Lean
Accounting Issues
 Lean
Manufacturing and traditional accounting conflict in several ways.
These conflicts often produce considerable difficulties. The roots
of this problem lie, largely, in the history
of accounting. Johnson and Kaplan's book, Relevance
Lost, has much useful background. This page begins our
series on Accounting and metrics. It introduces some of the most
important accounting-related issues.
Product
Costing
Traditional
accounting systems track total expenditures well and are accurate
in this. Determining the true costs of
individual products and components is another matter.
The
primary culprit in distorted product costs is overhead
allocation and the primary effect is to undervalue many
products and overvalue others. This, in turn, causes managers to
make products that could better be outsourced. It also causes
under pricing of products that actually lose money.
Activity
Based Costing (ABC)
Activity
Based Costing attempts to identify the factors that truly drive
overhead cost. It then allocates overhead costs with formulae that
reflect these "cost drivers". For example, in
Purchasing, the activity cost probably relates to the number of
line items on the BOM for each product. In Engineering it might
relate to the number of engineering changes.
In
practice ABC systems are often implemented in complex ways
and produce as much confusion as accuracy. Glen Navis' article on
Volume Adjusted Costing discusses this and offers a simple
alternative for some situations.
Inventory
Cost Analysis
While
conventional systems often track inventory well, they rarely track
the cost of holding it very
well. These costs include space, warehouse personnel,
insurance, utilities and many other costs. Most of these costs
fall into overhead accounts and appear in oversimplified overhead
allocation schemes. They are much higher
than is commonly recognized.
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Micro
Costing
In
many firms the accounting system integrates with production
control, scheduling and inventory systems via MRP or ERP. These
systems are often setup to collect time
and cost at each individual machine and operation. The
assumption is that the more detailed the data collection, the more
knowledge is available. This errs on two counts.
-
When
data collection becomes a burden, people fake the data,
fail to update or manipulate it.
-
Data
is not knowledge, let alone understanding. Often
there is so much data that it is difficult to interpret.
A
preoccupation with detailed machine-by-machine data does not fit
well in a workcell. In cells, one
operator may do many operations on a single part, several
operators may also work on a single part. Operators may switch
tasks in midstream. Finally, different parts often move through
one at a time in unpredictable sequences.
The
inability to collect detailed data in
a manufacturing cell
is sometimes a roadblock to implementation. But
all this data collection is non-value added activity and, in
workcells, unnecessary.
Non-Financial
Metrics
The
foremost goal of business is usually profit. Other goals such as
growth, future profitability, and future competitiveness follow
closely behind. The volatile nature of the present business
environment requires people, systems and organizations that cope
effectively with change. But, Traditional
accounting does not effectively measure investment in these longer
range objectives.
Profit
measures are the end result of a long string of activities that
create and market the products. These
profit measures, alone, are inadequate to control and manage
upstream activities.
Running
a business for the long term requires more than financial metrics.
Individual activities, processes and parameters within each
activity or process step require metrics that are, mostly,
non-dollar units.
Robert
S. Kaplan, David P. Norton, in their book, "The
Balanced Scorecard" show how
to link metrics and strategy. They provide a system for
investing in customers, employees, new product development, and in
systems-- not just pumping up short-term
earnings with myopic maneuvers. |
