- XXXXXXXXXXXXX Company

www.theprofessionalwriters
.com
write@theprofessionalwriter
s.com
+91-9989699562
Lean Accounting LOGO
Lean Accounting comprises of
principles and methods usually
very useful to support the
management in order to understand
the effects on lean transformation on
cash flow on profit and loss, and
on non financial performances.

www.theprofessionalwriters.c
Lean Accounting
 Traditional
Accounting Practices employed
during 1979 at Topeka plant does not value in
a Lean environment due to lack of
– Performance measurement and management
– Transactional elimination
– Calculation and approximation of Lean financial
benefits
– Target costing

www.theprofessionalwriters.c
Lean Accounting
*Source: This figure was adapted from the lean
thinking model created by
James Womack and Daniel Jones in their 2003 book
www.theprofessionalwriters.c
Lean Thinking, Free Press Publishing.Lean Accounting
Step 1 Define value

 This involves an in depth analysis of who is

doing what and what is that they are valuing
.It is always the customer who defines what
they value/want in products /services.
 In the case of Topeka though the process of
production was streamlined, an exact
approximation of the customers need was
not taken into account. This resulted in a
greater variance between production, sales
and accounting

www.theprofessionalwriters.com
Lean Accounting
 Identify the value stream
Step 2

 Many value added are involved and introduced during the

process of delivering specific products to the consumers.
Usually the services extend beyond the functional bodies.
 Thus the employees of an organization should not just
manufacture or build quality products but they should
manufacture quality products bearing in mind the customers
core necessities/view point and giving them the benefit of
certain value added services when they buy your product.
 This approach and methodology lacked at Topeka.

www.theprofessionalwriters.com
Lean Accounting
 Make the Value Stream
Step 3

The mass production approach was followed at Topeka.

This involves
– Organized batch and queue production which builds or adds up to
–  Building up of inventory
– Disappointing order to delivery cycle time
– Unnecessary and unwarranted rework and waste.

www.theprofessionalwriters.com
Lean Accounting
 Make the Value Stream
Step 3 (Cont’d)
  The lean way of accounting involves
– Cellular work plan that binds people and the
equipment together rather than viewing them as
functionally separate and specialized departments
– The different parts of equipment sequenced together in
manner that reflects the manufacturing process thereby
facilitating a continuous one piece flow of production.
– Training the employees to perform all roles within a
cell (the function they work for)

www.theprofessionalwriters.com
Lean Accounting
Step 4 Implement a pull system

 Visual controls are used to generate upstream links in the value stream to
commence or initiate extra production. Example: When at a point of use
storage bin of component parts become empty the visual controls designed
signal the upstream link in the value stream to refill the parts that are
exhausted. Paper work is avoided and also not required when a requisition for
material is raised. Also while establishing a tackt time (average production
time allowed for a unit demanded) which is calculated by taking into account
the total available during a period and dividing it by the number of units
required by the customer during that period ensures that the pace of
productions remain in sync and correlates with the customer demand.
 At Topeka although the production processes was streamlined it called or a
much faster and analytical inventory control which should have been aligned
with the customer.

www.theprofessionalwriters.com
Lean Accounting
 Strive for Perfection
Step 5

 Once a certain amount of stability is established,

striving for perfection by eliminating any possible minor
irregularities will be the need of the hour. This would
involve leveraging process expertise of the front line
managers.
 Instead of explicitly relying on the managerial level to
generate and implement ideas for improvement it’s
best to take every ones views. This will result in
capitalizing maximum intellectual property to increase
productivity and enhance customer satisfaction.

www.theprofessionalwriters.com
Lean Accounting
 From the above findings the analysis reveals
that the mass production process employed
during 1979 at Topeka does not have value in
a Lean environment and it is of prime
importance to implement the lean way of
accounting to pull Topeka out of the financial
crisis. This will definitely help the organization
revive its performance

www.theprofessionalwriters.c
Lean Accounting
 (cont’d
)

However it may be noted that

 The application of lean strategy has its impact affecting the cost
increase resulting in cost of labor and overhead costs. Due to such a
drawback (so called) over the standard costing system, the decision
making over implementing such an outstanding strategies has been
held back.
 
