No, when a mass manufacturer becomes leaner, the traditional accounting framework must also become leaner. Conventional accounting methods aim to maximize worker and machinery performance to achieve the minimum available cost per unit. Nevertheless, the facility’s lean accounting strategy is focused on delivering customer-driven significance (Nguyen, 2018). In a typical organization, lean transition delivers a combination of positive and negative outcomes from two distinct perspectives: external and internal. On the plus side, implementing lean management approaches can help enhance functions and reduce delivery times. However, while these modifications are beneficial to customers on the surface, they alter the customer’s purchasing patterns from the seller’s perspective (Nguyen, 2018). Consumers start to purchase less and reduce their stocks due to placing orders nearer the time they require the commodity. Therefore, this will result in a short-term loss in profitability on an internal level.
On the other hand, operational enhancements will result in a reduction in supply chain cycle time. In other words, as the time necessary to translate raw materials into completed items decreases, the requirement for work-in-process and finished products inventories decreases as well. While the operating income improves dramatically due to inventory reduction, the standard cost accounting approach allocates fixed expenses to products produced during the financial reporting period. When stock volumes decline and sales exceed production, previously accumulated fixed costs should be put back into the fixed costs for the products sold in the timeframe. As a result, as inventories decline, the total fixed costs include any profit or loss from
Irrespective of worsening profitability, the lean transition can have two positive outcomes. Performance per worker and output capabilities of the plant both increase dramatically. Nevertheless, it is hard to acknowledge these benefits in the short term because lean manufacturers are not satisfied with reducing their employee count. As discussed in this case, Walsh was not pleased with retrenchments because they would decrease team spirit and make it more difficult for laborers to contribute to the transformation’s achievement. Additionally, transitioning to lean requires personnel involvement and participation (Amusawi et al., 2019). Top management frequently gives staff contingent job protection to motivate them. That is why Walsh repurposed workforces rather than letting them go. Additionally, businesses fail to develop rapid alternatives to capitalize on the capacity additions they create (Amusawi et al., 2019). Thus, by implementing lean accounting, the senior executive can reduce the adverse fiscal consequences of inventory while benefiting from increased efficiency and capacity utilization.
Numerous executives seek reassurance that their lean transformation was the correct one. Embracing lean accounting is a corporate accounting technique that accurately reflects what is occurring in the firm. Lean accounting facilitates the generation of streamlined financial statements that all organization members commonly comprehend. As was the case following Welsh’s session with Dwyer, he was puzzled by accounting jargon and terms like variances and overhead absorption. Straightforward and concise financial statements can assist management in decision-making by monitoring resource utilization, determining where and how to allocate costs, determining the maximum production combination, and deciding whether or not to receive order requests. Additionally, it will demonstrate the influence of worker advancements on the bottom line.
Accounting functions that employ lean accounting practices can more accurately represent a firm’s financial position after using lean production techniques. However, value stream bookkeeping and procedures necessitate modifying the institution’s decision-making operations or portions to improve the effectiveness of monitoring and assessing the company’s achievements and accomplishments. To enable the accounting systems to support better value stream workgroups and production cells in their attempts to improve effectiveness, it is essential to recognize the corporate’s primary value streams (Nguyen, 2018). Moreover, it is also crucial to define key performance indicators and framework the accounts around a few value stream classifications rather than conventional divisions.
With proper lean accounting, value stream expenses can be documented more precisely, as non-financial data is provided and variances are eliminated. Additionally, certain variable expenditures may become fixed, and wages are an illustration of this. If they were explicitly changeable and related to the production volume, but under lean accounting, these people will be employed; therefore, it makes no sense to make this salary cost variable. Some objectives may be to reduce stock and activities in progress, optimize performance, and eliminate cash from being locked up in inventory accounts. Additionally, we discovered today that inventory is not always a resource in lean accounting; it simply stands in the way.
Objectives should be established so that participants of value streams can track and achieve them. For example, having a reduced rework rate, specific asset turnover ratio, or a rapid manufacturing time: for instance, take an order and have it dispatched to the customer within 10 hours. Regarding the final section, which concentrates on removing non-value-added operations and operations, they should consider that lean accounting focuses on producing value for consumers. If a procedure in the workstation does not accomplish this, it will become apparent and should be deleted. Additionally, avoid producing things that are detrimental to the firm’s bottom line. As with today’s discussion, I believe the group stated that the OS1 technology was costly to produce and that Lebanon should consider canceling it.
Amusawi, E. G., Almagtome, A. H., & Shaker, A. S. (2019). Impact of lean accounting information on the financial performance of the healthcare institutions: A Case study. Journal of Engineering and Applied Sciences, 14(2), 589-399. Web.
Nguyen, N. P. (2018). Performance implication of market orientation and use of management accounting systems: The moderating role of accountants’ participation in strategic decision making. Journal of Asian Business and Economic Studies, 25(1), 33-49. Web.