Solving the Standard Costing Problem

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If you are the CEO, CFO or COO of a lean manufacturing company, and your company uses a standard costing system, it is inevitable that you will be faced with confronting how your standard costing system is being used.

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I stress the term?inevitable, because based on my own experience both as a CFO and a consultant, I have seen it happen consistently. Sometimes the confrontation will occur early in the lean journey, sometimes later, but it is going to happen.

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My advice is to lead rather than react. Be the leaders of proactively evaluating how the standard costing system is being used as your lean journey begins and come up with a plan utilizing PDCA.

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Defining the Problem

The primary root cause of why you will have to deal with standard costing is twofold. Accounting needs standard costing to value inventory but lean operations does not need, nor have any use for, the performance measurement & financial analysis aspects of a standard costing system. Conflict between accounting and lean operations occurs when each side doesn’t understand each other’s reasoning.

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Typical Current State

·????? Lean manufacturing operations is 100% opposite of mass-production manufacturing. They need relevant & reliable information to support lean thinking.

·????? Standard costing system information supports mass-production manufacturing.

·????? Accounting uses standard costing systems to value inventory for financial reporting purposes and maintain compliance with GAAP/IFRS. This works well for accounting because it’s pretty much automated through setting standards & ERP transaction processing.

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Future State – What to Strive to Achieve Over Time

·????? Replace all standard costing- based operational performance measurements (variances, absorption, etc.) with a lean performance measurement system.

·????? Replace standard costing-based financial analysis (such as standard margin & product cost) with value stream box score-based financial analysis.

·????? Simplify standard costing systems based on macro-valuation of inventory to maintain GAAP/IFRS compliance. Long-term, you may be able to eliminate labor & overhead rates!

·????? Transition to a lean management accounting system to replace your standard costing-based management accounting system. This is a never-ending transition, just like a lean transformation. Make it part of your overall lean strategy.

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Root Cause Analysis & Solutions

·????? Take an objective look at exactly how your standard costing system is being used. This graphic illustrates how to look at each of these components of your standard costing system and do some “5-Why.”

·????? You can also use this graphic to develop the solutions & implementation plan for your company. It’s important to remember to create a transition plan that works for your company.

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Wrap Up: Four Initial Steps You Can Take Now

• Using a standard costing system in a lean company is company problem not an accounting problem. Face the fact that this is a problem that needs to be solved. Information from standard costing systems is used in all parts of a manufacturing business, and for many different reasons. The entire company will have to be part of the solution.
• It’s a long journey not a short destination. It’s going to take time to adapt, improvise & overcome a standard costing system. Just like a Lean journey, there will be successes, and adjustments along the way. The larger to company, the longer it will take.
• Begin communication of the issues. The CEO, CFO and COO need to begin talking to senior management. Controllers needs to engage lean operations management. The entire accounting function needs a continuing dialogue on this topic. Begin laying out the specific issues your company is going to face over the long run.
• Lean accounting practices & methods do provide a path & solution to resolving these issues in your lean manufacturing company. Learn about Lean Management Accounting.

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