Lean accounting: To become lean, shed accounting

by Brian Langarica
Author: Johnson
Year: 2006
This paper criticizes the view of companies which try to become lean solely through qualitative analysis. The key to success and longterm performance is firstly a company which respects inter-human relationships and acts as a living organism.

Power of quantitative methods

OK: Financial accounting needed to track cashflow, meet financial regulations
But: Firms use financial qualities to motivate ppl, control and explain financial results
inherently destructive thinking and reason why lean activities in companies fail

(Example for inherently destructive thinking: ABC Costing)

Invented for more relievable cost information for more complicated and prolonged material flows
New: Overhead costs traced to products according to costs of overhead activities required to make and sell product,

Vs. old way of directing overheads to products according to direct labour or machine hours spent on each product
Result: Identify product profit margins more reliably
Implications: Rely on products w/ highest margins -> max profits; But: high margins often with older products, vs. newcomers
have lower margins
ABC answers: How to get best cost data in order to boost bottom-line?
ABC does not answer: How to reduce costs so that overhead activities vanished?

Model I
Follows material flows
Whole is never more than the sum of single parts
What matters that can be measured ->accounting control systems are appropriate levers of control

Model II
Systems model is lean (like Toyota TPS)
Business community of interdependent parts which self-organize into a whole which is greater than the sum of single
parts
Quantity measures cannot describe the patterns of non-linear relationships
Today: Often believe that growth w/o limit possible+ financial control success
But: Destructive

Model III
Living system is ultimate lean and leads to sustainability
Key to success and long-term performance is a company which respects inter-human relationships and acts as a living
organism, e.g. not grow beyond inherent growth
Quantity measures control not possible since multidimensional interactions and feedback loops

Case example
Value Stream Map (vs. Floor Layout)
Make delays of material flow invisible;
make visible the production control system
both do not show: cost systems run by accounting dept.

Plant L: Future state/ TPS

Continuous, balanced work flow without external control, focused on relationships among people (employees, customers,
suppliers)
Create future state maps without numbers
No external Production control systems= PCS, no accounting targets on shop floor works itself and connections act as
control
consume less, focus on concrete real costs
Accounting treat plant as black box, only track what/who is at entrance (resources, people) and exit (shipments, sales)
every person in every step knows exactly what to do and when to communicate with whom
work flows at rate set by customer, leads to little/no inventory

Meet customer demand

Plant M: American mechanistic approach
Produce more, focus in abstract average unit cost and standard cost variance
Maximize output cycle speed, but e.g. not harmonize w/ other cycles -> delay in flow, products lie around
PCS help to constantly minimize costs
PCS as MRP which routes materials on floor
No understanding what produces results, because do not know about relationship no real error detection

Meet numbers