lean management systems

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Although manufacturing organizations worldwide ar lean management systems, field reports suggest that many lean manufactur tinue to use traditional standar e moving rapidly to adopt d cost ers conaccounting control systems, despite the argument by
lean accounting experts that they hinder lean implementation.1 No empirical research study has examined
field practices to determine if lean accounting theory
matches field practices. In this article, we present a
research protocol for determining how mature lean
manufacturers’ use of standard costing compares to lean
accounting theory. In addition, we offer perspectives to
determine why mature lean manufacturers may continue to use standard costing and variance analysis.
In our study, we use a model from social systems
thinking—Anthony Giddens’s structuration theory
(GST)—to guide the determination of nine relevant
variables. We anticipate that this research protocol will
lead to a better understanding of the reasons lean manufacturers retain standard costing and variance analysis
and of the facilitating factors that allow some companies
to discard standard costing as a control system for
operations.
Exploring the Role of
Standard Costing in
Lean Manufacturing
Enterprises:
A Structuration
Theory Approach
DO MATURE LEAN MANUFACTURERS CONTINUE TO USE STANDARD COSTING AND
VARIANCE ANALYSIS? THE AUTHORS PRESENT A RESEARCH PROTOCOL TO DETERMINE IF
THIS IS THE CASE AND HOW IT COMPARES TO LEAN ACCOUNTING THEORY.
B Y M A N J U N A T H H . S . R A O , C M A , A N D A N D R E W
B A R G E R S T O C K , P H . D . , C P A
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STANDARD COSTING VERSUS LEAN
ACCOUNTING
Standard costing was developed to suit the needs of
mass manufacturing. The mass manufacturing environment, which is characterized by high fixed-investment
costs in the plant and machinery, involves production of
large volumes of uniform output. To reap the
economies of scale, high fixed-investment costs are
spread (averaged) over volumes of units produced.
Standard costing is a convenient way of costing outputs
in mass manufacturing environments. Standard costs,
which are predetermined unit costs, estimate the costs
of the output, which then are compared with actual
costs incurred to determine variances that are useful for
exercising managerial control. Such controls, however,
take place at aggregated levels and often weeks after
actual operations, thus obscuring the cause-and-effect
connections. For instance, variance reports that provide
information at aggregated levels do not provide adequate information to exercise operational controls in a
lean environment.
In a lean environment, operational and process controls replace managerial and financial controls at aggregated levels. Also, visual operational controls replace
periodic financial controls at aggregated levels. The
objective of lean is to prevent deviations from occurring
in the first place and not correcting deviations that have
already occurred.
Standard costing systems also create a detailed system of accounting for recording each and every transaction to trace the flow of processes through different
stages of production. In a single-product environment,
standard costing will be easy to maintain and can produce meaningful reports for control. In a multiproduct,
lean manufacturing environment, where each process
can produce a variety of products, maintaining detailed
product accounts is both wasteful and cumbersome.2
The use of standard costing in such an environment
may produce volumes of variance reports that may not
only be difficult to analyze but may also not provide
any meaningful information to exercise control.
Further, accounting for fixed overhead costs becomes
more complicated in a lean environment. Fixed costs in
a lean manufacturing environment cannot be averaged
over the outputs produced because of lack of uniformity in the output in the multiproduct environment. In
such manufacturing systems, it becomes necessary to
trace the input costs to value streams rather than a single unit of output. A value stream consists of a group or
family of related products or services that employ the
same process steps.3 According to lean accounting, the
profitability reporting system should be organized
around value streams.
The lean manufacturing environment is characterized by manufacturing in work cells involving multiskilled workers and flexible manufacturing systems.4
Lean manufacturers often find visual controls and
work-cell metrics superior for controlling operations.
Consequently, according to lean accounting theory, it is
surprising to find standard costing in mature lean manufacturers. The unique features of a lean manufacturing
environment have led experts to develop lean accounting that provides various techniques and metrics to
measure performance at subtler (and more powerful)
levels of operations.5 Such measurements are superior
to standard costing and variance analysis in several ways
because they:
◆ Are developed by each work-cell team to support
value-stream metrics,
◆ Provide more detailed information for controlling
workflow processes,
◆ Are generated on a more real-time basis (hourly or
daily) instead of weeks or months after a production
run, and, therefore,
◆ Provide actionable information for correcting problems quickly rather than guessing retrospectively at
what happened and trying to make adjustments.
Brian Maskell and Bruce Baggaley have indicated a
three-stage path to lean transformation that should be
accompanied by corresponding changes in accounting
whereby the organization moves away from traditional
costing to lean accounting.6 They also say that, ideally,
in stage two of lean transformation, companies must
move away from traditional standard cost accounting
and variance analysis.
