The management accounting community is currently wrestling with controversy - conflicts and ambiguities caused by competing forms of managerial accounting for organizations embracing lean management techniques and principles. The controversy does not involve financial accounting for external reporting. Its purpose is historical reporting for external and regulatory entities; with recent reforms regarding fair value, one can say its purpose is financial valuation. In contrast, the purpose of managerial accounting is for economic value creation through better internal decision-making.
Part of the problem is that proposed accounting methods for a lean management environment, which typically focus on short-term decisions, assume a steady state. That is, they assume most expenses remain unchanged - fixed - except for those affected by a localized operational improvement. In contrast, longer-term decisions are strategic - such as pricing, investments, new product selection or rationalization, and marketing - and assume resource capacity and its expenses are adjustable - variable.
Related to this problem is the fact that lean management principles advocate simplicity. Because the vast majority of employees who make decisions are only responsible for the day-to-day operations of their portion of their organization, any simpler and more relevant costing technique for them is appealing. However, for the minority who make less frequent but more important strategic decisions, which may each have the impact of hundreds of day-to-day decisions, an enterprise view is needed to understand long-term economic consequences. This minority may not win the popular vote to choose their organizations cost accounting method, but their knowledge about costs and profits may generate the vast majority of their organizations bottom-line financial impact. The result is a debate between lean management practitioners proposing alternative management accounting methods and mainstream accountants.
What is Lean Management?
Lean management can be described as a systematic approach to identifying and eliminating waste and errors, including nonvalue-adding (NVA) work activities. Productivity increases are accomplished through continuous improvement of processes to accelerate the throughput time of products or services. Increasingly, lean management techniques are merging with Six Sigma quality and just-in-time (JIT) initiatives.
Nonmonetary process data is foundational to lean management, quality and continuous improvement projects. Employees are trained to use tools such as process flow charts, check sheets, fishbone charts, Pareto diagrams, process control charts, histograms and scattergrams. In addition, they measure movement of products or transactions, such as flow times and distances, as well as unplanned events like product rework and errors.
Value Stream Mapping
A popular method to visualize and measure processes is value stream mapping. A value stream consists of all the activities to create customer value for a product family or service offering.1 It removes the barriers of functional or department silos to aid improvement teams with better communications and decision-making. A simplified value stream is similar to a process flow chart.
Each value stream may have multiple performance measures, such as for safety, quality, time, delivery and cost. The last metric, cost, has spawned a relatively new cost accounting method referred to as lean accounting or, more appropriately, management accounting for a lean management environment.
How Does One Calculate Accounting For Lean Costs?
Accounting for lean is based, in part, on the concept that time is money. For example, a nights stay at a hotel might be 11cents per minute. Attending a music concert may be 63 cents per hour. A meeting with 10 employees may be $6.50 per minute. Any value streams cost-per-minute rate can be calculated as a ratio of its annual expenses (e.g., wages, supplies, depreciation, etc.), divided by the total annual minutes that all of the resources worked, excluding holidays and a percent factor for coffee breaks, illness, etc. This cost rate exists independent of whether the work produced any outputs. Think of it as an input cost rate - the rate of resource expenses supplied.
Another key concept is to quantify NVA costs from a customers view. For any value stream, the calculated time of work (for a time period, such as a month or year) to make error-free products or deliver error-free services is based on that product or service offerings average unit processing time (e.g., a bank tellers 4.26 minutes per customer). This is the rate of resource expenses used. This rate is then multiplied by the volume of units processed or delivered during the time period and the value streams input cost rate per minute. This total production cost is subtracted from the total value stream expenses, and the difference can be classified as the NVA costs for that time period.
The NVA cost is a total amount with little or no detail and visibility. There is only a single lump sum of the total value stream expense and a lump sum of the NVA cost. It can calculate an aggregate financial figure that the traditional accounting spending, standard cost accounting or income statement cannot report.
What Caused Interest in Accounting for Lean Costs?
Accounting for lean developed as a result of frustrations managers and employee teams in operations have with traditional standard cost accountings inability to evaluate lean projects for cost savings potential or measure improvements after they are completed. In addition, operations personnel question if their daily efforts to collect transactional data are worth it, given that many operations people have found little use for actual-to-standard cost variance reporting. This frustration is understandable considering what is now generally understood about deficiencies with traditional standard costing.
Accounting for lean attempts to solve some of operations immediate financial measurement problems, because as they make improvements (e.g., eliminate NVA costs, reduce resources and increase the rate of throughput in processes), they can financially measure productivity increases that show up on the bottom line of the companys income statement.
Controversy Among the Accountants
There are three areas of conflict:
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