LEAN ACCOUNTING

Introduction
Lean Accounting is the most recent concept in the accounting literature. In September 2005, a L
Accounting Summit in Detroit co-sponsored by Association for Manufacturing Excellence (AME was
held. The summit had on its agenda to codify the principles, practices and tools of lean accounting
developed over the last 10 years. It may be noted that lean accounting involves lean thinking, the
eliminating all forms of waste in the accounting process to provide quality goods or service to the
customer at the lowest price. Thus,
a. Lean accounting focuses measuring and understanding the value created for the customer and
uses this information to enhance customer relationships, product design, product pricing and
lean improvements.

b. To be lean accountant one must relentlessly seek to view his organization through the eyes of
his customers.
However, it has been found that everybody working seriously to implement lean thinking in his
organization ultimately bumps up against the accounting system prevalent in the organization. This is
because it has been found that in most "customer focused" companies, their employees in their narrow
interest optimize functional performance. As a result there is wide waste in the enterprise and large
number of unhappy customers.
Limitations of Traditional Accounting
The traditional accounting systems are largely and actively anti-lean because of their following
limitations:
1. Non-value work. They are large, complex, wasteful processes requiring huge amounts of non-
value work.
2. High-inventory Levels. They provide measurements and reports like labor efficiency and
overhead absorption that motivate large batch production and high inventory levels.
3. Misleading reports. They have no good way to identify the financial impact of the lean
improvements taking place throughout the company. On the contrary, the financial reports
will often show that bad things are happening when very good lean change is being made.
4. Lack of understanding. Very few people in the company understand the reports that emanate
from the accounting systems. However, they are used to make important and far-reaching
decisions.
5. Misleading costs. They use standard product costs which are misleading when making
decisions related to quoting, profitability, sourcing, make/buy, product rationalization, and so
forth.
Meaning of Lean Accounting
Lean accounting may be defined as applying lean methods to the accounting processes. It may
be noted that some accounting processes may involve waste which cannot be avoided while others
may involve waste that can be eliminated. The waste of a later type is to be eliminated in the same
way asis done in case of other production processes. Thus, lean accounting is the accounting
technique thus aims at continuously eliminating waste from the transaction processes, reports and
accounting methods throughout the organization. This all helps in simplifying accounting, quick
decision-making ad reducing cost.
Objectives of Lean Accounting
The objectives of lean accounting can be summarized as under

1. Providing appropriate information. Lean accounting aims at providing accurate, timely and
understandable information to all segments of an organization It results in motivating lean
transformation throughout the organization helping in quick decision-making, leading to
increased customer value, growth. profitability and cash flows

2. Elimination of waste. Lean accounting uses lean tools to eliminate waste from the accounting
processes besides increased comprehensive financial control.

3. Compliance with "GAAP". Lean accounting fully complies with the generally accepted
accounting principles (GAAP), external reporting regulations and internal reporting
requirements.

4. Encourages lean culture. Lean accounting supports the lean culture by motivating
investment in people providing information that is relevant and empowering continuous
improvement at every level of the organization.

Lean Accounting Steps

The following steps may be taken for introduction of lean accounting in an organization:
1. Defining value. This means identifying the expectation of the customer from a specific
product or a service. In other words, it is important to decide from customer's point of view
what IS important for him or what are his priorities while paying for a particular product or
service.
2. Identifying value streams. This refers to identification of the value added activities which
into delivering specific products and services to customers. Non-value added activities have
to be eliminated.
3. Making the value stream flow. This requires the various pieces of equipment placed in a
manner in sequence of the manufacturing processes thereby enabling a continuous single
piece flow of production. The employees should be crossed-trained to perform all the steps
within the cell they are working. Thus, lean accounting uses cellular work arrangements that
pull together people and equipment from physically separated and functionally specialized
departments.
4. Implementation of a pull system. This involves introduction of a system where visual
controls are used to trigger upstream links in the value stream to initiate additional
production. For instance, when a storage bin of components becomes empty up to a required
level for replenishing a fresh supply it automatically signals the upstream link in the value
stream to replenish the components without the need of any paper work viz. material or
purchase requisition slip etc.
5. Strive for perfection. There is continuous effort for making improvements. A management
seeks also frontline employees' opinion for improvement in the flow of value to the
customers. Thus, the management views all employees as intellectual assets.
Lean Accounting- Principles, Practices and Tools'
The principles, practices and tools of lean accounting are being briefly summarized in the following
table:

Principles Practices Tools of Lean Accounting

a. Value stream mapping:
current and future
state.
A. Learn & simple business 1. Continuously eliminate
b. Kaizen
accounting. waste.
c. Plan-Do-Check Act
problem solving
approach
a. Performance
Measurement Linkage
Chart; linking metrics
for cell/process, value
streams, plant and
corporate reporting to
the business strategy
target costs, and lean
1. Management control improvement.
& continuous b. Value stream
B. Accounting process that improvement performance boards
support lean transformation containing break
through and
continuous
improvements projects.
c. Box scores showing
value stream
performance

a. Value stream costing

2. Cost Management b. Value stream income
statement
3.Clear and timely
3. Customer & Supplier value
communication of a. Target costing
and cost management
information
a. Plain English financial
4.Planning from a lean statements,
1. Financial reporting
perspective b. Simple largely cash-
based accounting
a. Primary reporting
using visual
2. Visual reporting of performance boards;
5.Strengthen internal accounting financial and non- division plant value
control financial performance stream, cell/process in
measurement production product
design sales/marketing
administration etc
a. Incremental cost and
profitability analysis
6. 3. Decision making
using value stream
costing and box scores
7. 1. Planning and budgeting a. Formulation of
 business strategy for
the next three to five
years.
a. Value stream cast and
capacity analysis
b. Current state and
future state value
stream maps.
2. Impact of lean c. Box scores showing
8.
improvement operational financial
and capacity changes
from lean
improvement plan for
financial benefit from
the lean changes.
a. Incremental impact of
capital expenditure on
9. 3. Capital planning value stream box-score
often used with 3P
approaches.
a. Performance
measurement tracking
continuous
improvement
10. 4. Invest in people
participation
employees satisfaction
and across training.
b. Profit sharing.
1) Internal control based a. Involve company’s
11. on lean operational auditors into the lean
controls accounting process.
a. Transcation
elimination matrix;
b. Determination of lean
methods to eliminate
traditional truncation
based accounting
process without
compromising on
12. operational or financial
contrasts.
c. Drawing process maps
incorporating changes
required if an to meet
sarbance Oxley
Regulations (SOX in
the company’s
administrative process.
13. 2) Inventory valuation a. Simple methods to
value inventory
without the
requirement for
perpetual inventory
records and product
 costs can be used when
the inventory is low
and under visual
control

Conclusion
Lean accounting is still in a work in process stage. And hence the principles practices and tools of
lean accounting are being gradually formed, transformed improved an updated. A wide range of
companies are adoptiong lean accounting methods making the required adjustments in the principles.
Methods, techniques to meet the companies specific needs beside maintaining adherence to generally
accepted accounting principles and external reporting requirements and regulations. It is expected
that in the years to come lean accounting will become a way of life for corporates for providing
better cost effective information for the decision making an dcreat display and remit simple and
timely accounting reports for all stake holders in the organization.