PARADIGM SHIFT
The shift in emphasis from traditional standard costing
to lean accounting in lean enterprises can be considered
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a shift in focus from a cost-based approach to a valuebased approach to management accounting. For example, IMA® (Institute of Management Accountants)
published a Statement on Management Accounting
(SMA), Accounting for the Lean Enterprise: Major Changes
to the Accounting Paradigm, which describes the paradigm
shifts necessary for accounting in lean enterprises.7 It
describes five major changes in accounting for lean
enterprises:
◆ Preparation of value-stream income statements to
control costs, promote lean behavior, and monitor
performances;
◆ New decision-making methods without using standard costing as base;
◆ A product-family view of product costs;
◆ Budget and financial planning based on a box score
format and value-stream statements; and
◆ Transaction elimination and reduction in collection
and recording of data in favor of simple visual management methods.
Thomas Kuhn coined the term “paradigm” in 1962
to denote the models or broad concepts within which
theories are built in any field.8 He studied the history of
scientific developments and in Structure of Scientific Revolutions described how scientific changes occur through
periodic upheavals. According to Kuhn, scientific
progress occurs not through a steady process of evolution or linear accumulation of facts but through revolutionary periods involving shifts in paradigms. During
these times, there is a struggle between competing paradigms to dominate the field. When new, contradictory
evidence appears against existing paradigms, the proponents of the existing paradigms in the field discount the
new discoveries and defend the existing paradigms.
The proponents of new knowledge, however, develop
new paradigms outside old paradigms and struggle to
gain acceptance. The new paradigm eventually replaces
the old paradigm as a new generation grows up with it
and the opponents die or convert to a new paradigm.
Today the management accounting field is characterized by paradigm shifts. This shift began with the publication of Relevance Lost in 1987 by H. Thomas Johnson
and Robert S. Kaplan, which highlighted the serious
shortcomings of traditional cost accounting methods in
meeting the needs of current manufacturing systems.9
But while standard costing has been criticized as not
relevant in current manufacturing environments, it is
still used most widely in manufacturing companies
throughout the world, according to empirical findings.10
Even Japanese manufacturing companies continue to
use standard costing for different purposes, despite its
apparent weaknesses.11 A field study of integrated cost
management systems by Robin Cooper and Regine
Slagmulder in 2006 found that standard costing continued to play an important role to achieve cost containment in a network organization that also used lean
accounting techniques such as kaizen costing and target
costing for product costing.12
In 2003, IMA and Ernst & Young conducted a joint
survey to assess the current state of management
accounting. Among other findings, this survey indicated
that, despite introducing new tools, companies still frequently used traditional management accounting tools.
In fact, traditional costing techniques such as fullabsorption costing and overhead allocations were popular with more than 70% of the respondents.13
Why do lean enterprises continue to use standard
costing? The question reflects the debate that is going
on in the broader field of management accounting
where alternative cost accounting techniques are struggling to gain acceptance as a replacement for traditional
cost accounting methods. But traditional cost accounting methods, such as standard costing, continue to find
relevance in actual practice.
THEORETICAL FRAMEWORK
In 1984, Anthony Giddens proposed the theory of structuration to provide theoretical constructs with which to
analyze social systems.14 This theory not only explains
the nature of social institutions, but it provides a means
to understand the conditions for their transformation.
Management accounting systems increasingly are being
considered social systems.15 In 1991, Norman Macintosh and Robert Scapens used structuration theory to
describe the nature of management accounting systems,
explaining how it can provide a holistic perspective
with which to examine management accounting and
control systems and how they can bring about transformational changes in organizations.16 In our study, we
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use structuration theory as a sensitizing device to analyze and understand factors that may impact management accounting systems in lean manufacturing plants.
We apply the concepts from managerial accounting to
the constructs of structuration theory to make propositions about the probable reasons lean manufacturing
plants retain standard costing.
CONSTRUCTS
Figure 1 gives the framework of the structuration theory. The theory provides for three levels of constructs:
core concepts of structuration, dimensions of structuration, and elements of structuration. It shows the constructs of structuration theory, their interactions, and the
variables that operationalize the constructs for this
research.
CORE CONCEPTS
Giddens provides three core concepts: systems, structures, and structuration.17 At the heart of structuration
theory lies the concept of system. We can describe a
system as practices or activities that are regularly produced or reproduced by collective social actors. Giddens describes systems as reproduced relations that are
organized as regular social practices between people.18
When we consider “systems” as regularly produced or
reproduced practices, we can describe management
accounting as a system in which management accountants regularly organize, produce, and reproduce management accounting practices like standard costing.
Structures are the rules that govern the regularly
reproduced practices in social systems and the resources
that are organized through such practices. Thus Gid
Facility
(Machinery)
Facility
(Machinery)
Domination structures
(Days in Inventory)
Domination Structures
(Days in Inventory)
Power
(Extent of JIT purchasing)
DOMINATION
(Inventory Valuation)
System
Structure
Structuration
Structural
dimensions
Concepts
Interpretative schemes
(GAAP)
Signification structures
(Chart of accounts)
Signification Structures
(Chart of Accounts)
Communication
(Reporting)
SIGNIFICATION
(Reporting)
Norms
(ERP)
Legitimation structures
(Responsibility centers)
Sanction
(Top management support)
LEGITIMATION
(Control)
Figure 1: Constructs of Structuration Theory
D I M E N S I O N S
C O N C E P T S
(Figure adapted from Anthony Giddens, The Constitution of Society, 1984, p.29. Items shown in parentheses were added by authors.)
