If your business is implementing Lean, it's important that you understand Lean Accounting. It's especially important for your accounting staff to get on-board with Lean. If they don't, implementation of Lean may stall. Here's why.

The problem lies with cost accounting: Traditional cost accounting was built for another era and another manufacturing process. In fact, today's cost accounting practices in most manufacturers originated from concepts in the early 1900s. Not exactly keeping up with change.

To be blunt, the greater the initial success of Lean, the more likely earnings will be negatively impacted short-term. Why? Cost accounting was built in a time when labor was 60 to 70 percent of total costs. Today, that is more likely 10 to 15 percent of costs. Yet, overhead rates are still applied using labor as a primary factor.

As your company becomes Lean, your inventory levels will lower and cash will be freed. This also causes prior period capitalized labor and overhead costs to hit the profit & loss statement in the current period, depressing earnings. This is only a short-term phenomenon, but one that quickly catches the attention of the accountants. Other potential P&L hits may result from identifying obsolete inventory (which previously was ignored) and customers delaying orders when they know you have shorter lead times.

So if you are using Lean in your company, the key is to get the accountants on board early. And use Lean Accounting concepts like value stream costing, elimination of standard cost systems, easy to understand P&L's, performance metrics that are real-time and future oriented and a focus on cash flow.

Traditional cost accounting was built for another era; it ignores the customer and often leads to non-productive behavior.

For more information on Lean Accounting, please contact your Rea advisor. Our manufacturing team can help you make sense of this accounting method.

-by Dustin Hostetler (Lean Six Sigma Master Black Belt, Wooster office)

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