The Five Principles Of Lean Manufacturing And Traditional Accounting

1. Lean thinking is focused on eliminating waste throughout the company. It also places emphasis on looking through the customer’s point of view and providing value to them.

2. The five principles of lean thinking are:

a. Define value – this focuses on defining what the customer’s value in different products and services provided by the company. The emphasis is on the customer and how the company can provide value to them.

b. Identify the value streams – this requires company’s employees to see how the organization functions through the eyes of the customer. The company must identify all value added activities that go into delivering a quality product/service to the customer.

c. Make the value stream flow – rather than the traditional mass

Strive for perfection – this give employees empowerment to make decisions for themselves rather than having to rely on upper management. If an employee sees a flaw in the process, they are able to take the means necessary to improve it.

3. Contradiction between lean manufacturing and traditional accounting:

a. When the article talks about traditional accounting, it is referring to activity-based costing, functional costing, and/or standard costing. The characteristics of traditional accounting particularly deal with how to allocate overhead costs.

b. Three issues created from implementing a lean manufacturing system using traditional accounting were:

i. Relying heavily on variance data that was tabulated for the monthly accounting cycle – this meant that accountants were specifically focused to the month in which they were in, not future months that would help management plan production ii. Accountants provided data to management that incentivized high lot sizes and high utilization of employees in order to produce goods

The absorption costing method shows a decrease of income when management reduces inventory because of the need to expense the fixed overhead that was deferred as well as variances. Since both variances and fixed overhead deferrals are expensed through inventory reduction, both decreasing raw materials ending inventory and finished goods ending inventory would have an adverse effect on income.

4. Value stream cost analysis:

a. Costs are accumulated by the value stream in lean accounting.

b. Value stream analysis provides actual costs rather than standard costs to the value stream. Therefore, the focus is on a mixture of labor, materials, and other associated costs. Overhead costs are related to the value stream as a whole and not simply to labor.

c. The analysis highlights areas of waste, identifies bottlenecks in the system, and highlights opportunities to manage capacity more effectively. These factors can show improvements in company performance.

5. Value stream income statement:

a. More understandable to non-accountants due to simplicity

b. Attaches actual costs to each component of the value stream

c. Isolates the impact of inventory reductions on profits better than absorption accounting