Structural
Dimensions
Concepts
Structure
System
Structuration
DOMINATION
(Inventory Valuation)
Legitimation Structures
(Responsibility Centers)
Norms
(ERP)
Sanction
(Top-Management Support)
Interpretative Schemes
(GAAP)
Communication
(Reporting)
Power
(Extent of JIT Purchasing)
SIGNIFICATION
(Reporting)
LEGITIMATION
(Control)
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dens describes structures as “rules” and “resources”
that are organized as properties of social systems. Macintosh and Scapens describe structures as the codes,
templates, blueprints, rules, or formulas that shape and
program social behavior.19 In the context of this study,
we consider practices like standard costing as structures
of management accounting systems that provide rules,
templates, and formulas governing management
accounting systems.
Structuration also is the process whereby social actors
use structures to maintain or change systems.20 An
understanding of the process shows how accounting
control systems are maintained or changed to facilitate
resource management. In the context of this research,
management accountants are the social actors who support lean management objectives by maintaining or
changing management accounting practices.
DIMENSIONS OF STRUCTURATION
Management accountants as social actors are involved
in structuration through three dimensions of interactions in social systems. First, they exercise power over
system resources (e.g., inventories). Second, they communicate and exchange meaning with other social
actors (e.g., through management reports). Third, they
perform social activities within accepted norms of
behavior (e.g., supporting managerial controls). Giddens
calls these three dimensions domination, signification,
and legitimation.21 For our study, it is necessary to
understand these three concepts of structuration in the
context of standard costing practices in lean manufacturing enterprises.
In 1988, Kaplan analyzed the reasons for using costing systems and posited that there are different reasons
why costing systems can exist in an organization. Further, he asserted that a single costing system cannot
meet all the objectives of management accounting in
any organization. He suggested that management
accounting systems should be designed to meet three
distinct objectives: inventory valuation, product costing,
and control.22 Our research uses three distinct objectives of standard cost accounting practices to represent
the three structural dimensions of management
accounting systems in lean manufacturing plants. These
objectives are inventory valuation (domination), reporting (signification), and control (legitimation).
Inventory Valuation (Domination)
In a social system, domination refers to how social
actors exercise power over resources to apply their
transformative capabilities.23 In manufacturing companies, management accountants assist decision makers
by tracking how resources and related costs accumulate
through the production process leading to inventory
valuation. Such asset valuation is critical for a variety of
subsequent decisions about product pricing and possible changes to production methodologies. For our
study, the nature of inventory valuation in lean manufacturing plants represents the domination dimension of
the structuration theory.
Reporting (Signification)
Signification refers to the way social actors make sense
of the social world and exchange and communicate
meaning of their understanding of the social world with
other social actors.24 In our study, signification is represented by reporting practices in lean manufacturing
plants. Reports are the devices through which management accountants communicate their understanding
and interpretations of the economic impact of operations in lean manufacturing plants.
Managerial Control (Legitimation)
Legitimation denotes accepted value standards for
social behavior.25 Our study considers the nature of
managerial control as a legitimation dimension of management accounting systems in lean manufacturing
plants. Controls aim at ensuring that operations are carried on for legitimate purposes in an organization and
provide sanctions only for activities that are carried on
in accordance with predetermined standards or plans.
ELEMENTS OF STRUCTURATION
The three concepts of structuration—structures, systems, and structuration—interact with the three dimensions of domination, signification, and legitimation.
This interaction results in a 3 ✕ 3 matrix that provides
nine elements of structuration (see Figure 1).
Table 1 shows the nine elements in terms of operational variables in the context of management account
Table 1: Elements of Structural Dimensions and Propositions
Propositions
Structural
Dimensions
Operational
Variables
Discarding
of Standard
Costing
Retention
of Standard
Costing
Measure
DOMINATION
Structure
Domination
structures
Level of inventory
Days of
inventory
on hand
Low
High
System
Facility
Machines
Nature
Flexible
machines
Monument
machines
Structuration
Power
Manufacturing
strategy
Extent
of JIT
High
Low
SIGNIFICATION
Structure
Signification
structures
General
Ledger COA
Nature
Modified
Not modified
System
Interpretative
scheme
Attitude toward
GAAP use
Attitude
Not relevant to
management
accounting
Relevant to
management
accounting
Structuration
Communication
Reporting
Type
Box scores,
reports on
CSF
Variance
analysis and
variance
reports
LEGITIMATION
Structure
Legitimation
structures
Responsibility
centers
Type
Value
streams/profit
centers
Cost
centers
System
Norm
ERP
Nature
Modified
Legacy
Structuration
Sanction
Top-
management
support
Support
to lean
accounting
High
Low
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ing practices in lean manufacturing plants and indicates
the proposed impact of these variables on the decision
to retain or discard standard costing in lean manufacturing plants.
