Lean Accounting & Theory of
Constraints
Two related concepts
ACCT7320, 2/3/09
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Lean Accounting
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A practitioner-based movement
Not much in accounting textbooks and courses
Is it a fad?
According to one recent research article*…
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Lean manufacturing is a complete business system that combines
advanced manufacturing techniques including
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Lean accounting seeks to
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Just-in-time (JIT)
Total quality management (TQM
Total preventative maintenance (TPM).
Reduce steps in transaction processing
Eliminate standard costs in favor of actual costs
Discontinue cost allocations
Lean control practices re-focus the performance measurement
system
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Emphasize social and behavioral controls.
Frances A. Kennedy & Sally K. Widener, “A control framework: Insights from evidence on lean
accounting.” Management Accounting Research 19 (2008) 301–323
http://www.leanaccountingsummit.com/
Another article…
July 2004 article
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LEAN MANUFACTURING PRINCIPLES
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IN THIS ENVIRONMENT…
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eliminating waste, producing only to meet customer demand.
typically require a company to move from a functional division of work to
work cells where all of the processes needed to manufacture a product or
line occur next to each other in sequence.
Accountants have begun to realize many traditional cost accounting
practices no longer make sense.
A growing number of businesses are implementing lean accounting
concepts to better capture the performance of their operations.
ADHERENTS PROPOSE A NEW WAY of looking at the numbers.
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Rather than categorizing costs by department, organize them by value
stream, which includes everything done to create value for a customer
the company can reasonably associate with a product or product line.
http://www.journalofaccountancy.com/Issues/2004/Jul/TheLowdownOnLeanAccounting.htm
Key points about LA, cont’d.
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NEW ACCOUNTING CONCEPTS NOT A
PANACEA
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Difficulty accurately pricing products and determining
profitability when they analyze performance by value
stream rather than by individual product.
The approach also may emphasize speed and quality
almost to the exclusion of cost concerns.
SOLUTION MAY BE to supplement the company’s
standard financial statements with additional
information
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Report improvements from efficiency
Be aware of GAAP requirements
THEORY OF CONSTRAINTS
ACCT 7320
February 3, 2009
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What is the “Theory of Constraints”
all about?
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Developed by Eliyahu Goldratt in the mid 1980’s with
his business novel The Goal.
Has a close relationship with other modern
techniques:
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Just-in-Time
Manufacturing Resource Planning
Quality Management, Six-Sigma
Activity-Based Management.
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Goldratt’s Biography
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Born in Israel in the late 1940’s.
Bachelor’s degree in Physics.
Masters and Doctorate degrees in Philosophy.
Founder of a production scheduling software company.
Has helped many companies such as: GM, RCA,
Kodak, Westinghouse, Philips, etc.
Wrote several books:
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The Goal.
The Race.
What is this thing called TOC?
Critical Chain.
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Eliyahu Goldratt’s “The Goal”
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Brief overview:
 Midsize company having difficulty shipping products on time.
 Managed by a plant manager desperate to turn things around.
 With the help of a Physicist, the plant manager is able to locate
the bottleneck and find a solution.
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Symptoms noted in the book:
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Obsolete inventory.
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Low inventory turnover and high amount of inventory in storage.
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Idle workers or machines.
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Machine breakdown.
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A large amount of scrap pieces.
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A large amount of retooling and rework needed.
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What is the “Theory of Constraints”
all about?
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Looks at the entire supply chain and synchronizes the chain to
achieve ultimate performance.
Based on two assumptions:
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Every organization has a set of processes working together to
achieve a common goal.
Every process has a [single] constraint that limits it from higher
performance.
Typical constraints: Time, Capacity, Materials, Human
Resources, Capital Resources, Financial Resources
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Implementation of the Theory of
Constraints
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Step 1: Identify the bottleneck(s)/constraint(s).
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Look at your production plan as a whole and determine which
resource is preventing you from achieving better performance.
Look at the cause (old machine, untrained employee, long setup
times, machine breakdown).
According to Goldratt, an entire plant’s throughput (productivity) is
limited to the bottleneck’s productivity.
Step 2: Exploit the bottleneck(s).
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All process efforts should be focused primarily on the constraint to
maximize throughput.
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Implementation of the Theory of
Constraints
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Step 3: Subordinate everything else to the bottleneck(s).
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Step 4: Elevate the bottleneck(s).
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According to the theory, other activities must be subordinated to the
actions taken to fix the bottleneck in hand.
At this point, management has to decide whether to purchase
additional capacity (new machine, better trained employee)
Step 5: Evaluate whether solving the current bottleneck(s)
created other bottlenecks. Do not allow inertia.
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The production plant has to be monitored carefully as to whether
other constraints now exist and to monitor the progress of the old
constraint.
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Common Terms in Theory of
Constraints
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Throughput: processing another unit of output
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Emphasis on Increasing Sales, Productivity, and Market
Demand
Throughput contribution: Sales-(Material and any
other directly variable Costs).
Bottlenecks: limited resource that prevent the
supply chain from achieving ultimate performance
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Benefits of implementing TOC
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Reduction in inventory.
More productive machines.
Ability to meet shorter lead times.
More flexible.
Better customer service.
Better product mix.
Better customer relationship.
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Shortfalls or Criticisms of TOC
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Focus on short-term goals as opposed to long-term with
ABC.
Main emphasis on increasing sales and volume, not
quality.
May lose overall picture when only looking at specific
constraints.
Focuses on the push approach as opposed to pull
approach of JIT.
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The “Theory of Constraints” and
Other Concepts
PROS
CONS
JIT
Emphasis on customer, flexibility,
and low inventory costs.
Reliance on suppliers could be costly if
your needs cannot be met.
MRP
Reduction in inventory costs,
storage costs, and better
efficiency.
Focuses primarily on materials
management and not overall supply
chain management. Limited in scope.
ABC
Dynamic optimization of resource
supply, product design and mix,
and pricing.
Emphasis on cost-cutting initiatives.
Mostly used for accounting purposes.
TOC
Optimization of productivity and
customer satisfaction.
Primarily focuses on short-term profit
maximization.
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Velocity World- The Conference on TOC,
Lean and Six Sigma
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Questions?
Pass out problem to work and
discuss.
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