08. May. 2014

The Waste in Accounting System

by KII

What?

Inventory is to Lean manufacturing, Transactions are to Lean Accounting. We must appreciate that all transactions do no value addition and are PURE WASTE.

Entering and administering transaction is wasteful and time – consuming

Example

A Production plant with 150 people, 120 products and revenue of $15M required over 4,000,000 transactions per year.

  • Job costing, procurement, inventory control, accounts payable, accounts receivable
  • 38 equivalent heads spent processing and using the transactions
  • 12.7% of revenue!

For Most part transactions are in place to bring control to a manufacturing process that is out of control

However as we proceed in the Lean Journey, The number of transactions can go up dramatically

So we need to eliminate the transactions that are no longer needed without losing control of the business

Ideally we would eliminate most operational transactions because they are wasteful and they cause more waste

But we must

Maintain financial control of the business.
Remove transactions only when the reason for having them has been removed

Just consider the enormous possibilities

1. Accounts Payable:

  • How many suppliers?
  • Transactions per supplier?
  • Inspection and Verification of incoming goods.
  • No. of people processing supplier invoices and reconciling creditor accounts.
  • No. of purchase orders?
  • How many people involved in the process?         

2. Accounts Receivable:

  •  Number of invoices for key customers?
  •  Maintaining and checking invoices in accounts?   
  •  Increased number of transactions.
  •  Recovery of debtor payments and debtor accounts reconciliation.

3. General Ledger / Month end closure:

  •  How many accounts in the charter of accounts?
  •  Average number of entries in these accounts?
  •  How many accounts have no entries in the past six months?
  •  No of days spent in closing end month accounts

4. Job order (material & Labor) tracking:

  • Number of work orders
  • Resources employed to track material and labor consumed on job order basis.
  • Number of variance reports and time spent in analyzing such reports

 5. Inventory Management:

  • Time and resource spent in taking stock of inventory and reconciliation every month.
  • How much resource is deployed to the task of perpetual inventory tracking?

 Changing Transaction controls

 

Changing the Role of the Accounting Personnel

Some guidelines on eliminating transactions…

Labor Tracking

  • Eliminate job step tracking..track only starts and stops
  • Eliminate detailed labor tracking…by back flushing using std labor costs and actual production.
  • Eliminate detailed tracking of overheads and variance reporting
  • Apply labor and overheads directly to the value stream and not to specific products or production jobs
  • Eliminate work orders and other production tracking documents.

Inventory tracking

  • Visual controls eliminate the need for perpetual inventory tracking.
  • By expensing materials on receipt an end month adjustment is enough to bring the inventory value on to the balance sheet.-…as anyhow inventory value is greatly diminished.
  • Cycle counting of inventory becomes unnecessary

Material costs

  • Material assignment through back flushing using std material cost and actual production
  • Reduce no. of suppliers-through a supplier certification program
  • Introduce blanket purchase orders with suppliers
  • Use MRP for planning only…not for ordering material
  • Apply material costs directly to the value stream-once received
  • Eliminate standard costing

 Acknowledgement : Practical Lean accounting by Brian Maskell 

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