ELEMENTS IMPACTING INVENTORY
VALUATION (DOMINATION)
Days of Inventory on Hand (Domination Structures)
Domination structures refer to resources over which
agents use their power.26 In connection with inventory
valuation, we are concerned with one important
resource in manufacturing plants—inventory. The volume of inventory on hand has an impact on the nature
of inventory valuation. Low levels of inventory can be
valued at actual cost, but high levels of inventory
require the use of estimated costs or standard costs. In a
lean plant, a high volume of inventory may be necessary to balance workflow through bottleneck constraints
that have not yet been streamlined. In addition, external linkages to suppliers and customers may not be
developed sufficiently to minimize inventory. The volume of inventory in a plant can be measured in terms
of days of inventory on hand. With this understanding,
we state our first research proposition.
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Proposition 1. In lean manufacturing organizations
with a high level of inventory as indicated by the number of days of inventory on hand, the probability of
retention of standard costing will be high.
Monument Machines (Facility)
According to structuration theory, the agent uses “facilities” to harness resources through their transformative
capabilities. In lean manufacturing plants, the machinery can be considered a “facility” through which agents
exercise transformative capabilities over inventory
(resources). The existence of monument machines may
create problems for lean transformation. Monument
machines typically are large, expensive pieces of equipment with large batches, long lead times, and a slow
changeover and that serve more than one value stream.
They act as bottlenecks, and, in the short run, the solution would be to work around such machines. Because
monument machines have a tendency to produce large
batches, they may create a huge buffer stock of inventory in the downstream value streams, which may
require the use of standard costing to monitor and control production made in large batches.27 Thus we create
the second proposition.
Proposition 2. In lean manufacturing plants with
monument machines, the probability of retaining standard costing for inventory valuation will be high.
Just-in-Time Production (Power)
In structuration theory, power represents the capability
of agents to bring about transformative changes.28 In
connection with inventory valuation, the agents use
their power over inventories by applying appropriate
operational strategies. Lean enterprises follow the strategy of Just-in-Time (JIT) production. To keep a very
low level of inventory, lean managers adopt operational
tactics such as kanban (visual control) and create
upward and downward linkages on the supply chain.
The valuation of low levels of inventory can be done on
actual cost. On the other hand, in mass manufacturing
the operational strategy is to produce in anticipation of
demand to accumulate inventory for the future. High
levels of accumulated inventory require standard (estimated) costs to value inventories. With this understanding, we create the third proposition.
Proposition 3. In lean manufacturing plants where
the extent of JIT strategy is high, the probability of
retaining standard costing for inventory valuation will
be low.
ELEMENTS IMPACTING REPORTING
(SIGNIFICATION)
General Ledger Chart of Accounts
(Signification Structures)
In structuration theory, signification structures are
described as codes or modes of coding to communicate
meaning. Accounting constitutes signification structures
within organizations because accounting is the language
of business and finance with its terminology and symbols that create and communicate meaning concerning
resources and their use. As with any other language,
accountants use their own vocabulary and signification
structures to record, report, and interpret the financial
implications of operations.
The general ledger is the heart of accounting systems. The scheme of the general ledger, which is laid
out in the chart of accounts (COA), provides a structure
for recording and reporting financial impacts of transactions. We can consider the chart of accounts as codes for
accounting language and tools for cost accumulation. In
the standard cost accounting environment, accountants
create virtual factories in their books to track each and
every transaction for the purpose of product costing and
reporting, and periodically they reconcile the cost
accounting records with the general ledger figures.29
Maskell and Baggaley suggest that lean enterprises
should move away from the traditional functional chart
of accounts and use a simplified COA to trace transactions directly to value streams.30 They say that lean
enterprises must simplify the chart of accounts, streamline their general ledger accounts to clearly capture the
benefits of lean, and prepare value-stream income statements. Ideally, the changed chart of accounts and
accounting entries should reflect the value-based
approach of lean strategy against the cost-based
approach of mass manufacturing. Appendix 1 shows
new accounts and journal entries that a lean manufacturing plant may use to reflect the value-stream
approach of lean accounting as opposed to the costbased approach of standard costing. Thus we create the
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fourth proposition.
Proposition 4. In lean manufacturing plants where
the general ledger chart of accounts has been modified
to support the lean strategy, the probability of retaining
standard cost accounting for reporting purposes will be
low.
