Accounting in the Lean Enterprise : Providing Simple, by McVay, Gloria; Kennedy, Frances; Fullerton, Rosemary

By McVay, Gloria; Kennedy, Frances; Fullerton, Rosemary

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But these objectives are fluid, transparent, and flexible. The gamesmanship and significant resources expended on traditional budgeting should be largely eliminated and replaced with productive, current strategic forecasting and planning that is done on a monthly basis—not a year-­end theatrical project. One of the main keys to this new internal reporting system is having a relatively stable environment with low inventories. The reason for this is that inventories must be reported externally per generally accepted accounting principles (GAAP) at full absorption cost under an accrual system.

The most difficult part of this standard unit cost estimation is how to determine the budgeted unit price for overhead. Most companies use either a portion of labor hours/­dollars or a machine hour rate to allocate overhead. Generally an overhead rate is established at the beginning of the year. For example, if a company used direct labor hours to assign overhead costs to individual products, at the beginning of the year, the total overhead costs would be estimated along with the estimated total direct labor hours.

Cost distortion, particularly incremental direct labor and allocated manufacturing overhead, can impair decision making by adversely affecting management’s ability to correctly analyze costs. Decision frameworks better suited to lean environments are discussed in Chapter 7. In a lean accounting system, costs are more direct and understandable, relying on fewer estimates and allocations, and providing real-­time decision-­making data. As we examine the creation of value stream income statements and the valuation of inventory, it is important to note that the same accounting system used to 41 42 ◾ Accounting in the Lean Enterprise: Providing Simple, Practical, and Decision-Relevant Information produce internal information can also be used for financial statement creation.

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