Lean Production and Managerial Costing
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Lean Production and Managerial Costing
Dr. Taiichi Ohno’s position on cost accounting, as father of the Toyota Production System, is often cited during Lean discussions. He kept cost accountants out of his factory, and knowledge of cost accounting principles out of the minds of his people.
Time has proven he was on the right path. His objective was operational efficiency in pursuit of quality and customer satisfaction…and a healthy profit. Cost accounting, as he saw it applied, impeded achievement of his goal. It was measuring operations based on principles of financial accounting and financial reporting, not principles focused on decision support and causal relationships.
Despite Dr. Ohno’s insight, cost accounting, when done with the primary objective of supporting external financial reporting, continues to impede Lean implementations today. Is a purge the only answer?
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When costing is focused on managerial decision-making, it becomes a decision science like Lean and operations management. Decision sciences require cause and effect insights to apply the scientific method and gather the information necessary to find improvements. Organizations on the Lean journey need to understand many new perspectives—moving from batch process to one piece flow, learning to accept idle capacity of resources rather than engaging in wasteful activity, justifying investments in different production equipment to maximize flexibility, and many more. Understanding these perspectives from both an operational and financial perspective is important. One example is the creation of available capacity as processes become more efficient. If the costs associated with the newly available capacity aren’t clearly identified and excluded from product cost, operational improvements won’t be evident in the product cost. The existence of this available capacity needs to be communicated to marketing, sales, and/or product R&D so revenue-generating uses for it can be created. The creation of available capacity can be confusing from a financial point of view since the cost of existing production (and consequently product cost) has gone down, but the cost has shifted to available or excess capacity. No actual cash savings have been achieved at an entity level (except reduction in defects), but existing resources are now available to do more for only incremental costs such as raw material, marketing, design and the like.
Wading through costing approaches can be confusing. Look for a clear focus on decision support, capacity management, integration with operational data, and a comprehensive modeling approach based on cause and effect. In my experience, only Resource Consumption Accounting and GPK create the necessary causal and operationally connected models to clarify the costs for a lean journey at both the enterprise and shop floor level.
Larry White, CMA, CPA, CGFM , lwhite@rcainstitute.org, is the executive director of the Resource Consumption Accounting Institute ( www.rcainstitute.org), which seeks to advance management accounting’s ability to contribute to improving business performance.
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