Practical Lean Accounting
Value-stream costing for lean operations.
Summary
Brian Maskell and Bruce Baggaley argue that standard cost accounting actively obstructs lean manufacturing, and set out an alternative system. Their claim is that companies adopting lean methods make real operational improvements and then see their financial statements report deterioration, which causes management to abandon the programme.
The mechanism is specific. Standard costing absorbs overhead into inventory. When a lean programme reduces work in process and finished goods inventory, previously capitalised overhead flows into the income statement, so reported profit falls in the period improvement occurs. Standard costing also rewards machine utilisation and large batch sizes, which lean methods deliberately reduce, so efficiency variances turn unfavourable when the plant starts producing to actual demand.
Their replacement is value stream costing. Costs are collected by value stream rather than by product or department, with no allocation of overhead to units. Performance is reported on a box score showing operational measures, capacity utilisation split into productive, non-productive and available, and financial results together on one page. They also set out how to handle inventory valuation for external reporting, how to make product decisions without unit costs, and how to run a transition. The book is practical, aimed at controllers and plant managers, and assumes the company is already committed to lean. Its argument overlaps with Throughput Accounting and with the Johnson and Kaplan critique, and readers should know that the elimination of unit cost data makes some pricing and outsourcing decisions harder rather than easier.
Key takeaways 7
- Standard cost accounting reports deterioration when a plant successfully reduces inventory, because previously capitalised overhead flows into the income statement.
- Efficiency variances reward large batches and high machine utilisation, which are exactly what lean methods eliminate.
- Value stream costing collects costs by flow rather than by product, and allocates no overhead to units.
- Freed capacity has no value until management does something with it, so lean improvements must be paired with a decision about the capacity released.
- A box score reporting operational, capacity and financial measures together prevents managers from optimising one at the expense of the others.
- Product costing by allocation produces numbers that are precise and wrong, and decisions made from them destroy value.
- Maskell and Baggaley argue that the accounting system must change before a lean programme can survive its second year.
Who should read it
Controllers and operations executives implementing lean manufacturing who need an accounting system that does not penalise the improvements they are making.
Where it sits in the reference 2
Similar books 6
Chosen by shared topics, the entries that hold them, and the people who recommended both.