 Forecasting the upcoming measurements, people tend to follow the
customary (anti-lean) methods to overcome purchase price variances,
overhead absorption variations, labor performance etc…. where the
conventional practices include mass production, multiple activities
oriented jobs, picking the right job to earn time and production cost,
building inventory etc…
 
 The proportion of “zeroing” profitability with adjusting the inventory
cost reduction is found to be virtual since it made no impact over the
financial improvement as calculated by the finance people.

www.theprofessionalwriters.c
Lean Accounting
 Lean accounting process involves

Value Stream
Costing
Performance
Measurement
Decision making
Transaction
elimination
Measuring the
Effects
Changing the
Budgeting

www.theprofessionalwriters.c
Lean Accounting
Value Stream Costing

 As a lean company is organized by “Value

Streams”. The costs are not charged to products
but to value streams.
 As a result one does not need to determine a
unit standard cost for the individual product,
which, beyond requiring a remarkable effort,
gives just an abstract and can be useless
information. This is because it depends on the
criteria chosen to allocate indirect costs and on
the predicted level of demand. By the definition
this is variable and is impossible to predict.
 In Lean Accounting costs are reported by value
stream and as a result area lot more practical
and pragmatic and their calculation far less
complex.

Lean Accounting
Performance
Management
 Management accounting should not just furnish only financial
information. It must also compute and gauge the performances at
different levels which include procurement cell, value stream,
plant, company and these measures. For its effectiveness
frequency and timeliness should be ensured.
 Measures like delivery on time to the customers and from
suppliers, inventory turns, O.E.E., flow index etc should be an
integral part management accounting.
 The “variances” characteristic of conventional standard costing
system which are usually reported after a month require a lot of
work and serve no purpose at all.
 Management accounting information is usually not very
comprehensible to the senior management they do not provide
any performance measures and very often encourage anti-lean
behaviours (as it happens with the so called competence and
absorption variances which are positive if production exceeds the
expectations, without any regard to the fact that the extra
manufacturing can increase not sales but inventories)

Lean Accounting
Decision Making

 Important and critical decisions such as

– Making or buying, or that of accepting or not
accepting an order, should never be made based
on standard costs (which are just conceptual which
may run the risk of leading to wrong decisions).
– An accurate and appropriate decision in situations
can be made only by taking into account the
actual contribution of the decision in relation to the
profit and loss of the value stream in totality

Lean Accounting
Transaction
Elimination
 In a lean environment controls are built into the
work and are indented at instantly identifying and
rectifying issues. The successive controls which
are based on the processing of huge number of
transactions that are completely unworthy.
 Also, according to Lean accounting the major
impact of elimination of waste is creation of
available capacity. What is done with the newly
available facility/capacity to be utilized bares a
direct impact on the financial status. One can
increase sales, lay off people use the capacity
another way or expand the business but, there has
to be an increase monetarily from the lean
changes

Lean Accounting
Transaction (cont’d
Elimination )

 Lean accounting saves money and the costs are reduced. Most
organisations re clue less about the about the cost since thy are deeply
embedded into the company's processes. As and ho an organisation
takes Lean accounting to the next level, they are able to eliminate many
transactions precisely and systematically including the reconciliations,
reports and the meetings that are a part of the process. All this is waste.
As a process is closer towards stability operationally one will be able to
eliminate or most of the traditional accounting and control systems.
 
 A majority of purchasing and procurement processes can be eliminated
as requisition of materials , MRO items, components and supplies area ll
brought under controlby using lean management and supply chain
methods. This includes the conventional AP3 way match as one begins to
expence the materials on receipt back flush them on shipment. The
"Perpetual inventory by large, can be eliminated the inventory is brought
down under stringent operational control by implementing the visual
management and pull systems.

Lean Accounting
Measuring the Effects

 Conventional systems are not capable of computing

and gauging the actual effects of a lean
transformation. They are particularly unable to
measure the effects on the “flow”, i.e. the ability to
act in response flexibly and promptly to the
requests of the market eradicating queues, delays,
reworks, scraps and everything else that can
hamper or slow down the flow.
 In addition attention is given to the production
capacity only to brand the surplus capacity waste.

