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Lean Accounting

N V Ram (Manager) (272 Points)

04 January 2010

Appreciate if any body can share presentation on Lean Accounting.

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Lean accounting defined

Lean accounting is an accounting type that is designed for those companies who have implemented lean manufacturing techniques. Traditional cost accounting does not always accurately reflect the positive and cost saving measures that a lean system provides. But since many of a company's decisions are based on the numbers that the accounting department yields, many of these benefits are overlooked with traditional accounting methods. Just a few of the cost organization methods that lean accounting includes are value streaming, changing inventory valuation techniques and modifying financial statements to include non-financial information.

The principles of lean accounting are to measure and motivate. Lean accounting can measure positive gains through initiating lean alternatives in ways like reducing inventory, reducing cycle time, or improving production floor moral and thereby increasing overall capacity. Lean accounting works to motivate a company to continue to promote their lean initiatives rather than deliver numbers that are not necessarily an accurate reflection of company profitability such as is the case with attempting to meet machine efficiency quotas by producing an abundance of un-necessary inventory.

Standard cost accounting simply does not fit in with a lean manufacturing system. Traditional cost accounting reports were developed to present an accurate view of the company to outsiders, mainly shareholders who had the right to know in hard numbers how their investments in the company were being put to good use. Their purpose wasn't to help managers run their operations better. Lean accounting concepts better capture the performance of the lean manufacturing plant's operations, rather than show a skewed financial report that is just for show anyway.

Under lean manufacturing some non-financial measures simply aren't captured on GAAP (generally accepted accounting practices) financial statements. Now it is true that net income usually declines when a company switches to lean manufacturing. So traditional methods or not your accounting will reflect that change, but the decline is not necessarily something to get overly worried about at these declines are more often than not temporary. That's because as the company works through its existing inventory, deferred labor and overhead move from the asset side of the balance sheet to the expense section of the income statement. Lean manufacturers also view inventory differently than would those following a traditional accounting method. In lean accounting, inventory is not an asset because of all the costs that are associated with it. Just to mention a few of these costs, you have handling costs, it takes up floor space and reduces cash flow. Treating inventory as an asset in traditional financial statement only makes sense if those assets are a guaranteed sale, which they often are not. In fact, historically excesses in inventory have either not sold at all or sold for much less than market value because the customers are constantly looking for the next thing or something better than what they have been offered before. In lean operations, the goal is to produce only enough products to meet demand this means reducing inventory to the point where there is no inventory at all in some cases. Having a guaranteed buyer for every product that is made translates into no wasted time, money, or resources on a product that will never make it past the doors of your warehouse.