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Lean Accounting

Nowadays, lean techniques are being adopted by all sectors such as manufacturing, insurance, hospitals, airlines, high-tech product-development, oil production, IT operations, retail groups, publishing companies and even government organizations. The main issue is how well they are implementing them. The lean techniques are a set of tools and practices that managers and employees use to eliminate inefficiency and waste, reduce costs, improve quality and reliability and increase durability. Toyota Motor is the pioneer in implementing lean practices.

The methods of standard and absorption costing are not suitable for the lean technique users. Calculation of product cost under traditional standard costing methods may not give accurate figures and may lead to bad decision-making. This, in turn, leads to reduction in revenue and lower profitability. The standard costing system is complex and also time-consuming.

There has been a silent revolution among lean technique users, centered on the thought that the traditional accounting does not reflect the true results and that it is harmful to lean organizations. Lean accounting focuses on shift from traditional cost accounting system to a system which measures and motivates the lean practices. The lean accounting basically focuses on what the customers want. It is a part and parcel of lean movement.

Lean accounting helps to understand changes in managing operations and impacts on operational and financial performance. What a traditional accounting system does not say, lean accounting says. For example, the traditional accounting promotes measures to build up inventory by identifying it as an asset whereas the lean accounting completely runs reverse and wants inventory kept as low as possible. Traditional accounting reports are very difficult to understand and decisions cannot be taken quickly also. Lean accounting uses real numbers so that everyone can understand and act upon. In lean accounting, costs are charged to value and attached to people, machines, materials and support services. Allocations are eliminated or reduced to the maximum extent possible. Lean accounting will not increase sales but will give a chance to take better decisions in time which result in business growth, higher revenues, as well as profitability. The hurdle for the implementation of lean accounting is from auditors’ perspective that it does not comply with the Generally Accepted Accounting Principles (GAAP). Their view is that lean accounting is suitable only for the manufacturing sector.

The switch from traditional costing to lean accounting is not a perfunctory exercise. If an organization has to become world class, there should be a radical change. Lean culture should be adopted and also lean accounting must be a part of the transformation. The main challenge in adopting the lean approach is regarding the selection and use of tools and principles.

- S Vijayalakshmi