Does Toyota Use Lean Accounting?
The answer of course is yes but here’s some details. Glenn Uminger was a keynote presenter at the recent Lean Accounting Summit conference (web site link) and explained Toyota’s cost accounting.
I was very moved by his presentation because I have personally taken the same journey Mr. Uminger has taken. As an accountant in Xerox Corporation in the late 1980’s encountering (what we now call) lean thinking. Then working in the early 90’s with the development of ERP systems to support both traditional and and (what we then called) synchronous manufacturing. And grappling since then in my own consulting firm to understand how companies can move away from the complicated, wasteful, and anti-lean accounting to truly lean accounting that motivates lean thinking and yet provides appropriate internal and external reporting.
Glenn Uminger is one of the people that designed the Toyota management accounting in the USA and he started his talk with a couple of stories.
Glenn was an experienced accountant when he started to set up the cost accounting system for Toyota’s Georgetown, KY plant. He was ready to set up standard costing and variance analysis when one of the Japanese production leaders asked him to come with him to the paint-mix room where they prepare 300 gallons totes of paint for production. He showed Glenn the chart on the wall where they keep track of the paint usage every hour. He said that “when we see a problem with paint usage or production time we identify it immediately, get to the cause, and solve the problem. If you bring a financial variances report to me at the end of the month, I will not know what to do with it and (even if I try very hard) I will not be able to answer your questions.” So they scrapped the variance analysis.
This is classic Lean Accounting. Build controls visually and frequently into the processes and include the people who work in the area. You will NOT NEED complicated and useless reports like material usage variances.
Standard Costing, Labor Rates, and Overhead.
Glenn explained that they just do not do it. They have no need for routine calculation of products costs and certainly no need to use any of the data to control or monitor the process. But how do they value their inventory? Glenn showed that they post the (so called) labor and overhead once a month to the balance sheet using calculations that take less than an hour for the entire plant. They know how many cars each value stream has produced that month. They know the total conversion costs for each value stream. They can then divide one by the other to get the average cost per car. They count the cars in WIP and identify the “equivalent” number of finished units. They debit the balance sheet using a reversing journal entry with the amount of equivalent cars multiplied by the average cost per car this month.
These are tried and tested methods that have been used to value inventory for nearly two centuries; especially prior to the widespread use of computer system and standard costing. This approach is commonly used by companies even when their product range is more diverse than Toyota Georgetown. Glenn and his team verified these methods with their auditors (what is now PWC) and with Charles Horngren, the professor that wrote the iconic textbook on Cost Accounting. These methods are now included in the textbook.
The Toyota factory makes cars single piece flow. If you watch the production line, every car coming through is different from the prior one or the next one. The value streams make a range models and supports the 100 or so variations within each model. The plants produce based on kanban pull. When the dealer sells a car, the kanban comes back to the factory and triggers the production of another one of those cars. Toyota level schedules (heijunka) so the cars are made in a predetermined sequence, but only based on actual pulled demand. The heijunka is updated monthly by the equivalent of the SOFP planning process.
Toyota plants in the USA are required by their auditors to do a full physical inventory two times each year. The Georgetown, KY plant is a large automobile factory making x,000 cars a year and employing 15,000 (?) people. How long would you think it takes to complete this task?
This physical inventory is “required waste”. We can not eliminate it because it is legally necessary. But what do lean companies do with Required Waste? They skinny the process down to the minimum amount of work. Glenn explained that Toyota completes the full physical inventory of the entire plant in 95 minutes.
When Are Costs Committed?
He then moved on to another aspect of cost accounting. Toyota recognizes (like most manufacturing companies) that most costs a set a long time before manufacturing begins. The material costs are largely determined during the design and sourcing stages of product development. The labor time required and other manufacturing costs are also determined in the development stage, and the capital equipment and facilities are of course set up prior to production. So how can the value stream teams affect the costs of the products?
To keep the production costs down the operations people must produce in the pre-determined way. This is done using the hourly charts (mentioned above) that match the actual production times to the standardized work charts. The production people immediately identify problems and solve them quickly. They must also use their knowledge to solve problems and improve their own processes, and update standardized work. Accounting systems, labor reporting, and variances are redundant. Hourly charts and continuous improvement are superior controls.
Glenn pointed out that it is the operations people that have the biggest influence on customer value day-to-day. The Toyota teams recognize their responsibility to serve the customers on-time and with perfect quality. This is how the value is created. It is vital that they achieve these goals and also continuously improve their processes. This determines if the customer will come back again or not.
Do You Have Cost Accountants and What Do They Do?
This cryptic question came from the audience. The answer Glenn gave is they do have a small group if cost accountants in each plant. Here’s what they do:
- The cost accountants help the value stream leaders and team-members to identify, control, and reduce their controllable costs. The spending information is provided to the value streams frequently, sometimes daily. The cost accountants work with the value stream teams to offer assistance. There is no bureaucracy of departments and complex reporting, reconciliations, and meetings. The information is clear, simple, and targeted to cost control/reduction within the value streams.
- They work with the value stream leaders and senior managers to understand trends in the company’s costs. This leads to root cause analysis, change, and improvement. The cost accountants work a great deal “at the Gemba” rather than in an office in another building. This means they are constantly learning, understanding, and disseminating useful lean information.
- They work closely with marketing, product development, and production to help establish prices for the products. This is a large and detailed project that occurs when new models or upgrades are introduced. The cost information is used in detail as a part of the target costing processes. We do not have a complicated process to track our costs each day or each month, so we need to do these studies as they occur.
How Does This Simplified Accounting Affect the Life of a Cost Accountant?
Every thing is centered around the processes. I have to ask these kinds of questions:
- What is the capability of the value stream production and other process that I am supporting? The more capable the process the less detailed controlling is required. Work with your internal “customers” to help build control and improvement into their processes.
- Identify what I can do that will be helpful to the people in the value streams to enable them to be successful.
- Create and improve my own processes constantly so they are very effective and make good use of the people’s time, the processes, and our systems. Endless problem solving around my own processes.
- Work to influence the enterprise outside of my own area to improve and enhance lean.
As with most things at Toyota, the accounting systems are deeply imbued with lean thinking, and yet they recognize that they must continue to change and improve every day. There was no sign from Glenn Uminger’s presentation of arrogance or self satisfaction. We must pursue perfection in lean accounting beyond what we know now. There is a lot more to learn.