Lean Accounting

1
Lean Accounting Theory of Constraints

• Two related concepts
• ACCT7320, 2/3/09

2
Lean Accounting

• A practitioner-based movement
• Not much in accounting textbooks and courses
• Is it a fad?
• According to one recent research article
• Lean manufacturing is a complete business system
  that combines advanced manufacturing techniques
  including
• Just-in-time (JIT)
• Total quality management (TQM
• Total preventative maintenance (TPM).
• Lean accounting seeks to
• Reduce steps in transaction processing
• Eliminate standard costs in favor of actual costs
• Discontinue cost allocations
• Lean control practices re-focus the performance
  measurement system
• Emphasize social and behavioral controls.

Frances A. Kennedy Sally K. Widener, A control
framework Insights from evidence on lean
accounting. Management Accounting Research 19
(2008) 301323
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http//www.leanaccountingsummit.com/
4
Another article
July 2004 article

• LEAN MANUFACTURING PRINCIPLES
• eliminating waste, producing only to meet
  customer demand.
• typically require a company to move from a
  functional division of work to work cells where
  all of the processes needed to manufacture a
  product or line occur next to each other in
  sequence.
• IN THIS ENVIRONMENT
• Accountants have begun to realize many
  traditional cost accounting practices no longer
  make sense.
• A growing number of businesses are implementing
  lean accounting concepts to better capture the
  performance of their operations.
• ADHERENTS PROPOSE A NEW WAY of looking at the
  numbers.
• Rather than categorizing costs by department,
  organize them by value stream, which includes
  everything done to create value for a customer
  the company can reasonably associate with a
  product or product line.

http//www.journalofaccountancy.com/Issues/2004/Ju
l/TheLowdownOnLeanAccounting.htm
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Key points about LA, contd.

• NEW ACCOUNTING CONCEPTS NOT A PANACEA
• Difficulty accurately pricing products and
  determining profitability when they analyze
  performance by value stream rather than by
  individual product.
• The approach also may emphasize speed and quality
  almost to the exclusion of cost concerns.
• SOLUTION MAY BE to supplement the companys
  standard financial statements with additional
  information
• Report improvements from efficiency
• Be aware of GAAP requirements

6
THEORY OF CONSTRAINTS

• ACCT 7320
• February 3, 2009

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What is the Theory of Constraints all about?

• Developed by Eliyahu Goldratt in the mid 1980s
  with his business novel The Goal.
• Has a close relationship with other modern
  techniques
• Just-in-Time
• Manufacturing Resource Planning
• Quality Management, Six-Sigma
• Activity-Based Management.

8
Goldratts Biography

• Born in Israel in the late 1940s.
• Bachelors degree in Physics.
• Masters and Doctorate degrees in Philosophy.
• Founder of a production scheduling software
  company.
• Has helped many companies such as GM, RCA,
  Kodak, Westinghouse, Philips, etc.
• Wrote several books
• The Goal.
• The Race.
• What is this thing called TOC?
• Critical Chain.

9
Eliyahu Goldratts The Goal

• Brief overview
• Midsize company having difficulty shipping
  products on time.
• Managed by a plant manager desperate to turn
  things around.
• With the help of a Physicist, the plant manager
  is able to locate the bottleneck and find a
  solution.
• Symptoms noted in the book
• Obsolete inventory.
• Low inventory turnover and high amount of
  inventory in storage.
• Idle workers or machines.
• Machine breakdown.
• A large amount of scrap pieces.
• A large amount of retooling and rework needed.

10
What is the Theory of Constraints all about?

• Looks at the entire supply chain and synchronizes
  the chain to achieve ultimate performance.
• Based on two assumptions
• Every organization has a set of processes working
  together to achieve a common goal.
• Every process has a single constraint that
  limits it from higher performance.
• Typical constraints Time, Capacity, Materials,
  Human Resources, Capital Resources, Financial
  Resources

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Implementation of the Theory of Constraints

• Step 1 Identify the bottleneck(s)/constraint(s).
• Look at your production plan as a whole and
  determine which resource is preventing you from
  achieving better performance.
• Look at the cause (old machine, untrained
  employee, long setup times, machine breakdown).
• According to Goldratt, an entire plants
  throughput (productivity) is limited to the
  bottlenecks productivity.
• Step 2 Exploit the bottleneck(s).
• All process efforts should be focused primarily
  on the constraint to maximize throughput.

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Implementation of the Theory of Constraints

• Step 3 Subordinate everything else to the
  bottleneck(s).
• According to the theory, other activities must be
  subordinated to the actions taken to fix the
  bottleneck in hand.
• Step 4 Elevate the bottleneck(s).
• At this point, management has to decide whether
  to purchase additional capacity (new machine,
  better trained employee)
• Step 5 Evaluate whether solving the current
  bottleneck(s) created other bottlenecks. Do not
  allow inertia.
• The production plant has to be monitored
  carefully as to whether other constraints now
  exist and to monitor the progress of the old
  constraint.

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Common Terms in Theory of Constraints

• Throughput processing another unit of output
• Emphasis on Increasing Sales, Productivity, and
  Market Demand
• Throughput contribution Sales-(Material and any
  other directly variable Costs).
• Bottlenecks limited resource that prevent the
  supply chain from achieving ultimate performance

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Benefits of implementing TOC

• Reduction in inventory.
• More productive machines.
• Ability to meet shorter lead times.
• More flexible.
• Better customer service.
• Better product mix.
• Better customer relationship.

15
Shortfalls or Criticisms of TOC

• Focus on short-term goals as opposed to long-term
  with ABC.
• Main emphasis on increasing sales and volume, not
  quality.
• May lose overall picture when only looking at
  specific constraints.
• Focuses on the push approach as opposed to pull
  approach of JIT.

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The Theory of Constraints and Other Concepts
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Velocity World- The Conference on TOC, Lean and
Six Sigma
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Questions?

• Pass out problem to work and discuss.