The purpose of this note is to provide a sketch of lean accounting as it has evolved from earlier work on JIT  and TOC accounting. Although some new terminology appears in recent articles, it is not clear how much is really new in terms of concepts and techniques. Most current descriptions of lean enterprise concepts and lean accounting concepts can be found in much older articles and books related to just-in-time and the theory of constraints (e.g., see MAAW's JIT articles, TOC articles, and Chapter 8).

Several articles related to accounting in a JIT environment were published during the 1980's before the terms "lean enterprise" and "lean accounting" became popular. For example, Foster and Horngren (1987)¹ outlined the elements of what many now refer to as lean accounting. According to these authors, accounting systems in a JIT environment emphasize the direct traceability of costs, a reduction in the number of cost pools, less emphasis on traditional material, labor, and overhead variances, and a reduction in the frequency and detail involved in reporting purchases and deliveries. In addition, cost planning and cost reduction starts before production begins, and emphasis is placed on the simplification of all activities.

In a much more recent article, Kennedy and Brewer (2005)² illustrate two lean accounting concepts they refer to as 1) a value stream cost analysis and 2) a lean income statement. A value stream includes all the value-added activities involved in providing specific products and services to customers. The table below shows the format of the values stream cost analysis that appears in Table 1 on page 31. The idea is to identify areas of waste, bottlenecks, and opportunities to more effectively manage capacity.

The lean income statement format is illustrated below following Kennedy and Brewer's illustration on page 32. This statement shows the inventory change effect (hidden in traditional statements), actual costs (without confusing variance adjustments from standard to actual), and emphasizes the performance of each value stream.

In another article, Maskell and Baggaley (2006)³ indicate that lean accounting includes simple accounting, visual performance measures, value stream boards, value stream costing, target costing, visual management, box scores for decision making, Hoshin policy deployment, a 3P system for capital planning, and stronger internal controls. See the note below for more on this paper.

In an article somewhat critical of lean accounting, Van der Merwe and Thomson (2007)⁴ state that "Lean accounting refers to attempts to derive monetary management information based on Lean principles." They question the assertions of lean accounting, i.e: 1) that accounting is the problem, 2) that all conversion costs are fixed (defined as value stream costs except materials and purchased outside services), and 3) that lean accounting supports external reporting.

An obvious question for TOC advocates, is whether throughput accounting is considered lean accounting by lean accounting advocates? The answer to this question is not clear to me, but throughput accounting is part of the theory of constraints, and Goldratt and other TOC advocates have been very critical of traditional accounting since The Goal was published in 1986. Traditional accounting was certainly a problem for Alex Rogo in The Goal (See the summaries of The Goal and What is this thing called TOC). One thing that is fairly clear is that the question for both JIT (lean) and TOC advocates is how to design an accounting system that does not conflict with the concepts and practices of these two popular management concepts.

A related article by Kennedy, Owens-Jackson, Burney and Schoon⁵ includes a discussion of an assessment tool used to determine if measurements are effective in terms of the three attributes of good measures (i.e., technical, behavioral and cultural) defined by Ansari, Bell, Klammer and Lawrence.⁶ Using the tool involves answering a series of questions for each measurement related to each of the three attributes (a total of 48 questions) and then placing the results on a graph to show if the measurement is consistent with lean thinking. My initial reaction is that the tool involves too much unnecessary busywork, but it might be useful as a training tool for company employees that have had their heads buried in the sand for the past twenty years. The concepts of lean (mainly JIT and TOC) have been routinely discussed in the management and accounting literature since the 1980's. Those who have been paying attention know that it does not take 48 questions to see that a measurement like machine utilization percentages do not support anything but building excess inventory. A simple question like "does it promote throughput?" or "how does it affect TOC's three global measurements?" would do the trick. 

If you still don't know what lean accounting is, read some of the articles and stay tuned. I suspect many more papers on this topic are forthcoming in the accounting literature.

I plan to update this page as I learn more.

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¹ Foster, G. and C. T. Horngren. 1987. JIT: Cost accounting and cost management issues. Management Accounting (June): 19-25. (Summary).

Foster, G. and C. T. Horngren. 1988. Cost accounting and cost management in a JIT environment. Journal of Cost Management (Winter): 4-14.

² Kennedy, F. A. and P. C. Brewer. 2005. Lean accounting: What's it all about? Strategic Finance (November): 26-34.

³ Maskell, B. H. and B. L. Baggaley. 2006. Lean accounting: What's it all about? Target Magazine 22(1): 35-43. (Note and Article link).

⁴ Van der Merwe, A. and J. Thomson. 2007. The lowdown on lean accounting. Strategic Finance (February): 26-33.

⁵ Kennedy, F., L. Owens-Jackson, L. Burney and M. Schoon. 2007. How do your measurements stack up to lean? Strategic Finance (May): 32-41. 

⁶ Ansari, S., J. Bell, T. Klammer and C. Lawrence. 1999. Strategy and Management Accounting: Version 1.1: Module. Irwin.