Lean Accounting and GAAP – Part 3

Relevance and reliability are the primary qualities the qualitative characteristics of accounting information that distinguishes better (more useful) information from inferior (less useful) information for decision making purposes.

Today we are going to focus on reliability.

For accounting information to be reliable, it must possess 3 characteristics:

  • Verifiability – a high degree of consensus can be secured among independent measurers using the same measurement methods.
  • Representational faithfulness – means agreement between the accounting numbers and the resources or events these numbers purport to represent
  • Neutrality – means the primary concern should be relevance & reliability, not the economic consequence of a standard or rule

Lean accounting box score data is verifiable. The data is objective and easy to gather so independent measurers would agree on the data. Traditional cost accounting is very subjective in determining which costs are direct or indirect; projecting the labor and overhead costs; and determining machine usage. No standards exist in industries or within divisions of companies in standard setting.

Lean accounting box score data meets the representational faithfulness test – operational performance measures reflect what has occurred in the past week and value stream costs is what money the value stream spent last week. It is difficult to argue that product costs based on standard costing are the real costs of the product, given the amount of allocations that create product costing.

Lean accounting box scores meet the neutrality test in that that they are real numbers (economic consequence) that depict the financial & operational results of real events. Standard costing can distort real numbers – think about building inventory to increase overhead absorption and increase short-term profits. Hardly neutral.

In terms of the GAAP quality of reliable, it appears like the lean accounting box score easily meets the 3 characteristics of reliability much better than traditional standard costing.