Attitude Toward GAAP (Interpretative Schemes)
In structuration theory, “interpretative schemes” represent standardized elements of stocks of knowledge
applied by actors in production of meaning.31 Interpretative schemes are at the core of mutual knowledge that
actors use to understand interactions. Agents (actors)
apply interpretative schemes to signification codes to
arrive at a common understanding in activity. In connection with accounting, we consider the general principles that accountants use to prepare accounting reports
as interpretative schemes. The application of uniform
accounting principles prescribed by U.S. Generally
Accepted Accounting Principles (GAAP) is mandatory
in financial accounting and reporting, but the use of
GAAP is not necessary for internal management reporting. Still, several lean accounting experts indicate that
some management accountants act under a belief that
standard costing is a GAAP requirement.32 This clearly
indicates a situation of applying wrong interpretative
schemes, which results in wrong communication in
reporting. Thus we state our fifth proposition.
Proposition 5. In lean manufacturing plants where
the management accountants believe that the use of
standard costing techniques is a requirement under
GAAP, the probability of retaining standard costing for
reporting purposes will be high.
Communication (Reporting)
According to the structuration theory, regular reproduction of structural properties takes place across time and
space through communication.33 Applying this to a lean
manufacturing context, we can say that lean manufacturing strategies can be sustained only when the structural properties of a lean environment are reproduced
regularly within organizations. This is possible only
through sustained communication of shared meanings
on lean practices across time and organizational
domains.
Instead of standard costing and variance analysis,
Maskell and Baggaley recommend the use of special
reports called “box scores” in lean enterprises to report
on performance measurement based on key critical success factors, such as value, flow and pull, empowered
people, perfection, and value stream, that are linked to
strategic objectives. Also, they recommend preparation
of a periodic value-stream income statement to facilitate
managerial control.34 In theory, variance analysis reports
have little meaning in lean environments. The continued use of standard costing and variance analysis may
contribute to continuing the use of existing structures
and hinder the progress on the lean path. Anecdotal
evidence suggests that companies may even stop pursuing lean strategies because of the failure of traditional
standard costing to capture the financial benefits of
lean. Thus Proposition 6 expresses the connections
between the type of management reports generated
and the need for standard costing.
Proposition 6. In lean manufacturing plants where
the management accountants prepare specialized
reports to capture the financial impact of lean, the probability of retaining standard costing for reporting purposes will be low.
ELEMENTS IMPACTING MANAGERIAL
CONTROL (LEGITIMATION)
Responsibility Centers (Legitimation Structures)
Legitimation structures refer to accepted value standards of behavior in a social system and appeal to the
sense of what is right and what is wrong in social actors.
The concept of legitimation is different in a lean manufacturing environment and in a mass manufacturing
environment. In lean enterprises, customer value creation is considered the legitimate objective of effective
operations; in mass manufacturing organizations, the
emphasis is on low-cost production. This shift toward
value creation has an important bearing on the nature of
organizational structure. For the purpose of fixing
accountability and exercising control, organizations are
divided into various types of responsibility centers, such
as cost centers, profit centers, and investment centers.
In traditional mass manufacturing companies, cost
control forms the basis for managerial control, so the
responsibility centers are classified as cost centers. Stan
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dard costing systems accumulate cost data on the basis
of cost centers and provide variance reports at the costcenter level to enable managerial control. Lean
accounting theory, however, suggests that in lean enterprises the concept of cost centers should be replaced by
the concept of value streams. The continued use of the
concept of cost centers in lean manufacturing enterprises may be a reason for continued use of standard costing there. Our seventh proposition addresses
responsibility centers.
Proposition 7. In lean manufacturing plants where the
organizational responsibility centers are classified as cost
centers, the probability of using standard costing for
control purposes is high.
Enterprise Resource Planning (ERP)
Systems (Norms)
Norms are rules of behavior that reflect or embody values, either prescribing a given type of behavior or forbidding it.35 In the context of management accounting
systems, we can describe norms as procedural routines
through which management exercises control. In our
study, we examine the nature of ERP systems in lean
manufacturing enterprises.
ERP systems act as normative structures in organizations by embedding norms of actions. They automate
accounting process flows, such as matching invoices,
order management cycle, ledger management, automated accounting, scheduled reporting, and the like, thereby redefining rights and obligations of organizational
actors (accountants).36 Organizations that have invested
heavily in legacy ERP systems may continue to use
standard costing if such systems support only standard
costing or if such systems accumulate costs only on the
basis of cost centers. Further, it can be expensive to
modify existing ERP systems because of cascading
impacts of ERP changes. Thus we create the eighth
proposition.
Proposition 8. In lean manufacturing plants where
the ERP systems have not been modified to suit lean
initiatives, the probability of using standard costing for
control purposes will be high.
Top-Management Support (Sanction)
Giddens describes sanctions as a mode of reward or
punishment that reinforces expected forms of
behavior.37 In an organization, top management provides sanctions to encourage or discourage certain
norms through inducement or coercion. Top management must understand and lead the way toward changing management accounting systems. As long as it
thinks the traditional practices are still relevant, then
traditional practices will be retained. When top management understands and supports the importance of lean
accounting initiatives, standard costing will tend to be
eliminated. Thus, the ninth proposition addresses top
management’s role.
