sustainable global strategy. As Henry Ford so aptly noted, “Customers cannot be expected to pay for waste, nor can a worker be paid very much for producing waste. ”6 Lean is all about eliminating waste and creates value for both customers and the companies. But there are some problems when it comes to the time needed to completely transform into lean.

Recall this issue from Who’s Counting? , it takes time to implement lean accounting and see the anticipated outcome from it. And a most critical problem is that lean accounting requires proper environment, i. e. , a lean manufacturing environment, to work out. However, everything takes time and has its disadvantages. Maybe some changes will be added to it and make it happen without these problems. In a word, the best future for lean accounting will be figured out through more and more companies joining the implementation of lean accounting and those companies wanting the change.

V. Lean Principles Affect the Career The five lean principles, to be simplified, are 1) Customer value; 2) Define the value stream; 3) Create flow; 4) Create pull; 5) Continuous improvement. From my understanding, I think these principles can be concluded by a concept in lean thinking, i. e. , PDCA (Plan-Do-Check-Act). First of all, there should be a short-term or long-term plan for my career. And the core objective is to create value for the work and the company.

Second, implement those plans instead of just thinking; find the root cause to solve problems instead of running away from them; be proactive in work, that is to say, don’t wait others to push me move forward. Third, constantly check whether I am on my way towards the ultimate goal in my career and make changes accordingly. Fourth, be strict with myself. The organization should continuously strive itself to become better and better. So do I. I have to make progress every day in order to adapt to the changing environment. Seeking perfection can be the ultimate goal both in career and in life. 6.

SMA _Lean Enterprise, Conclusion, P28. Bibliography [1] Tyler Lacoma, Demand Media, Accounting Differences with Lean vs. Traditional Manufacturing [2] Dan Antony, Demand Media, Benefits of Lean Accounting in a Lean Manufacturing Company [3] Dan Woods, Lean Accounting’s Fat Problem, 07/28/2009 [4] John Cleveland, Benefits of lean in the accounting department, Feb, 2005 [5] Brain Maskell; Bruce Baggaley, Practical Lean Accounting [6] SMA _Lean Enterprise; SMA _Lean Accounting [7] Karen M. Kroll, The Lowdown on Lean Accounting—A new way of looking at the numbers, Journal of Accountancy, July 2004

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