Lean Accounting
Measuring the Effects
(Cont’d)
 On the contrary lean thinking says free up capacity (in terms of labour or utilization of
machines , space etc.) . It is a very apt objective to be pursued because the available capacity
means more flexibility and the opportunity to increase the business.

All the values are * 1,00,000

Lean Accounting
Changing the
Budgeting
 By traditional the budgeting process is a yearly
“rite”. This is both multifaceted and consumes a
lot of time .
 During the last quarter of the of the year
managers spend a lot of time trying to figure out
the future market trends so as to set goals for
the following year
 Eventually, after endless long discussions at
times bad conflicts between the various
functions, a budget draft t is approved. Normally
what happens is that after two or three months,
actual and authentic results materialize
reflecting a remarkably different situation from
documented budget.

Lean Accounting
 Inan economic environment
unstable and unpredictable situations
and representations like the present
one have to be replaced by SOFP
(Sales, Operational, Financial
Planning)This is a method based on
a monthly updation of the budget.

www.theprofessionalwriters.c
Lean Accounting
 A value-stream map (VSM) is an effective way to envisage the logical
flow of work and Information/data in a process.
 It is a step by step process to understand a procedure and eliminate
any kind of waste identified.
 If a particular value stream has product diversity (which is evident in
Topeka) one can distinguish between the costs assigned to the
products based on its features and characteristics. This has the
following advantages
– Shows how and where the productivity costs are incurred
– One can easily identify areas of wastage
– Does not show standard cost but depict the actual cost.
– Identifies bottlenecks and
– Brings forth opportunities to manage capacity more effectively

www.theprofessionalwriters.c
Lean Accounting
1. Who is the 4. Specification 7. Value and 10. Match
customer? to meet features/charac target cost
2. Match customer need teristics to processes
customer 5. Customer 8. Target costs 11. Continuous
needs to value for improvement
product weighting product/service
features 6. Customer 9. Target costs
3. Customer value of for major
satisfaction product and components
Thus an effectiveservice
cost analysis will redeploy any idle capacity ( if any) to
increase its sales rather than reducing the existing operating capacity.

www.theprofessionalwriters.c
Lean Accounting
 Itwas difficult to understand in the inventory of
profits because it concealed the “ inventory
effect “ in the cost of goods sold.
 The adjustments made to the income statement
by using the Standard costing method was not
understood by a non accounts person.
 Cost was not interpreted or depicted from a
value stream perspective. The product versus
period cost distinction met only the financial
requirements and no insight to the operations
personnel

www.theprofessionalwriters.c
Lean Accounting
 By implementing the value stream mechanism the new
income statement that will be generated will be able to
depict
 Simplicity of the transactions by putting together the
actual costs with each component of the value stream,
and dividing the impact of inventory fluctuations on the
profits.
 Also separating, organization-sustaining costs (costs that
can’t be traced to specific value streams)and corporate
allocations from value stream profitability.
 Cost allocations that are arbitrary are avoided, the only
exception being occupancy costs. These are allocated to
the value streams based on square foot to encourage
minimization if the occupied space.
 The profit for the total plant reconciles with profit
reported using an absorption format. However, unlike
absorption costing, the fundamental detail of the values
stream statement is comprehensible to non accountants.
www.theprofessionalwriters.c
Lean Accounting
 A more receptive accounting and finance
group with enhanced morale, staff utilization,
and greater integration With and support
of the operations of the business.
 A More practical, accurate, judicious, and
consistent management information is
ensured ensuing improved decision-making.
 Streamlined business so as to decrease cycle
time. This Improves the cash flow and
profitability.
 Elimination of non-value-added activities to
increase the capability and enable the staff
to focus on more value-creating activities like
business intelligence and analysis.
www.theprofessionalwriters.c
Lean Accounting
 Thank You
-XXXXXX Sharma
Masters
XXXXXXXXXXXX

www.theprofessionalwriters
.com
write@theprofessionalwriter
s.com
+91-9989699562
Lean Accounting LOGO