Proposition 9. In lean manufacturing plants where
there is little support from top management for lean
accounting initiatives, the probability of retaining standard costing will be high.
SUGGESTED RESEARCH METHODOLOGY
Despite the many lean accounting articles and books
that say that standard costing and variance analysis
(SCVA) will be eliminated in mature lean manufacturing companies, field reports suggest that many companies are retaining SCVA. No empirical research study
has quantified the state of the practice with respect to
this issue. A researcher who pursues this issue empirically is faced with the challenge of developing a
testable proposition.
The key question becomes “What is the threshold
for knocking down a testable hypothesis?” In the
absence of any research on this topic, we suggest the
following proposition: The majority of mature lean
manufacturers will eliminate use of SCVA. In this
proposition, it will be important to determine the criteria for “mature” lean. There are a variety of standardized survey instruments available with which to
ascertain the degree of lean and the maturity of lean
practices.38 Because field reports suggest that some
mature lean manufacturers are retaining SCVA, we
should not anticipate 100% compliance with this theoretical expectation. A test of proportions can be used as
the statistical method for evaluating survey results.
Beyond our basic proposition to evaluate the state of
current practice, the accounting profession could benefit by understanding how accountants perceive why
their company may be retaining SCVA even though
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lean theory suggests that it is a nonvalue-added activity.
With the framework provided here, future researchers
can clarify the extent to which mature lean manufacturers may be continuing to use SCVA and, through the
nine propositions we presented earlier, the logic for
retaining SCVA.
MORE RESEARCH IS NEEDED
For a long time, management and organizational theorists have debated whether structure or strategy is the
most important element for driving organizational
change. Giddens’s structuration theory takes a holistic
perspective by providing three concepts (systems, structures, and structuration) for analyzing organizational
change dynamics.39 Through the holistic lens of his
structuration theory, we have developed nine propositions to examine why mature lean manufacturers continue to use standard costing and variance analysis.
Propositions 1, 4, and 7 relate to the organization’s
existing structural framework that governs management
accounting practices. Propositions 3, 6, and 9 relate to
the structuration of management accounting practices.
Propositions 2, 5, and 8 relate to the systemic factors
that impact the nature of management accounting
practices.
Structuration theory is considered a “meta theory”
that can be used to build theories in specific domains.
It can be adapted to lean manufacturing environments
to provide new theories that can help design appropriate management accounting methods to capture the
beneficial financial impact of lean operations.
Based on the nine propositions we presented, we
encourage management accountants and researchers to
reflect on current accounting practices and to discover
pathways to better support lean initiatives in adding
value to customers while streamlining operations. ■
Manjunath H.S. Rao, CMA, Grad CWA, is a doctoral
student Ph.D. researcher at the Maharishi University of
Management in Fairfield, Iowa. An IMA member, he can
be contacted at (269) 762-6030 or hsmanjunath@mum.edu.
Andrew Bargerstock, Ph.D., CPA, is an associate professor
of business administration and director of MBA programs
at the Maharishi University of Management. You can reach
Andrew at (641) 919-4303 or andyb@mum.edu.
FURTHER READING
Brian H. Maskell and Bruce L. Baggaley, “Lean Accounting:
What’s It All About?” Target, Volume 22, Number 1, 2006,
pp. 35-43.
Brian H. Maskell and Frances A. Kennedy, “Why Do We Need
Lean Accounting and How Does It Work?” Journal of Corporate Accounting & Finance, March/April, 2007, pp. 59-73.
Frances A. Kennedy and Peter C. Brewer, “The Lean Enterprise
and Traditional Accounting—Is the Honeymoon Over?”
Journal of Corporate Accounting & Finance, September/October
2006, pp. 63-74.
Lawrence Grasso, “Are ABC and RCA Accounting Systems Compatible with Lean Management?” Management Accounting Quarterly, Fall 2005, pp.12-27.
James L. Huntzinger, Lean Cost Management: Accounting for Lean by
Establishing Flow, J. Ross Publishing, Inc., Fort Laurderdale,
Fla., 2007.
Jerrold M. Solomon, Who’s Counting? A Lean Accounting Business
Novel, WCM Associates, Fort Wayne, Ind., 2003.
ENDNOTES
1 Jean E. Cunningham and Orest J. Fiume, Real Numbers: Management Accounting for Lean Organizations, Times Press,
Durham, N.C., 2003.
2 Peter C. Brewer and Frances A. Kennedy, “Creating a Lean
Enterprise: The Lebanon Gasket Company Case,” Strategic
Finance, September 2005, pp. 49-53.
3 The Institute of Management Accountants, Statement on
Management Accounting, Accounting for the Lean Enterprise:
Major Changes to the Accounting Paradigm, 2006.
4 James P. Womack and Daniel T. Jones, Lean Thinking: Banish
Waste and Create Wealth in Your Corporation, Simon & Schuster,
New York, N.Y., 1993.
