31 Aug Cost Information and the Lean Enterprise

Cost Information and the Lean Enterprise 

Douglas T. Hicks, CPA 

Executive Summary 

• Traditional accounting methods, particularly traditional costing methods, do not serve the information needs of lean enterprises. 

• Some have suggested simplifying the lean enterprise’s costing methods by assigning a vast majority of its costs directly to its primary value stream(s). 

• Although this approach may make it easier to measure short-term manufacturing performance, it hamstrings top management’s ability to make quality pricing, investment, and other decisions that are necessary to insure the company’s long-term success. 

• No management initiative serves all of management’s needs. To succeed in the long-term, managers must understand and use different concepts for different purposes. 

• To effectively exploit the benefits generated by its lean initiatives, a lean enterprise needs to incorporate both the concept of causality-based costing and the principles of managerial economics into its decision making processes. 

• Causality-based costing provides the structure for understanding the impact on product, service, process, and customer costs resulting from lean initiatives. It also provides the mechanics necessary for measuring the incremental impact on costs of proposed management decisions and actions. 

• Managerial economics provides the appropriate cost measurements, particularly the measurement of cost of capital, critical to understanding the impact of lean initiatives on the organization. 

• Without including a cost of capital, a lean enterprise cannot measure the “with less” benefits of “doing more with less.” 

• Without including causality-based costing and managerial economics into its decision making equations, the lean enterprise puts itself at risk of “leaning itself out of business.” 

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