Explore BrainMass

The Lean System

What are the implications for cost accounting of lean production? What are the roles of suppliers and customers in a lean system?

Solution Preview

What are the implications of cost accounting on lean production?

Cost accounting evolved to measure profitability across a range of products and to satisfy generally accepted accounting principles (GAAP) and the Internal Revenue Service but in order to make lean recognizable, their management reporting needs to move away from cost accounting. Cost accounting tracks inventory transactions as large batches of material creep from process to process. Cost accounting identifies the value added to material and attempts to quantify how much labor and overhead should be absorbed into the financial statement thereby recording unfavorable variances when production is underutilized. In response, operations frequently overproduce which is one of the 'seven deadly wastes' that lean tries to eliminate. Cost accounting becomes problematic for lean during the financial periods when inventory is being reduced. In addition to its material content, inventory represents labor and overhead that are incurred to produce the product that are capitalized on the balance sheet and deferring the recognition of until some future period when the inventory is sold. When the length of time of inventory is decreased, all those deferred costs have to come off the balance sheet and there is only one place for those deferred costs to go and that is through the profit-and-loss statement which generally shows up as unfavorable overhead variances. This is a negative impact which explains why a lot of public companies have a hard time achieving significant success with lean because in a cost-based system, so much emphasis on earnings per share is ...

Solution Summary

The solution explains the implications for cost accounting of lean production and the roles of suppliers and customers in a lean system. References included.