Lean Accounting and Information Adjustment in Efficient Industries: Assimilation Ahead? (2013)

ABSTRACTGenerally Accepted Accounting Principles (GAAP) were originally tailored for mass-production firms. However, several important industries have recently adopted waste-minimizing technologies at odds with mass-production for their production lines. In this article we examine the typical implications of this mismatch to accounting practice and why lean accounting methods are seldom adopted by most accountants. We discuss how lean accounting and GAAP can complement each other in accounting practice and why assimilation of lean accounting adjustments by GAAP would be advantageous.INTRODUCTIONAccounting professionals rely on Generally Accepted Accounting Principles (GAAP) to report firm information in statements and journals. While the GAAP is a powerful resource to professionals, it builds on assumptions about the operating nature of firms. One such assumption - that the firm uses a mass-production technology - is now questionable in several important industries, such as electronics, automotive and furniture. Many firms in those industries have adopted waste-minimizing technologies at odds with traditional mass-production. In addition, businesses in many other industries such as healthcare and construction have been following a similar path over the last several years.Waste-minimizing technologies adopted in these industries are examples of lean manufacturing, a production method designed to meet consumer demand in the shortest possible amount of time (Carnes & Hedin, 2005; Maskell, Grasso, Baggaley, & Grasso, 2011). The popularity of this technology results from both cost savings and additional consumer satisfaction. For example, making products only when orders are received avoids costly inventory build-up, while shorter cycle times in the production process results in happier customers by getting the product in the shortest possible amount of time. Waste-minimization benefits from this production method are generally significant, yet not covered in Generally Accepted Accounting Principles (GAAP). In addition, the set of methods aimed at adjusting accounting information to the technological reality of lean manufacturing firms, named lean accounting, has not generally been accepted by accounting professionals. In this article we discuss the typical distortions to accounting information when data from a lean manufacturing firm is processed under the GAAP. We also discuss how lean accounting can assist on correcting reported information, and we suggest possible ways to have these corrections incorporated in financial statements with perhaps wider acceptance by the practice community. Building on the facts that (1) parties interested in firm financial statements seek the most accurate information about the firm in a language they understand, and (2) GAAP and lean accounting are complements, we argue that lean accounting results will be gradually incorporated in the GAAP over time.LEAN MANUFACTURING IMPLICATIONS TO ACCOUNTINGFirms operating under lean manufacturing technology typically benefit from cost savings via waste minimization. To this end, lean manufacturing focuses its attention on value streams (Carnes & Hedin, 2005; Hilker, 2011; Maskell & Baggaley, 2006), i.e., activity flows related to the production of goods (or services) valued by consumers. Since the actual firm profits consist of summing revenue-cost gaps across products, firms usually define a value stream for each brand and for products under development to identify which products are profitable and which ones lose money. Another related goal of this narrow definition of value stream is to ease identification of inefficiencies to the firm, such as high inventory, high cycle times and other sources of waste. Thus, lean manufacturing approach tracks how the firm performs in response to product demand, uses this information to identify and resolve inefficiencies at the value stream level, and repeats this process in a continuous way to improve results further (Carnes & Hedin, 2005; Maskell & Baggaley, 2006). …