Lean production: mistakes and limitations of accounting systems inside the SME sector

The Obsolescence of the Traditional Accounting Methods in Lean Environment

The intense global competition in 1984 forced organizations to improve their manufacturing system and adopting lean principles. Attention to the quality of products and processes, the level of inventories, and the improvement of work-force policies has made manufacturing once again a key element in the strategies of Organizations intending to be world-class competitors. Such organizations, anticipating difficulty with growth, must adopt cost reduction strategies if they wish to maintain and increase profits. One strategy that can yield returns in competitiveness is Lean Manufacturing, with its relentless concentration on eliminating waste and producing high-quality goods at the lowest possible price. Lean Manufacturing improves the production figures by eliminating waste in producing a product for cost reduction purposes. However, there remains a major obstacle to the lasting success of this revolution in the organization and technology of manufacturing operations. Most organizations are still using the traditional accounting methods that were developed decades ago for mass production

Lack of Relevance

Traditional accounting reports are not directly related to the organization's strategy. It is, by its nature, primarily financial in the way they collect and report information. But the goals of lean organizations are primarily established nonfinancial. Strategic goals will often make reference to financial objectives and these goals can generally be reported through the financial accounting system but most of the goals are nonfinancial

Cost Distortion

Traditional accounting methods is concerned with cost elements, but the pattern of cost elements has changed in recent years, and this detailed analysis is less important. Back when cost accounting was developed, the breakdown of costs into cost elements was quite straightforward. Total cost is determined by adding up material, labor and overhead costs for each level of the bill of material until the final product cost is determined. Obviously, there are some inaccuracies built into the traditional accounting methods. They present serious problems when applied to Lean as direct labor rates are too high for lean. Not many years ago, direct labor was a large part of the cost of a product as much as 30 to 60 percent of total cost. Material costs were low, and overhead was much lower. Today, a high-tech manufacturer may experience direct labor costs as low as 2% to 5% of the cost of product, and overhead of 40% to 60% of cost of product. Using the traditional accounting methods in a Lean environment, overhead costs normally can't be traced directly to the product.

Inflexibility

Traditional accounting reports do not vary from plant to plant within an organization. Similarly, they do not change over time as the business needs change. The reports are consistent across the organization, the divisions, and the entire corporation. A single set of numbers controls the whole organization. This does not make sense for a lean organization. An important aspect in the implementation of lean is that each plant is different. They have different products, different processes, different strengths and weaknesses, different problems and different people. For the management reporting to be of value, it must take account of these differences. Similarly, plants change over time, and their management reporting must also change with them.