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Lean Accounting

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Eliminating waste isn’t enough; you have to reduce inputs to save money

ProPer leAn ACCounTIng
By reGinald tomaS yu-lee
October 2011 October 2011

39

proper lean accounting rom its inception, lean has been about cost savings. The proof can be found by going to the founder of the concept. Lean has its roots in the Toyota Production System (TPS) or just-in-time manufacturing. Taiichi Ohno, the primary architect of the TPS, suggested that its goal was reducing costs. Ohno and his consultant, Shigeo Shingo, went so far as to restructure the profit and pricing equation so that its interpretation would be different to emphasize the concept of cost reduction. Often, the selling price is determined by adding profit to cost, or equation No. 1: cost + profit = selling price. For instance, the sales department always wants to know the cost so it can add a reasonable margin to get a proposed selling price. This, according to Shingo, was not a realistic perspective. He believed that the market determined the selling price. They thought that a more realistic way of looking at cost was to subtract cost from selling price to determine profit, or equation No. 2: selling price - cost = profit. With this approach, according to Ohno, “At Toyota, as in all manufacturing industries, profit can be obtained only by reducing costs.” Since lean was designed to focus on cost, the creators had to find places to look. The answer was to eliminate waste because, by eliminating waste, costs should go down. The next step was to categorize and define waste categories. Initially, Ohno and Shingo defined seven types of waste: 1. Overproduction 2. Inventory 3. Overprocessing 4. Defects 5. Motion 6. Waiting 7. Transport Considering these categories, you would think that eliminating these types of wastes definitely would lead to cost reductions, correct? Not necessarily. When you look through

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