Do Your Accounting Practices Encourage Bad Behavior When Implementing Lean?

Posted by on Jan 2, 2013 in Lean | 0 comments

Standard cost accounting, cumbersome capital appropriations request processes, end-of-month financial reviews, material resource planning systems, and direct/indirect labor measures all encourage much of the bad behavior you work hard to eliminate in implementing Lean.

One of the biggest mistakes companies make in implementing Lean is to keep existing systems and measurements in place and try to just lay Lean on top of them.  This especially happens when Lean is viewed as “just some manufacturing thing,” and almost guarantees you will not be successful.

Here is a prime example.  In a Lean world, inventory is considered a major waste and the root of all evil.  However, standard cost absorption accounting takes the opposite view and rewards those who build inventory, allowing them to defer a portion of their production costs to a later period.  It also drives the behavior of shop-floor managers to be more interested in hitting their absorption goals for the month than in making what the customers want.  In manufacturing, managers know exactly which products represent the most absorption hours and, come end of the month, if they are running behind on absorption hours, they will switch over to those high absorption products so the monthly P&L statement looks good.

In addition, standard cost accounting is not very accurate and contains a lot of assumptions that are easily disproved.  Leaders looking at a company through the lens of a standard cost P&L statement cannot see the detailed information about productivity and inventory levels, which has a huge impact on current and future competitiveness.

Lean accounting, which focuses on cost management, takes away the barrier of the traditional standard cost system and helps the entire organization clearly see what is happening.  In addition, Lean accounting requires less financial staff and is more accurate than standard cost accounting because it captures only actual costs.

A simplified and focused accounting system, based on cost management, generates better information and facilitates better decision making.  It also encourages, rather than fights, the transition to Lean.

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