5 Brian H. Maskell and Bruce L. Baggaley, Practical Lean
Accounting: A Proven System for Measuring and Managing Lean
Enterprise, Productivity Press, New York, N.Y., 2003.
6 Ibid., p.15.
7 The Institute of Management Accountants, Statement on
Management Accounting, Accounting for the Lean Enterprise:
Major Changes to the Accounting Paradigm, 2006.
8 Thomas S. Kuhn, The Structure of Scientific Revolutions, the University of Chicago Press, Chicago, Ill., 1962, p.151.
9 H. Thomas Johnson and Robert S. Kaplan, Relevance Lost: The
Rise and Fall of Management Accounting, Harvard Business
School Press, Boston, Mass., 1987.
10 Carole B. Cheatham and Leo R. Cheatham, “Redesigning
Cost Systems: Is Standard Costing Obsolete?” Accounting Horizons, Volume 10, Issue 4, 1996, pp. 23-31; Attiea Marie, Walid
Cheffi, Rosmy Jean Louis, and Ananth Rao, “Is Standard Costing Still Relevant? Evidence from Dubai,” Management
Accounting Quarterly, Winter 2010, pp. 1-10.
11 Anura De Zoysa and Siriyama Kanthi Herath, “Standard Costing in Japanese Firms: Re-examination of its Significance in
the New Manufacturing Environment,” Industrial Management
and Data Systems, February 2007, pp. 271-283.
12 Robin Cooper and Regine Slagmulder, “Integrated Cost Management,” in A. Bhimani (Ed.), Contemporary Issues in Management Accounting, Oxford Press, New York, N.Y., 2006,
pp.117-146.
M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y 57 F A L L 2 0 1 1 , V O L . 1 3 , N O . 1
13 The Institute of Management Accountants, 2003 Survey of
Management Accountants, IMA and Ernst & Young Survey, 2003.
14 Anthony Giddens, The Constitution of Society, Polity Press, Cambridge, England, 1984; Anthony Giddens, Central Problems in
Social Theory, University of California Press, Berkeley and Los
Angeles, Calif., 1979.
15 Hendrick Vollmer, “Management Accounting as Normal Social
Science,” Accounting, Organization and Society, January 2009,
pp. 141-150.
16 Norman B. Macintosh and Robert W. Scapens, “Management
Accounting and Control Systems: A Structuration Theory
Analysis,” Journal of Management Accounting Research, Fall 1991,
pp. 131-158.
17 Cristiano Busco, “Giddens’ Structuration Theory and Its
Implications for Management Accounting Research,” Journal
of Management and Governance, Volume 13, Issue 3, 2009,
pp. 249-260.
18 Giddens, 1979, p. 66.
19 Macintosh and Scapens, 1991.
20 Thomas Ahrens and Christopher C. Chapman, “The Structuration of Legitimate Performance Measures and Management: Day-to-Day Contests of Accountability in a U.K.
Restaurant Chain,” Management Accounting Research, June 2002,
pp. 151-171.
21 Giddens, 1979, p.97.
22 Robert S. Kaplan, “One Cost System Isn’t Enough,” Harvard
Business Review, January 1988, pp. 61-66.
23 Giddens, 1979, pp. 91-93.
24 Giddens, 1979, pp. 97-100.
25 Giddens, 1979, p. 102.
26 Vollmer, 2009.
27 Maskell and Baggaley, 2003, p. 103.
28 Vollmer, 2009.
29 H. Thomas Johnson, “Manage a Living System, Not a
Ledger,” Manufacturing Engineering, December 2006, pp. 73-80.
30 Maskell and Baggaley, 2003, p. 216.
31 Giddens, 1979, pp. 82-83.
32 James L. Huntzinger, Lean Cost Management: Accounting for Lean
by Establishing Flow, J. Ross Publishing, Inc., Fort Lauderdale,
Fla., 2007, p.18.
33 Giddens, 1979, p. 103.
34 Maskell and Baggaley, 2003, p. 296.
35 Giddens, 1979, pp. 85-88.
36 Ariela Caglio, “Enterprise Resource Planning Systems and
Accountants: Towards Hybridization?” European Accounting
Review, May 2003, pp. 123-153.
37 Giddens, 1979, pp. 93-94.
38 Frances Kennedy, Lisa Owens-Jackson, Laurie Burney, and
Michael Schoon, “How Do Your Measurements Stack Up to
Lean?” Strategic Finance, May 2007, pp. 33-41.
39 Marlei Pozzebon, “The Influence of a Structurationist View on
Strategic Management Research,” Journal of Management Studies, March 2004, pp. 247-272.
M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y 58 F A L L 2 0 1 1 , V O L . 1 3 , N O . 1
Material control
Direct materials price variance
Accounts payable control
(Materials are purchased based on MRP/Bill of Materials.
These schedules are prepared based on sales forecast.)
