Lean manufacturing processes force the company to conduct an audit of their inputs, outputs and processes involved in manufacturing the product. It requires reducing the scrap rate and waste. The scrap rate is the amount of products that do not meet company specifications and must be either reworked or written off as a loss. This results in a more efficient production process. Companies often take a hit on the financial statements when they first introduce lean manufacturing, but they soon report a significant drop in lead time, a 50% increase in inventory turnover, and a production capacity increase of 25% per year (Kroll, 2004).
It stands to reason that standard cost-based accounting does not present an accurate reflection of the company when they transform to a lean manufacturer. The goal of accounting is to provide an accurate representation of the company. Standard cost-based accounting methods fail to capture the reduced scrap rate and efficiency of the company. One of the main changes that lean manufacturing requires is that inventory is not an asset (Kroll, 2004). It takes up space, incurs handling costs, and takes up floor space. The strategy in lean manufacturing is not to have huge warehouses of product sitting around, but to reduce it to a point where it is negligible (Kroll, 2004). This means that inventory would be reported as zero, which is not entirely accurate.
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Lean accounting methods require taking into account the entire value stream of the product, which can include elements such as design, engineering, sales, and marketing costs (Kroll, 2004). The downside is that costs can appear to be a smaller part of the equation than they are in reality (Kroll, 2004). The reason for this is that lean manufacturing and lean accounting focus on processes. The key is striking a balance between accounting methods that are cost-based and that reflect the new efficiencies in the process. Lean accounting must include process oriented costs and profits, rather than only materials and traditional inputs such as labor.
- Kroll, K. (2004, July 1) The Lowdown on Lean Accounting. Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com
