Revisiting Lean Accounting

One difficulty in realizing the financial benefits of lean is the offsetting profit and loss (P&L) charge that occurs when a company improves inventory turns and recognizes the deferred labor and overhead that has resided on the balance sheet for many years. Lean accounting does not cause this phenomenon to occur. The culprit is improved operational effectiveness in the form of better inventory management and improved turns. Any system that facilitates such improvements will have the same impact on the P&L. It’s a testament to lean accounting’s effectiveness that it is perhaps the only business system that has facilitated inventory management improvement.

The article states, “Those who have worked with lean companies contend that many standard cost accounting practices no longer make sense.” Most standard cost accounting systems do not make sense in any company. The information is usually incorrect, motivates improper behavior and does not facilitate decision making. Only when a business makes the shift to lean does the practitioner see an alternative cost system that is extremely appealing.

I doubt that any true lean practitioner would pursue speed and quality to the exclusion of cost. Investing in capital equipment is absolutely last on the list of lean priorities. Right-sized equipment designed and made in-house at a fraction of the cost of purchased equipment would be the lean approach.

The most insightful comment in the article was that since the concepts of lean accounting were generally developed outside the accounting profession, there is a great deal of resistance. Welcome to the lean world where change is the order of the day and 20- or 30-year-old paradigms must be thrown out. The accountants are no different than engineers or anyone else affected by dramatic change. The only ones that seem to accept lean concepts, albeit somewhat reluctantly, are the manufacturing folks who have been asked to change throughout their careers.

Finally, one of the basic tenets of lean is the customer value proposition. If accountants want to truly serve their manufacturer customers by providing information that is readily understandable and actionable, then lean accounting is a huge step in the right direction.

Jerry Solomon
MarquipWardUnited
Hunt Valley, Maryland