Capacity control
Salaries payable, accumulated depreciation, development
costs, and other period costs
(Organizations create flexible capacities based on contin
uous process improvements. The capacity costs are relat
ed to period rather than output. This account helps
accounting to monitor unutilized capacity.)
1
1
Work-in-process control
Direct materials efficiency variance
Material control
(Materials charged to work-in-process on standard costs.
Production is done for full capacity utilization according
to preplanned production schedules.)
Accounts receivable control
Value stream on shop floor (1, 2, 3, 4, 5….)
(Order received from customer, and a liability for value
stream on shop floor is created. Value stream on floor rep
resents the liability to complete the received orders. This
account is necessary to pull appropriate resources for
production.)
2
2
Work-in-process control
Direct manufacturing labor variance
Direct manufacturing efficiency variance
Wages payable control
(Direct labor cost. Labor is classified into direct and
indirect labor based on units of output.)
Value stream on shop floor (1, 2, 3, 4, 5….)
Material control
(Materials are issued to the shop floor against the orders
on value stream pending on shop floor. Accountants
ensure that no material is issued unless there is a pre
existing liability to manufacture as per order.)
(Where necessary, buffer stocks are maintained to bal
ance machineries. In such cases, a constant buffer stock
reserve may be maintained and appropriately accounted
at cost.)
3
3
Variable manufacturing overhead control
Accounts payable control
(Variable manufacturing overhead incurred.)
Material control account
Accounts payable control
(Accounting for materials purchased. Material purchases
are triggered by a credit balance in material control
accounting, indicating that purchases are made only
against open orders from customers.)
4
4
Appendix 1: Suggested Double-Entry Journal Entries for Lean Accounting
Bookkeeping Entries in Traditional
Standard Costing (Cost-Based Approach)
Suggested Double-Entry Bookkeeping Entries
for Lean Accounting (Value-Based Approach)
M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y 59 F A L L 2 0 1 1 , V O L . 1 3 , N O . 1
Work-in-process control
Variable manufacturing overhead allocated
(Variable manufacturing overhead allocated to
production.)
Value stream on floor (1, 2, 3, 4, 5….)
Conversion costs
(Conversion costs are charged to value streams on shop
floors based on actual costs/target costs/differential cost or
hourly as convenient. There is no concept of direct labor
here because multiskilled labor produces a variety of
products. Labor is charged at value-stream level and not
at product level.)
5
5
Variable manufacturing overhead allocated
Variable manufacturing overhead efficiency variance
Variable manufacturing overhead control
Variable manufacturing overhead spending variance
(Accounting for variable cost variance.)
Value stream on shop floor (1, 2, 3, 4, 5….)
Capacity costs control (1, 2, 3, 4, 5)
(Capacity costs charged to value streams on floor on the
basis of hourly utilization calculated on the basis of
hourly requirement for value stream on floor. This is an
important entry that helps management track how much
of the capacity has actually been utilized.)
6
6
Fixed manufacturing overhead control
Salaries payable, accumulated depreciation, and other
accounts
(Fixed variable overheads incurred.)
Value stream on shop floor (1, 2, 3, 4, 5….)
Value stream realized account (1, 2, 3, 4, 5….)
(Accounting for revenue on shipped units out of shop
floor. Entries made to this account are based on shipping
documents.)
7
7
Work-in-process control
Fixed manufacturing overhead allocated
(Fixed manufacturing overhead allocated on predeter
mined standards to production.)
Value stream on shop floor
Liability for unfulfilled orders
(Accounting for any order that could not be shipped
owing to defect, etc. Any order not shipped out within
the predetermined throughput time can be transferred to
this account by accountants for follow up with operations.
The transfer should be made for the entire order amount.
This account will provide adequate and very timely mon
itoring of operations by accounting department without
depending on intricate variances. This entry may be
reversed if goods are shipped to customer satisfaction or
charged to abnormal loss in other cases.)
8
8
Bookkeeping Entries in Traditional
Standard Costing (Cost-Based Approach)
Suggested Double-Entry Bookkeeping Entries
for Lean Accounting (Value-Based Approach)
M A N A G E M E N T A C C O U N T I N G Q U A R T E R L Y 60 F A L L 2 0 1 1 , V O L . 1 3 , N O . 1
Fixed manufacturing overhead allocated
Fixed manufacturing overhead spending variance
Fixed manufacturing overhead production volume
variance
Fixed manufacturing overhead control
(Fixed manufacturing overhead variances recorded.)
Value stream realized (1, 2, 3, 4, 5….)
Net income control account
(Transfer of all realized values to net income at the end
of the period.)
9
9
Net income control account
Capacity control account
(Any unutilized capacity at the end of a period will be
charged to income account and will be an indication of
slack in operations.)
10
10
Bookkeeping Entries in Traditional
Standard Costing (Cost-Based Approach)
Suggested Double-Entry Bookkeeping Entries
for Lean Accounting (Value-Based Approach)

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