Lean Accounting

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Q1: Do the traditional accounting practices that the Topeka plant adopted in 1979 to support its mass production process have value in a lean environment? Explain the specific reasons that support your answer. In general, we do not think that traditional accounting practices that Topeka plant adopted in 1979 to support its mass production would fit into the lean accounting environment. The differences between the two accounting methods make the traditional accounting hard to work for the lean environment. We would analyze from the following perspectives:

Goal
The goal of traditional accounting practices is to achieve the lowest possible cost per unit by maximizing employee and equipment productivity. However, the goal of the plant’s lean accounting approach is to deliver customer-driven value.

Production process
Under traditional accounting approach, the plant’s heat, treating, assembly and pack, cutting and splicing, injection molding, and extrusion molding resources were maintained in physically separated and autonomously managed. Units of production were scheduled based on a forecast of expected customer demand and then processed in large expected customer demand and then processed in large batches to minimize changeover costs. On the other hand, under lean accounting practices, resources are organized in a manner that mirrors the linked set of activities that deliver products to customers. Units of production are pulled through manufacturing cells in a one-piece flow in response to actual customer orders.

Inventory
As for traditional accounting approach, the entire work-in-process inventory was stored as needed in between workstations. However, under lean accounting approach, since it improves and reduces the inventory level, cycle counts are becoming more accurate, and there is much less time needed to perform these counts.

Financials
The traditional accounting practice was inaccurately characterizing the financial impact of operational improvements. The absorption costing income statement treats all kinds of variable cost and fixed overhead as product costs and all selling and administrative expenses as period costs, which penalized managers’ inventory-reduction efforts with a major hit to the bottom line. What’s more, a lean company has special financial benefits calculation methods, such as the value stream cost analysis, which shows where and how productively costs are incurred, highlights areas of waste, shows actual costs rather than standard costs, identifies bottlenecks and highlights opportunities to manage capacity more effectively. Also, new format of the income statement focuses on simplicity by attaching actual costs to each component of the value stream, isolating the impact of inventory fluctuations on profits, and separating organization-sustaining costs and corporate allocations from value stream profitability. The modified financial reports may also include nonfinancial information. These aspects mentioned above cannot be showed on the traditional absorption costing income statement, especially the cost related to value streams. In conclusion, under traditional accounting system, the standard costing system and activity based costing methods are quite different from the lean accounting methods. Furthermore, concepts such as value stream are not present under the traditional approach that the company adopted in 1979. Therefore, we doubt that whether traditional accounting that the company adopted in 1979 would fit into the lean accounting environment. 2. How can the accounting function better serve our senior management team’s strategic planning, control, and decision-making efforts within its current lean environment? Specially, address issues related to capacity planning, aligning employee Incentives wit lean goals, and product mix decision-making.

A. Capacity Planning
* Lean manufacturing requires an inventory system different from mass production which can lead to inventory...
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